What is Ethereum?
Ethereum is a blockchain platform for decentralized applications, and the second largest cryptocurrency (ETH) by capitalization. Most of the popular DeFi and NFT projects operate on the Ethereum network.
Who and when created Ethereum?
Vitalik Buterin is considered the main creator and “face” of Ethereum. He was born in 1994 in the city of Kolomna near Moscow. At the age of six, he moved with his parents to Canada, where he lives to this day. Since childhood, he was fond of programming and computer science, studied cryptography at the university.
In 2011, Vitalik Buterin co-founded one of the first cryptocurrency media outlets, Bitcoin Magazine.
In 2013 he published whitepaper Ethereum is a blockchain where you can create decentralized applications that run on smart contracts. Other co-founders of Ethereum are Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin.
Following the publication of the whitepaper, Buterin received a $100,000 grant from The Thiel Fellowship, founded by entrepreneur Peter Thiel. He used this money to conduct an ICO. During the token sale, they managed to collect 31,550 BTC – about $18.5 million at that time.
The main Ethereum network was launched in the summer of 2015. From the moment of foundation to the present day, he has been responsible for the development of the project. Ethereum Foundation is a non-profit organization registered in Switzerland.
What are the features of Ethereum?
The main difference between the Ethereum network and Bitcoin was the support for full-fledged smart contracts. This is a computer algorithm that allows you to conduct transactions without the participation of a third party. In fact, this is a “digital contract” with predetermined conditions that are executed under certain conditions. This allows you to transfer business operations to the blockchain and avoid the “human factor”. Smart contracts have an unlimited number of application scenarios.
Virtual machine (EVM)
EVM (Ethereum Virtual Machine) is a “distributed computer” responsible for executing smart contracts. If the main function of the Bitcoin network is transactions between accounts in a distributed ledger, then the EVM can handle much more complex transactions programmed in smart contracts (which, nevertheless, are basically transfers between blockchain addresses).
Ethereum allowed users to issue their own tokens. For such tokens, a single ERC-20 standard has been developed. The value of user tokens is in the availability of utility within a particular application. Ethereum became the first popular blockchain for startups to monetize with their own tokens.
Non-Fungible Tokens (NFTs)
Ethereum has also gained popularity as a blockchain for NFTs due to the ERC-721 standard. These are non-fungible tokens, each of which contains unique information – an image or some other file. NFT is a unique digital item in the singular that cannot be reproduced. In 2022, soulbound tokens also began to gain popularity.
What is Ether (ETH) cryptocurrency?
Ether (ETH) is the colloquial name for the native cryptocurrency Ethereum. It is necessary for the operation of decentralized applications and payment of commissions for transactions in this network.
After the activation of The Merge update in September 2022, ether staking began to work on the Ethereum network: ETH holders can block coins and receive income from them. However, it will be possible to withdraw the cryptocurrency from staking only after the introduction of sharding in Ethereum – this should happen during 2023. To participate in ether staking, you need to run your own node (this requires hardware and 32 ETH) or use a centralized service such as Everstake, Lido or Binance.
ETH is the second largest digital asset in terms of capitalization in the cryptocurrency market. As of the end of October 2022, the total value of all Ethereum coins exceeds $192 billion. The Ethereum exchange rate has grown 10 times in less than two years: back in July 2020, one coin cost $300, but by the end of 2021, its price was fixed at a higher level $3000. You can buy Ethereum on almost any cryptocurrency exchange.
How did the DAO hack affect the development of Ethereum?
The first major crisis for Ethereum was the DAO hack. It is a Decentralized Autonomous Organization (DAO) that intended to manage an investment fund through the votes of member members. The DAO was planned to be built on Ethereum smart contracts. As a result of the ICO conducted in 2016, its founders raised funds in the amount of $150 million.
In June 2016, the project’s smart contract, using an exploit, was hacked by a hacker and withdrew $50 million worth of The DAO tokens from it. After that, the Ethereum team performed a network hard fork to return the stolen funds to the victims. Part of the community that did not agree with this decision continued the previous branch, naming their project Ethereum Classic.
Did tokensales come from Ethereum?
In 2017, the cryptocurrency market began to grow sharply, it was talked about at the global level. In digital assets began to actively invest, including retail investors. Against this background, hundreds of projects appeared that tried to repeat the success of Ethereum: they published a white paper and conducted an ICO. Due to the availability of ERC-20, anyone could issue their own token.
The peak of activity of token sales occurred in the 1st quarter of 2018 – the total amount of fees for them amounted to about $ 7 billion. But then public token sales practically ceased: prices for cryptocurrencies began to fall, in addition, token sales were criticized by the authorities of various countries.
Investors have lost confidence in ICOs as they have become a popular tool for scammers.
Gradually, new token sale formats appeared: IEO (Initial Exchange Offering) – selling project tokens through a special service on the exchange, as well as IDO (Initial Decentralized Offering) – attracting investments through asset farming.
How did Ethereum lead to the creation of DeFi?
The advent of decentralized finance (DeFi) is largely due to Ethereum. In 2017-2018, several landmark projects began to work on the basis of this blockchain, the popularity of which led to the rise of DeFi:
- MakerDAO. The first popular protocol that allows any user to issue a DAI stablecoin secured by various crypto assets. The protocol is managed through a DAO, in which holders of the Maker token (MKR) can participate in voting.
- Compound. This project pioneered the use of liquidity pools for various crypto assets. In addition, Compound hosted the first ever IDO for its users by giving away the COMP governance token through farming.
- Uniswap — a decentralized exchange for trading cryptocurrencies, in which for the first time the mechanism of an automatic market maker was used. It forms a sort of order book and matches orders without an order book. Uniswap became the first protocol with relatively fast trade transactions on the blockchain.
There are hundreds of projects running in DeFi today with various features such as Aave, Curve Finance, 1inch, Balancer, dYdX, Notional and more. They use different technologies and blockchains, but Ethereum was the first.
Does Ethereum have competitors?
The blockchain platform model paid off and Ethereum became the main crypto project along with bitcoin. But the main components of Ethereum have not changed for several years, and during this time the crypto industry has come a long way. The performance that the main blockchain platform was designed for is no longer enough.
Currently, Ethereum can process no more than 13-15 transactions per second (TPS), its network has repeatedly failed and delayed due to congestion, and transfer fees are consistently high.
At the same time, its modern “killers” have performance tens and hundreds of times higher. Tezos blockchain speed exceeds 1000 TPS, Polkadot up to 3000 TPS, Solana up to 50,000 TPS.
Each of the blockchain platforms offers its own scalability solution, that is, the ability to increase its throughput as the load increases. For example, Solana uses the implementation of the Practical Byzantine Fault Tolerance consensus algorithm, and Polkadot consists of several interconnected blockchains.
However, the growth in scalability has the disadvantages described in the blockchain trilemma. It says that of the three key properties – performance, security and decentralization – a decentralized network can only provide two at the same time. Both Ethereum and its competitors are trying to circumvent this theorem, but there is no generally accepted solution yet.
How is Ethereum being developed?
The developers have come up with several ways to increase the throughput of Ethereum and at the same time reduce the fees. One of these areas is second-level solutions (Layer 2).
These are applications and frameworks that are deployed on top of the main “first level” blockchain (Layer 1). An additional “layer” allows you to reduce commissions for transfers and increase the speed of transactions.
L2 solutions on the Ethereum blockchain are implemented using the Rollups technology, which allows you to include hundreds of transactions passing through the second level in one transaction of the first level. Examples of such applications are Arbitrum, Optimism, dYdX, StarkNet.
Another direction is sidechains. These are “parallel” networks that are connected to the main blockchain and between which transactions can be carried out. An example of an Ethereum compatible sidechain is Polygon PoS (one of the elements of the Polygon network).
What is Ethereum 2.0 (Eth2)?
Ethereum 2.0 (Eth2) is a major update that was announced back in 2017 and is designed to increase the scalability of this blockchain platform through major changes to its architecture. At the beginning of 2022, the Ethereum developers abandoned this term.
The Ethereum upgrade is divided into several major upgrades:
- Transition to the Proof-of-Stake consensus algorithm (successfully took place on September 15, 2022);
- Implementation of sharding technology: division of the blockchain into manageable segments (shards) and parallel execution of operations in each of them;
- A new eWASM virtual machine that will support smart contracts developed in popular programming languages.
The update is being implemented in several stages, the exact timing of the implementation of all its points is unknown. According to rough estimates, the work will be completed in 2023-2024.
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