Table of Contents

What is Ethereum and how does it work?

Ethereum is a decentralized blockchain network powered by the Ether token that enables users to make transactions, earn interest on their holdings through staking, use, and store nonfungible tokens (NFTs), trade cryptocurrencies, play games, use social media and so much more.

Many consider Ethereum to be the internet’s next step. If centralized platforms like Apple’s App Store represent Web 2.0, a decentralized, user-powered network like Ethereum is Web 3.0. This “next-generation web” supports decentralized applications (DApps), decentralized finance (DeFi), and decentralized exchanges (DEXs), for instance.

What Is Ethereum?

At its core, Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether (ETH).

Ethereum can be used by anyone to create any secured digital technology. It has a token designed to pay for work done supporting the blockchain, but participants can also use it to pay for tangible goods and services if accepted.

Ethereum is designed to be scalable, programmable, secure, and decentralized. It is the blockchain of choice for developers and enterprises creating technology based upon it to change how many industries operate and how we go about our daily lives.

It natively supports smart contracts, an essential tool behind decentralized applications. Much decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology.

Features of Ethereum

Smart contracts: Ethereum allows the creation and deployment of smart contracts. Smart contracts are created mainly using a programming language called solidity. Solidity is an Object Oriented Programming language that is comparatively easy to learn.
Ethereum Virtual Machine (EVM): It is designed to operate as a runtime environment for compiling and deploying Ethereum-based smart contracts.
Ether: Ether is the cryptocurrency of the Ethereum network. It is the only acceptable form of payment for transaction fees on the Ethereum network.
Decentralized applications (Daaps): Dapp has its backend code running on a decentralized peer-to-peer network. It can have a frontend and user interface written in any language to make calls and query data from its backend. They operate on Ethereum and perform the same function irrespective of the environment in which they get executed.
Decentralized autonomous organizations (DAOs): It is a decentralized organization that works in a democratic and decentralized fashion. DAO relies on smart contracts for decision-making or decentralized voting systems within the organization.

How does Ethereum work?

Like Bitcoin, the Ethereum network exists on thousands of computers worldwide, thanks to users participating as “nodes,” rather than a centralized server. This makes the network decentralized and highly immune to attacks, and essentially unable to go down as a result. If one computer goes down, it doesn’t matter because thousands of others are holding the network up.

Ethereum is essentially a single decentralized system that runs a computer called the Ethereum Virtual Machine (EVM). Each node holds a copy of that computer, meaning that any interactions must be verified so everyone can update their copy.

Network interactions are otherwise considered “transactions” and are stored within blocks on the Ethereum blockchain. Miners validate these blocks before committing them to the network and acting as transaction history or a digital ledger. Mining to verify transactions is known as a proof-of-work (PoW) consensus method. Each block has a unique 64-digit code identifying it. Miners commit their computer power to find that code, proving that it’s unique. Their computer power is “proof” of that work, and miners are rewarded in ETH for their efforts.

1. Blockchain Technology

Ethereum, like other cryptocurrencies, involves blockchain technology. Imagine a very long chain of blocks. All of the information contained in each block is added to every newly-created block with new data. Throughout the network, an identical copy of the blockchain is distributed.

This blockchain is validated by a network of automated programs that reach a consensus on the validity of transaction information. No changes can be made to the blockchain unless the network reaches a consensus. This makes it very secure.

2. Smart Contracts

The whole point of Ethereum having a system not controlled by a third party but by codes is induced by smart contracts. Smart contracts are automatically executed when certain stated conditions are met without the help of any external body. Smart contracts are involved in any cryptocurrency. They are not restricted to and can be used outside Ethereum, but they are popularly known for their Ethereum usage. Bitcoin also supports basic smart contracts, but its applications are limited when compared to Ethereum’s. Some developers and researchers have criticized smart contracts that would open up possibilities for security vulnerabilities.

3. Proof-of-Stake Mechanism

Proof-of-stake differs from proof-of-work in that it doesn’t require the energy-intensive computing referred to as mining to validate blocks. It uses a finalization protocol called Casper-FFG and the algorithm LMD Ghost, combined into a consensus mechanism called Gasper, which monitors consensus and defines how validators receive rewards for work or are punished for dishonesty.

Solo validators must stake 32 ETH to activate their validation ability. Individuals can stake smaller amounts of ETH, but they are required to join a validation pool and share any rewards. A validator creates a new block and attests that the information is valid in a process called attestation, where the block is broadcast to other validators called a committee who verify it and vote for its validity.

4. Ethereum Virtual Machine (EVM)

The Ethereum virtual machine executes smart contracts. It helps translate the smart contract written in a language computer that can’t read to a language (bytecode) that they can read. The EVM can execute at least 140 different codes with specific tasks.

5. Wallets

Ethereum owners use wallets to store their ether. A wallet is a digital interface that lets you access your ether stored on the blockchain. Your wallet has an address, which is similar to an email address in that it is where users send ether, much like they would an email.

Ether is not actually stored in your wallet. Your wallet holds private keys you use as you would a password when you initiate a transaction. You receive a private key for each ether you own. This key is essential for accessing your ether. That’s why you hear so much about securing keys using different storage methods.