Since its creation, Ethereum, the second-largest cryptocurrency by market capitalization, has taken the digital world by storm.
Designed to be more than a digital currency, Ethereum introduced the concept of smart contracts and the possibility for users to create decentralized applications on the blockchain revolutionizing the entire blockchain landscape.
In this 101 guide, we will talk about the origin of Ethereum and its key features and point out the main differences between Ethereum and Bitcoin.
As a concept, Ethereum has existed since late 2013, but the network officially launched in July 2015.
Like the Bitcoin blockchain, Ethereum is a network of computers, also known as nodes from all over the world. The computers on the network follow a specific set of rules called the Ethereum protocol. The native cryptocurrency of the Ethereum network is called Ether (ETH).
Ethereum is not just a peer-to-peer cash system like Bitcoin and it is not used only to transfer value from person A to person B. As stated in their white paper, Ethereum is a "Next Generation Smart Contract and Decentralized Application Platform.”
As mentioned above, the Ethereum blockchain goes beyond Bitcoin's limitations. One of Ethereum's groundbreaking features is smart contracts.
A smart contract is a type of software written in a programming language designed for blockchain platforms (for example, Solidity). The terms of the agreement are directly written into the code. Once deployed on the blockchain, a smart contract becomes tamper-proof.
These contracts are called “smart" because they are self-executing contracts. Their terms are automatically enforced without the need for intermediaries.
Smart contracts have proven to be a transformative technology with a wide range of real-life applications in industries like finance, supply chain management, gaming, and more.
For example, in finance, the terms of smart contracts may include rules for lending and borrowing funds, interest rates, and repayment conditions.
In supply chain management for pharmaceutical products, for instance, smart contracts may be used to verify temperature level data collected from sensors during product transportation.
They can be set to trigger alerts and send notifications when temperatures are outside the preset range. That helps automate various processes, increases effectiveness, and ensures product quality and safety.
In gaming, smart contracts set the terms for reward distribution upon reaching a certain level, item ownership, and in-game asset trading.
Unlike the Bitcoin blockchain, the Ethereum blockchain can be used by developers to build different applications called dApps.
What sets dApps apart from traditional applications is that they do not rely on a single computer or server to function because they are built on the blockchain.
There are thousands of dApps available in categories like gaming, social media, DeFi (decentralized finance), and NFTs.
As applications built on a blockchain system, dApps are decentralized, secure, and transparent, and all users need to do to be able to use them is connect their wallets.
Unlike the Bitcoin blockchain network which doesn't enable the creation of tokens or assets unless implemented separately on a layer or a sidechain, the Ethereum network allows users to create their cryptocurrencies directly on the Ethereum blockchain. These are commonly known as ERC-20 tokens.
Some examples include
Another significant difference between Bitcoin and Ethereum is the consensus mechanisms both blockchains use.
To improve scalability, security, and sustainability, Ethereum has undergone several upgrades.
The most significant upgrade, Ethereum 2.0, involves transitioning from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism, enhancing network efficiency and reducing energy consumption.
While Vitalik Buterin, the creator and co-founder of Ethereum, is well-known, Satoshi Nakamoto, the author of the Bitcoin white paper is not a person but a pseudonym, and nobody knows the true identity of Bitcoin’s creator.
While there's a limited amount of Bitcoins created (21 million, with over 19 million in circulation), there is no such specific limit when it comes to Ethers (the Ethereum blockchain network's native currency.)
Unlike the world's first cryptocurrency Bitcoin, there are no halving events on the Ethereum network.
Bitcoin halving is an event programmed into the Bitcoin protocol that occurs approximately every four years or after every 210,000 blocks mined.
During this event, the reward that miners receive for validating transactions and securing the network is reduced by half, hence the name. Reducing the mining rewards by half decreases the rate at which new Bitcoins are generated, enforces scarcity, and potentially drives up the cryptocurrency’s value.
However, Ethereum operates differently. After changing its consensus model from Proof-of-Work to Proof-of-Stake in September 2022, all revenue goes to stakers, not miners.
As the chart below demonstrates, as of April 2024, there is an upward trend in staker revenues.
Ethereum emerged as an improvement to the Bitcoin blockchain. Not only did it introduce self-executing smart contracts but it also made it possible for users to create decentralized applications (dApps) directly on the blockchain.
That changed the landscape entirely and practically removed all limitations as to what a blockchain system can do.
Ethereum's native cryptocurrency, Ether (ETH) is the second most popular crypto among investors, and understanding its ecosystem is a crucial step in navigating the ever-changing world of digital finance and decentralized applications.
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