Ethereum 101: The Ultimate Guide to Understanding Ethereum

Nowadays, those uninitiated to the world of crypto usually equate “crypto” with “Bitcoin.” With the recent interest in crypto in general, another name is starting to crop up regularly, and that name is Ethereum, or “ETH,” the native cryptocurrency associated with it. Not only is knowledge about the blockchain network spreading amongst the initiated, but even Wall Street is paying attention, as evidenced by the interest shown by institutional investors, hence why we felt it was appropriate to bring you this Ultimate Guide to Understanding Ethereum.

How does the market cap of crypto tokens compare with the market cap of some of the most famous companies in the world? Well, as of 2023, Apple’s market cap is $2.231 trillion, Amazon’s at $944 billion, and Tesla’s at $635 billion. It’s not quite there with the big leagues, but it’s not an amount to be sniffed at either. Even with many still clinging to the tulip fever analogy (which is fast fading), it’s hard to believe that a project selling vaporware can last for years and collect the amount of money it has.

With that doubt in mind, it’s time to take a real deep look at the beast called Ethereum and what it’s doing to gobble up all this money that could’ve gone to end world poverty or send us to Mars. Before we crack into in-depth analysis, here are some Ethereum facts and quick hits:

Ethereum Review Summary:

To sum up, “What is Ethereum,” Ethereum is a decentralized network that uses blockchain technology to run applications and process transactions. It has its own cryptocurrency called Ether (ETH), which is the native token responsible for running the network and paying for network fees. Ethereum’s utility comes from the fact that anyone can use the technology to build and create decentralized applications that do not need to be controlled by a centralized authority.

The Key Features of Ethereum Are:

  • Ether– This is the cryptocurrency that powers the network and is used to pay for transactions and services.
  • Smart Contracts- Smart Contracts are self-executing agreements that run on the blockchain and can enforce rules and conditions without the need for intermediaries.
  • Decentralized Applications (DApps)– Applications that can be built and run on top of the Ethereum blockchain that can offer various services such as finance, gaming, social media, etc. Similar to apps that can run on the web2 internet in use today, the same can be built on the next generation of the internet (Web3) on a network like Ethereum.
  • Decentralized Autonomous Organizations (DAOs)– A decentralized organization that has no central authority and is governed by its members who own tokens of the DAO. Members are able to vote on proposals that affect the project’s operations and goals. Blockchain technology executes the decisions automatically according to the set of rules encoded in smart contracts.
  • Ethereum Virtual Machine (EVM)– A computational network that is capable of running smart contracts on the Ethereum network. This allows any code written in any language that is compatible with the Ethereum Virtual Machine to be able to run and perform computations and code execution. The EVM updates the state of the Ethereum blockchain after each block is added, it is designed to promote cross-chain compatibility and be deterministic and secure.
  • What is Ethereum?

    The easiest way to describe Ethereum is to imagine an online computer on which thousands of people across the globe are running apps at the same time. Some users are playing Candy Crush on this computer, while some are using Apple Pay to buy groceries. Ethereum is no supercomputer; its processing capacity is limited, so it has to reject some operations when so many people are accessing it simultaneously. Periodically, this computer publishes a record of all the operations it accepted in that cycle, and a majority of users sign off on it to make it official. The real Ethereum network is not much different. Like users, there are nodes (computers connected to the internet and running the Ethereum software) through which users run apps on Ethereum. These apps are made of smart contracts. If you have heard of NFTs, those are also smart contracts on Ethereum. Users pay a fee (called ‘gas’) for apps.

    Once every node runs its desired set of apps (and in that order), it must convince every other node that its set of operations is correct. A vote is held to elect the canonical version. The voting is a consensus process called Proof of Stake, and the canonical version is called a block, a record of all accepted operations in that period. Now, every block maintains a record of all accepted transactions in that period. When you link every block with its preceding block, you get an immutable history of all operations leading back to the first ever block (genesis block); or a blockchain.

  • What’s really interesting about this network design is that no central authority tells all the nodes what to do. Instead, each node operates on its own accord, abiding by the rules of the network. Also, the nodes are spread around the world, thus making this a decentralized platform, and the apps are decentralized applications or Dapps.Let’s expand on the Dapps. Your high school computer science class must have introduced you to some programming languages like Python or Java. We use these programming languages to build countless phone and laptop apps. Programmers use a language called Solidity (which is actually quite similar to Java) to build Dapps for Ethereum. Smart contracts are programs built for Ethereum, a collection of smart contracts makes up a Dapp.

    Hopefully, you now have a more concrete idea of what Ethereum is, let’s go under the hood to see how it works. I’ll try my best to provide the least messy explanation I can. If you want Guy’s latest Ethereum take, here’s a great video:

    How Does Ethereum Work?

    The Ethereum network involves a complex interplay of several participants and processes, which can be overwhelming for newcomers. So, let’s scale down. Let’s focus on a singular node, understand the activity, and then consider the whole network.

    Once again, a node is the computer hardware running the Ethereum operating system. The Ethereum OS has two functions: maintaining a ledger of Ether (ETH) transactions and processing smart contracts (Dapps).

    Ether (ETH)

    Ether is the native currency of the Ethereum network. One of the network’s primary operations is recording Ether transactions and maintaining the balance held by each user. In this context, it is helpful to imagine a bank whose main function is to keep a record of money in every bank account. Ether is money in Ethereum, with blockchain accounts instead of bank accounts or users. One may use Ether to perform two broad functions:

    • Send Ether to other addresses.
    • Pay Ether as gas to run smart contracts.

    The dollar is further fractioned into cents. Similarly, ETH is accessible in smaller denominations. The standard unit is known as Gwei, short for giga wei. Anyone who has ever made a transaction on Ethereum knows Gwei because it’s the unit used to measure gas fees. Rather than say it costs 0.00000001 ETH, it is much easier to say 10 gwei.

    Ethereum Accounts

    Ethereum accounts are on-chain entities that interact with one another. They might interact to exchange ETH, or access smart contracts to perform operations on the network. We already covered that smart contracts are programs running on the Ethereum network. Ethereum uses smart contracts to create two kinds of accounts:

    Smart Contract Accounts:

    Commonly referred to as just smart contracts, these accounts comprise code written in Solidity to perform arbitrary operations on the Ethereum network. A bunch of smart contracts interact with one another to form a Dapp. These are like blank slates; you can program them to perform any function as long as they are within the foundational rules of Ethereum.

    For instance, tokens like CRV, UNI and USDC are also smart contracts that record their respective transaction ledgers. Smart contracts are the building blocks of DeFi; they enable DEX, lending protocols, NFTs, staking, and everything else. Users can perform operations on smart contracts by calling them using their public address. Once a smart contract is deployed on the network, it has no owner (private address), making them immutable, or impossible to alter.

    It is also important to note that Ethereum smart contracts are “Turing Complete.” This means that, in theory, any computation, no matter the complexity, will run until completed on the network. Another essential quality of Ethereum smart contracts is composability. It means that like legos, anyone can combine smart contracts from different applications to build new products.

    Smart Contract Wallets:

    Smart contract wallets are Ethereum network users who transact and interact with smart contracts. Traditionally, the ownership of such an account was defined by a private key. A user account would use this secret key to authorize operations from that account, so possessing the private key was synonymous with owning the account.

    Following ERC-4337, or Account Abstraction, Ethereum will replace private keys with smart contracts, leading to smart contract wallets. This upgrade means users are no longer restricted to the private key to define account ownership but replace it with a smart contract. Then, such a smart contract defines arbitrary signature logic. It may still use private keys, or access biometric, perhaps a password, the possibilities are endless.

    Ethereum Virtual Machine:

    The Ethereum Virtual Machine (EVM) is the core technology that enables running the smart contract code on the Ethereum network. Every node has EVM installed in its system and stores a record of all smart contracts and user accounts. To use Ethereum, a user accesses an EVM node, signs transactions using its smart contract wallet, performing actions on smart contracts. The node periodically executes a series of such operations and creates a block, linking it to the previous block to form the blockchain.

    From a single node to a network…

    So far, our focus has been on a standalone node. All the processes described previously happen locally on the node. If Ethereum was running on a single node, our analysis would end here. However, it runs on thousands of nodes simultaneously, with every node the complete liberty to perform whatever operations it desires and create new blocks independently. So, how do we decide which block version is the right (or canonical)? We are now venturing into the networking aspect of Ethereum.

    Ethereum Consensus

    Okay, so Ethereum is running on thousands of nodes simultaneously, and no two nodes trust one another, then how does Ethereum achieve a consensus about one canonical version? Let’s explore:

    Data Availability

    Put yourself in a node’s shoes; you need to convince every other node the following:

    • The bunch of transactions you have accepted and in their order are official.
    • You have honestly and correctly checked the validity of all the included transactions.
    • The state of the new block you have calculated is correct.

    How will you convince other nodes? For starters, you can share the data you believe is correct, stuff like the operations you conducted, the verifications you performed etc. This process of sharing is called data availability, or sharing enough data to verify the transactions with other nodes.

    Settlement

    Then, other nodes will re-execute the operations your batch proposes. If they land on the same result as you, they have verified your proposal. This verification process is called settlement.

    Consensus

    Once the nodes verify a proposed state, they hold a vote. If two-thirds of the nodes (or validators) agree on a common block state, it gets accepted in the network. To ensure every node’s honest conduct, the network mandates each node ‘stake’ 32 ETH as collateral. If the network detects dishonest behavior, it fines the nodes on their stake (called slashing). This process is called Proof of Stake Consensus.

    Note that reaching a consensus on every round is not necessary. If the consensus fails, that round will simply not produce any blocks, and a new round will commence.

    Gas

    We learned how all Ethereum nodes interact, exchange information, and communicate to propagate the blockchain, so the network must compensate them for their work. Validators receive compensation in two forms: gas collection and new Ether emissions.

    Transaction Fees (Gas)

    Users who conduct transactions and operations pay a transaction fee in Ether, called gas. The fee is named ‘gas’ quite appropriately. Imagine smart contracts as vehicles that run on a highway named Ethereum, on diesel (gas). Let’s say your car runs 400 miles on a full tank, and it costs $100 worth of diesel to fill the tank up. One day, the number of vehicles on the road shot up. Your car still ran 400 miles on a full tank, but the fuel cost $150 this time. In reality, there are bikes, buses, trucks, and many kinds of vehicles on the road, creating many price curves.

    Quite similarly, smart contracts consume gas to run on Ethereum. While each contract consumes a fixed amount of gas, the cost of gas fluctuates with demand. More on-chain traffic = higher gas prices.

    Ether Inflation

    Bitcoin has a fixed supply of 21 million units. In contrast, Ether’s supply is theoretically unlimited. With every new block, the network mints new units of ETH and distributes it among honest validators who participated in the consensus. Conversely, the network burns some of the gas fees it collects from the users and distributes the rest as rewards.

    When network demand is high, more gas is burned than new ETH is minted, deflating the supply. When network demand is stagnant, the supply inflates. Since the system was introduced in late 2022, the mechanism has resulted in a plateaued supply so far in March 2024.

    To dive deeper into the interesting nuances of Ethereum, learn more about Ethereum transactions on Coin Bureau.

    The above image is taken from Etherscan, a popular website known as a blockchain explorer, that shows the information in the blockchain in human-readable form. If this is the first time you come across this website, I’d like to recommend reading our article on Etherscan to understand how it works.

    Ethereum Wallets

    The next big question is: how do you store digital money?

    Why, with a digital wallet, of course! Does that mean the ETH is inside the wallet, like how you open your wallet and see cash? Well, not quite, as we’ll see below.

    Ethereum wallets serve as a gateway to the Ethereum blockchain, allowing users to manage their accounts and funds. An Ethereum account has the ability to initiate transactions and monitor its balance across multiple Ethereum addresses. Additionally, these accounts can engage in various activities such as creating smart contracts, interacting with decentralized applications and more. Whether in the form of software or hardware, Ethereum wallets are essential tools for users to navigate and utilize the Ethereum network to its full potential.

    Every Ethereum address is a public string of alphanumeric characters that commences with “0x”. The blockchain displays the balance of each Ethereum address, but it is not clear who controls each address since strings of numbers and letters represent them. Wallets, whether in software or hardware form, allow users to manage and control as many Ethereum addresses as they require.

    As Ethereum wallet addresses are very long, not easy to memorize, and prone to mistakes when typing them, many Ethereum users have opted to use blockchain domains instead. With a blockchain domain, instead of having a 42-character long hexadecimal address, your Ethereum address can be connected to something easy to remember, like bob.eth. You can learn more about blockchain domains in our review on Unstoppable Domains.

    Multiple types of Ethereum wallets are available. Users can opt to download software wallets on a desktop or mobile device, keep their wallets offline using paper or titanium, or our personal favourite, utilize hardware wallets like a Ledger or Trezor, which provides users with a good balance between convenience and security. We dive into the different types of wallets and their level of security in our article: Crypto Safety 101.

    The most popular Ethereum wallet for interacting with DeFi and DApps is undoubtedly the MetaMask wallet, which is primarily used as a browser extension wallet. You are going to want to get familiar with it if you want to access the wild world of Ethereum DApps, meaning that you may find our MetaMask Guide helpful. If you intend to use your crypto on the go, we’ve got you covered with our Top Mobile Wallets article, and if safety is your primary concern, then you’re likely going to want to check out our article on the Most Secure Hardware Wallets.

    Regardless of what type of wallet you choose, their core functionality essentially remains the same. When creating an Ethereum wallet, the process typically involves either downloading or recording a private key or seed phrase. Private keys enable users to send or use their crypto, while a seed phrase gives them access to their wallet and all the private keys associated with it. These private keys or seed phrases are essential for safeguarding funds, and a crypto wallet functions as a password manager for users’ cryptocurrency holdings. As long as users have their master password (the seed phrase), they can gain access to their crypto funds.

    New crypto users are often worried about using self-custodial crypto wallets, mistakenly assuming that if they lose their phone or their laptop breaks that had their crypto wallet, that they lose access to their funds forever. This is not true. As long as you have your recovery seed phrase noted down and kept someplace secure, you could launch your phone with your crypto wallet installed on it into the sun, then simply download a new wallet, any wallet that uses the same recovery method (which is most of them), enter your seed phrase, and poof, like magic, you will regain access to your crypto.

    A digital wallet is a container that stores the private keys for the ETH that you hold. This can be confusing as most people think that the wallet itself stores their ETH, which is not the case. Ethereum always remains on Ethereum’s ledger.

    Contract accounts are accounts associated with smart contracts, as each smart contract has a unique Ethereum address controlled by the code. Regardless of the different account types, one thing that doesn’t change are the four characteristics associated with Ethereum transactions:

    1. Nonce– For EOA accounts, this is a number that represents the number of transactions sent from the account’s address. In the case of a contract account, the nonce is the number of contracts created by the account.
    2. Balance– This figure shows the amount of Ether controlled by a wallet account, this figure is comparable to the balance of your bank account.
    3. codeHash– This hash represents the code of an account on the Ethereum Virtual Machine, and is the part of the protocol that is performing the transaction processing.
    4. storageRoot- This hash is a Merkle Patricia tree’s root node, which encodes the hash of the storage contents of an ETH account.

    If that bit all sounded a bit Greek to you, don’t worry, you don’t actually need to understand those 4 points or the difference in Ethereum accounts as a standard user. We just included that information for those who may have a little more of a technical interest. If you want to get even deeper into the weeds of Ethereum wallets, here is a great Ethereum Wallet Guide by ND Labs.

    What is ETH2.0?

    September 15, 2022, was a momentous day in the history of the Ethereum network. Known as The Merge, it’s when the network transitioned from using the Proof of Work consensus mechanism to the Proof of Stake algorithm, usually referred to as PoS. The difficulty involved in the transition, as mentioned by someone in the Bankless Show on YouTube, was akin to “swapping out the engine of an airplane while in flight and making sure the plane doesn’t crash.”

    How Proof of Stake works, in a nutshell, is that Ethereum validators hold 32 ETH as an eligibility condition to be a node operator. Instead of mining blocks, they verify transactions made on the blockchain. Once the data is verified, these are added to new blocks of data.

    It might be a bit steep to hold 32 ETH, especially at today’s prices, however, it is necessary to prevent malicious actions as bad actors will get their ETH confiscated for bad behaviour in a penalty known as slashing. This incentivizes network participants to behave decently.

    If you want more information on the difference between Proof of Work, which is used by Bitcoin, and Proof of Stake, which will be used by Ethereum, and is already securing other layer one networks like Cardano, NEAR, Solana, and many others, please check out this great article on Proof of Work vs Proof of Stake. There’s also a video version with Guy explaining it if you prefer to learn visually.

    One of the key benefits of this transition is the huge reduction of its carbon footprint. Previously, when ETH was still operating under the Proof of Work mechanism, huge amounts of energy were needed to crack the algorithm in order to add blocks to the blockchain network. With Proof of Stake, blockchains can operate with far more efficiency and use significantly less energy. The merge will also help contribute to the future scalability and sustainability of the Ethereum network.

    Dencun Upgrade

    In March 2024, Ethereum passed yet another monumental hard fork on the network, focusing on the scalability of layer-2 ecosystems on Ethereum. Also known as EIP-4844 or Proto-danksharding, the Dencun upgrade seeks to improve network scalability and promote the seamless integration of layer-2 chains on Ethereum.

    One of the key innovations of the Dencun upgrade that led to a dramatic drop in fees for L2 transactions is a new approach to managing layer-2 data posted on Ethereum. The upgrade introduces a data structure called Blobs (binary large objects) and a new transaction type—blob-carrying transactions.

    Traditionally, rollups post their transaction data on Ethereum. Then, Ethereum validators use the transaction data to verify block validity and retrace the rollup’s trace to ensure they arrive on the same block state as presented by the rollup; both processes together enable layer 2 to inherit Ethereum’s security.

    While the block verification is fairly cheap and fast, the retracing demands significant labor from Ethereum validators, increasing rollup cost and execution time. After Proto-danksharding, Ethereum will still verify rollup block’s validity, but will no longer do the retracing. Ethereum validators will simply store the transaction data within themselves without working on it. This simple change in rollup data handling leads to a dramatic drop in rollup fees because just storing data is significantly cheaper than working on it.

    This change does not diminish Ethereum’s security guarantees. The nodes ensure they store the transaction data for an adequate time for the network to spot malicious activity. The Dencun upgrade is an initiative to promote the use of Layer-2 to run decentralized applications, while Ethereum specializes in data management and security.

    Brief History of Ethereum

    At this point, we diverge a bit to tell you the story of how Ethereum came about.

    Once upon a time, a merry band of fellows got together and decided to change the world. This happened not long after Bitcoin came into existence. They bounced a bunch of ideas back and forth in a rented house dubbed “the spaceship” in Zug, Switzerland back in 2014, and came up with a different way to use blockchain technology.

    This was how Ethereum was created, as outlined in this white paper. The band of merry fellows was Vitalik Buterin and his gang – Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Iorio, Amir Chetrit, and Joseph Lubin.

    Amongst those mentioned above, Vitalik is the only person left still steering the Ethereum ship. Gavin Wood and Charles Hoskinson left to create their own blockchain platforms Polkadot and Cardano, while the rest either left the industry or formed companies to support the Ethereum ecosystem.

    The Ethereum Foundation, a non-profit organization, was formed to drive the development and awareness of the Ethereum network. It still plays an essential role to this day. You can find out more about it on their website, Ethereum.org.

    The DAO and the Hard Fork

    In 2016, a group of developers decided to pool some funds together into an organisation known as “the DAO”, short for Decentralised Autonomous Organisation. An unfortunate thing happened when a hacker stole $40 million from the network. There was a huge uproar, resulting in a vote brought to the Ethereum community on how this should be handled.

    The community had to vote on two outcomes: leave the chain as-is with the lost funds or create an identical copy of the blockchain from before the hack, making it seem as if it never happened. The creation of a separate version is known as a hard fork.

    If you’d like to find out more about the drama that went on, please check out the excellent book, The Cryptopians by Laura Shin, host of the Unchained Podcast. The book doesn’t talk about the hack exclusively, but it’s got its own section. To find out more about what other podcasts you can listen to, we’ve curated the Top 10 Crypto Podcasts for your listening pleasure. As always, you can also watch Guy talk about his Top Crypto podcasts on YouTube.

    The results of the vote gave birth to the creation of Ethereum Classic. This version kept the lost funds on record until block 1920000. The version that Ethereum is known for today was the other version without the hack. This was done in a new smart contract only for refunds for the lost funds.

    This exercise showed that the blockchain records can be changed, but only through a community vote, not willy-nilly for any old transaction. Those who opposed the refund wanted to maintain the purity of the blockchain records and follow the “code is law” stance, with the opinion that once the code is written, it should not be altered.

    Ethereum Use Cases

    In the world of start-ups, you don’t want to be the solution looking for a problem. This cannot be said about the Ethereum blockchain because there are real problems out there, or at the very least, the need for a good alternative to what’s already around. Even if we shouldn’t fix something that isn’t broken, sometimes, it’s too late to fix something after it’s broken. And anyway, who gets to define what is “broken”?

    Below are some of the spaces where Ethereum has contributed greatly to developing cryptocurrency as an asset class.

    Decentralized Applications

    One of the main use cases for the Ethereum protocol is for the creation of decentralised applications or “DApps”. DApps are distributed, transparent, resilient, and incentivized applications that many claim could revolutionize how technology works. These decentralized applications run on the Ethereum network, and all network nodes take part in running the application. Think of DApps as the software programs on computers or apps on a smartphone. The variety is endless, but there are some distinct categories that they fall into:

    • Decentralized Finance (DeFi) 
      • Unlike traditional finance which relies on tons of middlemen to push through financial transactions, decentralized finance relies on smart contracts that operate without bias. This enables users to become financial participants as they lend, borrow, and earn interest through all manners of financial actions previously restricted only to banks and professional investors.
    • Non-fungible Tokens (NFTs)
      • This type of token is unique in and of itself due to what it represents, which can be digital art, the key to unlocking privileges, a means of identity, or a piece of real-world property.
      • The gaming industry has also embraced the NFT concept by allowing gamers to trade their in-game piece with other players on open NFT markets. Not only does this foster a greater sense of ownership for gamers, but it also gives their grinding efforts a price tag that they can benefit from.
      • Another area that could potentially be disrupted by NFTs is the live events industry. Essentially, this means tickets will be sold as an NFT instead of a piece of paper that is worthless after the event is over. Instead, the value of the ticket extends beyond just attending the event as the ticket itself can be a collectible that also continues to unlock future value for the ticket holder. Coindesk is taking this approach with their Consensus event happening in 2023 by offering an NFT pass illustrated with generative artwork and also promising more benefits in the years to come.
      • The use case for NFTs is essentially limitless and we’ve barely begun to scratch the surface. An NFT can represent any contract between two parties, whether it be something as simple as a concert ticket, to things like housing deeds, medical records, and insurance contracts.
    • Decentralized Autonomous Organisations (DAOs)
      • An indirect beneficial recipient of the Ethereum network’s existence is DAOs. It’s a new way of organising people together to strive towards a shared vision or goal.
      • The most common ways for users to participate in a DAO is through holding tokens and voting on proposals made by the community on the direction of the project or what implementations to make. This is in contrast with traditional top-down approaches where key decisions are made by the top company management with ordinary workers having no say.

    Ethereum as a Data Availability Layer

    Ethereum serves as a robust data availability layer, ensuring that data remains accessible and tamper-proof. By storing data on the blockchain, Ethereum guarantees its availability and integrity, critical for applications requiring undisputed data veracity. For instance, in supply chain management, Ethereum can store records of product journeys, from manufacturing to delivery, providing a transparent and immutable data trail. This ensures that all parties can trust the data without relying on a central authority. Additionally, in voting systems, Ethereum can store votes securely, ensuring they are accessible for verification while maintaining voter anonymity, thereby enhancing the credibility of the electoral process.

    Ethereum as a Settlement Layer

    As a settlement layer, Ethereum offers a decentralized platform where transactions are securely and irrevocably settled. In finance, Ethereum enables peer-to-peer lending, where agreements are directly between parties without intermediaries, settled on the blockchain. This ensures transparency, security, and efficiency, reducing the risk of fraud and default. In the art world, Ethereum facilitates the buying and selling of digital art through non-fungible tokens (NFTs), with the blockchain acting as a trustless intermediary that confirms ownership and transfers. This use case demonstrates Ethereum’s ability to serve as a foundational layer for economic activities, ensuring that settlements are executed according to the coded agreements without the need for traditional financial institutions.

    Who is Using the Ethereum Network? (And How?)

    For all the talk about how important the Ethereum network is, it’s worth wondering who are the people actually using it? Below is a roles-based list of network participants who each have their own part to play in ensuring the network’s continued existence:

    Validators – Are tasked with validating transactions made on the blockchain network, making sure there aren’t any false records or bad actors trying to sneak past. They get rewarded with ETH for their efforts.

    Stakers – These are ordinary users like you and me who own ETH and would like to help secure the network by staking their tokens with the validators. If you own 32 ETH, you can become your own validator, whether or not you have the technical know-how. For those with less than 32 ETH, staking pool protocols like Lido Finance and Rocket Pool can help users earn an APY for staking their Ethereum.

    Developers – These are the programmers who maintain and improve the Ethereum network and implement any changes as voted on by the community. Ethereum developers are quite a busy group as there are a lot of proposals and improvements needed for the future of Ethereum, as can be seen on the Ethereum roadmap.

    DApp builders – These are the people who build their programs on the Ethereum network. I use builders as a generic term for this group as it involves a number of smaller roles like founders, admin, community managers, in addition to the devs writing the code.

    Users – Where would any of this be without people using the programs and DApps?

    Flashbots – this is a smaller group of non-humans that are using the network in a very specific way. It is related to which Ethereum transactions get listed first on the blockchain relative to the other transactions. As a high-volume trader involved in arbitrage trading, it matters greatly which transactions get listed first relative to other transactions.

    Ethereum vs Bitcoin

    Before we can delve into the underlying technology that makes Ether unique, it helps to take a step back and look at what Bitcoin and Ethereum share in common.

    Common with Bitcoin:

    Public & Permissionless

    Like Bitcoin, Ethereum is open source and anyone can download and write some software and run it on the network. They can also perform transactions and run smart contracts across the network. There is no requirement to “join” any network and provide your information to it.

    Blockchain technology

    Like Bitcoin, Ethereum has a blockchain made up of all transaction blocks prior. Inside these blocks, we have information on the transactions that took place. The connection of any Ethereum block is also linked to all prior blocks with a hash value. These were created by an algorithm of previous hashes thereby forming a non-breakable authenticated chain.

    Differences with Bitcoin

    Since The Merge, Ethereum has much less in common with the Bitcoin network. Indeed, the underlying idea behind Ethereum was to create one large and decentralised virtual machine like a supercomputer whereas the main purpose behind Bitcoin was to be a digital currency, making Bitcoin a kind of payment network. Other differences are seen below:

    Fixed Supply vs Infinite Supply

    Bitcoin’s finite supply of 21 million tokens is one of the key talking points that gives so many people faith in its ability to beat inflation in the long run. Ethereum however, has an infinite supply but since the Merge, it has become potentially deflationary, depending on usage, which could help it maintain a level of scarcity in value.

    The only way to get Bitcoin without buying it is to perform mining. The Ethereum Foundation is known for issuing grants in Ether to crowdfund and kickstart initiatives building on the network. Unlike Ethereum, Bitcoin does not have a “foundation” or an organization behind it for such initiatives, which is one of the reasons Bitcoin is considered more decentralized than Ethereum

    Proof of Work vs Proof of Stake

    It’s been widely criticised that Proof of Work has a higher level of energy consumption than Proof of Stake. One reason is that we haven’t actively harnessed the energy created from the former to be a power source for other uses in life. Proof of Stake, however, has a much lower level of energy consumption as less brute force is required from the hardware to obtain the rewards and power the network. More detail can be found in our Proof of Work vs Proof of Stake article.

    Blocksize Limits

    The way Bitcoin and Ethereum’s block size limits are calculated is quite different. Whereas Bitcoin has a defined block size limit of 1MB, the Ethereum block size is based on the computational complexity of the smart contracts. This is known as the “Gas” limit per block which is not homogeneous across blocks. The Maximum block size on the Ethereum network is about 1.5m Gas.

    A gas limit is put in place in order to add a cost for running the smart contracts. It also combats the problem of “transaction spam.” When making a standard transaction, the Gas required is about 21,000. Therefore, within one block you can fit about 70 transactions. In each Bitcoin block, you are able to get about 500-2,000 transactions depending on the size. This figure has now changed since the introduction of Ordinals on Bitcoin, as we even saw an instance of a Bitcoin block being filled by a single transaction.

    Shorter Block Time

    When it comes to the time needed to create a block, Ethereum takes about 14 seconds. This is markedly shorter than the 10 minutes that is currently required for Bitcoin blocks. Hence, transactions can be completed on the Ethereum blockchain in a much shorter time.

    Last but not least, Gary Gensler, chair of the US SEC organization and probably the least-liked person in crypto, claims that Bitcoin is a commodity, but he can’t say the same for other cryptocurrencies, including Ethereum. This comment could have some real implications for the future of crypto in the US.

    Dive deeper into Bitcoin vs Ethereum in a dedicated analysis on Coin Bureau.

    Ethereum Advantages

    First-mover

    As the earliest blockchain to introduce Smart Contracts, there is an upward spiral in further development and usage. Today, it is the default blockchain for anyone to build anything, as it has the most available tools. This includes the Ethereum Virtual machine (EVM), an important tool for developing DApps. Ethereum’s first-mover advantage also led to the network benefitting massively from what is known as a “network effect.”

    Simply put, because Ethereum is, by far, the largest smart contract layer one network, it attracts new users as it has the most users, developers, and community. This is comparable to Twitter being the dominant social media platform because if all your friends and people you follow are already on Twitter, why would you go anywhere else?

    Composability

    Unlike software programs, which are stand-alone products, many of the DApps built on Ethereum can integrate with each other or be built on top of one another to offer a rich user experience. Examples of this are in decentralized finance (DeFi), as stablecoin projects work with DeFi lending and borrow protocols and bridges to move assets from one blockchain network to the next.

    Grunty network

    Given Ethereum’s activity, it would not be unreasonable to see occasional downtimes due to extreme peak periods. Yet, one thing Ethereum can boast about is not having suffered any downtime since its launch in 2015. Not even The Merge, as good a reason as any, could bring it down. This has since become a kind of gold standard for other blockchain networks to aspire to.

    Although Ethereum does have its troubles with network congestion and high gas fees during peak usage, it is one of the very few networks that can boast of having zero downtime. It is also interesting to note that some competing networks like Solana have suffered outages while only experiencing mere fractions of the network activity as Ethereum, so while other networks may claim they have had zero downtime, none have come close to being as “battle-tested” as Ethereum.

    Top-notch Security

    The security risk on Ethereum is very small given the robust number of validators on the network. It is also relied on by many of the Layer 2 projects on Ethereum to safeguard their own network.

    Does Ethereum have a Future?

    Yes, we certainly believe so. There are big plans ahead for Ethereum in both the near and not-too-far future. Vitalik Buterin, the face of Ethereum, outlined future developments in detail during a two-part interview with the Bankless podcast team. We’re going to list the highlights here:

    Shapella upgrade – sometime in March or April 2023, two upgrades are happening concurrently on the network: Shanghai on the execution level and Capella on the consensus level. After this upgrade, staked ETH can officially be unstaked from the network. This will have quite an effect on the various liquidity tokens floating in the market such as stETH, rETH etc.

    The Verge‘ – this phase mainly focuses on the speed of processing Ethereum transactions. Every minute there are more transactions wanting to be added to its blockchain than it could reasonably handle. This upgrade introduces sharding and addresses the scalability issue. Once completed in 2023/2024, Ethereum transactions will be processed much faster and it will also ensure more seamless integration with the current batch of Layer-2 protocols.

    The Purge and The Splurge‘ – these are two phases in the further future that involves some clean-up and doing fun stuff after the clean-up to make the network more robust. Here is a look at what each stage of development entails:

    Conclusion

    These transitions are part of the evolution of the Ethereum network. The version we currently see is by no means the final outlook. Any of the phases listed above could face unknown difficulties, which may prove to be of future concern. Once all the phases have been deployed, it is assumed that Ethereum will enter a maintenance phase. By that time, it would be interesting to see how many of its competitors have managed to distinguish themselves from Ethereum.

    As the premier blockchain currently reigning supreme in the cryptocurrency space, it would take quite a lot for any blockchain projects of similar ilk to dethrone it from its position. Confidence in the project is at an all-time high, and its roadmap shows that it is here to stay.

    Pros
    It allows for global transactions without intermediaries.
    It has a large support network and a strong community.
    Has the capability to potentially support the future of the internet and IOT infrastructure.
    Has limitless applications beyond just cryptocurrency.
    Has proven to be highly secure and battle-tested.
    Cons

    Not as fast as many alternative layer 1 networks.

    Not as scalable as some competing layer 1 networks.

    Known for high transaction fees.

    There are concerns over how decentralized Ethereum truly is.

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