Ethereum is popular for being the world’s second-largest cryptocurrency by market capitalization after Bitcoin. But it’s not just a medium of exchange and a store of value. Ethereum is a decentralized computing platform, which takes the characteristics of blockchain technology and extends it to a wide range of applications. Let’s understand what this means in more detail.
Simply put, Ethereum is an open-source DIY platform for creating decentralized apps, or dApps, created using a programming language called Solidity. First proposed in late 2013, the Ethereum blockchain was later launched in 2015 by a group of blockchain enthusiasts such as ConsenSys founder Joe Lubin and Vitalik Buterin, who now serves as the CEO of the Ethereum network.
A key thing to remember is that Ethereum is not a cryptocurrency but a platform. While it functions as a distributed public ledger, its technology can be applied to several sectors—from financial tools and games to managing complex databases—making any middlemen or third-party institutions redundant.
Ethereum Foundation, a non-profit organization dedicated to supporting Ethereum-related technologies, describes the network as something that “can be used to codify, decentralize, secure and trade just about anything.”
That said, just like Bitcoin, Ethereum does have a virtual currency called ‘Ether’ that the network uses to incentivize developers to build dApps.
These apps usually are built using smart contracts—a self-executing contract between two parties that’s immutable, meaning once it’s deployed on the Ethereum network, it can’t be changed—even by its author.
The only way to change a smart contract would be to convince the entire network to make the changes which is almost impossible. This is because, unlike Bitcoin, Ethereum was created to build complex contracts that are difficult to secure.
Smart contracts ensure that whatever complex applications developers create are executed exactly how they intended, leaving very little room for any downtime, fraud, censorship, or third-party interference.
Since the Bitcoin network essentially functions as a bank’s ledger, its main task involves storing, processing, validating, and broadcasting all transactions happening on the network to every node.
By doing so, the entire blockchain ensures that the running tally that everyone has is accurate and secure. The verification process requires solving complex mathematical equations, often carried out by miners who use their massive computational power to check these transactions and receive rewards in exchange.
While the Ethereum network performs similar transaction verification processes, it functions much more like a computer. As a result, developers have more flexibility as they can use the blockchain to create a diverse range of software, from games to logistics management tools to even a whole universe of DeFi apps, including trading, lending, borrowing, etc.
The Ethereum blockchain has something called a ‘virtual machine,’ a global decentralized supercomputer that consists of several individual computers that run the Ethereum software.
Maintaining the entire network by keeping those computers running is expensive, requiring both hardware and electricity by users. The blockchain uses Ether, a Bitcoin-like digital token, to cover these costs.
Users use Ether (or ETH) to interact with others on the Ethereum network, for instance, to make payments to execute smart contracts. Such payments are known as ‘gas.’
The ‘gas’ rates keep on changing depending on the load that each network handles. To increase the efficiency of the entire Ethereum blockchain, a new version is being developed in December 2020 called ‘Ethereum 2.0.’
Also known as ETH2, Ethereum 2.0 is the latest upgrade to the blockchain designed to expand the Ethereum network and increase its speed, efficiency, and security. Today, Ethereum 1.0 and Ethereum 2.0 exist simultaneously on the network but will eventually merge into the ETH2 blockchain once the transition is complete.
If you’re an ETH holder on Ethereum 1.0, you’ll be automatically migrated to the Ethereum 2.0 blockchain in two years—the estimated duration of transition that began in December 2020.
Why the shift? Ethereum 2.0 was created to allow the Ethereum blockchain to scale and evolve. And while this moving of one popular crypto platform to a new one seems like a complex task, it needs to be done because of “proof of work.”
At its core, proof of work is used to verify the authenticity of transactions on the network. It allows the entire blockchain to ensure that nobody spends the same money twice.
How does it do so? Well, the process is carried out by virtual miners, who use their massive computing power to solve complex mathematical equations. The first miner to update the blockchain with the latest verified transactions gets rewarded with a certain amount of ETH.
While this same process occurs in the Bitcoin blockchain, the only difference here is that instead of Bitcoin’s 10-minute cycle, miners on the Ethereum network are rewarded every 30 seconds.
But as the traffic on the network increases, significant bottlenecks begin to appear, causing transaction fees to rise. Consequently, the amount of energy and resources such as electricity required for mining activities also spike unpredictably, which is not sustainable in the long term.
How does Ethereum 2.0 solve this problem? To allow the network to process thousands of transactions every second, Ethereum founders created a new consensus mechanism known as “proof of staking.” In this process, most of the mining and reward functionalities remain similar to the earlier process, except it allows for a faster, more secure, and less resource-intensive method for vetting the latest transactions.
Instead of solving a complex mathematical puzzle, proof of stake requires a dynamic network of miners who remain interested in a venture’s success known as validators.
These validators contribute ETH to something called a “staking pool.” rather than contributing their computing power. This action is what’s called “staking.”
The reward that validators earn for staking their ETH is directly proportional to the size of their stake. Think of staking similar to a savings account where you get some interest for the amount saved in your account.
A winner is selected based on the ETH amount each validator has put in the stake pool and for how long they remained invested. Essentially, ETH2 rewards only the most invested participants.
After the winner validates the blockchain with the latest transactions, other validators on the network have to attest to the block’s accuracy. Once a certain number of validators do so, the network updates the blockchain.
For this, all validators receive a reward in ETH from the network, distributed proportionally to their stakes.
On the Ethereum network, every new address receives a public key and a private key. You’ll also need a wallet to store your crypto holdings.
The public key essentially functions like your email id. People can send you ETH or other Ethereum-based tokens like USDC and Dai using your public key.
The private key is like your email password; only you should have access to it and nobody else. It’s basically a long string of letters and numbers through which you can securely access your ETH. If you lose this, you lose your ETH.
A crypto wallet allows you to store your digital tokens. There are many options, such as Coinbase and FTX, wherein you can safely and securely manage your digital assets.
You can buy Ethereum from wallets or popular cryptocurrency exchanges such as Coinbase, WazirX, or Binance. After making an account, you need to undergo a KYC process by submitting your Aadhaar, PAN Card or any other required documents. Once you’re done with this process, you can place an order by transferring money from your bank account to your digital wallet and then buy Ethereum.
You can also purchase Ethereum and other digital tokens on mesha.