What Is Ethereum (ETH)

Written by

Tamara T.

Crypto Analyst

Have you heard about Ethereum?

Perhaps you have an idea about what it is, but you don't have a lot of insight into how it works.

What is Ethereum and how does Ethereum work are tough questions, but you should look for trustworthy answers!

Our guide will include all the important information you need to understand Ethereum and its complex nature.

On this page, you can also find the following:

  • History of Ethereum 
  • Essential features of the currency
  • ETH benefits vs. drawbacks
  • Why it grows/falls down

Read on!
 

What Is Ethereum: A Quick Explanation

Before we delve into the essence of ETH, we want to start with Ethereum for beginners.

This means giving a straightforward, comprehensive definition to anyone interested in the currency.

Ethereum is a decentralized software platform that uses blockchain technology. You will recognize the currency by its native coin, Ether (ETH).

Anyone can use ETH and develop safe digital technology. Its token pays for completed work on the blockchain, but you can also use it to pay for goods and services. 

According to Ethereum for dummies guide, this crypto is scalable, secure, programmable, and decentralized.

It has become a blockchain of choice for developers and companies looking to create technology on its system.

Other important points about Ethereum you should know are:

  • It supports smart contracts, a key tool of decentralized applications.
  • It switched from proof of work to Ethereum proof of stake in September 2022.
  • Bitcoin and Ethereum have a lot of similarities but different visions and setbacks.

These features look incredible, but they should also be clarified for people looking to buy ETH.

It's clear that Ethereum can change the crypto industry, but this is only the beginning.

Let's take a look at ETH's evolution stages.
 
 

Ethereum History 

The process of creating any cryptocurrency takes time, and the same was the case with Ethereum.

We will focus on who created Ethereum, when Ethereum was created, and other essential information about the crypto. 

Vitalik Buterin published a whitepaper introducing the concept of ETH in November 2013. 

Shortly after that, other leaders started to pay attention to the project and brought their contributions to its creation. 

Today we know that ETH has several co-founders - Vitalik Buterin, Gavin Wood, Charles Hoskinson, Amir Chetrit, Anthony Di Iorio, Jeffrey Wilcke, Joseph Lubin, and Mihai Alisie.

Here are the most important dates for the ETH:

  • November 2013: Whitepaper released
  • April 2014: Buterin presented the yellow paper of the blockchain project at a conference in Miami, Florida. 
  • July 2014: The project raised capital via ICO, selling millions of dollars in exchange for the development of the project
  • July 2015: Ethereum blockchain went live
  • March 2016: The Homestead fork giving some changes to the protocol and opportunity for new upgrades
  • July 2016: The DAO fork after a hacking attack, moving the funds to a new contract 
  • Early 2017: ETH traded under $15.00 per unit
  • October 2017: The Byzantium fork when block mining rewards were reduced from 5 to 3 ETH. 
  • Early 2018: ETH surged up to about $1,400 per coin
  • February 2019: Constantinople fork optimized the gas cost 
  • December 2019: Istanbul fork bringing Layer 2 solution and Zcash interoperation
  • January 2020: Muir Glacier fork increasing the block difficulty of the PoW consensus
  • October 2020: Staking deposit contract deployed
  • December 2020: Beacon Chain genesis launched the production of blocks
  • April 2021: Berlin Ethereum upgrade optimizing the gas costs for AVM actions
  • August 2021: London Ethereum upgrade launching EIP-1559 to reform the transaction fee market
  • October 2021: Altair upgrade adding the support for sync committees
  • December 2021: Arrow Glacier upgrade pushed back the proof-of-work difficulty
  • June 2022: Gray Glacier upgrade delaying the difficulty bomb by three months
  • September 2022: Bellatrix upgrade was the second improvement for the Beacon Chain, preparing it for The Merge
  • September 2022: Paris upgrade or Merge transition when ETH switched from the proof-of-work algorithm to proof-of-stake 

 

Features Giving Ethereum Value

Ethereum stands out with multiple features.

Since becoming the second-most used crypto on the global market, it continues to add new improvements.

You can now take a look at these core features and find their benefits.
 

Ether

If you've already seen crypto charts, then you've probably noticed the ETH symbol next to the popular cryptocurrency. 

But what is ETH?

Ether (ETH) is the native cryptocurrency of Ethereum.

Participants can use it to pay for the computational resources and the fees for any transaction carried out on the network. 

Ether is a peer-to-peer coin whose main application is for paying transactions and buying gas.

 

What is Ethereum: Ether (ETH)
Ether (ETH)

Customers who look to deploy a contract on the network need gas, so they have to pay for it in Ether. 

This means that gas serves as an execution fee paid by a customer for Ethereum transactions. 

In addition, you can use Ether for building decentralized apps, smart contracts, and the completion of simple peer-to-peer payments.
 

Smart Contracts

A smart contract is a plain computer program that enables the exchange of assets between two parties.

This could include money, shares, property, or similar digital assets that you wish to exchange. 

Any participant on the Ethereum network is able to create smart contracts. They usually include terms and conditions determined by the parties.

You should also know that transactions on smart contracts are immutable. Eventual changes in smart contracts would not alter the previous transactions. 

The verification process is in the hands of anonymous parties, and there is no requirement for a centralized authority. 

All transfers are completely transparent and trustworthy, as well as the identities of the two entities.

Upon execution of a transaction, senders and receivers will have their accounts updated.
 

Ethereum Virtual Machine

Ethereum Virtual Machine serves as an environment for arranging and deploying smart contracts. EVM engine is fully compatible with the Solidity language of smart contracts.

It runs in a sandbox environment, and you can even deploy a unique background that will work as a testing environment. 

This means you can test smart contracts and use them countless times. 

You can deploy it on the ETH network upon verification and accomplishment of satisfactory contract performance. 
 

What Is Ethereum Mining

Ethereum used to operate on a proof of work consensus.

Every node in the network usually included:

  • The full history of all the transactions
  • The smart contract history or address of smart contract deployment, together with transactions connected with the smart contract
  • The handle to the existing state of the smart contract

Miners on the ETH network looked to validate each block by using computational power and other resources. 

The aim was to get the right hash value by altering the nonce. Miners used to vary the nonce and run it through the Ethash hashing algorithm.

As a result, they got a hash value that had to be lower than the predetermined target according to the proof-of-work consensus.

If the generated hash value was lower than the target amount, the verification process was over, and the miner claimed the reward.

All other nodes could update the ledger upon solving the proof of work. 

Once the other nodes approved the hashed block, it became part of Ethereum's main blockchain. 

Miners claimed a reward and transaction fees used to verify the block. In addition, a miner gets the cumulative transfer fees linked to all transfers.
 

Recent Shift to Proof of Stake

Ethereum blockchain has since moved from its native proof-of-work (PoW) to a more efficient proof-of-stake (PoS) consensus on Sept. 15, 2022.

A recently announced "Merge" for Ethereum decreased the requirement for miners.

It swapped them with validators who have a staking role.

This means that we can say goodbye to the costly and energy-consuming devices that keep the security of the network. As a result, we have more efficient crypto.

Before the Merge, we saw the creation of the ETH network hard fork, ETHW. 

 

What Is Ethereum: Other Things About ETH
Ethereum Features

The latter will continue to use PoW consensus, which is a real success for ETH miners.

Let's also take a look at the proof of stake and explain its role in the mining process.

Proof of stake is an alternative to previously used proof of work consensus. It aims to decrease the use of massive resources for mining.

As part of the same consensus, a validator is a miner, and its role is to validate the transactions according to the number of crypto coins held before the start of the mining process. 

A miner has a better chance of mining the block thanks to the accumulation of coins. 

Despite switching to the proof of stake protocol, proof of work remains the most popular protocol.

The newly created ETHW attempts to keep proof of work in the mining process. 

The idea came from the Chinese miner Chandler Guo, who was against the PoS consensus. 

That's why he introduced the PoW-based ETH blockchain.

The creation of ETHW was not a real victory for stakers, as the new protocol faced significant accessibility issues.
 

Gas

To execute any transaction on the network, a user needs to make a payment. This is possible by using the native currency ETHER, and the monetary value is gas.

Gas is a unit that counts the computational power needed to run a smart contract on the Ethereum network. 

Once you complete the transaction that updates the ETH blockchain, you have to pay a gas fee.

You can calculate the transaction fees with a formula. 

Each transaction requires that you pay both gas and the connected gas price. The transaction fees are equivalent to the amount of gas needed to carry out a transfer multiplied by the gas price. 

“Gas limit” is the amount of gas utilized for the computation and the sum of Ether you need to give for the gas.
 

Decentralized Applications (Dapps)

Decentralized applications (dApps) are programs that operate on a blockchain P2P (peer-to-peer) network of computers instead of a single one. 

DApps are not under the control of one authority.

Their base is the Ethereum platform, and they have a role in different spheres, such as finance, gaming, and social media.
 

What Is Ethereum: ETH Dapps
Ethereum DApps

DApps have many benefits, including the protection of user privacy, the absence of censorship, and the flexibility of development.

Drawbacks include the inability to scale, potential setbacks in creating a user interface, and problems with performing code modifications.
 

Decentralized Autonomous Organizations (DAOs)

A DAO is an organization where the decisions are not in the hands of a centralized authority.

This means that designated authorities or groups of people are responsible for decisions.

It operates on a blockchain network, and smart contract protocols rule it. 

DAOs use smart contracts for all decisions. This is part of the decentralized voting system, and all decisions must pass the voting system.
 

Real Benefits of Ethereum 

Until now, you've learned the answers to the questions, “what is Ethereum,” and “how does it work?”

You've also learned more about specific ETH features and what Ethereum is used for.

Now it's time to talk about the real benefits of this crypto.

Let's take a look. 
 

Large Network

Ethereum is a stable network that stood the test of time all these years.

It is known for its large community and robust ecosystem.

Even if it's not the first cryptocurrency, it has become one of the most popular options for customers. 

The ETH team is greatly admired for its expertise and dedication.

The Ethereum network continues to get more traction, and it already has more than 250,000 developers.
 

Different Functions

Ethereum has different functions.

Asides from being a digital currency, it can also process a wide range of transactions, execute smart contracts, and store information for third-party apps.

The use of crypto is possible in different fields, such as gaming, distribution of energy, and medicine.

At the same time, ETH can boost the tokenization of other industries, such as art, patents, medical records, crypto-collectibles, and many more.
 

Regular Innovation

ETH developers strive to improve the network with regular work.

They try to attract more people by developing new apps.

Since it has become one of the most popular options, it has also turned into the favorite blockchain for new and current decentralized apps.

Many companies back the further development of ETH, one of which is Ethereum Enterprise Alliance.

There's a huge likelihood that many other investors will show their interest in this crypto.
 

No Intermediaries

Ethereum is a fully decentralized network.

The network was created to separate it from the traditional systems. 

It means that the crypto doesn't have any connection with third-party organizations such as banks and other authorities. 
 

Ethereum 2.0 Development

If you've used Ethereum, you probably want to know what is Ethereum 2.0.

Ethereum 2.0 is a widely-used term that covers different improvements of the Ethereum network.

You should know that Ethereum 2.0 has been in the creation process for several years, and everything started with the introduction of the Beacon Chain in December 2020.

The second stage commenced in 2022 thanks to a number of “merges,” and now the network works on a proof of stake consensus.

A series of improvements will also result in the implementation of sharding. This will be the final phase of the ETH’s transition, and it will end by 2023.
 
 

Real Drawbacks of Ethereum

You know how many benefits Ethereum has, but it's far from a perfect option. 

Before investing in ETH, you should always reconsider your decision.

We’ll now introduce the key drawbacks of crypto.
 

Increasing Costs of Transactions

With the rising popularity of Ethereum, transaction costs have also become higher. 

Its fees or “gas” could be very expensive, which is not attractive to users.

Additionally, fees are prone to fluctuations, which keeps customers from using the option.
 

Crypto Volatility

Just like any other coin, Ethereum can go up and down. 

This crypto can boost your earnings, but you can also face severe losses.

Ethereum has experienced many downturns in the past, and no one can predict its future.

The same applies to ETH fees which can fluctuate a lot. 
 

Scaling Issues

Ethereum has scalability issues because it supports many features.

It works like a ledger or smart contract platform, which could lead to problems, hacks, and breakdowns.

Multifunctionality is a valuable feature, but investors know it could be a double-edged sword. 

ETH developers should work more on scaling and overall congestion to increase the interest of investors.
 

Ethereum Price History 

Before you buy some coins, you will want to know, “what is the price of Ethereum today?”

Since crypto has experienced many ups and downs, its price will continue to change. 

Ethereum reached its all time high of $4,800 in November 2021 but soon dropped almost 75%.

Ethereum lowest price ever was $880 on June 18, 2022.

Since then, the cryptocurrency has fluctuated a lot, and its most recent high was something above $2,000 in mid-August 2022.

However, it was 58% off the all-time high from November 2021.

The price of ETH dropped nearly 18% on November 10, and it still trades at less than $1,300.

Why is Ethereum going up / down?

The price of every cryptocurrency depends on supply and demand.

Buyers and sellers directly affect the Ethereum price and prices of all other cryptos. The price will logically rise if demand is greater than supply. 

Here we should also mention that cryptocurrencies have a predetermined supply.

For example, Bitcoin has a fixed maximum amount for supply.

Other coins, like Ether, do not have a maximum supply.

If the circulating supply becomes too large, this leads to token burning. The process includes sending coins to the irretrievable address on the blockchain.
 

Ethereum Currency, Store Of Value, Or New Asset Class?

When you think of Ethereum's nature, you can make many conclusions. 

First of all, ETH is a currency and the second-most popular digital token in the world. 

If you are learning Ethereum trading for beginners, you should know that ETH is tradeable on popular exchanges. 

You can also store it on the same platform if you plan to spend it at a later point. 

While many experts consider Bitcoin gold, others would not make the same comparison with Ethereum and silver. 

Marion Laboure, economist and market strategist at Deutsche Bank, said that bitcoin was synonymous with gold. 

And it was not the first time the leading investment bank drew an analogy between the BTC and the most precious metal. 

In January 2021, J.P. Morgan strategists noted that “bitcoin’s competition with gold started”.

It is worth noting that financial institutions have avoided making the same analogy between Ethereum and silver.

The second biggest cryptocurrency has a cap, but many prefer its multifunctionality and support of smart contracts.

In his written statement, Laboure finally compared Ethereum to ‘digital silver’.

It may have been the personal opinion of a Deutsche Bank economist.

However, we cannot negate the supremacy of Ethereum in the cryptocurrency world and its quality to be equivalent to the second-most-valuable metal in the world.

We should also consider other frequent questions, such as “what is wrapped Ethereum” and “what is the difference between Ethereum and Ethereum classic.”

wETH is the wrapped type of Ether with ERC-20 token standards. Wrapped Ethers are also safe to trade or invest in since they have a 1:1 ratio to the ETH value.

You can think of them as stablecoins as they always follow the value of the original currency.

We can also underline the difference between Ethereum (ETH) and Ethereum Classic (ETC).

ETC is a speculative asset with a predetermined supply. At the same time, ETH is the more popular version without a fixed supply. 

Both came from a hard fork after the hack of Ethereum Classic in 2016.
 
 

How Many People Own Ethereum?

Based on the data of Glassnode, the current number of active ETH digital wallets with at least 0.1 ETH has reached around 3.9 million.

Only two years ago, the number of active users was about 2.7 million, which is a notable 50% increase.

Currently, the ETH blockchain holds 70% of the total DeFi transactions in the crypto market, based on JP Morgan.

The ETH network dominates the non-fungible token (NFT) market by keeping 80% of the share.

There is also another logical question about who owns the most ETH.

The address with the most ETH belongs to the Eth2 Deposit Contract, with a balance of 9.5 million ETH ($26.86bn). 

This is a smart contract address, and individuals don't have access to it. 

The second-largest holder of Ethereum is the Wrapped Ether smart contract, holding 7.46 million ETH ($20.3bn). 

The Kraken exchange (CEX) takes third place with 2.11 million ETH ($5.75bn).
 
 

What Is Ethereum Used For?

Ethereum is the world-leading cryptocurrency right after Bitcoin. You can now use ETH at different locations and enjoy the convenience of the process.

Where can I spend Ethereum? You can use Ether to purchase gold, jewelry, real estate, cars, clothes, food, entertainment, professional services, and many other things.

Payments are possible directly from your wallet.
 

Ethereum Use
How Is Ethereum Used

If this is your first time using it, you may face some difficulties understanding the process.

That's why we have presented the most frequent methods for using ETH below:

  • Spend crypto directly with the enterprises that accept ETH
  • Use ETH like cash via cards
  • Purchase gift cards with ETH
  • Send some Ether to your friends via P2P transaction

Many global companies also accept Ethereum, including Twitch, Namecheap, APMEX, SlingTV, and Jompashop, among others.
 
 

So, What Is the Future of Ethereum?

Ethereum has a promising future, with chances to outclass its biggest rival, Bitcoin.

The main reason lies in its decentralized nature that enables developers to build their own applications. 

As a result, Ether will have enormous room for progress since there are different uses for its tech solutions.

In a recent blog post from December 5, 2022, Vitalik Buterin emphasizes the importance of major developments within the Ethereum ecosystem. 

This includes money, blockchain identities, decentralized finance, decentralized autonomous organizations (DAOs), and hybrid applications.

2022 was a really challenging year for Ethereum, but the second-largest crypto has made it through. 

The next year will bring even more obstacles for crypto, so many would indicate it as a ‘make or break’ period.

However, there is a reason for optimism that Ethereum will return to its previous level and bring many new opportunities for innovation.