Ethereum 101: what you need to know

While Bitcoin is the most important cryptocurrency in terms of market capitalization, Ethereum aims to become more than just a cryptocurrency. It's a decentralized platform that enables developers to build and deploy smart contracts and decentralized applications (DApps). This post will help you understand the basics of Ethereum, how it works, and why it’s considered a groundbreaking technology in the blockchain world.

What is Ethereum?

Ethereum is an open-source, blockchain-based platform that allows developers to create and deploy smart contracts. These are self-executing contracts with the terms of the agreement directly written into code.

In late 2013, Canadian programmer Vitalik Buterin published a white paper describing a way to build decentralized applications. Later, in 2014, development began through a Swiss company, Ethereum Switzerland GmbH (EthSuisse). The network went live on July 30, 2015, with an initial supply of 72 million Ether (ETH), its native cryptocurrency.

Key elements

Before explaining how Ethereum works, it is necessary to learn about its key components. These components are:

Ether (ETH)

• Ether is the native cryptocurrency of the Ethereum network. Ethers are used to compensate validators for adding blocks to the blockchain.
• Users must pay gas fees in Ether to perform transactions and developers must pay in Ether to deploy their DApps on the blockchain.

Gas

• Gas is a unit that measures the amount of computational effort required to execute operations like transactions and smart contracts.
• Users pay gas fees in ETH to incentivize validators to include their transactions in the blockchain.

Ethereum Virtual Machine (EVM)

• The EVM is a runtime environment for executing smart contracts on Ethereum.
• It allows developers to write code in several high-level programming languages, including Solidity, which is specifically designed for writing smart contracts.

How does it work?

Unlike Bitcoin, Ethereum was designed to enable developers to build and deploy smart contracts and decentralized applications. Moreover, Ethereum currently uses a different consensus mechanism.

Blockchain

Ethereum’s blockchain is similar to Bitcoin’s but with a crucial difference: it supports smart contracts and Dapps. Each block contains a record of transactions and the latest state of smart contracts.

Smart Contracts

Smart contracts are self-executing contracts with the terms directly written into code. These contracts automatically enforce and execute terms when conditions are met, eliminating the need for intermediaries.

Decentralized Applications (DApps)

DApps are applications that run on a decentralized network rather than being hosted on a single server. Examples of popular DApps include decentralized finance (DeFi) platforms, games, and marketplaces.

Mining

Initially, Ethereum used a Proof-of-Work (PoW) consensus mechanism, similar to Bitcoin, where miners solve complex mathematical problems to validate transactions and add new blocks to the blockchain. In 2022, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS). This process, known as the Merge, cut Ethereum’s energy usage by 99%. In PoS, validators are chosen based on the number of coins they are willing to stake.

Why Ethereum

Ethereum, like Bitcoin, has a decentralized nature, which means no single entity controls the network. This reduces the risk of censorship and fraud. However, Ethereum offers other singular benefits:

• Ethereum allows developers to create complex, customizable DApps.
• Its Turing-complete language, Solidity, enables developers to write more complex and flexible programs compared to Bitcoin’s scripting language.
• Ethereum’s smart contracts and DApps have applications in various industries. For example, DeFi (Decentralized Finance) platforms can disrupt traditional financial services.