What is Ethereum?
|— The Ethereum blockchain was launched in 2015 and quickly became the number two cryptocurrency in terms of market share.|
— Its native currency is called Ether (ETH) and its smallest denomination is known as a Wei.
— Ethereum introduced Smart Contracts to the crypto market, which are like the blockchain’s computer programs and they allow for blockchain app, DeFi, and NFT capabilities.
As the second most popular cryptocurrency, you may have already heard about ETH and the Ethereum network. This blockchain network is the home to some of the most successful decentralized projects in history. It has come a long way since its inception, having started life as a proof-of-work blockchain and transitioning into a proof-of-stake blockchain in 2022. However, that’s nowhere near the end of the story for the ETH Network. The blockchain’s poster boy and Ethereum co-founder Vitalik Buterin said there are many more upgrades in store for the network.
But what is the Ethereum network and why is it so popular?
Let’s explore and uncover the most important things about Ether and why it’s different from other blockchain networks.
What Is Ethereum
Ethereum is the blockchain network that introduced the world to real-life use cases of smart contracts and gave rise to decentralized applications (dApps) and decentralized finance (DeFi). Initially, blockchains were restricted to financial transactions, but Ethereum allowed the scalability needed for developers to build all kinds of software applications and crypto tokens to power multiple ecosystems. In short, it provided people with new use cases.
The History of Ethereum
The idea behind the Ethereum blockchain was outlined in its Whitepaper in 2013. Vitalik Buterin, its co-founder, envisioned a blockchain where the only limitations for potential use cases would be developers’ creativity. Since its launch in 2015, it quickly rose to become the second-largest cryptocurrency by market capitalization, right after Bitcoin.
What is Ether (ETH)?
The native cryptocurrency of this network is named Ether (ETH) Ether (ETH). The smallest unit of Ether is also known as a Wei (0.000,000,000,000,000,001 ETH). Ether is the coin that fuels all transactions on the network. Every time you transact on an application through your Ethereum wallet, you need to pay a transaction fee in ETH. These transaction fees are known as crypto gas fees. But apart from paying transaction fees, you can also use ETH as a currency for making payments.
Ethereum’s Unique Features
While being decentralized and open-source like many other blockchains, it stood out from the crowd by being the first to offer something called Smart Contracts.
But what are smart contracts?
To get the full details, read the Ledger Academy article on what Smart contracts are, but in essence, you can think of them like computer programs on the blockchain: they generate automatic responses made when certain conditions are met.
For example, a smart contract can be set to automatically send 1 ETH to address A once it receives 2 ETH from address B. Due to this, some say Ethereum allows for programmable money. However, once a user deploys a smart contract, it cannot be altered. This is important to maintain the network’s security.
So why does it do that and how?
How Does Ethereum Work?
Ethereum originally used a Proof of Work consensus, meaning that Ether was mined similarly to Bitcoin. However, since the Merge in September 2022, it transitioned to a proof of stake mechanism instead. This is now the method the network uses to validate transactions and maintain its security. Meanwhile, the Ethereum Virtual machine (EVM) is responsible for executing the conditions of smart contracts.
Ethereum Proof-of-stake Mechanism
Since Ethereum’s whole consensus mechanism changed from Proof-of-Work to Proof of Stake (PoS) it now uses validators to create the next block. These network participants must lock a set amount of cryptocurrency on the network which is called staking. In doing so, a participant becomes a validator. On the ETH network, participants must stake 32ETH to become a validator. To get into the details, check out the full article on Ethereum Proof-of-stake.
Ethereum Virtual Machine
The Ethereum virtual machine is a virtual computer that runs on all of the nodes in the system. This is the layer of the network that is capable of executing smart contracts, opening the network up to a world of functionality. To learn more about it, check out the full Ledger Academy article on what EVM is but, essentially, this is what allows the network to support blockchain apps, dApps, DeFi protocols, NFTS, and much more.
Why Is Ethereum So Popular?
The Ethereum network is mainly so popular due to its range of use cases. Since it has the power to execute smart contracts, it’s capable of supporting some particular functionalities.
The Ethereum network is home to some of the most popular DeFi protocols such as Aave, Uniswap, and Curve. This is because Ethereum smart contracts allow for functions such as borrowing, lending, trading, and more. If you want to know more, check out the Ledger Academy article on what DeFi is, but essentially, this functionality opened up a whole new web3 economy. Tokenization means that Ethereum users are even using the network to trade, borrow and lend real-world goods, such as gold or real-world fiat currencies. These capabilities mean that the network hosts over 70% of all DeFi applications.
The Ethereum network also powers several successful and popular Decentralized Autonomous organizations, or DAOs. To learn more, check out the Ledger Academy article on what a DAO is. To explain though, these are communities governed by users with the power of their vote usually decided by tokens they hold. This is a decentralized governance tool with a lot of potential across multiple industries. A good example of a DAO on the Ethereum network includes; MakerDAO. This is the group that governs DAI, a stablecoin pegged to the dollar. MakerDAO uses its own governance token issued on the ETH network called MKR. Those that hold MKR tokens receive voting power over the coin’s update proposals.
The Ethereum network also hosts some of the most prominent NFT collections in existence, For example, the wildly popular Bored Ape Yacht Club and Cryptopunks NFT collections are both on the Ethereum network. While other chains are also capable of minting NFTs now, Ethereum was the first to get an NFT economy running. Accordingly, it’s full of NFT marketplaces for all sorts of different genres including generative art, music NFTs, and more.
Blockchain Games and the Metaverse
Since the Ethereum network can execute computer programs and host tokens with its own ecosystems, it’s also possible to create blockchain games on its infrastructure. Many popular blockchain games use the network or one of the layer two networks built upon it. For example, Axie Infinity is one of the most popular blockchain games to date and it operates on an Ethereum network sidechain called the Ronin Network. Then you have blockchain games such as the digital horseracing game Zed Run, which uses the main Ethereum blockchain for its NFT horses and ZED token. Last but not least, the network also hosts many blockchain metaverses, with the most popular being The Sandbox, Decentraland, and Voxels.
Tokens in The Ethereum Ecosystem
One way that smart contracts are used is by supporting other crypto assets on the Ethereum blockchain. Cryptocurrencies that use the blockchain of another crypto asset rather than having one of their own are not coins, but tokens. Tokens on the Ethereum network are called ERC tokens. ERC tokens come in 3 important forms: Fungible, semi-fungible, and non-fungible.
Essentially, ERC-20 tokens are fungible, meaning they can be swapped for one another. The first-ever ERC-20 token, Augur launched back in 2015. Today, the Ethereum blockchain provides the foundation for over 200,000 ERC-20 tokens. Each of these tokens provides a purpose to a different community. Since you can even trade these tokens with each other using decentralized tools, there are several ERC-20 tokens in the top 20 of crypto market cap.
Then ERC-1155 tokens are semi-fungible. This means they come as copies of the same token, just like editions of a piece of artwork. Then finally, there are ERC-721 tokens, unique non-fungible tokens that can represent anything from art to physical items.
Ethereum Vs Bitcoin: What’s the Difference?
There are a few key differences between Ethereum and Bitcoin. Firstly, their consensus mechanisms are different. Bitcoin uses a PoW consensus mechanism whereas Ethereum uses PoS consensus mechanism. Then, Ethereum is capable of executing smart contracts, whereas Bitcoin is not. Apart from that, there are tons of differences as to how these blockchains work and what they are for.
The Future of the Ethereum Network
Although it’s decentralized, the Ethereum Foundation still proposes changes to the network. Participants of the network then deploy these changes. Co-founder of Ethereum Vitalik Buterin has ambitious plans for the chain, including multiple upgrades in its future. So far, it’s already progressed from being a Proof-of-Work chain to a Proof-of-Stake Chain in “The Merge” event. This transition was finalised with the Ethereum Shanghai Upgrade. In short, this network event allowed validators to unstake the ETH they used to secure the new Proof of Stake blockchain. It was actualised on April 12th 2023.
Upgrades into the Future
The network will undergo more upgrades including a change to how the Ethereum Virtual machine works. This will allow the chain to explore other scaling solutions such as sharding. Beyond that, there are also big plans involving Ethereum Smart Accounts and more.
How To Start Using The Ethereum Network
The ledger ecosystem offers plenty of different ways to get involved with the world’s second-most popular blockchain network.
How to Buy ETH
Through the buy feature, you can also use any of Ledger’s partners to buy Ether, or any ERC-20 token securely. Since ERC-20 tokens are ETH-specific, you can store them at your regular crypto address. However, this also means that there is a single Private Key to access your Ether and ERC-20 holdings.
To buy ETH securely on your Ledger device, install the Ethereum account if you haven’t already. From there, you can buy ETH directly through Ledger Live using one of Ledger’s partners. This way, your ETH goes directly to your ledger device, with your private keys never leaving the safety of the Secure element chip. Plus, you get to keep custody of your assets.
How to Interact with Ethereum Smart Contracts Safely
Through Ledger Live, you can access the apps you need to interact with NFTs, DeFi, blockchain games, and more. Plus, you can even use your Ledger with a Metamask wallet to access more apps and services with the comfort of custody over your private keys.
This means you can explore the Ethereum ecosystem without the threat of online hacks. However, if you’re interacting with smart contracts, make sure you know how to segregate your crypto assets. Using the right precautions, only signing a bad transaction can put you at risk.
Luckily, Ledger Extension reads those transactions and relays the information back to you in human-readable language. That means you can understand each transaction you sign, even when a specific app is not supported by Ledger Live. Plus, since Ledger wallets are non-custodial, you can also check all of your transaction details with ease using Ethereum block explorers such as Etherscan.
In short, navigating the Ethereum ecosystem is easy with a ledger device, the Ledger Live app, and your Ledger Extension in tow.