What is Ethereum? | Ethereum Explained for Beginners

what is ethereum

What is Ethereum?

Ethereum is a decentralized blockchain network that brought in some of the most important technological developments to the crypto space including smart contracts, defi, and NFTs.

Being a first mover in the smart contract scene meant that it has been able to capture an incredible amount of market share. Ethereum maintains a significant lead over other blockchains in terms of developers, technological innovation, applications, usage, etc. It has maintained its position as the second biggest coin by market cap for years now. 

How was Ethereum Started?

Ethereum $ETH was created in 2013 by programmer Vitalik Buterin, Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin. Many of these founders went on to found their own blockchains later on like Charles Hoskinson who founded Cardano, and Gavid Wood who founded Polka Dot. While others like Joseph Lubin remained in the Ethereum space launching the Ethereum development studio Consensys.  In 2014, crowdfunded development work began and the Ethereum Network went live in July 2015. 

In June 2016 the young network experienced a major hacking event called The DAO Hack, worth 3.6 million $ETH, on a smart contract that resulted in a fork of the network. This caused a lot of trouble in the community with some arguing that there should have been no fork of the network. This split resulted in the coin known as Ethereum Classic, a coin which kept the original parameters of Ethereum, including the hack on chain, but which has stagnated ever since. All of the brain power and most of the money went with Ethereum after the community split. Leaving Ethereum Classic a largely unused and irrelevant chain. 

Ethereum Use Cases - What Can You Do On Ethereum?

Now, enough of the history lesson. What can you do on Ethereum? Well, let’s look at a few use cases and what smart contracts have enabled the network to do. 

  • Decentralized Finance, or DEFI are decentralized applications (dApps) built on the blockchain. These dApps provide a broad array of financial services without the need for financial intermediaries like brokerages, exchanges, or banks. One example of Defi is that you can use your $ETH to take a cash loan using Maker Dao, an application. This loan can be done in minutes, and requires no centralized authority like a bank to tell you yes or no. 
  • NFTs, are non-fungible tokens, essentially unique verifiably scarce digital images with a broad range of use cases from profile pictures, to music, to invoices. Many see this as the cultural element of blockchains. 
  • Gaming has also been a wildly popular use case for Ethereum and other blockchains. This niche has used many different facets of Ethereum’s potential including NFTs for in game characters and items, tokens for in game economies, and layer two scaling to make games more affordable to use. 
  • DAOs stands for decentralized autonomous organizations. Basically these are member owned communities. A safe way to collaborate with strangers online. Their goals are many and varied, but it has been a fascinating experiment in terms of online collaboration. 
  • Stablecoins are coins that are pegged to some other stable asset. Coins like USDC and USDT are the most popular ones and exist on many networks. They are popular for maintaining stable value in a volatile market and also are used to earn in defi. You can even find assets pegged to the price of gold. For a more in depth explanation of what stablecoins are, check out this article.

This is just scratching the surface of what is possible and being done on Ethereum. There is also insurance, cloud storage, trading, tokenized securities, NFT lending, identity, fund raising and much much more. 

What is EVM?

The EVM (Ethereum Virtual Machine) is a computation engine and is responsible for making all of Ethereum’s use cases posible. You can think of it like a big decentralized computer. The EVM has been so critical to the entire crypto space that many newer blockchains use it as their base or implement compatibility with EVM. Contracts are written using a custom coding language called Solidity which has been widely adopted across the crypto space. 

What is $ETH & What is it Used For?

The core asset of the Ethereum network is Ether (ETH), in order to do anything on Ethereum you will need to hold some ETH. Want to send a stablecoin? You need ETH. Want to play a game? You need ETH. Want to write a smart contract… yep, you need ETH. ETH is what is used to pay gas on the network. Ethereum staking validators process transactions for you, but they don’t work for free. So anytime you want to do something on the network you need to pay them to process the transaction for you. This helps keep the network secure and ensures that it won’t be spammed to death.

You can also take your $ETH and stake it in the network allowing you to earn rewards on your $ETH. Please see our article on How To Stake Ethereum for options on how to get started. Ethereum staking is massively decentralized. 

The total supply of ETH has no fixed limit like Bitcoin’s 21 million, which has lead to constant criticism from Bitcoiners. That being said, the realities of the system are as follows:

  • In the early days, ETH inflation rates were much higher (24% in the first year) but this has been decreasing with current rates around 4%. Part of the Ethereum 2.0 upgrade has seen inflation drop even further to around 0.4%.
  • Ethereum also uses a burn mechanism, meaning that certain transactions actually reduce the supply of ETH. Meaning that the total supply of ETH will actually start to fall over time. So while there was no fixed upper limit the network was designed in such a way that ETH will actually become deflationary.

How does Ethereum Work?

Ethereum started its journey as a Proof of Work blockchain, but has transitioned to being a Proof of Stake blockchain after years of research and testing. Upgrades are tricky to perform on the Ethereum network as all upgrades must be tested at great length before being uploaded to the main chain in order to avoid causing any catastrophic events.

Network upgrades are done using Ethereum Improvement Proposals (EIPs) which are how developers work together to develop the Ethereum protocol. This system allows developers to find consensus about the best path forward. However, this it is not done on chain, and at this time it seems that all  Governance will continue off-chain, not allowing the average user the ability to influence major decisions on the network.

While some have wrongly criticized Ethereum for being some kind of dictatorship by Vitalik, the truth is far from that. Vitalik Buterin is the last remaining Founder to remain working on the Ethereum blockchain. While he is the one responsible for its conceptualization, his current capacity is more of a research-focused role. This leaves most changes or upgrade decisions to the network, independent of Vitalik’s guidance or opinions.

What is Ethereum 2.0?

Ethereum 2.0 is a multi-phased upgrade, aiming to address scalability and security.

The scaling issue has been debated for many years now. Concerns continue to grow over the high cost of operation causing developers to look at other, more cost-efficient networks to build programs on. This has enabled other networks like Solana, Avalanche, and Cardano to capture a larger DeFi market share. With Ethereum 2.0 many of the current concerns based on cost and efficiency will hopefully be resolved. The main objectives of the coming  upgrade are as follows

  • Transition to Proof of Stake. This makes Ethereum 99.9% more energy efficient. This also puts users, at least those who stake, in charge of the network instead of miners in terms of security and transaction processing. 
  • Increase transactional throughput using sharding, a system that breaks computation off into 64 different parallel shards. Easing the burden that any one shard has to take on. 
  • Moving away from the EVM to Web Assembly which is a lighter software which is more compatible with web applications. Making for faster, more scalable applications.

Ethereum Scalability

Until this upgrade is complete which may take a few more years of rolling out different features, the fees for users on Ethereum are likely to remain high. This is where Layer Twos come in! Layer Two scaling solutions are layers built on top of Ethereum that integrate with many of the most popular applications and allow you to experience Ethereum for a fraction of the fees. The most popular of these currently are Arbitrum, Optimism, and ImmutableX. Although there are around a dozen or so in total. These solutions are helping to solve the scalability issues here and now and will remain relevant even once fees on the main chain go down. 

Want to Learn More About Ethereum?

This has been a short overview on Ethereum. And while you don’t need to know everything here in great depth, I do hope that this short introduction has helped you gain a better understanding of the basic concepts related to this key blockchain. For those of you wanting to dive much deeper into the world of Ethereum, then the Ethereum Foundation Website is a great resource.

What is Ethereum? | Ethereum Explained for Beginners - - 2022

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What is Ethereum? | Ethereum Explained for Beginners - - 2022
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