Ethereum : What is it and how does it work?

You can’t discuss cryptocurrency without mentioning Ethereum, the second-largest by market capitalization. Launched in 2015 by Vitalik Buterin, the Ethereum blockchain has a broader vision of decentralized finance (DeFi). It offers developers the ability to build decentralized applications on the Ethereum ecosystem. Let’s focus on Ethereum’s features, history, operation, and how to buy the cryptocurrency Ether (ETH).

Definition of Ethereum

Ethereum is an open-source, decentralized blockchain network that has its own cryptocurrency: Ether.

History 

Here’s the history of Ethereum: The Ethereum project began in 2013 when Vitalik Buterin published the Ethereum white paper. In 2014, the Ethereum Foundation was created to support the development of the project. Vitalik Buterin, who received a $100,000 Thiel Fellowship, left the University of Waterloo to fully dedicate himself to the project. Gavin Wood and Joseph Lubin joined him to launch Ethereum.

With the project’s foundations laid, the Ethereum platform was launched in 2015. Numerous companies such as BP, Intel, and Microsoft came together under the Enterprise Ethereum Alliance (EEA). The platform underwent several modifications to refine it and enhance its security and efficiency.

Ethereum’s official launch occurred in July 2015 with the release of its Proof of Work consensus protocol. In 2022, Ethereum transitioned to the Proof of Stake consensus protocol as part of what is known as “The Merge.” This transition, anticipated since the project’s inception, aims to improve the network’s energy efficiency and security.

What is Ethereum?

Ethereum is an open-source, decentralized platform that allows developers to create decentralized applications (Dapps) using smart contracts. Smart contracts are computer programs that automatically execute when certain predefined conditions are met via the Ethereum Virtual Machine (EVM).

The Ethereum blockchain has its native token, Ether, known by the symbol “ETH.” This cryptocurrency serves to:

• Reward network validators;
• Pay transaction fees;
• Perform transactions.

How Does Ethereum Work?

To understand how Ethereum works, it is essential to review the definitions of cryptocurrency and blockchain.

What is Cryptocurrency?

A cryptocurrency is an electronic currency that enables transactions through cryptographic validation. It is a decentralized currency, different from fiat money. It is not issued by any central bank or government.

Cryptocurrency is an alternative currency that does not have legal tender status. Since its value is not tied to a traditional currency or gold, it is entirely outside the control of a central authority or financial institution.

Key characteristics of cryptocurrency include:

• Lack of intermediaries: It operates independently of a trusted third party;
• Security: Information entered cannot be altered;
• Autonomy: Network miners who maintain the network’s functionality are paid in cryptocurrency.

What is a blockchain?

Cryptocurrencies rely on blockchain technology to ensure their security and transparency. A blockchain is a digital ledger that acts as an immutable and tamper-proof database. It consists of a chain of blocks that ensures transaction authenticity through verification by voluntary participants.

These participants are called “miners” or “validators” and are responsible for verifying transactions contained in blocks. To do this, they must provide computational power in exchange for cryptocurrency rewards.

In the blockchain, each block is encrypted, with its code linked to the preceding code in the chain. Modifying one block triggers a chain reaction affecting all subsequent blocks. This complex process discourages malicious miners who attempt to compromise the network.

How Does the Ethereum Blockchain Work?

Ethereum’s creation extends beyond the simple value transfer function offered by Bitcoin. In addition to decentralizing money, Ethereum aims to broaden its scope. The blockchain allows for the construction of decentralized applications and smart contracts on the platform, using the Solidity programming language. Its native token, Ether (ETH), is used for transactions, rewarding network security work, and paying transaction fees.

It also enables users to create their own ERC-20 tokens based on the Ethereum blockchain. These tokens can serve various purposes, such as fundraising, utility tokens for accessing specific services, or reward systems.

Why Use Ethereum?

Ethereum offers numerous advantages beyond just financial benefits for investors.

Here are the benefits of Ethereum:

• Security and transparency: Transactions are secured and transparent due to the Ethereum blockchain;
• Transaction speed: Transaction processing is much faster than Bitcoin;
• New opportunities for banks and financial institutions: Thanks to blockchain technology;
• More eco-friendly consensus mechanism: The transition to Proof of Stake (PoS) has allowed Ethereum to reduce its carbon footprint by up to 99.95%;
• Cryptocurrency performance: Potential profits from its price increase benefit investors.

Where and How to Buy Ether (ETH)?

You can buy, sell, and trade Ether against other digital assets, and even against fiat currencies like the Euro and Dollar. Ethereum can be purchased on various platforms, including cryptocurrency exchanges, trading platforms, and online brokers.

To buy Ether on an exchange, you need to:

• Sign up on the platform by providing personal information;
• Verify your account through identity verification;
• Deposit funds into your account using your preferred payment method;
• Search for and purchase Ether (ETH).

When choosing the right platform to buy Ethereum, consider factors such as its reliability and reputation, fees and commissions, supported payment methods, exchange rates, geographic restrictions, and security standards. It is also important to store your Ether in secure crypto wallets.

Advice Before Investing in Ether

The main drawback of buying Ethereum is related to cryptocurrency volatility. Ether’s price, like all virtual currencies, depends on supply and demand. The biggest risk is capital loss.

Therefore, it’s important to follow key investment rules to minimize risks:

• Invest only what you can afford to lose;
• Diversify your cryptocurrency investments;
• Conduct your own analysis and consult reputable sources;
• Stay updated on news affecting the cryptocurrency market;
• Verify the reliability of the cryptocurrency.

Conclusion

Ethereum is not the result of a mere experiment but the product of hard work by passionate developers. It is rightly that its native token, Ether, holds the position of the second-largest cryptocurrency in the world, after Bitcoin. Beyond offering investment opportunities, Ethereum remains the leading blockchain for dApp and smart contract developers. With its history, institutional recognition, and numerous possibilities, Ethereum has the potential to revolutionize the world of finance.