What Is Ethereum and How Does It Work?

What is Ethereum, and how does it work? If you don’t really know, you’re not alone. Even though Ethereum has been around for some time, it’s still a new concept for many people.

In this article, we’ll explain Ethereum and its workings. We’ll also discuss its benefits and why it’s becoming more popular. 

This information will help you better understand the concept behind the Ethereum project and ETH cryptocurrency, so you can decide if it’s right for you to get involved. So let’s start!

A brief history of Ethereum

This section looks at significant events in Ethereum’s history. If you want to learn more details visit the official history page. 

2013 – White paper released 

Vitalik Buterin created Ethereum to answer for Bitcoin’s shortcomings. In 2013, he published a white paper detailing smart contracts that would enable the development of decentralized applications (Dapps). 

While Dapp development was already possible, platforms needed to be interoperable. To Buterin, unifying how Dapps ran and interacted was the only way to maintain adoption. This protocol would go on to become Ethereum 1.0. 

Unlike other protocols at the time, Ethereum 1.0 would allow different applications to share a single blockchain space while still abiding by the same ruleset. This was made possible by hardcoding the ruleset into the network and enforcing it autonomously. 

2014 – Ether sale 

Ethereum 1.0 gave power to the people by putting control of the network into their hands. To fund the development of Ethereum, Buterin and his co-founders held a token presale, raising 25000 BTC from selling 50 million ETH (price was set to be 2000 ETH = 1 BTC). 

The group soon founded the Ethereum Foundation, a nonprofit organization based in Switzerland, to maintain and develop the network. 

2016 – DAO fork 

Some group members left after Buterin announced that the foundation would operate as a nonprofit.

In 2016, these users founded The DAO, an organization backed by a smart contract and allowed for decentralized decision-making by its members. The DAO was created as an alternative to traditional organizations controlled by a single individual or group. 

Instead, changes to The DAO required approval from most of its members. However, Ethereum’s history took a turn when a hacker stole over 3.6 million ETH ( worth over 45 million USD at the time)  in funds from The DAO’s holdings. 

The DAO’s members voted to “hard fork” Ethereum to reverse the theft, diverging from the old network and updating to another protocol. This new fork blockchain maintained the name Ethereum, as opposed to the original network changing to Ethereum Classic to operate as a separate project.

2018 – Becoming 2nd largest cryptocurrency

During this time, Ethereum’s popularity surged, and its market capitalization surpassed that of other cryptocurrencies, securing its position as the second-largest cryptocurrency after Bitcoin.

Ethereum’s success was primarily driven by its innovative smart contract capabilities, which attracted developers and businesses to build decentralized applications (Dapps) on its platform.

Ethereum’s vibrant ecosystem, with a wide range of Dapps and tokens, further solidified its position in the cryptocurrency market.

2020 – The Beacon Chain upgrade 

The introduction of the Beacon Chain upgrade marked a crucial milestone in Ethereum’s transition toward the proof-of-stake consensus mechanism. To ensure a secure transition, the Ethereum foundation required 16,384 deposits of 32 staked ETH each.

This milestone was successfully achieved on November 27, 2020, signifying a significant step forward in realizing the project’s overarching vision.

2022 – Paris (The Merge) 

The Paris upgrade marked a significant milestone known as “The Merge.” Its primary focus was transitioning Ethereum from the proof-of-work mining algorithm to the more efficient proof-of-stake mechanism. The critical feature of Paris was switching off the proof-of-work consensus logic and enabling the execution clients to communicate with the connected consensus clients. Essentially, Paris upgraded the execution clients, allowing them to receive instructions from their associated consensus clients. 

The Merge was executed on September 15, 2022. This transition was crucial to a more sustainable and scalable Ethereum network and helped reduce energy consumption by ~99.9%.

Ether and Ethereum: Is there a difference?

Regarding cryptocurrency, two terms are often used interchangeably: Ether and Ethereum. While they are related, there is a crucial difference between the two. 

• Ether is the native token of the Ethereum network. It powers transactions and is used as collateral by validators on the Ethereum blockchain. 
• Ethereum is a decentralized platform that can be used to build decentralized applications (Dapps). Dapps run on the Ethereum network and use Ether to function.

Ethereum (ETH) project in-depth review 

We will do an overview of the Ethereum project by looking at the following criteria:

• Vision: Read the white paper 
• Team: Who are the founders 
• Investors and advisers: Who supports Ethereum  
• Roadmap: State and execution
• Tokenomics: Explore ETH price and critical metrics
• Activity: Look at the blockchain (on-chain) data

By looking at these points, you can better understand how the project develops and if you should buy (invest) in ETH cryptocurrency.  

Vision: Read the white paper

The Ethereum original white paper is an important document written by Vitalik Buterin, the founder of Ethereum. It was first published in 2014 before the Ethereum project started in 2015. 

In that document, Buterin explains the logic of the Ethereum project and its basic ideas. Often this document gets updated. In Ethereum’s case, they post updates on this page. Reading the project’s white paper should give you a clear or at least a rough idea of its main logic and concept.

Team: Who are the founders

On June 7, 2014, eight people had a special meeting in Zug, Switzerland. They decided to rent a house in the woods and called it “the spaceship”! 

These eight people became known as Ethereum’s co-founders, and their goal was to create the world’s second-biggest blockchain platform.

Vitalik Buterin is the only one of these original co-founders still working on it today. Charles Hoskinson and Gavin Wood have set up other blockchain projects, and Amir Chetrit, Jeffrey Wilcke, and Anthony Di Iorio chose different industries to focus on instead. 

Mihai Alisie and Joseph Lubin are both developing businesses that help make Ethereum better.

Investors and advisers: Who supports Ethereum 

Early supporters and investors are two groups that offer the necessary backing for the project launch.

In the first two weeks of the initial ether sale, between July 22nd and August 5th, 2014 project received over 25000 BTC from early supporters (a discounted price of ether was set to be 2000 ETH per BTC). 

More companies support Ethereum too. Here are few that hold considerable amounts of ETH today: 

• Galaxy Digital Holdings has 98,892 ETH
• Coinbase has 31,787 ETH
• Meitu holds 15,000 ETH
• HIVE, with 13,331 ETH in its wallet
• BTCS has over 7,801 ETH

CryptoTreasuries provides a more extensive list of ETH holders.

However, most support and investments come from regular users like you and me. Together, these people make sure Ethereum stays strong.

Roadmap: State and execution 

Checking the project’s roadmap should show you what is being promised and how well these promises are executed. 

In the case of the Ethereum roadmap, you can see what future updates are preplanned and what past upgrades the project went through. These updates are a way to ensure that the Ethereum network is better able to keep up with user demand. 

To do this, they involve making significant changes to the digital infrastructure of the Ethereum blockchain, such as being more secure and faster. Teams worldwide are working hard to ensure these updates are successful.

Tokenomics: Explore ETH price and critical metrics

To understand the tokenomics of any cryptocurrency, you can first look at some fundamental metrics on resources like Coinmarketcap or Coingeiko.

Here are Ethereum’s essential supply and price metrics as of June 10th, 2023:

• Max Supply: Unlimited 
• Total Supply: 120,227,838.14 ETH
• Market Cap: $210B
• Fully Diluted Market Cap: $210,207,602,478
• Price: $1,745.95
• ATH: $4,891.70
• Total Value Locked: $25.52B

However, to better understand and evaluate a project’s economics, learning things like initial token distribution, how many people are holding it, how many projects are using it, and more is essential. 

Let’s take a look at this info for Ethereum. 

Ethereum token allocation and distribution:

• Crowdsale: 83.33%
• Foundation and early contributors: 16.67% of ETH

_{Image source: Coinmarketcap.com}

The initial presale of Ethereum started on July 22nd, 2014, and lasted 14 days, with the price set to be 2000 ETH per 1 BTC (at the time, 1 BTC was $621 USD). 

Developer Activity is very high: 

• More than 4.1k projects use the Ethereum blockchain
• 4.9 million smart contracts deployed on Ethereum

ETH holdings metrics

_{Image source: Coinmarketcap.com}

Wallet addresses by the amount held in USD:

• $0 – $1k: 97.07%
• $1k – $100: 2.83% 
• $100K+: 0.09%

As of June 11th, 2023, there are over 100 million active wallets (addresses) on the Ethereum blockchain. 

Whale holdings:

• Whales – 21.70%
• Others – 78.29%

Whales are wallet addresses holding over 1% of the circulating supply, data from Intotheblock.com. 

Ethereum staking and reward metrics:

• Total ETH staked: 19,373,572
• Total validators: 608,984
• Current APR: 4.8%

_{Data source: Ethereum.org}

These numbers reflect the sum of ETH at stake only on Beacon Chain, not including balances over 32 ETH. 

Tokenomics is vital in analyzing how any cryptocurrency could perform by considering factors like supply, token allocation, distribution, and market capitalization.

In the crypto world, token emissions also hold significant importance in evaluating the long-term value of any project.

Activity: Look at the blockchain (on-chain) data

Looking at the on-chain data of Ethereum can help you better understand how this technology works and how active blockchain is. To do this, you’ll need to find an online platform that offers you access to view this type of data.

For Ethereum blockchain your can check these resources: Ultrasound.money and Beaconcha.in.

Blockchain data is like a digital trail that can track and record Ether transactions. It’s basically an online ledger of Ether’s movement on the platform, showing who did what and when. 

What is Ethereum 2.0 (ETH2)?

Ethereum 2.0, also known as ETH2, is an upgrade to the Ethereum network, aiming to improve its scalability, security, and sustainability. The main change in ETH2 is the switch from a PoW (proof-of-work consensus) algorithm to a PoS (proof-of-stake) algorithm.

_{Image source: Ethereum.org}

This allowed Ethereum to process more transactions per second and reduce its energy consumption (carbon footprint) by approximately 99.9%. 

Advantages and disadvantages of Ethereum

Advantages

Overall, Ethereum offers many advantages over other platforms, making it one of the most popular choices for developers looking to build Dapps:

• Ethereum has a wide range of applications. It enables developers to build decentralized applications (dApps) on its blockchain. These Dapps can range from financial applications and games to data storage and identity management. 
• It has a large and growing network. There are 211.78 million cumulative unique addresses on the Ethereum blockchain, with numerous new addresses being added daily. This ever-increasing network provides greater security and stability for the Ethereum platform. 
• Ethereum avoids intermediaries. Because it is a decentralized platform, there is no need for third-party intermediaries such as banks or payment processors. Transactions on the Ethereum network are directly between users, with no mediator required. 
• It is constantly innovating. The Ethereum Foundation researches and develops new features and improvements for the Ethereum blockchain. This results in a continually evolving platform, becoming more robust over time.

With its wide range of functions, sizeable existing network, lack of intermediaries, and constant innovation, Ethereum is well-positioned to continue its growth in future years.

Disadvantages

Some of the most crucial downsides are:

• Like any new technology, Ethereum has a learning curve — especially for developers. While many resources are available to help developers get up to speed with Solidity, the language of choice for Ethereum smart contracts, it can still be daunting for those without a background in programming. 
• Ethereum’s popularity has led to rising transaction costs on the network. Competition for scarce resources like gas has increased prices as more users crowd onto the network. 
• There is the potential for crypto inflation on Ethereum. Unlike fiat currencies, which are subject to central bank control, cryptocurrencies like ETH are not deflationary. This means there is a risk that the price of ETH could decrease as more tokens enter circulation. 

Investors should weigh these risks carefully before deciding to purchase Ethereum.

Ethereum vs. Bitcoin

While Bitcoin is the most widely known cryptocurrency, Ethereum has the potential to expand blockchain technology’s application vastly. Bitcoin was designed primarily as a digital currency and has functioned reasonably well. 

However, Bitcoin has several limitations, which have become more apparent as the network has grown. 

Here’s a comparison table highlighting some fundamental differences between Ethereum and Bitcoin:

Feature	Ethereum	Bitcoin
Launch Year	2015	2009
Purpose	Decentralized platform for smart contracts	Digital currency and peer-to-peer payments
Blockchain Type	Full programmable blockchain	Transaction-based blockchain
Consensus	Transitioning to Proof of Stake (PoS)	Proof of Work (PoW)
Max Supply	No fixed supply, currently inflating	Limited supply (21 million coins)
Native Currency	Ether (ETH)	Bitcoin (BTC)
Smart Contracts	Supports complex, self-executing contracts	Does not support smart contracts
Use Cases	Decentralized finance, DApps, NFTs, and more	Digital currency, store of value, payments
Ecosystem	Vibrant developer community, large ecosystem	Established and widely recognized ecosystem
Scalability	Working towards scalability improvements	Limited scalability, transaction throughput

Please note that this table provides a general overview. There may be additional factors to consider when comparing Ethereum and Bitcoin.

How and where can you buy Ethereum (ETH)?

Here’s a breakdown of the various options available for buying Ethereum (ETH), along with short instructions on how to use each method:

1. Crypto Wallets (e.g., MetaMask)

Crypto wallets such as MetaMask allow you to buy Ethereum directly within the wallet interface using integrated partner services.

Instructions on how to buy ETH inside a crypto wallet:

• Download and install a cryptocurrency wallet like MetaMask on your desktop or mobile device.
• Create a new wallet or import an existing one following the wallet’s instructions.
• Set up and secure your wallet with a strong password and back up your wallet’s recovery phrase.
• Within the wallet interface, look for an option to buy Ethereum or connect to a partner service for purchasing.
• Follow the prompts to complete the purchase, which may involve linking your bank account or providing payment details.
• Review the transaction details, including the exchange rate and fees.
• Confirm the purchase, and once completed, the Ethereum will be deposited directly into your wallet.

2. Cryptocurrency exchanges

Popular exchanges like Coinbase, Binance, and Kraken allow you to buy Ethereum directly with fiat currency or other cryptocurrencies.

Instructions on how to buy ETH in crypto exchange:

• Sign up for an account on your chosen exchange and complete the verification process.
• Deposit funds into your account (if using fiat currency).
• Find the Ethereum (ETH) market or trading pair on the exchange.
• Set the amount of ETH you want to buy and review the transaction details.
• Confirm the purchase; the ETH will be credited to your exchange wallet.

3. Peer-to-Peer (P2P) Trading Platforms

Platforms like LocalCryptos, Paxful, and LocalEthereum facilitate direct transactions between buyers and sellers.

Instructions on how to buy ETH with the P2P platform: 

• Sign up for an account on the P2P platform.
• Browse available listings to find a seller offering Ethereum.
• Negotiate the terms of the trade, including price, payment method, and any other requirements.
• Initiate the trade and follow the platform’s instructions for making payment.
• Once the seller confirms receipt of payment, the Ethereum will be transferred to your wallet.

4. Decentralized Exchanges (DEXs)

DEXs like Uniswap, Sushiswap, and PancakeSwap allow you to trade Ethereum and other tokens directly from your wallet without an intermediary.

Instructions on buying ETH on the DEX platform: 

• Connect your digital wallet (e.g., MetaMask) to the DEX.
• Select the desired trading pair (e.g., ETH/USDT) and enter the ETH you want to buy.
• Review and approve the transaction, paying attention to gas fees.
• Once confirmed, the ETH will be transferred to your wallet.

5. Crypto ATMs

Some crypto ATMs offer the option to buy Ethereum. These machines allow you to exchange cash or Bitcoin for Ethereum.

Instructions on how to buy ETH with the ATM: 

• Locate a Bitcoin ATM that supports Ethereum purchases.
• Follow the on-screen instructions to select the buy option and enter the amount of Ethereum you wish to purchase.
• Insert cash or scan the QR code of your Bitcoin wallet to initiate the transaction.
• Confirm the transaction and wait for the Ethereum to be sent to your wallet.

Remember to store your purchased Ethereum securely in a wallet you control, such as a hardware or software wallet where you control the private keys. Additionally, always ensure you use reputable platforms and exercise caution when conducting transactions to safeguard your funds.

Conclusion

Ethereum is a decentralized platform running smart contracts: applications that run as programmed with no possibility of fraud or third-party interference. Ethereum’s internal cryptocurrency (Ether) powers these apps and fuels the network. 

ETH2 is an exciting upgrade to the Ethereum blockchain that introduced new features. Ethereum is a compelling cryptocurrency that has several advantages over Bitcoin. 

Understanding the basics of how Ethereum works before buying any is essential. Be sure to do your research and weigh the pros and cons before investing in Ethereum.