What is Ethereum and How Does It Work?
Ethereum is an open blockchain platform that wants to allow anyone to build and use applications on its infrastructure that will not be managed by a specific entity but exclusively by code.
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Although many see it solely as the second most popular cryptocurrency, Ethereum is a network that wants to become much more than a digital medium of exchange.
Ethereum wants to become an infrastructure that will provide the user with more options, from creating their own token, to launching decentralized applications and finally using various services.
In short, Ethereum wants to become the world's supercomputer.
Find out below how Ethereum became as popular as Bitcoin and how it plans to meet this goal.
History of Ethereum
Noticing how Bitcoin, as a first-generation network, was designed exclusively as a digital currency system, young developer Vitalik Buterin saw an opportunity to develop a completely different blockchain network with multiple capabilities.
In 2013, Buterin proposed a solution for a new generation blockchain platform that would use a general programming language.
This would open the opportunity for other users to easily access the network and an easier way to develop their own applications.
His work soon attracted other programmers.
A group consisting of Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood and Jeffrey Wilcke helped Buterin launch the new platform.
After it started operating in 2015, the Ethereum network soon paved the way for the development of completely new branches in the blockchain industry, including DeFi, ICO coin and token offerings, NFT tokens, etc.
What is Ethereum?
Ethereum is an open-source, decentralized platform based on blockchain technology.
Its network is used by thousands of applications related to finance, NFTs, gaming industry.
The Ethereum network is so powerful and popular that many use it as infrastructure for their own token.
Ethereum is recognized in the world of blockchain technology as a platform that greatly helped the concept of "Web 3.0"- a decentralized Internet, where users have full control over their data.
The network consists of several factors, namely:
- Ethereum blockchain network - a record of the entire history of Ethereum - every transaction and smart contract is stored in its blockchain.
- Ether (ETH) cryptocurrency - a native cryptocurrency that is required to perform transactions within the network and execute smart contracts.
- Smart contracts - rules in the form of code that dictate under what conditions transactions are executed
- Consensus Mechanism - A method used to validate transactions and record transactions on the network. It is also a method that ensures that all actions are carried out according to the rules.
- Ethereum Virtual Machine (EMV) - the part of the network that ensures that transactions and smart contracts follow the rules of the network.
How does Ethereum work?
As we stated, Ethereum works using several elements (smart contracts, ETH cryptocurrency, EMV machine, and Proof-of-Stake consensus mechanism).
But how do these elements work together and what do they achieve?
We will try to explain how Ethereum works through a simple example.
Imagine the situation of buying and selling real estate.
The whole process takes a lot of time, in most cases both the buyer and the seller have to use the services of third parties (real estate agents, lawyers, notaries, etc.).
When the parties come to an agreement, usually all terms of the sale are included in the contract.
After signing the contract, the buyer must pay the amount for the property, and both parties must pay a fee for using third-party services.
What would buying and selling real estate look like on the Ethereum blockchain?
The whole process would be done with the help of smart contracts and ETH cryptocurrency.
Third parties would not be necessary at all.
Here's what it would look like.
Smart contract
A smart contract is the name for software that independently (automatically) executes all conditions and commands written in its code.
So, when the conditions are met, the contract is executed.
In the context of buying and selling real estate, a smart contract would replace the classic paper document with all the details and conditions of the sale.
In this example, the smart contract contains information about the price paid by the buyer of the property, the deadline by which the buyer must pay the amount, and the deadline by which the seller must transfer ownership.
This contract is stored on Ethereum's blockchain network, which means that it is not stored on a single computer but on multiple computers around the world (all users of the Ethereum network have visibility into this contract).
Ether (ETH)
Ether is a cryptocurrency with which the buyer will pay the full amount to the seller for the property.
Let's say the property price is 116 Ether (ETH).
Smart contract execution
The smart contract verifies whether the buyer has paid the amount for the property on the due date.
If the buyer has paid as agreed, the smart contract will automatically transfer ownership to them, and Ether is sent to the seller.
If the buyer has not paid, ownership of the property remains with the seller.
What would this type of transaction enable?
Transparency of the process
The entire process is visible to anyone using the Ethereum network.
This ensures compliance with all the rules of the Ethereum network and prevents potential fraud.
Although the process is transparent, the personal identity of the parties remains anonymous.
Decentralization and security
ETH as a cryptocurrency and the Ethereum network are considered very secure.
Their security is contributed by the enormous computing power contributed by all the computers participating in the network.
Each computer verifies each transaction and ensures the transparency of the process along the way.
ETH is currently secured by the Ethereum blockchain in the same way that Bitcoin is secured by its blockchain.
Massive computing power — contributed by all the computers on the network — verifies and secures every transaction, making third-party interference virtually impossible.
Ethereum Merge - transition to Proof-of-Stake mechanism
Confirmation of transactions and their storage in the blockchain network (Ledger) takes place through a consensus mechanism.
If you want to go deeper into the topic to understand why the consensus mechanism is applied in blockchain technology and what types of consensus exist, read the following two articles:
The following example of Bitcoin and Ethereum used the Proof-of-Work system as the main consensus mechanism.
However, in the Ethereum Foundation, they were looking for a faster and more effective way to confirm transactions, which would also reduce gas fees.
According to information circulating on the Internet, PoS consumes less energy than the PoW protocol, even by around 90%.
Since the Ethereum ecosystem is constantly growing (new decentralized applications and other projects are being developed on its infrastructure), this move was considered logical.
After the transition to the so-called Ethereum 2.0 was announced for a long time, in 2022 the upgrade was successfully implemented.
Ethereum vs. Bitcoin - What's the difference?
Ethereum is often compared to Bitcoin.
Although the two cryptocurrencies have many similarities, there are some important differences.
Ethereum's founders and developers describe it as the "world's programmable blockchain," positioning itself as an electronic, programmable network with a multitude of applications using its infrastructure.
In contrast, the Bitcoin blockchain was created only to support the bitcoin cryptocurrency.
In other words, the Ethereum platform was founded with the aim of exploiting blockchain technology for applications outside of financial frameworks.
Bitcoin was designed solely as a payment infrastructure.
The most common differences between Bitcoin and Ethereum:
| Bitcoin (BTC) | Ethereum (ETH) | |
|---|---|---|
| Year of Launch | 2009 | 2015 |
| Consensus Mechanism | Proof of Work (PoW) | Proof of Stake (PoS) |
| Average Time for Adding a New Block | 10 minutes | 15 seconds |
| Total Supply | 21 million | Unlimited supply |
| Encryption Algorithm | SHA-256 | Ethash |
What are the advantages of Ethereum?
A wide range of functions
Although viewed as a cryptocurrency in most cases, Ethereum has multiple functions in addition to handling and processing transactions.
The innovative platform can execute actions with the help of smart contracts, store data for third-party applications, and ultimately serve as an infrastructure for creating other decentralized applications.
It does not require the presence of third parties
Since the platform is decentralized, it provides users, including developers who want to create new applications, a process that does not require the involvement of third parties.
For example, to create a decentralized application on the Ethereum network, you do not need web hosting.
A trusted network that makes innovations
In the cryptocurrency market, projects appear that initially promise a lot, but after a certain time, they disappear from the map.
Sustainability and long-term projects have a lot of weight in this industry.
Ethereum has been operating since 2015 and to date, transactions worth several billion dollars have been processed through it.
On the other hand, the team behind the project is constantly looking for new ways to improve, as evidenced by the recent switch to the Proof-of-Stake system, which would provide users with lower fees, faster transfer of transactions and lower energy consumption.
What are the disadvantages of Ethereum?
High transaction fees
The growing popularity of Ethereum has also brought certain problems. A large number of users often caused network congestion.
As a result, transaction processing fees (eng. gas fees) can increase significantly. This entails an additional problem in the form of a longer time period for confirming transactions.
Inflation risks
Although Ethereum has a limit of a maximum of 18 million Ether per year that can be put into circulation, there is no defined maximum number of Ether that can exist (like Bitcoin has a limited supply of 21 million units).
Because of this, there are fears that Ethereum could end up as a fiat currency, whose value decreases over time once a new amount of notes are printed.
Slow process of adaptation and learning
Although Ethereum is an open-source platform, many developers still find using the infrastructure complex. Developers who are not familiar with blockchain technology will certainly have the most problems in adaptation.
Ethereum FAQ
What is the Ethereum exchange rate today?
The price of Ethereum changes every second and follows the exchange rates of global exchanges.
The exchange rate list of the Bitcoin Store platform shows the middle exchange rate.
You can track the Ethereum price change in real time here.
How to buy Ethereum (ETH)?
If you are new to the cryptocurrency world, it is worth pointing out a common misconception. Namely, when you buy cryptocurrency you don't buy Ethereum.
You are actually buying Ether (symbol: ETH).
In addition to being stored in your wallet, you can use the purchased Ether on the Ethereum network.
- If you want to buy ETH cryptocurrency, the first thing you need to do is choose a cryptocurrency exchange.
- After selecting an exchange, create an account and deposit fiat funds.
- Select the ETH cryptocurrency and buy it.
*A fee is paid when trading cryptocurrencies. If you buy on the Bitcoin Store platform, you can pay 30% lower fees with the native Store Finance (SEF) token. Learn more about paying lower transaction fees on the Bitcon Store platform.
- The purchased cryptocurrency will be stored in the digital wallet of the exchange you have chosen.
Where to buy and sell Ethereum (ETH) in Croatia?
You can buy or sell Ethereum easily on the Bitcoin Store online platform or for cash at one of the Bitcoin Store physical cryptocurrency exchanges.
Is Ethereum a good investment?
As with any investment, it is difficult to predict the course of events and the final outcome.
Ethereum is one of the longest-running projects in the market whose cryptocurrency has the second largest market capitalization behind Bitcoin.
The price of Ethereum is not only influenced by the quality of their product, but also by other factors such as macroeconomic influences, popularity in the crypto world, and many others.
Before making any investment, you must keep in mind that cryptocurrencies are highly volatile assets.
Their price can go up and down in a short period of time.
This is why information and education is recommended before any investment, especially if you are a beginner.