Ethereum is a decentralized, Layer 1 smart-contract blockchain network that was launched in July of 2015. The open-source cryptocurrency project was initially proposed by a Russian Canadian programmer Vitalik Buterin. In order to fund the early stages of development, the Ethereum team sold ETH tokens in an initial token offering (ICO) that took place between June and August of 2014. The digital currency used by the participants to purchase ETH was Bitcoin. The Ethereum team raised approximately $16 million worth of BTC during the ICO campaign.
While Bitcoin can be credited with kickstarting the cryptocurrency revolution, Ethereum can be credited with taking the concept of a distributed public ledger to new heights. Beyond immutable, transparent and secure value transfers, the Ethereum platform can facilitate the operation of additional blockchain-powered products and services thanks to its smart contract functionality, and support for fungible and non-fungible tokens (NFTs).
These properties allow Ethereum to facilitate decentralized trading of digital assets via decentralized exchanges, allow the gaming sector to make use of unique digital items in the form of NFTs, and lay the foundation for various borrowing, lending and trading applications that aim to challenge offerings of their traditional finance counterparts.
Here’s a quick overview of key facts about Ethereum and its core blockchain features:
- Mainnet launched in 2015 after a successful ICO campaign during which $16 million in BTC was raised
- Leading smart contract and dApp platform, enabling users to participate in DeFi and NFT sectors
- Users can create custom tokens that run on top of Ethereum
- Ethereum currently uses Proof-of-Work but will transition to an energy-efficient Proof-of-Stake consensus mechanism in the future
What is Ethereum and how does it work?
Ethereum, like all other cryptocurrencies, uses blockchain technology and operates through a decentralized network of nodes that communicate with each other in order to maintain the network and provide decentralized services for its users. According to ethernodes.org, there are more than 5600 active synced Ethereum nodes in operation as of May 2022.
Ethereum makes it possible for users to create smart contracts and decentralized applications (dApps). Once these apps and contracts are deployed on the Ethereum network, they are executed exactly as programmed, ensuring that no third-party entity can tamper with smart contract data.
Ethereum’s native digital asset ETH–called Ether–is used to pay for transaction fees and to interact with dApps on the platform. New ETH is issued via cryptocurrency mining – a computational procedure that verifies transactions and adds new transactions to the blockchain through the Proof-of-Work (PoW) method. Miners are incentivized to use powerful hardware to solve complex mathematical problems involved in PoW mining with ETH rewards, which successful miners receive as a reward for generating a new Ethereum block.
ETH is not the only asset that can be sent through the Ethereum network – users can create custom tokens and set the token parameters (such as the maximum supply, for instance) to their liking. In fact, new token issuance was one of the features that enabled Ethereum to get a lot of traction within the cryptocurrency community. Ethereum’s unique properties enabled teams to run ICOs, which gave numerous crypto projects the opportunity to raise funds to launch their products and services.
On Ethereum, users can also create non-fungible tokens, which is a unique use-case enabled by blockchain technology – NFTs are verifiably scarce digital objects, which is why they’re often called “crypto collectibles.” CryptoKitties is an example of a dApp that leverages NFTs.
One of the major emerging trends in the Ethereum ecosystem is decentralized finance, commonly referred to with the abbreviation “DeFi”. This term refers to the numerous protocols built on top of Ethereum that allow users to lend, borrow, buy and sell their cryptocurrency without having to trust an intermediary in the process.
Ethereum supply is uncapped, which means there is no maximum amount of tokens that can be in circulation at the same time. This comes as a stark contrast to a cryptocurrency like Bitcoin, which has a hard cap of 21 million coins.
New ETH tokens enter circulation via a process known as mining. As of May 2022, there are over 120 million ETH in circulation. Per Etherscan data, the supply of ETH has grown at an approximately 10% yearly pace since 2016. It is worth noting that the supply growth rate has decreased in recent years, mostly due to EIP-1559, which introduced deflationary pressure on the cryptocurrency via real-time ETH burns.
With the price of Ethereum skyrocketing in recent years, most investors cannot afford to buy a whole Ethereum coin. However, this doesn’t prevent investors from gaining exposure to ETH with only a small amount of funds. Investors can buy a fraction of ETH for as little as $1, or even less, using various simple methods to buy Ethereum.
New ETH tokens enter circulation as a block mining reward. As of the time of writing, the block reward is set to exactly 3 ETH. Since 2019, 13,000 ETH are, on average, distributed each day to successful miners, according to data curated by YCharts.
Ethereum Token Types
Ethereum makes it possible for multiple token types to be issued and take advantage of the smart contract characteristics of the network. To ensure smart contact compatibility, Ethereum uses token standards, a set of rules that define various blockchain parameters such as token creation, transaction properties, spending, etc. Here are the four most important and popular Ethereum token standards:
- ERC-20: Fungible token interface with six primary functions that allow the creation of tokens that can be used by dApps
- ERC-721: Non-fungible token interface that defines parameters of NFTs on the Ethereum blockchain. In contrast to ERC-20 tokens, NFTs are unique, which makes them a great option to represent ownership records on-chain
- ERC-777: Allows users to issue privacy-focused tokens that take advantage of functions such as a mixer contract
- ERC-1155: A standard for both NFTs and fungible tokens that introduces cost saving features via transaction bundling
Ethereum Gas Fees
ETH tokens are used to pay transaction fees, also referred as gas, on the Ethereum network. Gas is measured in Gwei, which represents 0.000000001 ETH. Each transaction needs many operations to complete, which spends a certain amount of gas.
In its current iteration, Ethereum can process roughly 30 transactions per second (TPS). Due to a rising number of DeFi use cases and the explosive growth of NFTs, network congestion is a significant problem for Ethereum because it leads to high transaction costs.
Several Layer 2 solutions have emerged in recent years to reduce the problems associated with high transaction costs on the platform. Layer 2 scaling solutions, like Polygon and Arbitrum, allow transactions to be processed at a lower cost and greater speed away from the Ethereum mainnet. Although the full rollout of the Ethereum 2.0 upgrade will increase the throughput of the mainnnet and make transactions way cheaper, it probably won’t make Layer 2 scaling solutions obsolete.