Ethereum

Ethereum operates as an open-source, decentralized blockchain network that supports its native digital currency, Ether. It serves as a foundation for various other cryptocurrencies and enables the deployment of decentralized smart contracts.

Vitalik Buterin initially outlined the concept in a 2013 whitepaper. He and fellow co-founders raised capital through a public online crowd sale during the summer of 2014. The team collected $18.3 million in Bitcoin, selling more than 60 million Ether at an Initial Coin Offering (ICO) price of $0.311 per token. Based on current prices, this represents an annualized return on investment (ROI) exceeding 270%, meaning the value has nearly quadrupled each year since mid-2014.

The Ethereum Foundation formally introduced the blockchain on July 30, 2015, via the “Frontier” prototype. The network has undergone multiple upgrades since then, including “Constantinople” on Feb. 28, 2019, “Istanbul” on Dec. 8, 2019, “Muir Glacier” on Jan. 2, 2020, “Berlin” on April 14, 2021, and the “London” hard fork on Aug. 5, 2021.

According to its stated aims, Ethereum seeks to function as a worldwide platform for decentralized applications, permitting users globally to create and operate software that is resilient against fraud, downtime, and censorship.

Ethereum was launched by eight co-founders, a notably large group for a cryptocurrency initiative. They initially convened in Zug, Switzerland, on June 7, 2014.

• Vitalik Buterin, a Russian-Canadian, is likely the most recognizable figure among them. He wrote the initial whitepaper outlining Ethereum in 2013 and continues to contribute to the platform’s enhancement. Before his work on ETH, Buterin co-founded and contributed articles to Bitcoin Magazine.
• Gavin Wood, a British programmer, is often considered the second most significant co-founder. He developed the first technical version of Ethereum using C++, created the Solidity programming language, and served as the Ethereum Foundation’s first chief technology officer. Prior to joining Ethereum, Wood worked as a research scientist at Microsoft, and he later founded the Web3 Foundation.

The remaining co-founders include:

• Anthony Di Iorio, who provided financial backing during the project’s early development phase.
• Charles Hoskinson, who took a leading role in setting up the Swiss-based Ethereum Foundation and defining its legal structure.
• Mihai Alisie, who assisted in the establishment of the Ethereum Foundation.
• Joseph Lubin, a Canadian entrepreneur who helped fund Ethereum in its infancy similar to Di Iorio, and subsequently started ConsenSys, an incubator for ETH-based startups.
• Amir Chetrit, who participated in co-founding Ethereum but left the project early in its development cycle.

Ethereum was the first to introduce the idea of a blockchain-based smart contract platform. These contracts are automated software scripts that carry out the steps required to satisfy an agreement among multiple online parties. Their purpose is to minimize reliance on trusted middlemen, which lowers transaction fees and boosts reliability.

The main breakthrough for Ethereum was creating a system that runs these smart contracts on a blockchain, enhancing the inherent advantages of the technology. Co-founder Gavin Wood described the design as a “one computer for the entire planet,” aiming to make applications more durable, resistant to censorship, and harder to defraud by operating them across a worldwide network of public nodes.

Beyond smart contracts, the Ethereum blockchain supports other cryptocurrencies known as “tokens” via its ERC-20 compatibility standard. This has become the most frequent use case for the platform: so far, more than 280,000 ERC-20-compliant tokens have been issued. Over 40 of these rank among the top-100 cryptocurrencies by market cap, including USDT, LINK, and BNB. Following the rise of Play2Earn games, interest in the ETH to PHP price has grown substantially.

Ethereum Name Service, or ENS, is a scalable, decentralized naming framework built on the Ethereum blockchain. It functions as the Web3 equivalent of DNS (domain name service).

Typically, crypto addresses are lengthy alphanumeric strings intended for computer processing, such as “0xDC25EF3F5B8A186998338A2ADA83795FBA2D695E”. These can be difficult to read and may occasionally result in lost funds.

ENS addresses this issue by linking human-friendly names to machine-readable data, including Ethereum addresses, other crypto addresses, metadata, and content hashes. For instance, the complex address mentioned earlier could be replaced with “Alice.eth,” allowing you to receive various cryptocurrencies or NFTs through your ENS domain.

The system relies on two Ethereum smart contracts. The first, the ENS registry, stores three key details: the domain owner, the associated resolver, and the time-to-live for all records under that domain. The second contract, the Resolver, converts domain names into machine-readable addresses and back again.

Additionally, ENS integrates with .eth names and supports widely used DNS names like .com, .org, .io, .app, and others.

Ethereum has held its position as the second-largest cryptocurrency by market capitalization since it began. However, the network is not flawless; it suffers from high gas fees and a low throughput of 15 to 30 transactions per second.

While upgrades are planned to address these issues, various competitors have used this delay to provide users with faster and cheaper transactions. The phrase “Ethereum Killer” appeared around 2016/2017 when alternative blockchains like Cardano entered the market. In 2018, EOS launched as the next contender, securing $4.1 billion from investors, which was the highest amount ever raised by an ICO. Since that time, other projects such as Tezos, Solana, Fantom, Avalanche, and Binance Smart Chain have emerged as potential Ethereum killers.

These networks use distinct consensus models to overcome the limitations caused by Ethereum’s proof-of-work (PoW). For example, Solana employs proof-of-history (PoH), whereas Binance Smart Chain combines proof-of-authority (PoA) with delegated proof-of-stake (DPoS).

Despite these efforts, none of these rival blockchains have managed to replace Ethereum as the second-largest cryptocurrency by market cap. Additionally, Ethereum currently remains the leading blockchain for NFT trading activity.

EIP-1559 alters how gas fees are calculated on the Ethereum blockchain. Prior to this change, users engaged in a “first-price auction” where miners selected transactions based on the highest bid.

Under EIP-1559, an automated system sets a “base fee” for inclusion in the next block, which adjusts according to network congestion. Users wanting faster processing can add a “priority fee” to incentivize miners.

The upgrade also implements a fee-burning feature where the base fee is destroyed, removing it from circulation. This aims to reduce the circulating supply of Ether and potentially boost the token’s value over time. Notably, within less than two months of the London upgrade’s launch, the network burned more than $1 billion worth of Ether.

As of September 2021, approximately 117.5 million ETH coins were in circulation. The genesis block, which was the first block on the Ethereum blockchain, issued 72 million of these coins. From that initial 72 million, 60 million went to early contributors who participated in the 2014 crowd sale that funded the project, while 12 million were assigned to the development fund.

Miners on the Ethereum network received the rest of the supply through block rewards. When the network launched in 2015, the reward was 5 ETH per block. This amount dropped to 3 ETH in late 2017 and further decreased to 2 ETH in early 2019. On average, mining an Ethereum block takes about 13-15 seconds.

The London hard fork, an upgrade to the Ethereum network in August 2021, included the Ethereum Improvement Protocol known as EIP-1559. This protocol replaced the first-price auction system, where the highest bidder won, with a “base fee” required for transactions to be added to the next block. Users wishing to prioritize their transactions can pay a “tip” or “priority fee” to miners. Because the base fee changes dynamically based on transaction activity, it helps lower the volatility of Ethereum gas fees, though it does not lower the price itself, which remains notoriously high during periods of peak network congestion.

A key economic distinction between Bitcoin and Ethereum is that Ethereum is not deflationary, meaning its total supply has no limit. Developers explain this choice by stating they wish to avoid a “fixed security budget” for the network. By allowing the ETH issuance rate to be adjusted through consensus, the network can ensure it maintains the minimum issuance necessary for sufficient security.

However, with EIP-1559, the base fees from transactions are burned, effectively removing ETH from circulation. Consequently, higher network activity results in more ETH being burned, and this reducing supply could lead to an appreciation in the Ethereum price, assuming other factors remain equal. This creates the potential for Ethereum to become deflationary, a prospect that excites ETH holders due to the possibility of Ethereum price appreciation today.

As of August 2020, the Ethereum network relies on the Ethash proof-of-work algorithm, which is part of the Keccak family of hash functions, for its security. However, there are plans to shift to a proof-of-stake system as part of the major Ethereum 2.0 update that launched in late 2020.

Following the launch of the Ethereum 2.0 Beacon Chain (Phase 0) in early December 2020, users could begin staking on the Ethereum 2.0 network. Staking involves depositing ETH into a specific contract to help secure the network by storing data, processing transactions, and adding new blocks. To activate validator software, a deposit of 32 ETH is required. At the time of writing in mid-September 2021, the value of 32 Ether was approximately $116,029. Validators were earning a return of 6% APR, which amounted to roughly 1.91952 ETH, or $6960 at current prices. This figure is expected to change as the network evolves and the number of validators grows.

Rewards for Ethereum staking follow a distribution curve based on participation rates and the average percentage of stakers. While early participants saw rewards as high as 20%, these rates are projected to decrease to an annual range between 7% and 4.5%. The minimum threshold for staking remains 32 ETH. Those who choose to stake in Ethereum 2.0 should be aware that their funds will be locked on the network for months or potentially years until the Ethereum 2.0 upgrade is fully completed.

Because Ethereum (ETH) ranks as the second-largest cryptocurrency behind Bitcoin, you can purchase it or trade ETH pairs on almost every major crypto exchange. Key platforms include:

• Binance

Common trading pairs are ETH/USD, ETH/GBP, ETH/AUD, and ETH/JPY.

High demand often causes transaction fees on the Ethereum network to spike. In May 2021, the average fee reached a peak of $71.72. Along with these costs, the leading altcoin faces scalability challenges.

To improve scalability and introduce new features, the team plans to shift to a proof-of-stake algorithm. The transition to ETH 2.0 has begun, with upgrades like the London hard fork implemented along the way. This upgrade launched in August 2021 and included five Ethereum Improvement Proposals (EIPs): EIP-3529, EIP-3198, EIP-3541, EIP-3554, and the notable EIP-1559. EIP-1559 is considered the most popular of these changes.

The roadmap includes switching to proof-of-stake via the Ethereum 2.0 update in 2022. This change aims to introduce sharding for scaling and a new consensus mechanism. The existing chain would become the Beacon Chain, acting as a settlement layer for smart contracts on other chains.

In late 2021, the Arrow Glacier update was pushed back to June 2022. Until that time, Vitalik Buterin anticipated that optimistic rollups and Zk-rollups would shape the path toward the network's endgame.

In January 2022, the Ethereum Foundation decided to drop the “Ethereum 2.0” label to prevent user confusion. They stated that “Ethereum 1.0” would be known as the “execution layer,” and “Ethereum 2.0” would be called the “consensus layer” to better reflect the roadmap.

On April 13, 2022, developer Tim Beiko tweeted that Ethereum was in the “final chapter of PoW.” He noted the Merge might happen a few months after June, though no specific date was given. This followed a successful mainnet shadow fork test on April 11, 2022.

In 2022, the transition from proof-of-work to proof-of-stake was renamed from Ethereum 2.0 to The Merge. It went live on Sept. 15, 2022, after the Goerli testnet merge finished on Aug. 11, 2022.

The Merge brings critical changes. First, it combines the PoW mainnet with the PoS Beacon Chain. Together, they form the new proof-of-stake Ethereum, comprising a consensus layer for synchronizing chain state and an execution layer for transactions and block production.

Second, the Merge cuts ETH issuance by 90%, a change referred to as the "triple halving." With over 14M ETH already staked, ETH could become deflationary. Projections suggest stakers may earn between 8% and 12% APR. However, staked ETH withdrawals will not be possible until the Shanghai upgrade, estimated to arrive 6 to 12 months later.

The Merge does not boost transaction throughput or lower gas fees, as the block production rate remains near 12 seconds (currently 13 seconds). It also does not enable on-chain governance; protocol changes remain decided off-chain by stakeholders.

The shift to PoS is expected to slash annual energy use from 112 TWh/yr to 0.01 TWh/yr, a 99.9% decrease. This drop led investors to anticipate more institutional interest in a "greener" Ethereum. Conversely, miners in the $19 billion industry may support ETHPoW, a potential proof-of-work hard fork.

The Shanghai Upgrade is the most significant update since The Merge. It allows stakers to withdraw ETH and rewards from the Beacon Chain. During The Merge, validators began staking 32 ETH to secure the network instead of mining, but they could not unstake until this upgrade.

Known as Shanghai on the execution layer and Capella on the consensus layer (“Shapella”), this hard fork implements five EIPs, with EIP-4895 being the most anticipated for enabling withdrawals.

Withdrawals were enabled on the Zhejiang testnet on Feb. 7, 2023. The Sepolia testnet successfully executed the upgrade on Feb. 28, and the Goerli testnet followed on March 15, 2023. The mainnet upgrade was expected sometime in March 2023, making over 17.5 million ETH available for withdrawal.