What Is Ethereum (ETH) Cryptocurrency And How Does It Work?

What is Ethereum (ETH) cryptocurrency and how does it work? In this article, we will tell you everything you need to know about Ethereum. 
Ethereum is an open-source, decentralized blockchain platform that uses its native currency, Ether (ETH), to pay transaction fees (known as “gas”).

The platform is capable of doing everything from moving currencies and non-fungible tokens (NFTs) that can represent any asset, to performing advanced processes through the use of “smart contracts”. Developers can use the Ethereum network to run decentralized applications (dApps) and issue entirely new crypto assets, known as ERC-20 tokens.

Are you interested in Ethereum (ETH), but don't know what it is or where to start? Do not worry. This guide is designed to teach you everything you need to know about the project and prepare you to embark on the most user-friendly trading experience on the market.

Table Of Contents:

1. What is Ethereum (ETH)?

• A new internet for a new world

2. How does Ethereum work?

• Building the future with blocks and chains
• What are "smart contracts"?
• Powerful digital vending machines?
• Who are the founders of Ethereum?
• What makes Ethereum unique?
• Tokens for all occasions
• What makes Ethereum valuable?
• How many Ethereum (ETH) coins are in circulation?
• How Does Bitcoin Compare?
• Other technical data
• How is the Ethereum network secured?

3. How to use Ethereum?

4. What is ETH 2.0?

• The phases of an evolution
• Ethereum mining and staking
• A challenge for the new Internet

5. Conclusion

Ethereum FAQs

1. What is Ethereum (ETH)?

The Ethereum blockchain was first detailed in a white paper published in 2013 by Vitalik Buterin. Designed primarily to run code on a decentralized computing platform, the Ether cryptocurrency is capable of transferring value like Bitcoin. But it is also able to leverage the distributed processing power of its open platform to execute smart contracts.

As Ether works in a distributed fashion, the decentralized applications (dApps) that are run are not at risk of being tampered with by humans. They are added to the Ethereum blockchain and can be designed in such a way that the code is permanent and cannot be changed. 

Transparency is a major advantage: the blockchain is publicly visible and easy to explore, so any user participating in the market can verify the code before interacting with it.

• A new internet for a new world.

The concept of a new Ether-powered internet infused with decentralized finance (DeFi) and digital currency is gaining more and more interest around the world, and is it really a surprise?

The Ethereum blockchain not only provides a way to resist the censorship that plagues traditional internet applications, but it also empowers developers to create or generate real value.

2. How does Ethereum work?

Ethereum essentially operates as if it were a massive, decentralized state machine. This means that at any time, you can get a snapshot of every address (account) on the Ethereum blockchain and determine its current status. Actions that occur in the blockchain cause state changes, and each node updates its snapshot to reflect those changes.

Each state that Ethereum transitions to are the result of millions of transactions. These transactions are grouped together in what are called “blocks”. Think of a block as a large batch of transactions, and each block is chained together with its previous block – creating what we know as the blockchain.

• Building the future with blocks and chains

The actual process of updating the state of the platform and committing these batches of transactions is known as mining. Ethereum blocks are mined using the Proof of Work algorithm, just like Bitcoin – for now. A complete overhaul of the mechanics of Ethereum (ETH2.0) is in development and the crypto platform will soon be moving to a Proof of Stake algorithm, along with other improvements.

Smart contracts running on Ethereum are triggered by transactions. When a person interacts with a contract, each node executes the contract code while recording the output. This is made possible by the Ethereum Virtual Machine (EVM), which translates smart contracts in a way that connected computers can understand.

• What are "smart contracts"?

Basically, a “smart contract” is code. Although code itself isn't "smart" or a "contract" in the traditional sense, we consider it smart because it can react to triggers or conditions - and it can be considered a contract because of its ability to execute agreements between multiple entities.

Famous computer scientist Nick Szabo pioneered the concept of the smart contract in the 1990s. He notably compared basic smart contracts to the operation of a traditional vending machine: the user inserts a coin, selects the item he wants and the machine delivers it to him.

• Powerful digital vending machines?

By taking the logic of vending machines and applying it to the digital realm, developers are able to specify any action to take when a user sends a set amount of Ether cryptocurrency to the contract.

Developers code these contracts in such a way that the EVM can read them and then pass them to the computers that operate the platform's nodes. The contract is published in a way that makes it immune to censorship and cannot be removed unless the developer sets specific terms in the code to do so.

• Who are the founders of Ethereum?

Ethereum was co-founded by 8 developers from all over the world. They first met and joined forces on June 7, 2014, in Zug, Switzerland.
Russian-Canadian Vitalik Buterin is the best-known developer, becoming a celebrity in his own right. Author of the original Ethereum white paper in 2013, Vitalik has remained an active contributor to the development of Ethereum and is still working to improve the platform today.

Gavin Wood, a British developer, is arguably the second most famous co-founder of ETH. Having coded the very first iteration of Ethereum in the C++ programming language, conceptualized the Solidity programming language (now Ethereum's primary development language), and serving as the first CTO of the Ethereum Foundation, Gavin has been integral to the evolution of Ethereum.

The other co-founders of Ethereum all played a significant role in making it what it is today:

Mihai Alisie: helped found the Ethereum Foundation.

Amir Chetrit: participated in the co-foundation of Ethereum but retired very early.

Anthony Di Iorio: underwriter of the project during the early stages of development.

Charles Hoskinson: Mainly responsible for the creation of the Ethereum Foundation and its legal framework.

Joseph Lubin: participated in the financing of the first developments of Ethereum and founded the incubator of ETH ConsenSys.

Jeffrey Wilcke: supported initial development using the Go programming language.

• What makes Ethereum unique?

Ethereum took some of the concepts originally defined by Bitcoin and created a powerful open-source smart contract blockchain platform. This platform is capable of moving and storing value, just like Bitcoin, but its main strength is the ability of the network to essentially function as a whole new decentralized internet, with its own applications.

This is the main innovation of Ethereum: the possibility of executing smart contracts using the blockchain, which reinforces the existing advantages of smart contract technology. The Ethereum blockchain was designed essentially to be "a computer for the entire planet", in the words of Gavin Wood.

In theory, Ether is capable of making any application more robust, more censorship-resistant, and more secure, by running it on a globally distributed system of public nodes.

• Tokens for all occasions.

Besides smart contracts, the Ethereum blockchain is capable of hosting other cryptocurrencies, called “tokens”. The ERC-20 token standard allows developers to create entirely new currencies, backed by the power of Ethereum.

Do you consider yourself an NFT fan? The more streamlined ERC-721 and ERC-1155 token standards make this new asset class a reality, and Ethereum provides the power and security to make it happen.

• What makes Ethereum valuable?

Ethereum derives its value from its utility rather than its limited supply (like Bitcoin). Its ability to serve as a platform for various decentralized projects and applications increases its value exponentially.

• How many Ethereum (ETH) coins are in circulation?

When Ethereum launched, it did so with an initial supply of 72,000,000 ETH. More than 50,000,000 of them were distributed in a public token sale – known as an Initial Coin Offering (ICO), where people wishing to participate could buy ETH in exchange for BTC (bitcoin) or fiat currency (like the US dollar).

Fast forward to summer 2020.

At that time, there were around 112 million Ether (ETH) in circulation – 72 million from the initial offering and around 40 million from the digital currency having been mined from transactions and healthy activity on the open network.

 
These mined ETH are distributed to miners who fund it all (in addition to gas fees), with the rewards following a deflationary scale over time. The initial reward in 2015 was 5 ETH per block, which then went down to 3 ETH at the end of 2017, then to 2 ETH at the beginning of 2019. The typical time to mine an Ethereum block is around 13-15 seconds, and the real-time profitability of the miner is directly related to the price of the crypto.

• How Does Bitcoin Compare?

A major difference between Bitcoin and Ethereum is that ETH is not deflationary. While bitcoin has a strict limit set in its code that will never allow more than 21 million BTC to be mined, ETH has no cap on total supply and continues to grow year after year.

Although opinions are divided on this subject and some have proposed to implement a supply cap, Ethereum developers justify the current system by the desire not to have a “fixed security budget”. The ability to adjust the ETH issuance rate by consensus allows the Ethereum market to maintain security without capping supply.

• Other technical data

Ethereum reached an all-time high of $2,040 on February 20, 2021, with the main catalyst for the price surge being the growth of the DeFi sector.

• How is the Ethereum network secured?

Ethereum is currently secured by Proof of Work (PoW), the proven but arguably ineffective method pioneered by Bitcoin. Ethereum, however, uses an open-source algorithm designed specifically for it called Ethash.

Although Ethash provides a more efficient PoW mechanism for Ethereum, the network is transitioning to a Proof of Stake (PoS) algorithm as part of the major Ethereum 2.0 update, a rollout in several stages that began in December 2020.

READ MORE: Ethereum: The SEC Worries

3. How to use Ethereum?

Ethereum provides an enormous amount of utility to the cryptocurrency industry simply by offering its blockchain as a platform to build other projects. Its ability to host other projects has proven more than valuable, as its current ecosystem includes DeFi giants such as ChainLink, Uniswap, Wrapped Bitcoin, DAI, and more.

Ether, on the other hand, is not widely used as a means of payment due to high transaction fees and low processing speed.

4. What is ETH 2.0?

Ethereum 2.0, also referred to as ETH 2.0 or codenamed “Serenity,” is a massive, multi-part upgrade to the existing Ethereum blockchain. The features built into ETH 2.0 are fully designed to improve the speed, efficiency, and scalability of the Ethereum network.

The end goal is to strengthen the network until it can process more transactions at an exponential rate, which would solve the current problems of erratic and cost-restrictive fees faced by many Ethereum-based projects and their users.

• The phases of evolution.

Ethereum 2.0 is being rolled out in several phases, with the first upgrade taking effect in December 2020: Phase 0 – the Beacon Chain.

• Ethereum mining and staking.

After the Beacon chain went live, it became possible to start staking on the Ethereum 2.0 network. Staking on Ethereum 2.0 involves sending the ETH you wish to stake to a deposit smart contract, effectively turning you into a node/miner and securing the network.

Ethereum staking rewards are distributed along a curve, influenced by both participation and the average percentage of participants. Most ETH 2.0 staking rewards are set at 20% for early entrants but will be gradually reduced until they are between 7% and 4.5% per year for the foreseeable future.

• A challenge for the new Internet.

The minimum required for a user to run their own Ethereum node is a stake of 32 ETH. Down payment in Ethereum 2.0 means that your down payment in ETH will be locked in the network for an estimated period of two years until phase 2 of the Ethereum 2.0 upgrade is completed (probably in 2022).

Another option for users who are unwilling or unable to stake 32 ETH (almost $58,000 at the time of writing) is grouping. Pooling is a third-party service that allows users to wager what they can and then earn rewards in proportion to their wager. This offers a lot more flexibility for the average user.

Later, we can expect the following phases of the ETH 2.0 upgrade:

• Phase 1 – Shard Chains: Shard Chains, or sharding, on the ETH 2.0 network, giving the network an extension solution designed to enable instant and cheap transactions like never before. Release estimated in 2021.

• Phase 2 – The Docking: The Ethereum mainnet merges with the Beacon chain, enabling PoS and Shard chains across the network and signaling the end of PoW on Ethereum. Release estimated in 2022.

5. Conclusion

Clearly, Ethereum addresses a massive need that is becoming more evident every day: the need for a new, open internet free from censorship and manipulation.

The Ether cryptocurrency benefits from a platform with many features designed to enable the decentralization of finance as an integral part of this new internet, as well as the ability to run applications and host entirely new projects.

Ethereum is overhauling the way it works. The network will gradually expand over the next two years while retaining the aspects of decentralization that we all know and love.

Ethereum FAQs

• Is Ethereum a currency?

Ethereum's design is not suited to be a currency, but rather a platform for building decentralized applications.

• Does Ethereum have competitors?

Ethereum currently faces competition primarily from Binance Smart Chain, Cardano, and Polkadot.

• How to buy Ethereum (ETH)?

Are you ready to be part of the Ethereum network? Buying ETH is as simple, just visit a trading platform such as Kraken and make a purchase.

• How to sell Ethereum (ETH)?

If you already own Ether and hold it in a crypto exchange wallet you can easily sell it by navigating to the interface and choosing the desired payment option.

• Ethereum price?

The price of Ethereum is 1,285.16 €.

The 24-hour trading volume of Ethereum is € 20,309,271,919. Ethereum is currently ranked #2 by total market cap, with a market cap of € 155,472,739,980. It has a circulating supply of 120,622,354 ETH/Ether and the maximum supply currently has no limit.

Your crypto adventure awaits

It is easy and exciting to buy ETH. Just join any crypto exchange platform, create an account and make a purchase. Always remember to do your own homework on the platform. Look for a reputable platform.

READ MORE: Ethereum 2.0: The Merge Triggers Massive Investor Staking