Everyone in the crypto space has heard of Ethereum (ETH) at some point. Either you know it as the second largest cryptocurrency by market cap, with only Bitcoin (BTC) bigger than ETH, or as the platform that hosts many of the world’s biggest decentralized applications (dApps). In this guide, you will find everything you need to know about Ethereum, how it works, how it came to be, and what the future might hold in store for it.
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What Is Ethereum?
Ethereum is an open-source blockchain-based platform that is used to create various applications, ranging from business and finance (notably decentralized finance or DeFi), to games and entertainment. The platform is powered by its own cryptocurrency called Ether and shortened to ETH. It also has its own programming language called Solidity, and is Turing-complete, which means you can write a program to complete virtually any reasonable task given enough instructions, time, and resources.
Ethereum introduced a novel concept into the still very young world of cryptocurrencies: smart contracts. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code, executed on the blockchain and irreversible. This removes the need for trust between parties, as anyone can verify the terms of the agreement, and there is no way to secretly write a caveat into the code without it being visible to all participants. Computer scientist and cryptographer Nick Szabo has called traditional vending machines a rudimentary form of smart contract: you put in the required amount of money, press the button, and get the snack. There is no need for an employee to give you what you paid for; everything is already coded into the machine, following an extremely simple logic.
The combination of smart contracts and the nature of blockchain—which is, by definition, decentralized, immutable, and transparent—offered a new approach to handling highly sensitive information, with finance at the forefront. This now meant that it was possible to do things faster, cheaper, and with significantly more transparency than usual, which led to the rise of decentralized finance (DeFi). Nowadays DeFi goes beyond Ethereum as its basic platform, but most of the projects still use Ethereum in some capacity.
How Does It Work (Right Now)?
Anyone who has been in the crypto space for any amount of time has noticed talk about the upgrade of Ethereum. However, at this point (in August 2021), this is still in a relatively early stage. This is why we will cover the way Ethereum works right now and has worked until the planned upgrades have started rolling out. Further below, we will talk more about what is expected to happen in the next few years and how it will change Ethereum’s landscape.
At its core, Ethereum is a blockchain-based software platform. It aims to offer a platform for any decentralized application (dApp) that aims to offer services without requiring their users to trust them with their data. Since they also remove the need for intermediaries thanks to the use of smart contracts, they aim to be cheaper to use than conventional apps.
Ethereum has also been the basis for many other projects without their own blockchain. A project that needed funding, for example, would build a prototype of its end product on Ethereum in order to sell the tokens to raise funds. They could then use those funds to build their own platform with a fully native token that would be exchanged for the Ethereum one (in most cases, this is called an ERC-20 token). The process of selling these tokens is called an Initial Coin Offering, or ICO.
Under the hood of Ethereum is a blockchain, composed of blocks bound together by complex cryptographic protocols that ensure immutability, transparency, and decentralization. These blocks are added to the blockchain through a process called mining that requires special hardware. Currently, miners are those who keep the network safe and healthy, enable transactions, and get rewarded for doing this. However, the issue with this approach (also called a Proof of Work consensus mechanism) is that it is very computationally heavy, which means it uses a lot of energy and is bad for the environment, among other issues.
Another layer of Ethereum is made up of the Ethereum Virtual Machine (EVM). This is the part that executes the rules of the network and makes sure any smart contracts or transactions follow the rules. For those who have experience in computing, the EVM is the runtime environment for transaction execution in Ethereum. There are several implementations of EVM, but all of them must adhere to the specification described in the Ethereum Yellowpaper, the document that specified all the technical details surrounding Ethereum.
Ether is the name of the currency itself: this is required to make transactions and execute smart contracts. It is also often referred to as “gas.” Everything you do on the network costs some amount of ether—every transaction you make, every smart contract you call, each of these has to be paid for, while the amount depends on the complexity of what you want to do. Storing ether is done in accounts, and there are two types:
- Contract accounts: these belong to smart contracts.
- Externally owned accounts (EOAs): as the name implies, they belong to something other than things (like smart contracts) within the network; in this case, this is where users store their ether.
At this moment, Ethereum is relatively slow and inefficient. To keep the network decentralized and thus remove the risk of single-point failure, thousands of nodes around the world are all compiling and executing the same code. The more people use the network, the more the gas fees rise, as the competition is high and everyone wants their own transaction or smart contract to run before anyone else’s. These issues are addressed with Ethereum 2.0, and we will cover more on that later.
Ethereum was first proposed in late 2013 by Vitalik Buterin in a whitepaper. The goal was to build decentralized applications; the whitepaper argued that blockchain, as a whole, could benefit from being used for more than just money, and that what it needed was a scripting language. Ethereum was announced in January 2014, where notable names from the industry gathered to further develop the idea of what Ethereum might become—more on them in the Ethereum Team part of this guide.
The development of everything, from the Ethereum Virtual Machine to the Ethereum Foundation, was funded by an online public crowdsale that went on from July to August 2014. During this time, interested parties could purchase ETH in return for bitcoin.
Since the initial launch, Ethereum has undergone several planned protocol upgrades. These were made to fix certain parts of the platform, add new functionalities, or as part of a transition from its current consensus algorithm, Proof of Work (PoW), to the upcoming Proof of Stake (PoS).
The first live implementation of Ethereum was called Frontier and happened in 2015, which followed the successful Olympic testing phase. It was very barebone, as it was meant for developers and other technical users, unlike today. At the time, the purpose was to enable miners to start operations without the need to rush. The Frontier Thawing fork introduced transactions. This was followed by Homestead in 2016, where several protocol changes were introduced, while the network itself was adapted in a way that allowed for further upgrades.
One of the best known hard forks in Ethereum’s history is The DAO fork. In 2016, The DAO (short for decentralized autonomous organization) launched after a crowdfunding campaign. Its primary objective was to provide a new decentralized business model for organizing both commercial and non-profit enterprises. There was no management structure or board of directors, and its code was open-source. However, users exploited a vulnerability in The DAO code to enable them to siphon off one-third of The DAO's funds to a subsidiary account—this was more than 3.6 million Ether, at the time worth around USD 50 million. The funds were not irrevocably lost; they were put into an account subject to a 28-day holding period under the terms of the Ethereum contract, but the community disagreed on what should be done. Those who believed that nobody should have the power to reverse such an event (as it would go against what they considered the spirit of decentralization) let the funds go and kept the same blockchain in function, which is today known as Ethereum Classic (ETC). Those who wanted to reverse the event and get the funds back did just that through a hard fork, moving the funds in The DAO to a recovery address where they could be exchanged back to Ethereum by their original owners. The decision was reached in a democratic manner: every holder of Ethereum was allowed to vote, and the decision to fork reached over 85% of the votes.
While this fork changed Ethereum from what it stood for before that, it was far from the last one to do so. In the same year, the Tangerine Whistle fork was implemented to address denial of service (DoS) attacks on the network that went on during September and October of the year. The second response to these attacks was the Spurious Dragon fork.
In 2017, the Byzantium fork went live. Among other things, this fork slashed the mining reward from 5 ETH to 3 ETH and delayed the difficulty bomb (more on that later) by a year. There would be a two-year-long pause between that and Constantinople, which launched in February 2019 and ensured the blockchain didn’t freeze before the PoS algorithm was implemented. That same year, Istanbul brought other improvements, like those for scaling, interoperability with other blockchains, and more creative functions for contracts.
January 2020 needed another delay to the difficulty bomb, in the form of the Muir Glacier fork. In October, the Staking Deposit Contract deployed, which set an important foundation for the shift towards PoS, and enabled the Beacon Chain to go live in December of that year. The Beacon Chain was the first step towards Eth2.
2021 also saw its own share of important forks: Berlin launched in April and optimized gas cost for certain EVM actions, as well as increased support for multiple transaction types. London went live in August, reforming the transaction fee market, along with changes to how gas refunds are handled and the Ice Age schedule. An upcoming fork is the Altair upgrade on the Beacon Chain, expected to launch sometime in 2021, and will add support for "sync committees", which can enable light clients, and will bring inactivity and slashing penalties up to their full values.
The future of Ethereum has been mostly decided: shifting from PoW to PoS means it aims to be more sustainable and will work on that in the upcoming few years. The set of upgrades required for this is called Eth2, Ethereum 2.0 or Serenity.
Here, we will offer a general overview of Ethereum 2.0. For a more detailed overview, read our guide on the topic.
The future of Ethereum has been in a Proof of Stake consensus algorithm for a long while. However, when a network has been running for years and has millions of users, with other projects and tokens depending on it, it cannot be overhauled to a completely different modus operandi overnight. This is why the different Ethereum 2.0 upgrades will take years to deploy and run successfully. They are expected to deliver greater scalability, security, and sustainability compared to the current version. There are three main upgrades:
- The Beacon Chain. As we already mentioned, the Beacon Chain launched in December 2020, introducing staking to the network and paving the way to future upgrades.
- The Merge. The next step in the path to the new Ethereum, this will bring together the existing network and the Beacon Chain, bringing staking to the mainnet and ending mining for good. This is estimated to happen sometime in 2021 or 2022.
- Shard Chains. To increase the capacity for processing transactions and storing data, this represents a sort of splitting of the Ethereum network that will occur in phases. This will most likely happen in 2022.
Users who want to participate in the rollout of Ethereum 2.0 can do so through staking as of the time of writing, simply by setting up the launchpad (the Eth2 website will guide them through the process), and confirming their staking address. If you have ETH, participating in staking has a double effect: you will earn more ETH while securing the network at the same time.
You can also run a client, which will make you an active participant in Ethereum, helping keep track of transactions and checking new blocks. There are several clients available, and you can choose whichever you’re most comfortable with. Other than that, you can also go bug hunting. This is a community testing effort, where you’re encouraged to test the Eth2 upgrades before they're shipped, find bugs, and earn rewards. You can earn up to USD 50,000 this way, and there is a leaderboard, which offers a chance at bragging rights.
Last but certainly not least, you can also participate in the research. A good part of the research is public, so you can read through it, participate in discussions, and potentially offer unique insights that would otherwise go unnoticed.
The Difficulty Bomb
Like any Proof of Work consensus algorithm, Ethereum offers their miners cryptographic puzzles that they have to solve in order to create a new block and collect the rewards. The difficulty of these puzzles makes it hard for many users to participate, as the costs of electricity can get too high, while those with better and more expensive machines are more likely to get a profit out of it. The harder the puzzles, the fewer miners will participate.
This is where the so-called Difficulty Bomb comes in. As the puzzle becomes progressively more complex, there will be fewer miners and a substantial lag between production of blocks on Ethereum’s blockchain. This will make mining significantly less attractive, and the start of this scenario is often known as Ethereum’s Ice Age. This time will then be used to make the final transition from PoW to PoS, so people will turn to staking as a way to keep the network running and get rewards for it. In other words, the Difficulty Bomb is a deterrent to miners who may want to choose using PoW after the network has already shifted to PoS, which could create two versions of Ethereum.
Difficulty levels on Ethereum’s blockchain began increasing in November 2016, from block 200,000 onwards. However, there have also been some delays in the slowdown, as the timeline for Ethereum 2.0 upgrades moves further. The exact date of the bomb will depend on these plans, but is expected to happen within the next year or so from now (August 2021).
There are a total of eight people who are considered co-founders of Ethereum.
The first of them is Vitalik Buterin, who came upon the idea when he was 19 years old, in November 2013. He had explored the emerging crypto space for three years before outlining his own idea in a whitepaper, addressing things he thought projects like Bitcoin could benefit from, like programmability. He had also set up the Bitcoin Magazine in 2011 together with Mihai Alisie, another co-founder of Ethereum. Alisie helped incorporate the startup, opened a bank account for the pre-sale, and dealt with the legal matters around the process.
Anthony Di Iorio met Buterin at a Bitcoin meetup in 2012, and he was one of the first people who were asked to be a co-founder. However, after Ethereum decided to go down the non-profit path, Di Iorio took a backseat. Amir Chetrit was working with Israeli startup Colored Coins, a project to manage real-world assets as tokens on top of the Bitcoin network, at the time he met Buterin, who was part of the same project for a time. However, he stepped down for his lack of input at a co-founders’ meeting in June 2014, but remained a co-founder.
Charles Hoskinson was introduced to Buterin and Ethereum through Di Iorio, and was named CEO in 2013. He played the main role in setting up the Swiss Foundation for the project, as well as the legal framework around it, but he left as the team declined to take the for-profit route. He had supported Ethereum Classic when it forked, and went on to create Cardano (ADA) in 2016.
Gavin Wood met the other five co-founders at the announcement of Ethereum in 2014 during the Bitcoin Conference in Miami. As a computer programmer, he offered Buterin to write an implementation of Ethereum in the C++ programming language. Once his testnet was up and running, he asked for a seat at the top table—which was granted, but with some pushback. In April 2014, he published the Ethereum Yellowpaper and later proposed Solidity, the native programming language of the platform.
Jeffrey Wilcke heard about Ethereum while he was working on Mastercoin, the first ICO. He decided to write an implementation in Google’s Go language without reaching out to Buterin about it. He named it Go Ethereum, later shortened to Geth and still in use. He was added to the co-founders list at the same time as Wood. The fact that there are two seemingly competing implementations is actually a net positive for the project, as this guarantees that there is always a backup that might not have been created otherwise. However, the DAO hard fork and a series of hacks caused Wilcke to hand over Geth to Peter Szilagyi.
Last but not least, the most experienced of the co-founders was certainly Joseph Lubin, who had already made a successful, diverse career in programming, business, and finance before getting in contact with Di Iorio and later Buterin. Di Iorio and Lubin largely funded the project, and Lubin was another one of the voices calling for a for-profit path. Later, he built ConsenSys, a company that acts as an incubator for other blockchain startups. He has also worked hard to get Ethereum many of the influential, institutional partners it now has.
Before getting into trading, you should be prepared for largely unpredictable price fluctuations. As an illustration, consider that back in 2017 the Ethereum price recorded 1400% growth in just three months, reaching a market capitalization of USD 70 billion in December 2017. Less than a year later, the Ethereum market capitalization dropped to about 28 billion.
It is expected that improved regulations and the maturing of the market will make it less volatile. In the meantime, traders are advised to closely monitor the trends while the live Ethereum price index should be followed on a daily basis with the help of relevant charts.
Despite superficial similarities with bitcoin, ethereum is an offshoot of quite a different project built on the back of blockchain technology. For starters, the amount of bitcoins that will be created is capped at 21 million, while ETH coins can be made endlessly, at least in theory.
Ethereum has its share of competitors among blockchain platforms as well, although its veteran status has made it the most mature technology on the market. Yet, the likes of Zilliqa (ZIL), EOS (EOS), and Neo (NEO) give Ethereum run for its money, with their plans to improve on its weaker points. Many of these weaker points are addressed in the upcoming Eth2 upgrades.
The price of Ethereum, as with most other crypto assets, is influenced by a wide array of factors. These are often current events in the market, regulatory shifts and turns, big changes concerning the network, and many others. Keeping all factors in mind is pretty much impossible, but it is still possible to make informed choices. To stay in touch with all relevant news about Ethereum, be sure to check Cryptonews’ Ethereum News section regularly.