What is Ethereum?

Introduction to Ethereum

Ethereum is defined as a decentralized, open-source blockchain project that enables developers to build applications and help users to interact with the same. It is commonly known for its cryptocurrency called Ether, which is currently the second-largest cryptocurrency by market capitalization. Ethereum, as a project, was started in 2015 by its founder Vitalik Buterin and other co-founders working to build the project. The core idea, according to the founders, was to enable the world to use smart contracts and enable the use cases of blockchain technology for more than just monetary transactions.

Currently, everything from decentralized exchanges to peer-to-peer lending, to play-to-earn games, NFTs, etc is being built on the Ethereum blockchain with the help of smart contracts.

According to the nonprofit Ethereum Foundation: “Ethereum can be used to codify, decentralize, secure and trade just about anything.”

How Does Ethereum Work?

Similar to Bitcoin, Ethereum is based on a distributed ledger system where every transaction is entered in a block on the Ethereum chain and accessible to every node on the blockchain. Moreover, the Ethereum blockchain is more flexible than the original bitcoin blockchain as it not only facilitates transactions but also allows developers to build dApps on it.

If you are new to the space, this article will help you in understanding What is Blockchain?

To validate the transactions on the chain, Ethereum uses a consensus mechanism called “Proof of Work” where every miner has to solve a complex mathematical puzzle to win and validate the particular transaction (Note: This has changed after the merge on 15th September 2022, Ethereum now uses a consensus mechanism called Proof of Stake, you can read more about it below)

Ethereum uses a virtual machine to keep the network running which is made up of small individual machines. For a user, one needs to pay a “gas fee” in order to interact with the network and execute smart contracts.

Advantages of Ethereum

1. As a blockchain, Ethereum is one of the first multi-functional blockchain technologies which not only facilitates transactions but also helps build applications and execute smart contracts.
2. Ethereum is one of the few networks which has been constantly involving and hence giving the maximum benefit to its users. A recent example is of shifting to Ethereum - ‘The Merge’
3. Ethereum came into existence in 2014-15. Since then, it has built a large network of its adopters and has been tried and tested in multiple conditions. It provides a sense of security and safety to its upcoming users.

Disadvantages of Ethereum

1. As the network still uses the “Proof of Work” consensus mechanism to validate the transactions & the number of transactions has increased, it has led to increased gas fees on the network. It has in turn made the network inaccessible to many users.
2. Although Ethereum has an annual limit of releasing 18 million Ether per year, there’s no lifetime limit on the potential number of coins.

Future of Ethereum

Ethereum as a blockchain technology currently relies on the consensus mechanism of “Proof of Work”. Though it’s working well, this consensus mechanism consumes a lot of energy and reduces the transaction speed on the network. As the world of web3 is becoming more accessible, the number of transactions on the platform are increasing. And hence, to solve this problem, Ethereum is being upgraded to Ethereum 2.0 which is popularly called “ The Merge”. In Ethereum 2.0, Ethereum would move to the “Proof of Stake” consensus mechanism which would help the network scale and become more sustainable.

Learn more about What is Proof of Stake? to get more clarity about what Ethereum is going to be in the future

Conclusion

Ethereum launched in 2014-15 and continues to be the second-largest cryptocurrency by market capitalization. It is in turn projected to be the future of a decentralized world as it offers the potential of building applications and ecosystem services. Ethereum 2.0 would determine its future depending on how smooth and acceptable the upgrade is.