Without a doubt, it can be said that cryptocurrencies are the new big thing these days and almost every other person you interact with turns out to be investing in these virtual payment systems. In the world of cryptocurrency, Bitcoin might be the most pronounced name but second to it, stands Ethereum in the market cap.
And here’s the catch, the creator of Ethereum, Vitalik Buterin was initially a Bitcoin enthusiast who co-founded the Bitcoin Magazine around 2011 which published writings dedicated to cryptocurrencies. However, he soon realized the limitations in the Bitcoin system and the prospects of blockchains than just single peer-to-peer currency which gave birth to idea of Ethereum.
Also referred to as “Blockchain 2.0” , Ethereum is a blockchain based platform launched in 2015 and its development was crowdfunded. With applications in various areas like Decentralized finance (DeFi) , NFTs , smart contracts and no limit on the amount of coins one can mine , it quickly rose to popularity with Eth’s worth currently being around $ 3,400 .
Let dig deeper into the various functionalities of Ethereum and understand how this disruptive technology works.
What are Smart Contracts?
Ethereum is Bitcoin but with much more additional features. One of these features is Smart Contracts which is a program that facilitates a utomatic implementation, control or documentation of legally significant actions according to the terms of trusted agreements between the buyer and the seller on a blockchain.
It was Nick Szabo , an American computer scientist and cryptographer who first came up with the concept of smart contracts back in the year 1994. He is also the inventor of ‘ Bit Gold ‘, another virtual currency introduced in 1998. Decentralized Application or “DApps ” Enables to execute the smart contract which exists on the Ethereum blockchain network.
Users need to sign the smart contracts in order to exchange currency. These self-executing contracts reduce the need for intermediaries, external enforcement mechanisms or legal system and arbitrations instead, they managed by codes. Smart contracts are developed using programming languages like Solidity, Vyper or Bamboo.
Understanding Blockchain
When discussing cryptocurrencies, it is necessary to understand the blockchain fundamentals as they are all in essence, use cases of blockchain. In simple terms, it is a distributed, immutable database or list of records known as ‘blocks’ each of which store a set of information electronically regarding transaction data and timestamp of the transaction which help in tracking of assets and maintaining a record which is transparent , shared and accessible by all the connected members permitted on the particular network called ‘ nodes ‘.
With blockchain, one can be assured regarding the security of the data without the intervention of some other trusted third party and it is because of this reason, blockchain plays a vital role in the system of cryptocurrency . Undoubtedly, blockchain has evolved and changed how we perceive problems and definitely has brought a lot of benefits.
Like the agile and secured way, data is transferred amongst entities, without the need for any entity to safeguard the data. This drastically reduces the risk of tampering , the transaction cost due to negligible participation of intermediaries ; and also yielding instant settlements , upping the time from days. And from these benefits, the value of blockchain is determined permeated through adoption in different industries and many use cases.
Blockchain technology solves key issues like trust in a network . By changing the key parameters, trust, any organization can focus on solving the problems at hand. Global governments have also understood its importance and are keen on implementing blockchain technology. For example, Dubai Smart City 2020 is a project which aims to build a smart city with new technologies, including blockchain.
It is important to note here, that Ethereum, unlike Bitcoin, uses blockchain technology for more than just keeping a decentralized payment network. Buterin was quick to figure that it can be also utilized to store codes that can facilitate entirely secure decentralized financial contracts and applications.
Consensus Mechanism
Now the question arises, who takes the charge of verifying the reliability and efficiency to ensure all the transactions taking place in a dynamic network of blockchain are genuine and that all the parties involved are in an agreement on the status of a ledger?
The answer is a Concensus Mechanism . The Consensus mechanism used in Ethereum is Proof-of-Work or “PoW” which is cryptographic evidence with which provers can prove to the verifiers that an expenditure has been made and the verifiers can confirm it without much hassle. It helps in the agreement on the information that is recorded in the respective blockchain networks.
PoW was proposed by Cynthia Dwork and Moni Naor in 1993 to prevent any denial-of-service attack and spam on a network. It was mainly popularized by Bitcoin as their consensus protocol and later was also used by Ethereum as well.
Ethereum is undergoing a major upgrade of open-source development this year and soon it will be referred to as Ethereum 2.0 or Eth2. With this upgrade, its consensus mechanism will be transitioned to Proof-of-Stake (PoS) which will make the Ethereum ecosystem more secure and sustainable.
A major con of PoW is that it consumes a great amount of energy owing to the computational power required whereas PoS proves itself efficient by being less energy intensive as it replaces computational power with staking. As the Ethereum website states, this transition will also phase out mining from Ethereum. It will also reduce the entry barriers and lower the need for elite hardware to create new blocks!
The Ethereum Virtual Machine (EVM)
When signing a smart contract on Ethereum blockchain, one might come across the term ‘EVM’. EVM stands for Ethereum Virtual Machine . Understanding the notion of EVM is essential to understand how the entire Ethereum structure works.
At first, let us focus on what virtual machines are. They are machines that help in creating a level of abstraction higher than what is done by the usual operating systems like Windows or iOS . It acts like a global processor that enables the developers to use resources on a network irrespective of their location to develop smart contracts or DApps.
EVM plays the role of bringing a number of additional functionalities to the blockchain so that users encounter lesser issues on the distributed ledger. The EVM is the part of Ethereum which acts as a runtime system for the smart contracts and a smart contract code running in the EVM is completely isolated from the network, file system and other processes.
Every node on Ethereum has its very own EVM. Ethereum has two kind of accounts, namely, Externally Owned Accounts or (EOA) and Contract Accounts . The abstraction attempts to reduce these to one account which means EOAs and contract accounts function similarly and both are treated equally under EVM.
The contracts accounts are stored in smart contracts which are written in languages like Solidity as mentioned earlier but EVM cannot directly understand Solidity so it is converted into opcodes for EVM to interpret which then uses these operational codes to complete all sorts of tasks on the blockchain. EVM is perhaps the biggest project in the Cryptocurrency world.
Ether
All the understanding of Ethereum’s features leads us to the virtual currency generated in Ethereum, Ether. Ether or ETH is the cryptocurrency of the Ethereum ecosystem . They are the transactional tokens that functions as form of payment for users to carry out their operations on the network.
Every account on the Ethereum platform has an ETH balance and transactions can be executed using ETH with other accounts. One can also look at ETH as a sort of fuel needed for doing pretty much everything on the platform, speaking of which, ETH is often referred to as ‘gas’ when executing smart contracts .
Recalling the two types of accounts that Ethereum has, EOAs and Contract accounts, the former one is used by normal users for storing and sending amounts and the later, holds the smart contracts which are activated by ETH transactions from EOAs or other.
The symbol used to denote ETH is the Greek uppercase Xi character (Ξ). ‘Wei’ is the smallest subunit of ETH which is equivalent to 10−18 ETH. Its value at present is ranging from $ 3,300 to $ 3,800 approximately . ETH has established itself as the second-largest digital currency in 2021, right after Bitcoin (BTC).
How do users interact with Ethereum?
In order to interact with Ethereum, users are required to connect their computers with the platform by installing the blockchain software on their computers or they can also opt for simply generating a private key and develop a wallet address.
The ‘wallet‘ here is a digital or physical storage tool devised solely for cryptocurrencies. The Ethereum blockchain allots every ETH owner a private key that lets the individual access their balance and use it however they want. The private key is extremely essential for a crypto owner to access his or her virtual asset. If this private key is lost or stolen, the user will be in trouble.
The ownership of the transferred amount is updated by the blockchain every time ETHs are transferred to another account. When Ether is transferred, the blockchain updates your balance to replicate and update the change in the ownership of the coins transferred . These are the ‘private keys’ we have discussed already, that wallets store.
A private key is mandatory for any user / crypto holder to access their asset . Which is why, safety of these keys is paramount. If any kind of unscrupulous interaction happens between the keys and a third party, something which you are unaware of, that implies your digital assets have been successfully embezzled.
Ethereum authentication is also an interesting aspect of the ways people interact or associate with the cryptocoin. This area is still being explored as with each day, more and more crypto enthusiasts are booming. As well as hefty amounts of investments are being made. Owing to which, legit authentication of Ethereum, or any cryptocoin per se, is crucial.
Ethereum – The Disruptive Game Changer for Investing
The conviction behind mass usage of Ether as a mainstream cryptocurrency, aims to foster a system that gives more control over the data and allow applications to run on blockchain. The more people use these apps, the higher is the number of Ether required, and of course, higher fees . Simply put, Ether is more like a medium through which crypto holders can execute a particular task on Ethereum.
And just after Bitcoin, Ethereum is also an immensely thriving and growing platform, which is here to sustain. In April 2021, Ethereum was the second-largest blockchain in the world deriving colossal amount of investment by big players like Google, Facebook, and the likes.
Delving further deep into the worth of Ethereum, in early 2021, Ethereum had a market cap of just below $ 200 billion, with more than $ 55 billion locked as blockchain tokens. As it is evident from these stats, Ethereum was host to the chunk of blockchain apps the crypto industry possessed. What is more interesting is that most leading stable coins like USDT, BUSD, USDC – mostly sustain on Ethereum today thanks to its networks.
Wrapping Up – The Challenges & Future
But amidst all the good things, there are significant challenges to Ethereum as well that are better be avoided before it’s too late. Rumor has it, that a new variety of smart contract blockchains are emerging which is creating a fervent pressure for the launch of Ethereum 2.0.
However, probably, the main obstacle for this technology to be the leading mainstream currency is the difficulty for a non-technical common person to understand what exactly Ethereum is . There are still myriads of people who are unaware of the cryptocurrency concept, and for them Bitcoin , Ripple , Ethereum, Cardano , Solana – are far from being fathomed. Which is why, misconceptions and misleading information are rampant.
But, moving on and looking forward to the way the world is changing and technologies evolving, Ethereum has the potential, the market demand and the market size to surpass Bitcoin . Think wisely before you invest, but once you do and you see success, there’s no looking back!