What Is Ethereum & How Does It Work? A Complete Explainer

Blockchain and cryptocurrency are prime areas of discussion these days, not just for people who are into technology or finance but also for the general public. In this case, Ethereum and bitcoin are two of the most popular terms linked with the blockchain and crypto scene. 

A basic understanding of blockchain and cryptocurrency is penetrating the masses gradually; however, there is more that meets the ears. Therefore, to perceive the developments in these areas to a greater extent, having a fair idea about Ethereum, its manner of functioning, what Ethereum is used for, and other relevant information becomes essential.   

Since crypto is viewed as a lucrative space for investment, many are even interested in the price prediction of Ethereum and how Ethereum’s value could appreciate or depreciate in the future.

For all such reasons, and to answer some of the most prominent questions on Ethereum. Therefore, we write this article covering most of the basics of Ethereum for you in one place. Read till the end to learn everything you need to know about Ethereum! 

What Is Ethereum?

Ethereum is an open-source platform built using blockchain technology that allows users to establish a decentralized computing network. It creates a peer-to-peer network, with no intermediation by a third party, that securely implements and substantiates application code, called smart contracts. 

Smart contracts are self-executing contracts that entail the terms of an agreement between the buyer and the seller directly written in the lines of code. The code controls the execution of the contract, making it traceable and irreversible. 

The Ethereum blockchain allows developers to build and run a variety of applications. Being an open-source network, Ethereum enables anyone with an internet connection to run an Ethereum node or interact with the network.

With the help of smart contracts running on Ethereum’s decentralized blockchain, developers can build complex applications that can run accurately as programmed without any third-party interference, fraud, censorship, or downtime. 

The Ethereum Foundation, a non-profit organization dedicated to Ethereum and related technologies, quotes, “Ethereum is the world’s programmable blockchain, used to curate programmable money and decentralized applications, allowing users to have control over their data. Hence, developers/people can use it to codify, decentralize, secure, and trade just about anything.”   

In addition, Ethereum also has a native cryptocurrency, known as Ether or ETH, which is used to pay for the execution of smart contracts. 

What Is The History Of Ethereum?

The History of Ethereum can be traced back to late 2013, when Vitalik Buterin, a programmer and writer, conceived and initiated the original concept of Ethereum that he described in a whitepaper, elaborating on the way to build decentralized applications. 

The co-founder of Bitcoin Magazine believed that Bitcoin and Blockchain technology could benefit from other applications besides money. Vitalik saw the potential in this field and felt the need for a more robust language for application development that could enable linking real-world assets like property or stocks to the blockchain. 

The platform was ultimately launched in 2015 by Vitalik Buterin and Joe Lubin. However, it did have other co-founders, namely, Anthony Di Iorio, Chares Hoskinson, Mihai Alisie, Amir Chetrit, Gavin Wook, and Jeffery Wilcke. 

Buterin shared in an interview why he chose the name Ethereum for the platform, to which he replied, “I immediately realized that I liked Ethereum better than all of the other alternatives that I had seen while browsing for science fiction words; I suppose it was the fact that it sounded nice and it had the word ‘ether,’ referring to the hypothetical invisible medium that permeates the universe and allows light to travel.” 

An online public crowd sale funded the development of Ethereum from July to August 2014, wherein the participants bought the Ethereum value token Ether or ETH with another crypto, Bitcoin. 

A Swiss company called Ethereum Switzerland GmbH and Ethereum Foundation were the forces behind the platform’s development. In addition, the Ethereum Foundation developed several codenamed prototypes of Ethereum between 2014 to 2015 as part of their proof-of-concept series. 

How Does Ethereum Work?

The functioning of Ethereum involves several components that work together to enable various transactions. The most vital of them is the Ethereum Virtual Machine concept. 

A virtual machine is built on top of usual operating systems to approximate the computing power of physical devices using virtual architecture. They can run on different operating systems and hardware types, making them suitable for establishing a decentralized ecosystem. In addition, participating nodes can access these from anywhere in the world.  

Gavin Wood, the then CTO, specified the Ethereum Virtual Machine in the Ethereum Yellow Paper.  The Ethereum Virtual Machine or EVM can be interpreted as a massive global computer composed of several individual computers running the Ethereum software for ease of understanding. 

The participants that are part of the network have to invest in hardware and electricity to keep the computers running. Therefore, a specific fee is charged every time a transaction occurs, payable in cryptocurrency to cover the costs. For this, the network uses Ether or ETH, its native crypto.  

ETH is fuel for the whole network as it enables to pay for the execution of the smart contracts. As a result, the fees paid in ETH are also popularly known as the “gas fees.” The amount of gas fee depends on the traffic over the network. 

What Is Ethereum Used For?

Ethereum primarily has three use cases. Since the network is relatively young, there are a lot of potential areas where people can explore the ways to utilize Ethereum. However, the three most popular ones at present are:

1. DeFi or Decentralized Finance

It is a collective term used to describe financial products and services available and accessible to anyone with an internet connection which can and is willing to use Ethereum. With DeFi, individuals have control over their money and its whereabouts. 

In addition, DeFi is built on transparency; therefore, anyone can look at the product’s data and inspect how the system works. 

With decentralized finance or DeFi, financial activities like fund transfers, borrowing with or without collateral, lending, saving, crowdfunding, insurance, trading/predictions, and other activities are made easy. Some of the dApps built using Ethereum for the aforementioned financial activities are Aacve, Compound, Uniswap, Polymarket, GitCoin Grants, Etheric, and more.     

2. NFTs or Non-Fungible Tokens

These are being used to represent ownership of unique items. In addition, they enable content creators, artists, and general people to tokenize art, collectibles, and even real estate.  

NFTs can have only one official owner at a time and are secured by the Ethereum blockchain; subsequently, an individual cannot solely modify the record of ownership, or merely copying/pasting an NFT would not imply the same as owning it.  

These tokens are unique, so no two NFTs will be the same. In addition, every NFT must have an owner of public record and is easy for anyone to verify. 

Moreover, NFTs are compatible with anything built using Ethereum. Therefore, NFT owners can trade their digital assets on any Ethereum Marketplace for an entirely different NFT; and these transactions would directly happen between the interested parties because Ethereum follows the P2P or peer-to-peer protocol. 

3. DAOs or Decentralized Autonomous Organizations

DAOs are collective organizations on the blockchain that work based on smart contracts and are managed by their members. The decisions are made through proposals and voting by the members to ensure everyone has a voice in the organization. 

Consequently, DAOs are flat and fully democratized; all their activities are transparent and public. In addition, it doesn’t require an intermediary to implement the outcomes from voting. 

Smart Contracts on the Ethereum blockchain platform enable the DAOs to receive and send funds without a trusted intermediary. A few examples of DAO can include a charity to receive donations or accept membership; the group decides how the contributions may be spent.

A freelancer network is another example of DAO, where a network of contractors could pool their expertise and funds for office spaces and software subscriptions. 

What Are The Features Of Ethereum?

Some characteristic features that make Ethereum network different are as follows:

• Private Internet. One does not have to provide all personal information to use an Ethereum app. A private ethereum network is where nodes aren’t connected to the leading network. In a way, it is the best way to learn blockchain concepts without the need for real currency. 
• Peer-to-Peer Network. Ethereum allows the participants to move money, or make agreements directly with someone, without the interference of third parties. In addition, Peer-to-Peer networks are much easier to set up and don’t require specialist knowledge, making ethereum participant-friendly to some extent.
• Censorship Resistant. Ethereum is free from the authoritativeness of any government or other organizations. Furthermore, the decentralization of this network makes it impossible for anyone to restrict the services on the network in any context. 
• Greater Compatibility. Ethereum products are compatible by default. As a result, they can deliver better products and experiences. Businesses can build on the success of other companies on the network, and there can be collective growth. 

How To Mine Ethereum?

Crypto mining is an expensive affair as it requires adequate hardware, electricity for greater computational power, and an internet connection. The collective cost of these could be more than its benefit; therefore, exploring the mining pool for individuals interested in starting crypto mining is suggested. 

Ethereum mining can be done in the following steps: 

1. Firstly, there are three different approaches to ethereum mining, out of which an individual has to choose one to begin with. These approaches include Pool Mining, Solo Mining, Cloud Mining, CPU Mining, GPU Mining, and ASIC Mining. The choice will depend on how much expenditure one is willing to make, whether crypto mining is something they’ll pursue long, and alike. 
2. Next, opening a crypto wallet is required to store the mined ethereum coins. There are two kinds of wallets that an individual may choose from — Hardware Wallets and Software Wallets.
3. The third step requires ensuring the availability of appropriate hardware and mining software. For example, Ethereum uses the Ethash algorithm; therefore, the mining application chosen should be tailored to that algorithm. Also, the operating system should be robust and compatible enough to support the mining process.
4. The simplest way to get into ethereum mining is by selecting a mining pool. The pool size, hashrate, minimum payout, payout method, and fees of the mining pool influence one’s choice. In addition, a pool’s location server matter’s too. If the server is in the local region, it will optimize the mining performance. 
5. Members of the mining pool receive payouts in periodic installments based on the block-solving success of the ethereum mining group. Also, the mining pools have online dashboards that give users a fair idea regarding their mining performance. Finally, the ethereum coins mined get stored in the crypto wallet.  

How To Buy Ethereum?

Following are the steps one can follow if interested in buying Ether or ETH:

1. Open an account with a crypto exchange. Several platforms are available, ranging from easy-to-use systems to complex user-fronts for advanced traders. Platforms like CoinBase, Gemini, and eToro are a few where one can buy Ether.  In addition, different platforms offer different features and security measures and come with varying fees. These must be considered before signing up for any crypto exchange. 
2. After signing up with an exchange platform, one would need to fund their account by linking it to their bank account or debit/credit card.
3. Next, according to the fund one has, they can place an order for Ether or ETH. For instance, if someone has $12,000, they can buy around three ether coins per the current Ethereum price, i.e., 1 ETH = 3097.93 USD.   
4. If the amount of crypto is small, it can be left in the exchange account. However, if the investment is enormous, a crypto/digital wallet would be the safest to keep Ether crypto. 

Is Ethereum A Good Investment?

Ethereum is the second-largest and most popular cryptocurrency after Bitcoin. It undoubtedly, seems like a lucrative investment, but is it worth it? The following facts will help you to form an idea about it:

1. Cryptocurrency is a volatile and speculative investment. Therefore, experts recommend one should invest only in the trusted and well-known cryptos, one of which is Ether/ETH or Ethereum. 
2. Ethereum is extensively being used to develop blockchain decentralized applications for the future; adding it to the investment portfolio would allow one to have exposure to Ethereum technology. 
3. However, before investing, one must consider that Ether as a digital currency will fluctuate compared to Ethereum technology. And therefore, the return expectation from the investment directly or indirectly should be fair and realistic. 

FAQs 

Q1. What Is Ethereum Classic?

Ethereum Classic is the version of the Ethereum blockchain network that continued on the original chain after the June 2016 DAO exploitation, where an unknown hacker stole $50 million DAO tokens. 

Q2. What Is The Difference Between Bitcoin and Ethereum?

The primary focus of Bitcoin was to be a digital alternative to traditional fiat currency. Hence, it was launched as a digital medium of exchange and store of value. Ethereum, on the other hand, is more than a digital currency. It’s a programmable blockchain that leverages the power of blockchain technology across areas such as DeFi, NFTs, and smart contracts. 

Q3. How To Convert Ethereum To Cash?

Ethereum can be converted to cash through a crypto exchange linked to an existing bank account. The Ether and mining rewards can be transferred to that exchange platform and sold against a preferred currency. The investor can withdraw the amount received in the bank account. During the process, certain transactional charges might apply. 

The Bottom Line

Ethereum was one of the first to identify and utilize blockchain technology‘s real potential and power across numerous industries and use cases. Even though the technology had been subject to specific attacks and scams, leading to a split in the network, namely Ethereum and Ethereum Classic in 2016, affecting Ethereum’s value. The rise in its usability and people’s interest in the same requires anyone to understand the Ethereum network and its native cryptocurrency, Ether or ETH.