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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, or ETH.


Ethereum can be used by anyone to create any secured digital technology. It has a token designed for use in the blockchain network, but it can also be used by participants as a method to pay for work done on the blockchain.

Ethereum is designed to be scalable, programmable, secure, and decentralized. It is the blockchain of choice for developers and enterprises that are creating technology based upon it to change the way many industries operate and how we go about our daily lives.

How Does Ethereum Work?

Vitalik Buterin, credited with conceiving of Ethereum, published a white paper to introduce it in 2014.
 The Ethereum platform was launched in 2015 by Buterin and Joe Lubin, founder 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.

Since the launch of Ethereum, ether as a cryptocurrency has risen to become the second-largest cryptocurrency by market value. It is outranked only by Bitcoin.

Blockchain Technology

Ethereum, 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 a protocol referred to as a consensus mechanism. Ethereum uses the proof-of-work protocol, where a network of participants runs software that attempts to prove that an encrypted number is valid.7

This is called mining. The first miner to prove the validity of the number is rewarded in ether. A new block is opened on the blockchain, information from the previous block is encrypted and placed into the new block along with new data, and the mining process begins again.


Proof-of-Stake Protocol

Currently, Ethereum uses the proof-of-work consensus protocol. At some point, it will move to another consensus protocol called proof-of-stake, where ETH owners stake a certain amount of their ether. Staking ether keeps it from being used in transactions. It serves as incentive and collateral for the privilege of mining.

Mining will work differently under this protocol because it won't require everyone on the network to compete for the rewards. Instead, the protocol will randomly choose users with staked ether to verify the transactions. These validators are then rewarded in ether for their work.

Wallets

Ethereum 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 some important distinctions.

Ethereum is described by the organization 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 120 million.

Another significant difference between Ethereum 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.

A significant way that Ethereum and Bitcoin are similar is that both blockchain networks consume vast amounts of energy. This is because each of these blockchains operates using the proof-of-work protocol. Proof-of-stake uses much less energy.

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 as the consensus layer.

The upgrade will also add capacity to the Ethereum network to support its growth, which will help to address chronic network congestion problems that have driven up gas fees.

Ethereum adoption continues, including by high-profile enterprises. In 2020, chipmaker Advanced Micro Devices (AMD) announced a joint venture with ConsenSys to create a network of data centers built on the Ethereum platform.

Since 2015, Microsoft has had a partnership with ConsenSys to develop Ethereum Blockchain as a Service (EBaaS) technology on Microsoft’s Azure cloud platform


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