Ethereum has quickly grown to become one of the most talked about technologies in the world of blockchain and cryptocurrency. Originally proposed in 2013 by Vitalik Buterin, Ethereum builds on the innovations of Bitcoin to create a decentralized computing platform that enables the deployment of smart contracts and decentralized applications (dapps). In this beginner’s guide, we’ll cover the core concepts and history behind Ethereum to help you understand what makes it so revolutionary.
What is Ethereum?
Ethereum is an open-source, public blockchain-based distributed computing platform. It operates based on a cryptocurrency called ether (ETH) which can be transferred between accounts and used to compensate participant nodes for computations performed.
Ethereum enables developers to build and deploy decentralized applications (dapps) by providing a platform to create smart contracts – self-executing code that runs exactly as programmed without the possibility of downtime, censorship, or third party interference.
These dapps can have use cases in finance, identity management, supply chains, online gaming and voting, and many other industries. The potential for Ethereum to disrupt traditional business models is immense.
Smart contracts are the key innovation of Ethereum. A smart contract is simply a program that runs on the Ethereum blockchain. It’s a collection of code and data that resides at a specific address on the Ethereum blockchain.
Smart contracts are executed by the network of nodes that run the Ethereum protocol. They automatically execute when certain conditions are met. The execution is carried out by the blockchain, which means it does not rely on a centralized party. The execution also cannot be altered. Even the creator of the smart contract does not have the ability to interfere with its execution once deployed on the network.
This allows for decentralized applications that do not require a centralized authority to function. For example, a smart contract could automatically pay out insurance claims once flight delays pass a set length of time without requiring an insurance company to process claims.
Ether (ETH) is the native cryptocurrency of the Ethereum network. It acts as “fuel” for the network, providing incentives for developers to write quality applications and for miners to contribute computing power to secure the network.
When you execute transactions on the Ethereum blockchain, you must pay a fee in ETH to use the network. This fee is called “gas.” The amount of gas required depends on the complexity of the transaction. The ETH is then awarded to the miner who mines the block that contains that transaction.
Miners compete with each other to validate transactions and create new blocks. In return, they earn newly minted ETH and gas fees from transactions. This provides the economic incentives for people to dedicate hardware and electricity to powering the network.
Similar to Bitcoin, ETH is created through a proof-of-work mining process. Its supply is not controlled by any government or company. The maximum supply is not capped, but the rate of new ETH creation is capped at 18 million per year.
History of Ethereum
Ethereum was first proposed in 2013 by programmer Vitalik Buterin. Buterin envisioned Ethereum as a blockchain-based computing platform that could go beyond the limited functionality of Bitcoin.
In 2014, Buterin formally announced Ethereum at the North American Bitcoin Conference in Miami, Florida. He also published the initial Ethereum whitepaper which laid out the technical design of the project.
An online crowdsale was held in July 2014 to help fund development. It sold over 60 million ether tokens and brought in over $18 million. This allowed Buterin and the other founders to fund their work to build Ethereum.
The first live release of Ethereum, known as Frontier, launched on July 30, 2015. This initial version provided developers with the tools to start experimenting with and building decentralized applications.
In March 2016, Homestead, the first “stable” Ethereum release, went live, allowing for the creation of more complex smart contracts and decentralized applications.
The DAO Hack
In 2016, an organization called The DAO (decentralized autonomous organization) launched a venture capital fund built on Ethereum that aimed to crowdfund investments in Ethereum-based startups. Investors bought DAO tokens with ether which gave them voting rights on potential projects to fund.
The DAO raised over $150 million, making it the largest crowdfunding project at the time. However, in June 2016, hackers exploited a vulnerability in The DAO’s code to syphon off one-third of its funds to a subsidiary account.
To return the stolen funds, the Ethereum community voted to implement a hard fork to essentially undo the hack. This controversial move resulted in Ethereum being split into two blockchains – Ethereum (ETH) and Ethereum Classic (ETC). This highlighted issues around immutability and transparency in decentralized systems.
The hard fork successfully returned the stolen funds but also raised criticisms around violating the core philosophical principles behind blockchain technology. This event highlighted the youthfulness of smart contract programming and the need for better practices and development tools.
Launch of Ethereum 2.0
Ethereum is transitioning from a proof-of-work consensus model to a proof-of-stake model via a multi-year upgrade process. This will eventually allow Ethereum to scale more efficiently by relying on staked ETH to validate transactions instead of energy-intensive mining.
The first phase, Beacon Chain, went live in December 2020. It operates independently but will eventually be merged with the main Ethereum blockchain. Staking on the Beacon Chain was also introduced, allowing users to earn rewards for staking their ETH.
The final phase, docking with mainnet, is targeted for late 2022. This will fully transition Ethereum to proof-of-stake consensus model.
Growth of Decentralized Finance
Decentralized finance (DeFi) has emerged as one of the most active sectors building on Ethereum. DeFi aims to recreate traditional financial systems like lending and derivatives trading in a transparent, decentralized manner without intermediaries.
MakerDAO launched the DAI stablecoin in 2017, allowing anyone to take out loans collateralized by crypto. Other DeFi projects like Uniswap, Compound, Aave, and Yearn Finance have since followed, offering decentralized trading, lending and yield generation.
As of 2022, over $100 billion is locked in DeFi platforms and individuals can earn passive income on crypto holdings by lending and staking tokens in DeFi apps. DeFi shows the potential for blockchain technology to disrupt the existing centralized finance industry.
Ethereum’s popularity has resulted in network congestion and high transaction fees as usage outpaces capacity. At times, fees have exceeded $100 per transaction, making micropayments impractical.
There are a number of solutions in the works to scale Ethereum to millions of transactions per second and reduce fees. Second-layer scaling solutions like Polygon and Optimism roll transactions off-chain and settle them in bulk on Ethereum. Sharding will allow parallel transaction processing across 64 new chains.
Scaling remains an active area of research and development. Finding solutions that retain decentralization and security will be critical for Ethereum to achieve mainstream adoption. The upcoming switch to proof-of-stake aims to significantly increase scalability once implemented.
As the first generalized programmable blockchain, Ethereum has unlocked a whole new range of possibilities for decentralized computing and finance. It has already seen billions of dollars worth of value flow through its ecosystem.
Upgrades like proof-of-stake and sharding promise to address scaling challenges and allow Ethereum to support higher throughput. Ethereum also benefits from strong developer support, brand recognition, and the first-mover advantage in its market niche.
However, there are now other “ETH killers” like Cardano, Solana and Polkadot competing for the smart contract blockchain space. Only time will tell if Ethereum can maintain network effects and its dominant position as other platforms emphasize lower fees and higher scalability.
Nonetheless, as web3 and decentralized technologies become more mainstream, Ethereum appears poised to capture a significant share of the market, making it a blockchain project to continue watching closely in the years ahead. For now, it remains the go-to platform for decentralized applications and will likely see increasing adoption if it can successfully scale while maintaining security and decentralization.