Ethereum is a blockchain-based software platform that can be used for sending and receiving value globally with its native cryptocurrency, ether, without any third-party interference. But it can also do much more than that.
First proposed in 2013 by Russian-Canadian computer programmer Vitalik Buterin, Ethereum was designed to expand the utility of cryptocurrencies by allowing developers to create their own special applications. Unlike traditional apps, these Ethereum-based applications, called “decentralized applications,” or dapps, are self-executing thanks to the use of smart contracts.
Smart contracts are code-based programs that are stored on the Ethereum blockchain and automatically carry out certain functions when predetermined conditions are met. That can be anything from sending a transaction when a certain event takes place or loaning funds once collateral is deposited into a designated wallet. The smart contracts form the basis of all dapps built on Ethereum, as well as all other dapps created across other blockchain platforms.
In August 2014, Ethereum launched its native token, ether, through an initial coin offering (ICO). Some 50 million ETHs were sold at a price of $0.31 per coin, raising over $16 million for the project.
Unlike many other cryptocurrencies, Ethereum’s cryptocurrency has an unbounded supply, meaning there is no limit to how many ether can enter circulation.
According to the project’s official website, the annual inflation rate of ether is about 4.5%. Block rewards have been reduced two times since the first ever Ethereum block was mined. That block is known as the genesis block. The reductions in block rewards aren’t programmed into Ethereum’s code like Bitcoin’s halving events are. Instead, members of the community propose changes, called “Ethereum Improvement Proposals,” or EIPs, and the rest of the community votes on whether to include the proposals in updates to Ethereum’s software code. Here is a breakdown of ether’s issuance schedule to date.
• Block 0 to Block 4,369,999: 5 ether
• Block 4,370,000 to 7,280,000: 3 ether (changed via EIP-649)
• Block 7,280,000 to now: 2 Ether (changed via EIP-1234)
The issuance rate is also affected by a feature known as the “difficulty bomb.” This refers to a mechanism that increases the difficulty of mining on the original Ethereum blockchain (prior to the transition to the proof-of-stake Ethereum 2.0 blockchain. See below).
Increasing mining difficulty lengthens the time it takes for miners to discover new blocks. That means less ether enters circulation in the form of block rewards, which in turn tapers overall issuance. This mechanism was activated, reset and delayed several times between 2017 and 2020, mainly because Ethereum developers needed more time to work on key updates ahead of the 2.0 upgrade.
From ether’s official launch date in 2014 to March 2017, the token’s price remained rangebound between $0.70 and $21. It wasn’t until the 2017 bull crypto market started to pick up in May of that year that ETH price went above $100 for the first time. From there, ether skyrocketed to a peak of $414 in June 2017 before correcting. It took another five months for bullish momentum to regain strength. By that point, the entire crypto market was starting to experience huge buying pressure, which elevated almost every crypto token to new highs. By January 2018, ETH’s price peaked at $1,418 before it fell sharply.
It took about three years for the second-largest cryptocurrency by market cap (behind bitcoin) to retest its previous all-time high price. Between February and May 2021, eth’s price more than tripled to set a new all-time high of $4,379.
How Ethereum works
Like Bitcoin, Ethereum has its own blockchain where a global network of more than 2.4 million computers known as “nodes” maintains a record of transactions. Anyone can run an Ethereum node and participate in validating the network provided they have the right hardware, knowledge and time to commit to it.
There are three main types of nodes that operate on the Ethereum network.
• Full nodes: These copy and verify all transactions on the Ethereum blockchain, as well as execute smart contract instructions known as opcodes. Full nodes shouldn’t be confused with miners (see example below).
• Light nodes: These maintain only a partial record of the blockchain and request the rest of the data from full nodes. As the name suggests, these nodes can run on lighter devices such as mobile phones and don’t need to operate 24/7.
• Full archive nodes: These store the entire history of the Ethereum blockchain, including previous “states” – or the information on the blockchain – and are used for tools like block explorers.
An easy way to understand the difference between miners and full nodes is to think of miners as archaeologists out in the field uncovering historical artifacts and full nodes as administrators at a national museum who maintain a record of all the archaeologists’ findings.
The main difference between a full node and a full archive node is that a full archive node does everything a full node does but also compiles an archive of all previous states.
The Ethereum blockchain relies on miners to discover new blocks. These are like digital boxes that store transaction information and other data. Miners compete using specialized computing equipment to win the chance to be the next person to add a block to the chain and get rewarded with transaction fees (from the transactions they add to the block) and “block rewards.”
Block rewards are new ether coins that are created when each new block is discovered and are given to the successful miner for their efforts. Once a block is added, the rest of the mining network verifies it to make sure the balances are correct and the transaction isn’t a “double-spend,” i.e., someone isn’t trying to spend money they don’t have. Full nodes then make a record of the final data.
However, unlike Bitcoin, Ethereum full nodes also need to keep track of the state (the current information) of all of these applications, including each user’s balance, all the smart contract code, where it’s all stored and any changes that are made. This means running an Ethereum node requires significantly more storage and is expensive to run compared with a bitcoin node.
Here’s a summary of what’s stored in each node:
• Accounts: This shows how much ether the user has.
• Smart contract code: Ethereum stores smart contracts, which describe the rules that need to be met for money to be unlocked and transferred.
• Smart contract state: The state of the smart contracts.
Ether and gas
Ether (ETH) is the main token of the Ethereum blockchain and acts as the primary “fuel” that powers all activity on it. “Gas” refers to an amount of ether that’s needed to perform a certain function on the network, such as:
• Sending transactions (swapping, trading or moving Ethereum-based tokens around)
• Interacting with decentralized applications
• Creating smart contracts
• Minting non-fungible tokens, or NFTs
How much gas you pay for each action on the Ethereum blockchain is calculated based on two things:
• Gas cost: The computational energy an operation on Ethereum requires to be processed and executed on the network. This is denominated in units of gas.
• Gas price: The rate set by the user for converting gas into units of ether. These units are usually denominated in “gwei,” which is a unit of Ethereum equivalent to 0.000000001 ether.
Cost of an operation on Ethereum = gas cost x gas price
These contracts then have to be converted from high-level languages (that humans can understand) to low-level languages (that a machine can understand). That’s because a computer environment called the “Ethereum Virtual Machine,” or EVM, is where all smart contracts are deployed and executed. This EVM is built into every full Ethereum node and can carry out more than 140 different operation codes (opcodes). These are essentially machine instructions that can be strung together to perform virtually any task, which is what the term “Turing-complete” refers to.
The advent of smart contracts has led to the creation of decentralized autonomous organizations (DAOs) and an entire decentralized finance ecosystem, or “DeFi,” where traditional financial services such as lending and providing insurance can now be accessed through peer-to-peer powered dapps.
Ethereum token standards
Ethereum token standards are the blueprints for creating tokens that are compatible with the broader Ethereum network. These include tokens that can be traded for one another (fungible) as well as tokens that are inherently unique and cannot be mutually exchanged (NFTs). Ethereum token standards were invented by Ethereum developers to help users create new digital currencies more easily, faster and cheaper than starting from scratch.
While there are several different token standards known as “ERC” deployed on the ethereum network, three are commonly used:
• ERC-20: For creating fungible tokens that have similar properties to bitcoin and other mainstream cryptocurrencies.
• ERC-721: For creating non-fungible, unique tokens such as NFTs.
• ERC-1155: A multi-token standard used for creating fungible, non-fungible and semi-fungible tokens.
Ethereum 2.0, also known as “Serenity,” is a major upgrade that aims to make the world’s second-largest crypto project faster, more efficient and more scalable by migrating the network from a proof-of-work to a proof-of-stake system.
Dubbed “Casper,” Ethereum’s new proof-of-stake (PoS) system involves users of the network locking up their coins to become network contributors, as opposed to using expensive, energy-intensive mining equipment. Each staker is required to lock up 32 ethers or to join a staking pool and combine their ether with others to participate in creating new blocks on the Ethereum PoS blockchain. The Ethereum 2.0 upgrade is rolling out in multiple phases. The initial ones include:
• Phase 0: Beacon chain and proof-of-stake launch
• Phase 1: Merging the old and new Ethereum blockchains
• Phase 2: Introduction of “shard” chains and roll-up technology
• Phase 3: Security improvements
Phase 0 launched in December 2020, and the Beacon is a separate Ethereum blockchain that introduced a proof-of-stake system. It’s also responsible for new block creation, transaction verification, staking rewards and managing new Ethereum blockchains called “shard chains.”
In the next major phase of development, Ethereum’s Beacon chain will be bridged to the main Ethereum network and will replace the current, energy-intensive proof-of-work system with proof-of-stake. Network stakeholders known as “validators” will begin producing blocks, verifying transactions and managing the security of the blockchain in place of miners after Ethereum and Eth 2.0 are merged.
After the merge, there will be additional, smaller upgrades needed. The next task for Ethereum developers will be enabling sharding, which creates multiple mini-blockchains. Each shard will be responsible for verifying its own set of transactions rather than the entire network verifying every single transaction. The Beacon chain will act as the main coordinator between these shards, randomly assigning validators to each.
With PoS and sharding both enabled, Ethereum developers expect that they will make further tweaks to enhance the security of the network. That includes adding anonymity features to conceal validator identities behind block proposals. It also includes leveraging new technologies such as the Verifiable Delay Function (VDF) to further secure the randomness of validator assignments and make it harder for malicious actors to disrupt the network.
Key events and management
As mentioned above, Ethereum was originally conceived by Buterin, the Russian-Canadian computer programmer. At the time, Buterin was just 19 years old.
In November 2013, he released the Ethereum white paper – a technical document that outlined the vision and technology behind the proposed project. A month later, Buterin asked Israeli-American Amir Chetrit to join his project. The two had worked together on a separate project called “Colored Coins” – which subsequently laid the foundations for the NFT market.
Not long after publishing the white paper, Buterin attended a Bitcoin conference in Miami, where he met a number of interested developers and investors who joined the Ethereum project as co-founders. Those included Mihai Alisie, Anthony Di Iorio and Charles Hoskinson
Joseph Lubin, Jeffrey Wilcke and Wood were introduced later as the project’s last three co-founders. Together, the eight-member team formed an entity known as the Ethereum Foundation – a Switzerland-based nonprofit organization. A dispute between Hoskinson and Buterin over whether Ethereum should be a for-profit company, led to Hoskinson leaving the project.
Over the course of a few short years, all seven co-founders stepped down or became detached from Ethereum, leaving Buterin as the last remaining active co-founder.
The Ethereum protocol officially launched in 2015 and quickly rose to become the world’s second-largest cryptocurrency by market value behind bitcoin.