Ethereum definition

What is ethereum

Ethereum is a platform based on blockchain technology and is best known for its native cryptocurrency – called Ether or ETH or simply Ethereum. The distributed nature of blockchain technology makes the Ethereum platform secure, and that security enables ETH to create value.

The Ethereum platform supports Ether in addition to a network of decentralized apps, also known as “dApps”. Smart contracts that originate on the Ethereum platform are a central part of how the platform works. Many decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology.

As a cryptocurrency, Ethereum is only second in market value after Bitcoin in December 2021.

The central theses

• Ethereum is a blockchain-based platform that is best known for its cryptocurrency ETH.
• The blockchain technology that powers Ethereum enables the public to create and maintain secure digital ledgers.
• Bitcoin and Ethereum share many similarities, but different long-term visions and limitations.
• Ethereum is moving to an operating protocol that provides incentives to process transactions for those who own the largest amounts of ETH.

Ethereum founder Joe Lubin explains what it is and why it matters

How does Ethereum work?

Like other cryptocurrencies, Ethereum uses blockchain technology. Imagine a very long chain of interconnected blocks, with all the information about each block known to every member of the blockchain network. Since every member of the network has the same knowledge of the blockchain, which works like an electronic ledger, a distributed consensus can be established and maintained on the status of the blockchain.

Blockchain technology creates a distributed consensus on the state of the Ethereum network. New blocks are being added to the very long Ethereum blockchain in order to process Ethereum transactions and mint new Ether coins or to execute smart contracts for decentralized Ethereum applications.

The Ethereum network derives its security from the decentralized nature of blockchain technology. A huge network of computers around the world maintains the Ethereum blockchain network, and the network requires a distributed consensus – a majority agreement – for any changes to the blockchain. An individual or a group of network participants would have to gain majority control over the computing power of the Ethereum platform – a gigantic, if not impossible, task – in order to successfully manipulate the Ethereum blockchain.

The Ethereum platform can support many more applications than ETH and other cryptocurrencies. The users of the network can create, publish, monetize and use a variety of applications on the Ethereum platform, as well as use ETH or another cryptocurrency as a means of payment.

A brief history of Ethereum

Vitalik Buterin, who is credited with the conception of the original Ethereum concept, published a whitepaper on the introduction of Ethereum in 2013. The Ethereum platform was launched in 2015 by Buterin and Joe Lubin, the founders of the blockchain software company ConsenSys. The founders of Ethereum were among the first to consider the full potential of blockchain technology beyond safely trading virtual currency.

A notable event in the history of Ethereum is the hard fork or split between Ethereum and Ethereum Classic. In 2016, a group of network participants gained majority control of the Ethereum blockchain to steal more than $ 50 million worth of ether raised for a project called The DAO. The raid’s success was attributed to a third party developer’s involvement in the new project. While the majority of the Ethereum community chose to reverse the theft by invalidating the existing Ethereum blockchain and approving a blockchain with a revised history, a fraction of the community chose to use the original version of the Ethereum blockchain to maintain. This unchanged version of Ethereum was permanently split to become the cryptocurrency Ethereum Classic, or ETC.

Since the introduction of Ethereum, ether has risen as a cryptocurrency to become the second largest cryptocurrency by market value. It is only surpassed by Bitcoin.

Ethereum vs. Bitcoin

Ethereum is often compared to Bitcoin. Although the two cryptocurrencies have a lot in common, potential investors should be aware of some important differences.

Ethereum is described as “the world’s programmable blockchain” and positions itself as an electronic, programmable network with many applications. The Bitcoin blockchain, on the other hand, was only created to support the cryptocurrency Bitcoin.

The Ethereum platform was founded with the far-reaching ambitions to use blockchain technology for many different applications. Bitcoin was designed exclusively as a cryptocurrency.

The maximum number of bitcoins that can be put into circulation is 21 million. There is no limit to the amount of ETH that can be created, although the time it takes to process an ETH block limits the amount of Ether that can be minted each year. The number of Ethereum coins in circulation is more than 118 million at the end of 2021.

One key difference that affects investors is the way the Ethereum and Bitcoin networks handle transaction processing fees. These fees, known as “gas” in the Ethereum network, are paid by the participants in Ethereum transactions. The fees associated with Bitcoin transactions are borne by the wider Bitcoin network.

A key aspect of the similarity between Ethereum and Bitcoin is that both blockchain networks consume large amounts of energy. Each of these blockchains uses the proof-of-work protocol, a methodology that requires extensive computing power to validate transactions and mint new currencies. Ethereum is gradually switching to a different operating protocol known as Proof of Stake, which uses much less energy.

The future of Ethereum

The transition from Ethereum to the Proof-of-Stake protocol, which allows users to validate transactions and coin new ETH based on their ether holdings, is part of a major upgrade to the Ethereum platform known as Eth2. The upgrade also adds capacity to the Ethereum network to support its growth, which will help resolve chronic network congestion issues that have driven up gas charges.

The rollout of Ethereum continues, including from high profile companies. Chip maker Advanced Micro Devices (AMD) announced a joint venture with ConsenSys in 2020 to build a network of data centers based on the Ethereum platform. Microsoft has partnered with ConsenSys since 2015 to develop Ethereum Blockchain as a Service (EBaaS) technology on Microsoft’s Azure cloud platform.

How can I buy Ethereum?

Investors can use any of many cryptocurrency exchanges to buy and sell ethers. Ethereum is backed by dedicated crypto exchanges like Coinbase, Kraken, Gemini, and Binance, as well as brokers like Robinhood.

How does Ethereum make money?

Ethereum is not a centralized money making organization. Miners and validators who participate in the operation of the Ethereum network, usually through mining, earn ETH rewards for their contributions.

Is Ethereum a Cryptocurrency?

The Ethereum platform has a native cryptocurrency known as Ether or ETH. Ethereum itself is a blockchain technology platform that supports a wide range of decentralized applications including cryptocurrencies. The ETH coin is commonly referred to as Ethereum, although the difference is that Ethereum is a blockchain-powered platform and Ether is its cryptocurrency.

Investing in cryptocurrencies and Initial Coin Offerings (“ICOs”) is very risky and speculative, and this article is not a recommendation by Investopedia or the author to invest in cryptocurrencies or ICOs. As each individual’s situation is unique, a qualified professional should always be consulted before making any financial decision. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. At the time of this writing, the author owns Bitcoin and Ripple.