What is Ethereum?

Ethereum and ether: what is the difference?

People often talk about "buying Ethereum", but strictly speaking that isn't right:

• Ethereum is the network itself, the BlockchainBlockchainA public ledger where transactions are grouped into blocks, each linked to the one before, so past records can't be altered without it showing. and the software that runs it.
• Ether (ETH)Ether (ETH)The currency of the Ethereum network, used to pay network fees, as a stake under proof of stake and to send value between people. is the coin used on the network. It is what you buy, hold and send.

If Ethereum is a computer the whole world shares, ether is the fee for using it. Ether is also staked to secure the network, as described below.

Unlike bitcoin, ether has no fixed maximum supply. New ether is issued as a reward to those who secure the network, while part of the fees is destroyed. A little over 120 million ETH are in circulation. Ether divides into smaller units. The one you will see most often is the gwei, one billionth of an ether.

Who created Ethereum?

The programmer Vitalik Buterin described the idea for Ethereum in a whitepaper in late 2013. He founded the project with a group of co-founders, and the network went live on 30 July 2015.

No chief executive or company runs Ethereum. The software is open source and changes are proposed in public. They only take effect if the people running the network adopt them. The Ethereum Foundation, a non-profit, funds research and development but doesn't control the network.

What are smart contracts?

A smart contractSmart contractA program that runs on a blockchain and automatically carries out what it was written to do once certain conditions are met. is a program stored on the blockchain that runs automatically when certain conditions are met. Once a smart contract has been deployed, it usually can't be changed.

Think of a vending machine. You put in the right amount, choose an item and the machine hands it over. No staff member is involved and the machine always follows the same rules. A smart contract works the same way, except that it can do far more complex things, such as making a loan against collateral or swapping one cryptocurrency for another.

Applications built on smart contracts are called dAppsdApp (decentralised app)An app that runs on smart contracts on a blockchain instead of one company's servers, such as a decentralised exchange or lending service., decentralised apps. Anyone can inspect the code and use the apps, wherever they are in the world.

What is gas?

Everything that happens on Ethereum takes computing work, and that work is paid for with GasGasThe unit that measures the computing work a transaction or smart contract needs on Ethereum, which sets how high the network fee is.. Gas measures how much work an action requires. A simple ether transfer uses 21,000 units of gas, while a complex smart-contract action can use many times more.

The price of each unit of gas is quoted in gwei. If the base fee is 10 gwei and you add a 2 gwei tip, a simple transfer costs 21,000 × 12 gwei, or 0.000252 ETH. The base fee is destroyed, while the tip goes to whoever adds your transaction to a block.

Gas prices rise when the network is busy. If a transaction fails, you still pay for the gas it used. To bring costs down, networks have been built on top of Ethereum, known as layer 2Layer 2A system built on top of a blockchain such as Ethereum or Bitcoin to make transactions faster and cheaper than on the base network itself., which bundle many transactions together and record them on Ethereum in one go.

How is Ethereum secured?

Ethereum originally used proof of workProof of workA consensus method where the right to add the next block to a blockchain goes to whoever first solves a hard computing puzzle., like Bitcoin. On 15 September 2022 the network switched to proof of stakeProof of stakeA consensus method where crypto is locked up as a stake for the right to create blocks, and anyone who cheats can lose part of that stake.. The switch was called The Merge, and it cut Ethereum's energy use by an estimated 99.95%.

Under proof of stake, validatorsValidatorA participant on a proof-of-stake network who locks up their own crypto as a stake to create and check blocks in return for rewards. take the place of miners. To become a validator you have to stake at least 32 ETH. Every 12 seconds one of them is chosen at random to propose a new block, and others confirm that it is valid.

Validators earn ether for honest work. Anyone who tries to cheat, for example by signing two conflicting blocks, loses part of their stake. People with less than 32 ETH can take part through a StakingStakingLocking up crypto on a proof-of-stake network to help confirm transactions, in return for rewards paid in the same crypto. service, which stakes ether on their behalf in return for rewards. That adds the risks of the service itself. Read more about staking.

What is built on Ethereum?

• Stablecoins. StablecoinsStablecoinA cryptocurrency designed to keep a steady price, usually by tracking the US dollar or another currency. such as USDC and USDT are issued on Ethereum, among other networks. Read more about stablecoins.
• DeFi. DeFiDeFi (decentralised finance)Financial services, such as lending, saving and trading, that run on smart contracts on a blockchain instead of through a bank or other middleman. (decentralised finance) covers apps where you can lend, borrow and swap crypto without a bank or broker. Read more about DeFi.
• NFTs. NFTsNFT (non-fungible token)A unique token on a blockchain that records who owns a specific item, such as a piece of digital art, a ticket or an item in a game. are unique tokens that prove ownership of a digital item, such as an artwork or a ticket. NFT prices have swung widely.
• Other tokens. Thousands of tokensTokenA digital asset created with a smart contract on another cryptocurrency's blockchain, rather than on a blockchain of its own. run on Ethereum using the ERC-20ERC-20A standard for tokens on the Ethereum network that lets every wallet and service receive and send them in the same way. standard. Chainlink (LINK) and Shiba Inu (SHIB) are examples.

What are the risks?

• Price swings. From its peak in November 2021 to June 2022, the price of ether fell by more than 80%. It can happen again.
• Bugs in smart contracts. A smart contract does exactly what its code says, even if the code is flawed. In 2016 an attacker exploited a bug in a project called The DAODAOAn organisation run by rules in smart contracts, where token holders vote on decisions instead of a board or chief executive. and drained more than 3.6 million ETH. The network then split, and Ethereum Classic was the result.
• Scams. Anyone can create a token with any name, including one that looks like a well-known project. Scammers take advantage of this.
• Little protection in DeFi. Fully decentralised apps often fall outside MiCA. If something goes wrong, there is usually nobody to turn to.
• The wrong network. The same wallet address can exist on several networks. If you send ether on the wrong network, it can be lost.

Closing thoughts

Ethereum is a blockchain that runs programs, and ether is the currency that pays for them. Stablecoins, DeFi and NFTs are built on Ethereum, and the network has used proof of stake since 2022.

Ethereum offers more possibilities than most other cryptocurrencies. That flexibility also brings more complexity, so it pays to understand what you are using. Learn the basics of crypto before you start.