Ethereum Explained: A Beginner’s Guide to the Smart Contract Blockchain
Ethereum is the world’s leading smart contract blockchain platform that offers a user-friendly framework for decentralized tools, games, and applications. Launched in 2015 by programmer Vitalik Buterin, Ethereum quickly gained momentum in late 2021 to hit an all-time high price of $4,878 for one Ether and a market cap of $571.67 billion. Unlike the Bitcoin blockchain, Ethereum inherently supports smart contracts, meaning it doesn’t necessarily require a Layer 2 solution. Ethereum’s functionality combined with the rise of digital assets, non-fungible tokens, and cryptocurrency exchange-traded funds (ETFs) has made it the backbone of decentralized finance, applications, and blockchain technology.
The Basics of Ethereum
Decentralization
Like other blockchains, Ethereum operates without a central authority. Due to the lack of centralized financial institutions, governmental intervention, and third-party databases, users have more control over their identity, privacy, and digital assets on the blockchain. Additionally, thousands of nodes (or computers) around the world maintain the network, with each node maintaining the same record of transactions. For public blockchains, this requires full visibility into transactions. The decentralization of authority and technology results in a resilient, secure, and transparent network.
Smart Contracts
Smart contracts are the core innovation of Ethereum. The platform was designed around smart contract functionality, increasing the utility and efficiency of blockchain technology. Smart contracts are automated agreements coded to execute when conditions are met, removing the need for intermediaries. This sounds simple in nature, but in reality, smart contracts are a powerful piece of technology that enables decentralized applications, finance, games, and more. Ethereum has its own smart contract coding language, Solidity, which is designed to run on the Ethereum Virtual Machine.
Ether (ETH) and Gas
Ether is Ethereum’s native digital asset, or cryptocurrency. It’s used to pay for transactions, interact with dApps, and compensate validators who secure the network. The value of ETH fluctuates alongside global demand for the asset. The amount of ETH that can be created is unlimited. Keep in mind that Ethereum transaction processing fees, or “gas,” are paid by the participants and burned by the network.
Proof of Stake (PoS) Network
In 2022, Ethereum transitioned from proof of work to proof of stake, a more energy-efficient consensus mechanism. Instead of mining, validators are chosen to confirm transactions based on how much ETH they’ve staked, reducing the network’s carbon footprint and improving scalability. Validators create new blocks on the Ethereum blockchain, meaning they are responsible for confirming that the information within the block is accurate. A committee of validators will then verify and vote for its validity. This is different from the original Proof of Work (PoW) network that Bitcoin and other blockchains use because it removes the dependency on energy-guzzling computers. Not only is it expensive to acquire the necessary computational power needed for PoW networks, it is expensive to maintain them with their high energy costs.
Ethereum is more than just a digital asset. It’s a foundation for a new, open internet- one where users control their data, developers create without permission, and financial systems are accessible to anyone with an internet connection. While Bitcoin introduced the concept of peer-to-peer digital currency, Ethereum expanded on that idea by turning the blockchain into a global, programmable platform, which drives its popularity and value.
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