The Ethereum network has had quite a feat throughout its existence in the crypto world. Firstly, it wowed investors with an unprecedented technology called smart contracts. Then, its token hit the second-largest market cap following Bitcoin. Surely, this is quite a topic of interest. Let’s get into the nits and grits of the all-powerful Ethereum.
Article summary
What is Ethereum?
Ethereum is a decentralized platform powered by the blockchain with the primary use of developing smart contracts and decentralized applications (dApps). Ethereum was launched in 2015 by its founder, Vitalik Buterin. The Russian-born programmer used his expertise to create a propelling force for the crypto scene.
Preceding the release of Ethereum was its whitepaper launch. The whitepaper contained all the necessary information about the soon-to-be-released platform. It noted the mechanisms and the ability of its users to make certain executions with commands through smart contracts and create decentralized applications. Ethereum created some form of autonomy for users to easily build their terms with smart contracts.
Ethereum has helped many companies build smart contracts and dApps, which aided in revolutionizing their spheres. It also posed a great fit for programmers and people with an existing passion for development. The platform has enabled a myriad of projects like non-fungible tokens, the Metaverse, and other mind-blowing dApps.
How does Ethereum work?
To fully understand Ethereum, you need to get entwined with its consensus mechanism. A consensus mechanism is a protocol that enables systems like cryptocurrencies to perform. They establish certain steps to be taken for the efficiency of a network. All cryptocurrencies have their set consensus mechanism. Just like Bitcoin, Ethereum uses the Proof of Work consensus mechanism.
Proof of Work mandates that an entity should prove to another entity that work has been performed. The rule of thumb followed by PoW is that the entity that is proving would usually perform a great deal of complex work. Meanwhile, the verifier will perform a negligible amount of work to verify the first entity. One might wonder: What work is getting performed? This work is known as mining.
Mining is a way of strengthening the Ethereum blockchain security and adding new Ether in circulation. To ensure blockchain security, miners verify transactions before they can be added to the blockchain. As the name implies, the blockchain is made of a long chain of blocks. Each block on the blockchain contains transactions. Hence, miners must check and validate these transactions before they can be successfully added to a block and recorded on the blockchain. These acts prevent hackers, double spending, and attacks.
It is a good note that there are computers that carry out the operation of mining. They do this by solving complex problems known as hash puzzles. A hash puzzle is a 64-digit hexadecimal number that a computer would have to guess. If it is guessed correctly, the miner of the computer would be rewarded with cryptocurrency. Also, this act allows for the production of new cryptocurrencies.
However, enthusiasts are rubbing their palms in preparation for Ethereum’s switch to Proof of Stake. Proof of Stake (PoS) is a consensus mechanism where cryptocurrency is staked to ensure the blockchain’s efficiency. PoS is mostly used by altcoins. Bitcoin and Ethereum stood their ground with the PoW consensus mechanisms. However, the Ethereum network is set to switch to PoS soon.
Like PoW is to mining, PoS is to staking. Staking is an act performed by users on a network where they lock their cryptocurrency. Any user that staked cryptocurrency can be chosen at any time to validate transactions. When they get chosen, the user is then rewarded with crypto. Hence, staking provides a win-win situation for both users and the blockchain.
Difference between Ether and Ethereum
People often confuse Ether and Ethereum to perform the same purposes. Before getting into their disparities, let’s dive into Ether.
Ether (ETH) is a token that is used on the Ethereum platform. Transactions on Ethereum are facilitated by the Ether token. Ether should be looked at as more than a medium of exchange. It oversees the Ethereum network through transactions. For example, developers looking to create dApps on the Ethereum blockchain are required to pay fees. These fees are usually paid in the form of Ether. Other activities like minting in NFT are also performed on the Ethereum blockchain with Ether as payment.
Ether is synonymous with the famous term “gas fees”. Gas fees are mandatory when making transactions on the Ethereum blockchain. Think of gas fees as compensation for the amount of work done to maintain the well-being of the Ethereum blockchain. There has been a surge in gas fees for a while now. Gas fees are regulated by the laws of demand and supply. If there are a lot of activities and demand on the Ethereum network, higher gas fees will be required for computers to perform their operations.
Now let’s get back to our original concern- the difference between Ether and Ethereum. You must have an idea by now, but we’ll help out. Ether is simply a token used to facilitate transactions, while Ethereum is a protocol where developments like smart contracts and dApps are built.
Ethereum Classic
Ethereum classic is an upgraded form of Ethereum introduced to efficiently run smart contracts and decentralized applications. Ethereum classic has stood against the limitations of contract censorship often battled by the main network. A major catalyst for the creation of Ethereum classic is a DAO attack that occurred in 2016. Like its counterpart, Ethereum classic might arouse some concerns on scalability with the network capacity of just 15 transactions per second. Ethereum classic might still have some quirks to fix with the previous hacks on its hands. However, it has remained a better tool for smart contracts and dApps.
Pros and Cons
Take it for what it is, Ethereum has its positive and negative sides.
- Multifaceted: Ethereum has proven its ability to perform diverse operations. Not only can you trade on the network but also develop a plethora of decentralized applications. The platform has also made the existence of smart contracts. Presently, smart contracts users from regular individuals to giant businesses. This just goes to show that Ethereum can be used by the everyday Joe, avid traders, and even business magnates.
- Security: Ethereum’s equipped nodes ensure the network’s safety. Most hacks that occur on the Ethereum network are usually a result of poorly developed smart contracts. With these measures put in place, Ethereum has the potential to get even better. As the network migrates to a Proof of Stake protocol, Ethereum will be set to be more secure.
- Decentralized: The blockchain eliminates the need for intermediaries strengthening Ethereum’s decentralization. Decentralization helps the network to foster security since there is a lack of a central authority. Instead of just a single entity, different nodes across the network oversee transactions. Manipulation is very difficult in this type of system.
- Immutability: Immutability in Ethereum’s blockchain entails that data on the network cannot be changed. Hence, when certain data has been written, it cannot be tampered with. Nobody, including the author of the data, can replace it. This is why hacks are very difficult on the platform. Like other amazing traits of Ethereum, this feature accounts for its top-notch security.
- High gas fees: A major concern with Ethereum is its exorbitant gas fees. This problem has led people to boycott the network. People now prefer to make transactions with other cryptocurrencies and networks other than Ethereum because of the high gas fees that come with it. Although, it cannot all be escaped. When minting an NFT or developing a dApp on the platform, you still have to face the loud tune of the costly gas fees.
- Scalability: Ethereum is facing a scalability problem. But can we really blame the network? Considering the number of operations it carries out, this issue has long prevailed among users. Ethereum does not only have to deal with validating transactions but also powering decentralized applications and smart contracts. These obstacles can get in the way of efficient scalability.
- Volatility: Volatility is not just a trait of Ethereum but many other cryptocurrencies. Although, we can say that volatility is not always a bad thing. It can work either in the favor or opposition of a trader, depending on how utilized. But many people have found the volatile state of Ethereum saddening with its astonishing recent dips.
Is Ethereum a good investment?
If you are conversant with crypto, you might have observed the mass crypto crash following a series of dips from different cryptocurrencies, including Ethereum. This has got people wondering if Ethereum is, by any chance, fit for investment. Experts believe that it will still take a hit regardless of the lows. This might just be one of the drawbacks of cryptocurrency. With the amount of power and projects the network is saddled with, Ethereum is definitely on a path to greatness. Keep in mind that taking the right steps to invest in Ethereum involves adequate research. Ensure that you digest the right information and equip yourself with proper strategies.
Ebiere Watchman is a prolific writer specialized in web 3.0 and finance. Ebiere’s experience includes research projects, sales copywriting, and storytelling. She prides herself in crafting impeccable content to drive mass adoption in cryptocurrency.
