What Is Ethereum and How Does It Work?

What Is Ethereum?

At its core, Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether (ETH).

ETH can be used by anyone to create any secured digital technology. It has a token designed to pay for work done supporting the blockchain, but participants can also use it to pay for tangible goods and services if accepted.

Ethereum is designed to be scalable, programmable, secure, and decentralized.

It is the blockchain of choice for developers and enterprises creating technology based upon it to change how many industries operate and how we go about our daily lives.

It natively supports smart contracts, an essential tool behind decentralized applications.

Much decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology.


The internet of assets

Ethereum isn’t just for digital money. Anything you can own can be represented, traded, and put to use as non-fungible tokens (NFTs).

You can tokenize your art and get royalties automatically every time it’s re-sold. Or use a token for something you own to take out a loan.

The possibilities are growing all the time.

Who Are the Founders of Ethereum?

Ethereum has a total of eight co-founders — an unusually large number for a crypto project.

They first met on June 7, 2014, in Zug, Switzerland.

Russian-Canadian Vitalik Buterin is perhaps the best-known of the bunch.

He authored the original white paper that first described Ethereum in 2013 and still works on improving the platform to this day.

Before ETH, Buterin co-founded and wrote for the Bitcoin Magazine news website.
British programmer Gavin Wood is arguably the second most important co-founder of ETH, as he coded the first technical implementation of Ethereum in the C++ programming language, proposed Ethereum’s native programming language Solidity and was the first chief technology officer of the Ethereum Foundation.

Before Ethereum, Wood was a research scientist at Microsoft. Afterward, he moved on to establish the Web3 Foundation.
Among the other co-founders of Ethereum is

– Anthony Di Iorio, who underwrote the project during its early stage of development.

– Charles Hoskinson, played the principal role in establishing the Swiss-based Ethereum Foundation and its legal framework.

– Mihai Alisie, who assisted in establishing the Ethereum Foundation.

– Joseph Lubin, a Canadian entrepreneur, who, like Di Iorio, has helped fund Ethereum during its early days, and later founded an incubator for startups based on ETH called ConsenSys.

– Amir Chetrit, who helped co-found Ethereum but stepped away from it early into the development.

How Does Ethereum Work?

The Ethereum platform was launched in 2015 by Buterin and Joe Lubin, founders of the blockchain software company ConsenSys
The founders of Ethereum were among the first to consider the full potential of blockchain technology beyond just enabling the secure virtual payment method.

Blockchain Technology

ETH, like other cryptocurrencies, involves blockchain technology. Imagine a very long chain of blocks.

All of the information contained in each block is added to every newly-created block with new data.

Throughout the network, an identical copy of the blockchain is distributed.

This blockchain is validated by a network of automated programs that reach a consensus on the validity of transaction information.

No changes can be made to the blockchain unless the network reaches a consensus. This makes it very secure.

Consensus is reached using an algorithm commonly called a consensus mechanism.

Ethereum uses the proof-of-stake algorithm, where a network of participants is called validators to create new blocks and work together to verify the information they contain.

The blocks contain information about the state of the blockchain, a list of attestations (a validator’s signature and vote on the validity of the block),

transactions, and much more.

In mid-September 2022, Ethereum officially switched over to a proof-of-stake algorithm,

which is cheaper and more environmentally friendly than a proof-of-work model.




Therefore you should know what is the Proof of Stack


Proof-of-Stake Mechanism

Proof-of-stake differs from proof-of-work in that it doesn’t require the energy-intensive computing referred to as mining to validate blocks.

It uses a finalization protocol called Casper-FFG and the algorithm LMD Ghost, combined into a consensus mechanism called Gasper, which monitors consensus and defines how validators receive rewards for work or are punished for dishonesty.

Solo validators must stake 32 ETH to activate their validation ability.

Individuals can stake smaller amounts of ETH, but they are required to join a validation pool and share any rewards.

A validator creates a new block and attests that the information is valid in a process called attestation, where the block is broadcast to other validators called a committee who verify it and vote for its validity.

Validators who act dishonestly are punished under proof-of-stake. Validators who attempt to attack the network are identified by Gasper,

which identifies the blocks to accept and reject based on the votes of the validators.

Dishonest validators are punished by having their staked ETH burned and being removed from the network.

Burning refers to sending crypto to a wallet that has no keys, which takes them out of circulation.



ETH owners use wallets to store their ether.

A wallet is a digital interface that lets you access your ether stored on the blockchain.

Your wallet has an address,

which is similar to an email address in that it is where users send ether, much like they would an email.

Ether is not actually stored in your wallet. Your wallet holds private keys you use as you would a password when you initiate a transaction. You receive a private key for each ether you own. This key is essential for accessing your ether. That’s why you hear so much about securing keys using different storage methods.


Historic Split

One notable event in Ethereum’s history is the hard fork, or split, of Ethereum and Ethereum Classic.

In 2016, a group of network participants gained majority control of the Ethereum blockchain to steal more than $50 million worth of ether,

which had been raised for a project called The DAO.

The raid’s success was attributed to the involvement of a third-party developer for the new project.

Most of the Ethereum community opted to reverse the theft by invalidating the existing Ethereum blockchain and approving a blockchain with a revised history.

However, a fraction of the community chose to maintain the original version of the Ethereum blockchain.

That unaltered version of Ethereum permanently split to become the cryptocurrency Ethereum Classic (ETC)


Ethereum vs. Bitcoin

Ethereum is often compared to Bitcoin.

While the two cryptocurrencies have many similarities, there are some important distinctions.

Ethereum is described by founders and developers as “the world’s programmable blockchain,” positioning itself as an electronic,

programmable network with many applications.

The Bitcoin blockchain, by contrast, was created only to support the bitcoin cryptocurrency.
The maximum number of bitcoins that can enter circulation is 21 million.
The amount of ETH that can be created is unlimited,

although the time it takes to process a block of ETH limits how much ether can be minted each year.
The number of Ethereum coins in circulation is more than 122 million.

Another significant difference between ETH and Bitcoin is how the respective networks treat transaction processing fees. These fees, known as gas on the Ethereum network, are paid by the participants in Ethereum transactions.

The fees associated with Bitcoin transactions are absorbed by the broader Bitcoin network.

Ethereum, as of September 2022, uses a proof-of-stake consensus mechanism. Bitcoin uses the energy-intensive proof-of-work consensus,

which requires miners to compete for rewards.

Bitcoin vs Ethereum


The Future of Ethereum

Ethereum’s transition to the proof-of-stake protocol, which enables users to validate transactions and mint new ETH based on their ether holdings,

is part of a significant upgrade to the Ethereum platform.

Previously called Eth2, this upgrade is now referred to only as ETH. However, Ethereum now has two layers.

The first layer is the execution layer, where transactions and validations occur.

The second layer is the consensus layer, where attestations and the consensus chain are maintained.

The upgrade added capacity to the Ethereum network to support its growth,

which will eventually help to address chronic network congestion problems that have driven up gas fees.

To address scalability, Ethereum is continuing the development of “sharding.” Sharding will divide the Ethereum database amongst its network.

This idea is similar to cloud computing, where many computers handle the workload to reduce computational time.

These smaller database sections will be called shards, and shards will be worked on by those who have staked ETH. Shards will allow more validators to work at the same time,

reducing the amount of time needed to reach consensus through a process called sharding consensus.


Use in Gaming

Ethereum is also being implemented into gaming and virtual reality.

Decentraland is a virtual world that uses the Ethereum blockchain to secure items contained within that world.

Land, avatars, wearables, buildings, and environments are all tokenized through the blockchain to create ownership.

Axie Infinity is another game that uses blockchain technology and has its own cryptocurrency called Smooth Love Potion (SLP), used for rewards and transactions within the game.


Non-Fungible Tokens

Non-fungible tokens (NFTs) gained popularity in 2021. NFTs are tokenized digital items created using ETH.

Generally speaking, tokenization gives one digital asset a specific digital token that identifies it and stores it on the blockchain.

This establishes ownership because the encrypted data stores the owner’s wallet address.

The NFT can be traded or sold and is viewed as a transaction on the blockchain.

The transaction is verified by the network and ownership is transferred.

NFTs are being developed for all sorts of assets. For example, sports fans can buy a sports token—also called fan tokens—of their favorite athletes,

which can be treated like trading cards. Some of these NFTs are pictures that resemble a trading card, and some of them are videos of a memorable or historic moment in the athlete’s career.



What is Ethereum: Centralized and decentralized applications.

Decentralized applications (or ‘dApps’) are simply applications that do not run on a traditional central server. Instead, they run on a blockchain — using it to decentralize their server.

dApps are at the core of Ethereum’s design and its beliefs. Ethereum’s founders want users to learn Ethereum and build on it.

So another part of what is the Ethereum question is dApps.

Ethereum has its own coding language called Solidity.

Solidity is used to build dApps. Because Solidity is like JavaScript (one of the most common programming languages),

it encourages developers to create new and exciting dApps.

These dApps could soon be competing with (or replacing) centralized apps, in industries like social media, e-commerce, email, and online banking.

There are endless possibilities for building dApps on Ethereum’s blockchain.


The Development of DAOs

Decentralized Autonomous Organizations (DAOs),

which are a collaborative method for making decisions across a distributed network, are being developed.

For example, imagine that you created a venture capital fund and raised money through fund-raising,

but you want decision-making to be decentralized and distributions to be automatic and transparent.

A DAO could use smart contracts and applications to gather the votes from the fund members and buy into ventures based on the majority of the group’s votes,

then automatically distribute any returns.

The transactions could be viewed by all parties, and there would be no third-party involvement in handling any funds.

The part that cryptocurrency will play in the future is still vague.

However, Ethereum appears to have a significant, upcoming role in personal and corporate finance and many aspects of our modern lives.


How Can I Buy Ethereum?

Investors can use one of many cryptocurrency exchange platforms to buy and sell ether.

Ethereum is supported by dedicated crypto exchanges, including Coinbase, Kucoin, Gemini, Binance, and brokerages like Robinhood.

Ethereum trading

How Does Ethereum Make Money?

Ethereum is not a centralized organization that makes money.

Validators who participate in the Ethereum network earn ETH rewards for their contributions.


Is Ethereum a Cryptocurrency?

The Ethereum platform has a native cryptocurrency, known as ether, or ETH.

Ethereum itself is a blockchain technology platform that supports a wide range of decentralized applications (dApps), including cryptocurrencies.

The ETH coin is commonly called Ethereum, although the distinction remains that Ethereum is a blockchain-powered platform, and ether is its cryptocurrency.


Can Ethereum Be Converted to Cash?

Yes. Investors who hold the cryptocurrency ETH can use online exchanges such as Coinbase, Kucoin, and Gemini for this process.

Just set up an account at the exchange, link a bank account, and send ETH to the exchange account from an Ethereum wallet.

Place an order on the exchange to sell ETH. Then, once sold, transfer the U.S. dollar proceeds to the linked bank account.

Investing in cryptocurrencies and initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs.

Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions.

Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.


What is an Ethereum Killer?

Since its inception, Ethereum has maintained its spot as the second-largest cryptocurrency by market capitalization.

But like every other blockchain network that exists, Ethereum is not perfect.

Notable, the legacy blockchain is plagued with high gas fees and low throughput of between 15 to 30 transactions per second.

Although plans are already on the way to solve these shortcomings through several upgrades, many competitors have capitalized on this delay to offer crypto users cheaper and faster transactions.

The term “Ethereum Killer” emerged around 2016/2017 as substitute blockchains such as Cardano began to enter the crypto scene. In 2018, EOS made its debut as the next “Ethereum killer,” raising $4.1 billion from investors, the highest amount an ICO had ever generated.

Since then, others like Tezos, Solana, Fantom, Avalanche, and Binance Smart Chain have surfaced as possible Ethereum killers.

Each of these blockchains employs a different consensus model to tackle Ethereum’s PoW-induced limitations.

For instance, Solana uses proof-of-history (PoH) while Binance Smart Chain utilizes both proof-of-authority (PoA) and delegated proof-of-stake (DPoS).

However, none of these alternative blockchains have been able to unseat Ethereum as the second-largest cryptocurrency by market cap.

ETH is also currently the largest blockchain for NFT trading activities.







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