To many people outside of the crypto space, Ethereum – and its native Ether – represents the second line found under Bitcoin being listed on exchanges far and wide.
However, it’s not exactly fair to consider Ethereum as the direct competitor to its headline-hogging counterpart Bitcoin. Especially both consists of different goals, features, and cases of use than the latter.
Yet, many tapped Ethereum to become more prominent than Bitcoin in the long run. The Enterprise Ethereum Alliance (EEA) racked up some of the biggest names in tech as founding members. Among them are Microsoft, Intel, and JPMorgan Chase.
“The adoption of Ethereum by the corporate world means it could eventually be bigger than its early stage rival,” an article by CNBC noted. But what exactly is Ethereum? How does it work? What are its features? And why has it attracted the attention of the world’s biggest companies?
Let’s jump in.
What is Ethereum?
At its core, Ethereum is a decentralized computing platform powered by blockchain technology. It allows developers to build and deploy their own self-sufficient, autonomous decentralized applications (DApps) and digital tokens onto it.
The technology paved the way for the founding of a broad spectrum of markets. This includes decentralized finance (DeFi), initial coin offerings (ICOs), Web3 gaming, and Non-Fungible Tokens (NFTs).
The Origin Story
Prior to being the second-largest blockchain project in the world, Ethereum was co-created by Vitalik Buterin as an answer to Bitcoin’s shortcomings. Buterin published the Ethereum whitepaper earlier in 2013. It detailed smart contracts – automated immutable “if-then” statements – that would pave the way for DApps.
However, DApp development back then had already existed within the space. Still, platforms weren’t interoperable – an aspect that Ethereum looked to unify applications to maintain wider adoption through the blockchain space.
And Eureka! Ethereum 1.0 was born. Consider Apple’s App Store. One location for thousands upon thousands of applications, all working and abiding by the same rules and principles. That ruleset, however, is hardcoded into the network and enforced autonomously, with developers able to implement their practices within DApps. It is important to note that there isn’t a major party pulling all the rule levers – like how Apple changes and enforces regulations – but power lies in the hands of the community.
To further build out the technology, Buterin, alongside his co-founders Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Lorio, and Amir Chetrit held a token presale to raise $18,439,086 in Ether. This was done to fund Ethereum’s present and future developments.
Work didn’t stop there. The founding members also set up the Ethereum Foundation in Switzerland to further develop the network. However, Buterin later announced that the foundation would operate as a non-profit, driving some co-founders to leave.
How Does Ethereum Work?
First and foremost, the initial goal of the network was to establish a blockchain allowing developers to create and publish DApps. Removing interference from a third-party provider while also shying away from downtimes.
The beauty of Ethereum allows online computer systems to run and operate without a middle man – think Google’s large server farms – but instead on a large decentralized network of small, private PCs. Due to it being open-source, anyone from across the globe could hop on and create DApps without paying hefty fees.
In parallel, each time a transaction happens, it’s transferred using the Ethereum smart contract, with Ether being the payment method. Accordingly, DApps running on the network must pay a small Ether fee called “gas.” These fees are meant to discourage applications with malicious intent aimed at bogging down the network.
As discussed in our previous article about Bitcoin, Ethereum transactions are verified and secured using blockchain technology and cryptography. Ethereum previously used proof-of-work (PoW), verification in which cryptocurrency miners compete to verify transactions by solving complex mathematical puzzles using powerful computers called hashes.
However, Ethereum transitioned from PoW to Proof-of-Stake (PoS) on September 15, 2022. Proof-of-Stake is a more energy-efficient model where, at a high level, validators are chosen based on the number of coins they have staked or locked up to the network.
What Is Ether?
Ether (ETH) is Ethereum’s cryptocurrency, the fuel that runs the whole network; similar to Bitcoin, it is also peer-to-peer – used to pay for computational resources (in the form of gas) and any transactions happening on the network.
In parallel, if a person would like to deploy an Ethereum smart contract, they will need gas, paying for it using Ether. Not only that but also used in the construction of DApps.
Anyone with a crypto wallet can buy ETH through a plethora of exchanges. As of the time of writing, 1 ETH = $1,137, according to CoinMarketCap.
What are Smart Contracts?
Simply put, a smart contract is a programmable agreement running on the blockchain, which allows users to digitize conditions governing the relationship and interactions between two parties involved in a transaction.
It is important to highlight that once conditions are agreed upon, they are programmed and launched into the blockchain as smart contracts. A self-executing (initiating and completing the set of transactions they govern, as long as the predefined conditions are met).
Let’s break that down for a bit.
Consider that Fred will borrow from William 1,000 tether (USDT) only if William deposits Ether worth $2,000 as collateral. Using a smart contract, Fred could independently define the conditions that validate the deal, instead of trusting a middleman that would broker the deal.
If done right, the smart contract would autonomously release 1,000 USDT to William after depositing and locking $2,000 as collateral. Subsequently, when Fred reimburses the loan, the smart contract would release the locked collateral, sending it back to William.
This eliminates the worry of counterparty risks and the need for a middleman. It would allow both parties to not pay any extra fees to an escrow service before conducting the peer-to-peer transactions.
Here’s a fun fact, Ethereum was the first blockchain to discover and implement smart contracts as part of the functionalities of the blockchain. In parallel, this innovation paved the way for many use cases that led to the explosion of DApps.
What is an Ethereum Virtual Machine (EVM)?
However, smart contracts written in Solidity can be read by humans, not PCs. It, therefore, has to be converted into low-level machine instructions – called opcodes – which the EVM can easily understand and execute, according to Ethereum.org.
Also, every Ethereum node has its own EVM.
When a person sends a transaction to a smart contract deployed on Ethereum, every node runs the smart contract and the transaction through their EVM.
In this simulated environment, each node can see what the result will be and whether the outcome produces a valid transaction or not. If all nodes reach the same valid outcome, the changes are made, and the updated Ethereum state is recorded on the blockchain.