Ethereum

Updated on January 5, 2024
Article byShrestha Ghosal
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Ethereum? 

Ethereum is a decentralized blockchain platform that allows users to create and execute smart contract and decentralized applications (dApps). It helps ensure transparency and security through cryptographic techniques. The platform utilizes a cryptocurrency called Ether (ETH) as its native currency.

Ethereum

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The platform’s ability to support smart contracts, which are self-executing code that automates agreements, eliminates the need for intermediaries. This programmable blockchain has facilitated applications across various industries and promoted innovation in the decentralized digital space.

Key Takeaways

  • The Ethereum blockchain is a decentralized blockchain ecosystem that aids in the creation and execution of smart contracts and various decentralized applications. It functions on a network of nodes where each node stores an exact copy of the blockchain.
  • This blockchain has its native cryptocurrency called Ether (ETH). This token acts as a medium of exchange and rewards the network participants.
  • Ethereum is a diverse ecosystem that hosts a wide range of applications across different industries.
  • However, the smart contracts in this ecosystem may contain vulnerabilities that could result in significant losses.
  • Unlike Ethereum, Hyperledger is a collection of open-source blockchain frameworks hosted by Linux.

How Does Ethereum Work? 

The Ethereum blockchain is a decentralized digital infrastructure that assists several applications by enabling the creation and execution of smart contracts and decentralized applications in a secure environment. It operates on a global network of computers or nodes, each storing an identical copy of the blockchain. Users maintain and update this distributed ledger through a consensus mechanism known as Proof of Stake (PoS), in which validators confirm transactions and add new blocks to the chain.

This blockchain is famous for its native cryptocurrency, Ether (ETH), which serves as a medium of exchange and an incentive for the network participants. The participants, including miners, stakers, and developers, are vital for the ecosystem’s functionality and security. The platform’s smart contract functionality allows self-executing agreements written in code to automate various processes and applications. These contracts run without the need for intermediaries. They reduce the risk of fraud, eliminate administrative hurdles, and increase efficiency.

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History 

The Ethereum history dates back to late 2013 when Vitalik Buterin conceived this blockchain. It emerged as a groundbreaking platform that aimed to extend the capabilities of blockchain technology beyond simple cryptocurrency transactions. Its official development began in early 2014, with a whitepaper displaying its objectives for a decentralized, programmable blockchain.

The blockchain’s initial fundraising occurred through a public crowd sale in mid-2014. It raised over $18 million, showcasing the growing interest in blockchain innovation. The platform went live on July 30, 2015, with its first version, “Frontier.” It introduced the concept of smart contracts, which could automate various processes, including financial transactions and complex applications.

Over the years, the blockchain underwent several network upgrades to enhance security, scalability, and functionality. The most significant upgrade in Ethereum history was the transition to a proof-of-stake system in December 2020. This shift addressed energy consumption and network congestion while making the platform more sustainable and scalable.

Features 

The Ethereum ecosystem features are:

  • It operates on a decentralized network of nodes, ensuring no single entity has complete control over the network. This decentralized nature enhances security and censorship resistance.
  • This platform’s native cryptocurrency, Ether, serves multiple purposes. It acts as a digital currency for transactions on the network, provides security through staking in Ethereum 2.0, and serves as an incentive for miners and validators.
  • The blockchain’s design allows it to interact with other blockchains and platforms through various protocols and standards. This interoperability facilitates cross-chain operations and the integration of its assets into other blockchain ecosystems.
  • It has a robust and diverse ecosystem of developers, projects, and applications. It hosts a wide range of DApps, DeFi (decentralized finance) platforms, and non-funded token (NFT) marketplaces, boosting innovation across various industries.
  • The transparent blockchain lets anyone view transaction history and smart contract code. Once users record the data on the blockchain, it is tough to alter or erase, ensuring data immutability and security.

Examples 

 Let us study the following examples to understand this blockchain:

Example #1

Suppose there is a digital art gallery running on the Ethereum blockchain. Artists upload their artwork as non-fungible tokens to the gallery’s smart contract. Art enthusiasts and collectors visit the gallery’s website to view the NFTs. If they wish to purchase any artwork, they send Ether (ETH) to the smart contract associated with the chosen artwork. Once the payment is verified, the smart contract transfers ownership of the NFT to the buyer, who now has a digital certificate of authenticity and ownership recorded on the blockchain. Artists automatically receive their share of the sale, and the gallery deducts a small commission. 

Example #2

According to the September 25, 2023 data, Ethereum’s inflation rate is currently 0.270% due to reduced activity and decreased fees. The noticeable drop in daily network transactions is the primary cause for this shift. There were two notable dips in activity: one in the middle of the year and the other in September. On September 10, daily sales plunged to 866,548, which was 62,852 lower than the day before. Moreover, network costs have started to decline, reflecting the decline in user activity. Since May 2023, there has been a steady decrease in costs, peaking on September 9 and 10, with the lowest daily fees ever recorded.

Applications 

Some Ethereum blockchain applications are as follows:

  • It is the primary platform for NFTs, representing ownership of unique digital assets like digital art, collectibles, and virtual real estate. This platform facilitates the creation, trading, and ownership of NFTs.
  • The blockchain hosts DEXs, which allow users to swap cryptocurrencies directly without relying on centralized exchanges.
  • This platform enables tokenizing real-world assets, including real estate, stocks, and commodities. These tokens provide fractional ownership and increase liquidity in traditionally illiquid markets.
  • DApps based on this platform help enhance supply chain transparency, traceability, and authenticity verification for products and goods. Moreover, it supports blockchain-based gaming and virtual worlds, allowing users to own, trade, and use in-game assets.
  • It can be used for decentralized identity solutions, allowing users to control their digital identities securely and privately.
  • This blockchain’s dApps aims to improve patient data management and access while maintaining privacy and security.

Advantages & Disadvantages 

The advantages of the Ethereum blockchain are:

  • This platform supports smart contracts. These self-executing contracts enable the automation of various processes and agreements without intermediaries. This feature has led to the creation of decentralized applications, facilitating efficient and trustless interactions in fields like finance, supply chain, and legal agreements.
  • It operates on a decentralized network of nodes, meaning no central authority controls the blockchain. This decentralization enhances security, censorship resistance, and trust, making manipulating the network difficult for any single entity.
  • The blockchain is highly versatile and programmable, allowing developers to create a wide range of DApps and customize smart contracts to suit their specific needs.
  • It has a vast and active developer community that promotes continuous development and innovation. Its ecosystem includes decentralized finance platforms, non-fungible token marketplaces, and more.

The disadvantages are as follows:

  • This platform faces scalability issues, especially when network congestion leads to high gas fees and slower transaction processing times.
  • The smart contracts on this platform are code-based and can contain vulnerabilities. Exploits or coding errors in smart contracts have led to significant losses.
  • The Ethereum ecosystem is extensive. However, it can be challenging for its assets and applications to interact seamlessly with other blockchain platforms. 

Ethereum vs Hyperledger 

The differences between the two are as follows:

#1 – Ethereum

  • This is a public blockchain platform designed for decentralized applications and smart contracts. It aims to provide a global platform for various applications, including DeFi and NFTs.
  • It is a permissionless blockchain, allowing anyone to participate in the network, create DApps, and interact with smart contracts. It emphasizes decentralization and censorship resistance.
  • Its native cryptocurrency is Ether (ETH), used for transactions, smart contract execution, and as a staking asset in the PoS system.

#2 – Hyperledger

  • Hyperledger is not a single blockchain but a collection of open-source blockchain frameworks and tools hosted by the Linux Foundation. It is designed primarily for enterprise use cases, including supply chain, healthcare, and identity management.
  • These frameworks offer permissioned blockchains, which restrict access to authorized participants. It is often used in consortiums, where multiple organizations collaborate within a private network.
  • The frameworks support multiple consensus mechanisms. This makes it more suitable for enterprise environments.
  • They do not have native cryptocurrencies or tokens. They focus on facilitating business processes and data sharing among participants.

Frequently Asked Questions (FAQs)

1. Are Ethereum addresses case-sensitive?

No, the addresses are not case-sensitive. These addresses consist of a combination of 40 hexadecimal characters. The addresses may contain both uppercase and lowercase letters. However, they are treated as identical regardless of the letter case. Its address format is designed to simplify sharing and transacting with addresses, ensuring that users do not encounter errors or confusion due to letter case variations.

2. Are Ethereum transactions traceable?

Yes, these transactions are traceable. Every transaction on this blockchain is recorded in a public ledger, making it transparent and traceable. Users can view transaction details, including sender and recipient addresses, transaction amounts, and timestamps, by exploring blockchain explorers or wallet applications.

3. Did Ethereum switch to proof of stake?

It has initiated a transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. This upgrade is known as Ethereum 2.0 or ETH 2.0. Phase 0 of Ethereum 2.0 was launched in December 2020, introducing the Beacon Chain. It operates in parallel with the existing PoW chain. The Beacon Chain is PoS-based and facilitates the coordination of validators for the new PoS system. This transition seeks to improve scalability, energy efficiency, and network security.

This has been a guide to what is Ethereum. We explain its history, features, examples, applications, advantages, & comparison with hyperledger. You can learn more about it from the following articles –

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