Ethereum is a programmable blockchain with smart contracts that enables the creation and use of decentralized applications. Ethereum is today the home of NFTs and thousands of decentralized applications have been built on the blockchain.
Compared to Bitcoin, which is largely a payment network, Ethereum can be seen more as an internet of decentralized applications. Ethereum and its cryptocurrency ether (ETH) is the largest blockchain and cryptocurrency in the NFT space. Here we provide an insight into what Ethereum is and how the blockchain works.
In December 2013 Vitalik Buterin and 7 other people founded Ethereum with two goals; (1) to offload the Bitcoin blockchain and (2) to create a network of decentralized computers to manage applications and programs.
During July-August 2014, 60 million Ether (ETH) were sold for 31,600 Bitcoins (BTC), equivalent at the time to 0.3 dollars per ETH.
Ethereum Virtual Machine
Ethereum uses a so-called Virtual Machine (EVM) which can be though of as a huge global computer made up of many individual computers running Ethereum's software. The individual computers running Ethereum are called nodes, all of which have copies of the blockchain's data history. Today, Ethereum has thousands of nodes run by people worldwide. If one or more nodes were to disappear, there are thousands of others that continue to run the software that keeps the blockchain running.
Keeping the computers running the blockchain running involves investments in both hardware and electricity from the participants. To cover these costs, Ethereum uses its own cryptocurrency Ether (ETH).
Decentralized collaboration
The decentralized collaboration means that participants do not have to rely on a centralized system, which reduces the risk of shutdown. Since the first block was produced in 2015, Ethereum has never been down.
Security through cryptography
Cryptographic mechanisms ensure that once transactions have been verified as valid and added to the blockchain by validators, they cannot be tampered with later. The same mechanisms also ensure that all transactions are executed only after a user has signed the transaction through their crypto wallet.
Ether (ETH) is the cryptocurrency that forms the foundation of the Ethereum blockchain.
ETH as fuel for Ethereum
When using Ethereum, e.g., to buy, sell or transfer NFTs, a transaction fee is paid (gas) in ETH. Each transaction requires a certain amount of computing power which is paid out in ETH. This means that you need a small amount of ETH to be able to use the Ethereum blockchain. The transaction fee varies depending on the amount of computing resources required and how many users want to use Ethereum at the same time.
ETH as salary for validators
The transaction fee is also an incentive fee to validators (those who produce and validate new block) for them to process, verify, approve and include transactions in new blocks on the blockchain. These rewards also prevent malicious intentions such as deliberately clogging the network by requesting infinite computations or other resource-intensive actions, as this would incur high costs.
ETH as collateral for Ethereum
ETH is also used to secure Ethereum in three main ways: 1) Reward validators who propose new blocks or report dishonest behavior by other validators; 2) Deposits from validators, which acts as security against dishonest behavior – if validators act dishonestly, they can lose their deposit; 3) Weigh votes for newly proposed blocks.
Validators secure Ethereum
Ethereum is secured through validators. To participate as a validator, a user needs to deposit 32 ETH as a deposit in a deposit contract and run three separate software; an execution client, a consensus client, and a validator.
Upon depositing 32 ETH, the user is joined to an activation queue. Once the user has been activated, the user gets new proposed blocks sent to them from nodes on the Ethereum network. The transactions delivered in a block are then re-executed and the block signature is checked to ensure that the block is valid. If valid, the validator sends a vote (a certificate) in favor of the block.
Continuously, a validator is randomly selected to propose a new block. This validator is responsible for creating a new block and sending it to other nodes across the network. At the same time, a committee of validators is randomly selected to verify the validity of the proposed block.
Security is strengthened as more people stake ETH
As more people become validators and lock in ETH as a deposit (stake), it becomes more difficult to attack Ethereum since a majority is required to control the blockchain. This means that more and more capital (ETH) is required to be able to reach a majority control, which helps to strengthen Ethereum's security.
Ethereum uses consensus mechanism Proof-of-Stake (PoS) after previously, like Bitcoin having used Proof-of-Work (PoW).
Staking
Staking, the method used in PoS, involves anyone wanting to validate and add new blocks to the Ethereum blockchain needing to lock up at least 32 ETH in a deposit contract as a deposit and run validation software. By becoming a validator you are responsible for storing data, processing transactions and adding new blocks to the blockchain. Validators help keeping Ethereum safe while earning ETH for their work.
Rewards and punishments promote honest behavior
PoS includes a system of rewards and punishments that strongly incentivizes validators to be honest and connected to the greatest extent possible while creating an extremely high cost to attack the blockchain.
Become a validator on Ethereum
To become your own validator, a deposit of 32 ETH and a computer that is connected 24/7 is required. However, there are several options, such as Rocket Pool and Lido, where less ETH is required.
Developers upload programs (reusable snippets of code) that users of the blockchain can call with requests whicht then are executed by the network. These programs are called smart contracts.
Automatic execution without intermediaries
A smart contract is a script that, when called with a request, automatically performs actions or calculations given that predetermined conditions are met. For example, when you sign a transaction to buy an NFT, code runs on a smart contract that causes the seller's wallet to be given access to the predetermined amount of ETH, while your crypto wallet is given access to the NFT. Interactions with smart contracts are irreversible.
Available for everyone
Upon paying a fee, anyone can create a smart contract and make it available on Ethereum. All users are then, upon paying a fee, able to call the smart contract with requests to execute its code. A programmable blockchain with smart contracts allow developers to build and distribute applications and services to Ethereum's users.
Anyone with an internet connection has the opportunity to participate in the Ethereum ecosystem.
Ethereum makes it possible to conduct transactions with any user on Ethereum without the involvement of third parties, 24/7. You don't need to go through intermediaries.
No government or company has control over Ethereum. The decentralization makes it almost impossible for anyone to prevent you from conducting transactions and using applications on Ethereum.
Users have a safe, built-in guarantee that funds will only change hands if the terms agreed upon are maintained. In the same way, developers can be sure that rules and conditions will not change for them.
Since all apps on Ethereum are built on the same blockchain, they can build on each other. This means that protocols and services only need to be built from scratch once. The next protocol and service can start from what already exists and focus solely on improvement.
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