Ethereum Explained: What Is ETH and How Does It Work?(6 min read)

A jack of all trades, Ethereum (ETH) stands as the second-largest cryptocurrency by market cap behind bitcoin. The ethereum network is responsible for producing a teeming ecosystem of tokens, can be used to develop scores of decentralized applications, and aims to disrupt finance as we know it. Here’s everything you need to know about Ethereum.

Overview:

  • Ethereum was created in 2015 by Vitalik Buterin as a means of building upon bitcoin’s innovation.
  • The ethereum blockchain is programmable, enabling anyone to create any application upon it.
  • Ethereum applications are powered by self-executing “smart contracts,” removing the need for middlemen.

Ethereum, much like bitcoin, is a decentralized system underpinned by blockchain. Both networks allow the storage and transfer of value while forgoing the need for a financial institution or bank to enact the transaction. Similar to bitcoin, in which miners are rewarded for their work verifying transactions, Ethereum miners charge transaction fees (otherwise known as “gas”) to fuel and execute trades.

But that’s where the comparisons end.

Known by many as the “world computer,”  Ethereum was devised to build upon bitcoin, moving beyond its function as a currency by enabling greater programmability. The capacity to program Ethereum’s blockchain has empowered developers to create entire swathes of games, apps, and even other tokens—not to mention a comprehensive decentralized financial sector based on lending and borrowing otherwise known as “DeFi” (we’ll get into that later).

What are smart contracts?

What makes ethereum capable of offering such functionality? Smart contracts.

a graphic desgn for a smart contract

As their name suggests, these novel tools are essentially self-executing programmable contracts or agreements between two or more parties. Smart contracts enable an automated means of settling the pre-defined terms of a contract with anyone—anonymous or otherwise. The transactions that occur within a smart contract are processed via the blockchain, removing the need for a middle man.

Smart contracts aren’t confined to monetary transactions either; they can be used for almost anything, including the transfer of property rights.

Imagine you wish to buy a house but don’t want to go through the rigmarole of escrow or pay costly estate agents fees.

An agreement can be formed between you and the house owner via a smart contract on the ethereum blockchain. Written into the contract are simple rules: When the buyer sends 500 ETH, the seller will transfer ownership of the house.

The contract settles only when the terms and conditions of the agreement are met on either side, meaning neither party can dupe the other without backing out of the contract altogether.

What is ethereum used for?

Ethereum and its smart contracts capabilities are already finding major usage, from automating financial trades to streamlining legal processes and insurance claims as well as within crowdfunding, such as initial coin offerings (ICOs).  However, they’re most often employed within decentralized apps, or “dapps.”

decentralized app graphic

Similar to the kinds of traditional applications you’d find on your phone or computer, dapps can range from games and social media to lending platforms and exchanges.

The critical difference is dapps, akin to almost everything else in the crypto space, are decentralized, running on a blockchain rather than via a central server—assuring against censorship and downtime. They’re also open-source, encouraging development from anyone with the proper know-how.

Decentralized finance or DeFi—an umbrella term for a collection of finance-focused dapps, comprising of exchanges and lending and borrowing protocols—is recognized as Ethereum’s “killer app.”

lending and borrowing graphic

The DeFi sector is essentially the cryptocurrency industry’s take on traditional borrowing and lending, only—you guessed it—with a decentralized twist. Without costly human gatekeepers to impede transaction speeds, and with the blockchain extending liquidity globally, DeFi has gone from strength to strength.

Per the sector’s growth metric: Total Value Locked (TVL)—which denotes the aggregate value of user funds used within loans, collateral, or trading pool liquidity—DeFi has amassed almost $15 billion in TVL this year alone.

A graph showing the amount of value locked in the decentralized finance sector
Source: DeFi Pulse

What is Ethereum 2.0

As touched upon, Ethereum currently employs the same proof-of-work (PoW) mining technique as bitcoin. However, to improve the efficiency and speed of the Ethereum network, a major upgrade is planned.

The wheels of this upgrade are already in motion. On December 1, 2020, Ethereum shipped the first phase of Ethereum 2.0, which looks to transition Ethereum to a new, more efficient blockchain. While the breadth of the upgrade is deserving of an entire explainer guide itself, the main takeaway is Ethereum’s shift from proof-of-work to proof-of-stake (PoS).

Ethereum cyptocurrency coin

In PoS systems, rather than competing to solve equations—as in PoW mechanisms—miners or “validators” verify transactions based on how much cryptocurrency they lock up within the network, or “stake.” The more a user holds, the more mining power is granted, and thus the bigger the reward for verifying transactions. Because PoS removes energy-intensive equation solving, it’s much more efficient than PoW, allowing for faster verification/confirmation times for transactions.

The EVAI token shares quite a bit in common with Ethereum. Not only is EVAI derived from Ethereum architecture, being an ERC-20 standard token, but it also operates via a PoS-based consensus mechanism, allowing holders to gain passive income via staking rewards.

To find out more about us, visit: evai.io

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About Evai: 

Evai aims to establish the world’s first independent ratings service for evaluating the true worth of cryptocurrencies. The platform combines economic research, machine learning, and AI to pioneer a new approach to crypto ratings.

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