Ethereum 101: The Ultimate Guide to Understanding Ethereum
Nowadays, those uninitiated to the world of crypto usually equate "crypto" with "Bitcoin." With the recent interest in crypto in general, another name is starting to crop up regularly, and that name is Ethereum, or "ETH," the native cryptocurrency associated with it. Not only is knowledge about the blockchain network spreading amongst the initiated, but even Wall Street is paying attention, as evidenced by the interest shown by institutional investors, hence why we felt it was appropriate to bring you this Ultimate Guide to Understanding Ethereum.
The total value of the crypto market, measured in market capitalization, currently stands at $1.12 trillion. Bitcoin, in the pole position, is valued at around 45% of the total at $451 billion, while Ethereum, as the second largest cryptocurrency, is slightly less than half of Bitcoin at $198 billion.
How does this compare with the market cap of some of the most famous companies in the world? Well, as of 2023, Apple's market cap is $2.231 trillion, Amazon's at $944 billion, and Tesla is at $635 billion. Not quite there with the big leagues, but not an amount to be sniffed at either. Even with many still clinging to the tulip fever analogy (which is fast fading), it's hard to believe that a project selling vaporware can last for years and collect the amount of money it has.
With that doubt in mind, it's time to take a real deep look at the beast called Ethereum and what it's doing to gobble up all this money that could've gone to end world poverty or send us to Mars. Before we crack into in-depth analysis, here are some Ethereum facts and quick hits:
Ethereum Review Summary:
To sum up "What is Ethereum," Ethereum is a decentralized network that uses blockchain technology to run applications and process transactions. It has its own cryptocurrency called Ether (ETH), which is the native token responsible for running the network and paying for network fees. Ethereum's utility comes from the fact that anyone can use the technology to build and create decentralized applications that do not need to be controlled by a centralized authority.
The Key Features of Ethereum Are:
- Ether- This is the cryptocurrency that powers the network and is used to pay for transactions and services.
- Smart Contracts- Smart Contracts are self-executing agreements that run on the blockchain and can enforce rules and conditions without the need for intermediaries.
- Decentralized Applications (DApps)- Applications that can be built and run on top of the Ethereum blockchain that can offer various services such as finance, gaming, social media, etc. Similar to apps that can run on the web2 internet in use today, the same can be built on the next generation of the internet (Web3) on a network like Ethereum.
- Decentralized Autonomous Organizations (DAOs)- A decentralized organization that has no central authority and is governed by its members who own tokens of the DAO. Members are able to vote on proposals that affect the project's operations and goals. Blockchain technology executes the decisions automatically according to the set of rules encoded in smart contracts.
- Ethereum Virtual Machine (EVM)- A computational network that is capable of running smart contracts on the Ethereum network. This allows any code written in any language that is compatible with the Ethereum Virtual Machine to be able to run and perform computations and code execution. The EVM updates the state of the Ethereum blockchain after each block is added, it is designed to promote cross-chain compatibility and be deterministic and secure.
Great, now let's crack into the details.
What is Ethereum?
The easiest way to describe Ethereum is that it's a supercomputer of sorts. Think of a 1000-piece jigsaw puzzle as one big supercomputer when put together. That completed puzzle is the entire Ethereum network. Each puzzle piece is one mini computer by itself, known as a node, operated by a user known as a miner or validator. Unlike a jigsaw puzzle, where each piece is incomplete unless assembled, each node is its own complete being. It processes the exchange of data, called transactions, and adds the data to the Ethereum network.
The underlying glue that binds all the nodes together is blockchain technology. Basically, the nodes store data in a block and connect them together one by one, like links on a chain.
What's really interesting about the Ethereum network is that there's no central authority telling all the nodes what to do. Instead, each node operates by following the rules programmed into the network. Also, the nodes are spread around the world, thus making this a decentralized platform.
On this gigantic big supercomputer, all kinds of programs run on it, just like the software you use on your own computer at home. These programs are called decentralized applications, aka DApps, and they're built using Smart Contracts, which we will get into later.
Hopefully, you now have a more concrete idea of what Ethereum is, let's go under the hood to see how it works. I'll try my best to provide the least messy explanation I can. If you want Guy's latest Ethereum take, here's a great video:
How Does Ethereum work?
In its most basic sense, Ethereum, like any other cryptocurrency project, involves the exchange and storage of data. How it differs from one blockchain project to another is how the data exchange works and what kind of data is stored on it.
Data is exchanged and stored using blockchain technology, which we mentioned earlier. This type of technology works by involving something called a Consensus Mechanism. It's how the miners participate in the process of adding blocks, known as mining. The first consensus mechanism that came about was called Proof-of-Work. This type of mechanism was adopted for creating the Ethereum network when it was first conceived back in 2013.
I think of Proof-of-Work as the first person to finish an in-class assignment, got the answers checked by everyone and then it gets submitted to the teacher for a reward.
Data stored in this manner cannot be reversed or altered in any way unless everyone agrees to do so. With thousands of node operators spread out across the world, getting the majority of people to agree to something is not easy but it was done successfully before, which we will talk about later.
Next, we come to the part about what kind of data is stored on Ethereum.
Ethereum is the first crypto project to pioneer the usage of Smart contracts. It's a set of computer codes programmed to act a certain way when it gets triggered by the programmer, another contract, or a user. These contracts are then run across the entire Ethereum network or on the “Virtual Machine.”
As the name implies, this type of contract doesn't rely on humans to execute the contents of the contract. Nor does it require a third party to check that the content of the contract is correctly executed. However, it is required for someone to check that the rules of the contract are correctly written down, which is where blockchain audits come into play. Audits and accuracy are important because once code is agreed on by the community and put into place, it would take a fair amount of effort for it to be rewritten, and consensus may need to be agreed on by the developer community.
It is also important to point out that Ethereum smart contracts are “Turing Complete.” What this means is that, in theory, any computation can be completed on the network, no matter the complexity.
Another tool that developers use to create DApps is called the Ethereum Virtual Machine. The EVM is software capable of executing smart contracts and computes the state of the Ethereum network after each new block is added to the chain. The primary function of the EVM is to compute the network's state and run various types of smart contracts and DApps, converting them into readable format known as “Bytecode.”
This is crucial as this is what makes it possible for other EVM-compatible chains like Polygon, Avalanche and multiple other EVM-compatible networks to be recognized by Ethereum nodes, allowing developers to port their DApps and tokens over from EVM-compatible networks to Ethereum and vice versa, enhancing interoperability between EVM-compatible networks.
The last part we're going to look at is payment, which is the most important part, the one thing that greases all wheels. After all, no one would be doing all this work out of the goodness of their own hearts.
Ether (ETH) - The Ethereum Cryptocurrency
Ethereum validators do the work of deciding what data to store. The network gives them a reward in the form of a token called Ether, commonly known as ETH. This is the native cryptocurrency for the Ethereum network.
Aside from being given out as rewards, Ether is also the only accepted form of payment for storing data on the Ethereum network, making it a kind of digital money. Any piece of data that needs to be on the Ethereum network takes up space in the block and needs to be paid for. This is known as "gas fees," which, I suspect, is due to the American way of saying petrol.
Due to the increasing demand for block space on the network, and the bright future that lots of people foresee for it, the price of ETH in terms of dollars has been rising fairly rapidly since it was first introduced to the world.
Just like a dollar that can be broken down into smaller units, ETH is like the dollar with smaller denominations accessible. The most common one is known as gwei, short for giga wei. Anyone who has ever done a transaction on Ethereum knows gwei because it's the unit used to measure gas fees. Rather than say it costs 0.00000001 ETH, much easier to say 10 gwei.
Everything recorded on the Ethereum blockchain is public knowledge. If you'd like to see what a transaction looks like, here's an example:
The above image is taken from Etherscan, a popular website known as a blockchain explorer, that shows the information in the blockchain in human-readable form. If this is the first time you come across this website, I'd like to recommend reading our article on Etherscan to understand how it works.
The next big question is: how do you store digital money?
Why, with a digital wallet, of course! Does that mean the ETH is inside the wallet like how you open your wallet and see cash? Well, not quite, as we'll see below.
Ethereum wallets serve as a gateway to the Ethereum blockchain, providing users with access to manage their accounts and funds. An Ethereum account has the ability to initiate transactions and monitor its balance across multiple Ethereum addresses. Additionally, these accounts can engage in various activities such as creating smart contracts, interacting with decentralized applications and more. Whether in the form of software or hardware, Ethereum wallets are essential tools for users to navigate and utilize the Ethereum network to its full potential.
Every Ethereum address is a public string of alphanumeric characters that commences with "0x". The blockchain displays the balance of each Ethereum address, but it is not clear who controls each address since they are represented by strings of numbers and letters. Wallets, whether in software or hardware form, provide users with the ability to manage and control as many Ethereum addresses as they require.
As Ethereum wallet addresses are very long and not easy to memorize, not to mention are prone to mistakes when typing them, many Ethereum users have opted to use blockchain domains instead. With a blockchain domain, instead of having a 42-character long hexadecimal address, your Ethereum address can be connected to something easy to remember like bob.eth. You can learn more about blockchain domains in our review on Unstoppable Domains.
Multiple types of Ethereum wallets are available. Users can opt to download software wallets on a desktop or mobile device, keep their wallets offline using paper or titanium, or our personal favourite, utilize hardware wallets like a Ledger or Trezor, which provides users with a good balance between convenience and security. We dive into the different types of wallets and their level of security in our article: Crypto Safety 101.
The most popular Ethereum wallet for interacting with DeFi and DApps is undoubtedly the MetaMask wallet, which is primarily used as a browser extension wallet. You are going to want to get familiar with it if you want to access the wild world of Ethereum DApps, meaning that you may find our MetaMask Guide helpful. If you intend to use your crypto on the go, we've got you covered with our Top Mobile Wallets article, and if safety is your primary concern, then you're likely going to want to check out our article on the Most Secure Hardware Wallets.
Regardless of what type of wallet you choose, their core functionality essentially remains the same. When creating an Ethereum wallet, the process typically involves either downloading or recording a private key or seed phrase. Private keys enable users to send or use their crypto, while a seed phrase gives them access to their wallet and all the private keys associated with it. These private keys or seed phrases are essential for safeguarding funds, and a crypto wallet functions as a password manager for users' cryptocurrency holdings. As long as users have their master password (the seed phrase), they can gain access to their crypto funds.
New crypto users are often worried about using self-custodial crypto wallets, mistakenly assuming that if they lose their phone or their laptop breaks that had their crypto wallet, that they lose access to their funds forever. This is not true. As long as you have your recovery seed phrase noted down and kept someplace secure, you could launch your phone with your crypto wallet installed on it into the sun, then simply download a new wallet, any wallet that uses the same recovery method (which is most of them), enter your seed phrase, and poof, like magic, you will regain access to your crypto.
To "nerd out" a bit, there are two main types of Ethereum accounts to be aware of: Externally owned accounts (EOAs) and Contract Accounts. EOAs are made up of public and private keys, which proves that the sender genuinely initiated a transaction and had the authority to do so. This is what gives users control over their accounts.
So, a digital wallet is a container that stores the private keys for the ETH that you hold. This can be confusing as most people think that the wallet itself stores the ETH they have, which is not the case. Ethereum always remains on Ethereum's ledger, the record-keeping system that keeps track of wallet accounts, transaction history, balances, and basically the entire history of the Ethereum network.
Contract accounts are accounts associated with smart contracts, as each smart contract has a unique Ethereum address controlled by the code. Regardless of the different account types, one thing that doesn't change are the four characteristics associated with Ethereum transactions:
- Nonce- For EOA accounts, this is a number that represents the number of transactions sent from the account's address. In the case of a contract account, the nonce is the number of contracts created by the account.
- Balance- This figure shows the amount of Ether controlled by a wallet account, this figure is comparable to the balance of your bank account.
- codeHash- This hash represents the code of an account on the Ethereum Virtual Machine, and is the part of the protocol that is performing the transaction processing.
- storageRoot- This hash is a Merkle Patricia tree's root node, which encodes the hash of the storage contents of an ETH account.
If that bit all sounded a bit Greek to you, don't worry, you don't actually need to understand those 4 points or the difference in Ethereum accounts as a standard user. We just included that information for those who may have a little more of a technical interest. If you want to get even deeper into the weeds of Ethereum wallets, here is a great Ethereum Wallet Guide by ND Labs.
What is ETH2.0?
September 15, 2022, was a momentous day in the history of the Ethereum network. Known as The Merge, it's when the network transitioned from using the Proof of Work consensus mechanism to the Proof of Stake algorithm, usually referred to as PoS. The difficulty involved in the transition, as mentioned by someone in the Bankless Show on YouTube, was akin to “swapping out the engine of an airplane while in flight and making sure the plane doesn't crash.”
How Proof of Stake works, in a nutshell, is that Ethereum validators hold 32 ETH as an eligibility condition to be a node operator. Instead of mining blocks, they verify transactions made on the blockchain. Once the data is verified, these are added to new blocks of data.
It might be a bit steep to hold 32 ETH, especially at today's prices, however, it is necessary to prevent malicious actions as bad actors will get their ETH confiscated for bad behaviour in a penalty known as slashing. This incentivizes network participants to behave decently.
If you want more information on the difference between Proof of Work, which is used by Bitcoin, and Proof of Stake, which will be used by Ethereum, and is already securing other layer one networks like Cardano, NEAR, Solana, and many others, please check out this great article on Proof of Work vs Proof of Stake. There's also a video version with Guy explaining it if you prefer to learn visually.
One of the key benefits of this transition is the huge reduction of its carbon footprint. Previously, when ETH was still operating under the Proof of Work mechanism, huge amounts of energy were needed to crack the algorithm in order to add blocks to the blockchain network. With Proof of Stake, blockchains can operate with far more efficiency and use significantly less energy. The merge will also help contribute to the future scalability and sustainability of the Ethereum network.
Brief History of Ethereum
At this point, we diverge a bit to tell you the story of how Ethereum came about.
Once upon a time, a merry band of fellows got together and decided to change the world. This happened not long after Bitcoin came into existence. They bounced a bunch of ideas back and forth in a rented house dubbed "the spaceship" in Zug, Switzerland back in 2014, and came up with a different way to use blockchain technology.
This was how Ethereum was created, as outlined in this white paper. The band of merry fellows were Vitalik Buterin and his gang - Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Iorio, Amir Chetrit, and Joseph Lubin.
Amongst those mentioned above, Vitalik is the only person left still steering the Ethereum ship. Both Gavin Wood and Charles Hoskinson left to create their own blockchain platforms Polkadot and Cardano, while the rest either left the industry or formed companies to support the Ethereum ecosystem.
The Ethereum Foundation, a non-profit organisation, was formed to drive the development and awareness of the Ethereum network. It is still playing an essential role to this day. You can find out more about it on their website Ethereum.org.
The DAO and the Hard Fork
In 2016, a group of developers decided to pool some funds together into an organisation known as "the DAO", short for Decentralised Autonomous Organisation. An unfortunate thing happened when a hacker stole $40 million from the network. There was a huge uproar, resulting in a vote brought to the Ethereum community on how this should be handled.
There were two outcomes the community had to vote on: leave the chain as-is with the lost funds or create an identical copy of the blockchain from before the hack, making it seem as if it never happened. The creation of a separate version is known as a hard fork.
If you'd like to find out more about the drama that went on, please check out the excellent book, The Cryptopians by Laura Shin, host of the Unchained Podcast. The book doesn't talk about the hack exclusively, but it's got its own section. To find out more about what other podcasts you can listen to, we've curated the Top 10 Crypto Podcasts for your listening pleasure. As always, you can also watch Guy talk about his Top Crypto podcasts on YouTube.
The results of the vote gave birth to the creation of Ethereum Classic. This version kept the lost funds on record until block 1920000. The version that Ethereum is known for today was the other version without the hack. This was taken care of in a new smart contract only for refunds for the lost funds.
This exercise showed that it's possible for the records of the blockchain to be changed but only through community vote, not willy-nilly for any old transaction. Those who opposed the refund wanted to maintain the purity of the blockchain records, and follow the "code is law" stance, with the opinion that once the code is written, it should not be altered.
Ethereum Use Cases
In the world of start-ups, you don't want to be the solution looking for a problem. This cannot be said about the Ethereum blockchain because there are real problems out there, or at the very least, the need for a good alternative to what's already around. Even if we shouldn't fix something that isn't broken, sometimes, it's too late to fix something after it's broken. And anyway, who gets to define what is "broken"?
Below are some of the spaces where Ethereum has contributed greatly to the development of cryptocurrency as an asset class.
One of the main use cases for the Ethereum protocol is for the creation of decentralised applications or “DApps”. DApps are distributed, transparent, resilient, and incentivised applications that many are claiming could revolutionise the way technology works. These decentralised applications run on the Ethereum network with all network nodes taking part in the running of the application. Think of DApps as the software programs on computers or apps on a smartphone. The variety is endless but there are some distinct categories that they fall into:
- Decentralized Finance (DeFi)
- Unlike traditional finance which relies on tons of middlemen to push through financial transactions, decentralized finance relies on smart contracts that operate without bias. This enables users to become financial participants as they lend, borrow, and earn interest through all manners of financial actions previously restricted only to banks and professional investors.
- Non-fungible Tokens (NFTs)
- This type of token is unique in and of itself due to what it represents, which can be digital art, the key to unlocking privileges, a means of identity, or a piece of real-world property.
- The gaming industry has also embraced the NFT concept by allowing gamers to trade their in-game piece with other players on open NFT markets. Not only does this foster a greater sense of ownership for gamers, but it also gives their grinding efforts a price tag that they can benefit from.
- Another area that could potentially be disrupted by NFTs is the live events industry. Essentially, this means tickets will be sold as an NFT instead of a piece of paper that is worthless after the event is over. Instead, the value of the ticket extends beyond just attending the event as the ticket itself can be a collectible that also continues to unlock future value for the ticket holder. Coindesk is taking this approach with their Consensus event happening in 2023 by offering an NFT pass illustrated with generative artwork and also promising more benefits in the years to come.
- The use case for NFTs is essentially limitless and we've barely begun to scratch the surface. An NFT can represent any contract between two parties, whether it be something as simple as a concert ticket, to things like housing deeds, medical records, and insurance contracts.
- Decentralized Autonomous Organisations (DAOs)
- An indirect beneficial recipient of the Ethereum network's existence is DAOs. It's a new way of organising people together to strive towards a shared vision or goal.
- The most common ways for users to participate in a DAO is through holding tokens and voting on proposals made by the community on the direction of the project or what implementations to make. This is in contrast with traditional top-down approaches where key decisions are made by the top company management with ordinary workers having no say.
Who is Using the Ethereum Network? (And How?)
For all the talk about how important the Ethereum network is, it's worth wondering who are the people actually using it? Below is a roles-based list of network participants who each have their own part to play in ensuring the network's continued existence:
Validators - Are tasked with validating transactions made on the blockchain network, making sure there aren't any false records or bad actors trying to sneak past. They get rewarded with ETH for their efforts.
Stakers - These are ordinary users like you and me who own ETH and would like to help secure the network by staking their tokens with the validators. If you own 32 ETH, you can become your own validator, whether or not you have the technical know-how. For those with less than 32 ETH, staking pool protocols like Lido Finance and Rocket Pool can help users earn an APY for staking their Ethereum.
Developers - These are the programmers who maintain and improve the Ethereum network and implement any changes as voted on by the community. Ethereum developers are quite a busy group as there are a lot of proposals and improvements needed for the future of Ethereum, as can be seen on the Ethereum roadmap.
DApp builders - These are the people who build their programs on the Ethereum network. I use builders as a generic term for this group as it involves a number of smaller roles like founders, admin, community managers, in addition to the devs writing the code.
Users - Where would any of this be without people using the programs and DApps?
Flashbots - this is a smaller group of non-humans that are using the network in a very specific way. It is related to which Ethereum transactions get listed first on the blockchain relative to the other transactions. As a high-volume trader involved in arbitrage trading, it matters greatly which transactions get listed first relative to other transactions.
Ethereum vs Bitcoin
Before we can delve into the underlying technology that makes Ether unique, it helps to take a step back and look at what Bitcoin and Ethereum share in common.
Common with Bitcoin:
Public & Permissionless
Like Bitcoin, Ethereum is open source and anyone can download and write some software and run it on the network. They can also perform transactions and run smart contracts across the network. There is no requirement to “join” any network and provide your information to it.
Like Bitcoin, Ethereum has a blockchain made up of all transaction blocks prior. Inside these blocks, we have information on the transactions that took place. The connection of any Ethereum block is also linked to all prior blocks with a hash value. These were created by an algorithm of previous hashes thereby forming a non-breakable authenticated chain.
Differences with Bitcoin
Since The Merge, Ethereum has much less in common with the Bitcoin network. Indeed, the underlying idea behind Ethereum was to create one large and decentralised virtual machine like a supercomputer whereas the main purpose behind Bitcoin was to be a digital currency, making Bitcoin a kind of payment network. Other differences are seen below:
Fixed Supply vs Infinite Supply
Bitcoin's finite supply of 21 million tokens is one of the key talking points that gives so many people faith in its ability to beat inflation in the long run. Ethereum however, has an infinite supply but since the Merge, it has become potentially deflationary, depending on usage, which could help it maintain a level of scarcity in value.
The only way to get Bitcoin without buying it is to perform mining. The Ethereum Foundation is known for issuing grants in Ether to crowdfund and kickstart initiatives building on the network. Unlike Ethereum, Bitcoin does not have a "foundation" or an organization behind it for such initiatives, which is one of the reasons Bitcoin is considered more decentralized than Ethereum
Proof of Work vs Proof of Stake
It's been widely criticised that Proof of Work has a higher level of energy consumption than Proof of Stake. One reason is that we haven't actively harnessed the energy created from the former to be a power source for other uses in life. Proof of Stake, however, has a much lower level of energy consumption as less brute force is required from the hardware to obtain the rewards and power the network. More detail can be found in our Proof of Work vs Proof of Stake article.
The way Bitcoin and Ethereum’s block size limits are calculated is quite different. Whereas Bitcoin has a defined block size limit of 1MB, the Ethereum block size is based on the computational complexity of the smart contracts. This is known as the “Gas” limit per block which is not homogeneous across blocks. The Maximum block size on the Ethereum network is about 1.5m Gas.
A gas limit is put in place in order to add a cost for running the smart contracts. It also combats the problem of “transaction spam.” When making a standard transaction, the Gas required is about 21,000. Therefore, within one block you can fit about 70 transactions. In each Bitcoin block, you are able to get about 500-2,000 transactions depending on the size. This figure has now changed since the introduction of Ordinals on Bitcoin, as we even saw an instance of a Bitcoin block being filled by a single transaction.
Shorter Block Time
When it comes to the time needed to create a block, Ethereum takes about 14 seconds. This is markedly shorter than the 10 minutes that is currently required for Bitcoin blocks. Hence, transactions can be completed in a much shorter time on the Ethereum blockchain.
Last but not least, Gary Gensler, chair of the US SEC organisation and probably the least-liked person in crypto, claims that Bitcoin is a commodity but he can't say the same for the other cryptocurrencies, including Ethereum. This comment could have some real implications for the future of crypto in the US.
As the earliest blockchain to introduce Smart Contracts, there is an upward spiral in further development and usage. Today, it is the default blockchain for anyone to build anything as it has the most amount of tools available. This includes the Ethereum Virtual machine (EVM), which is an important tool used in developing DApps. Ethereum's first-mover advantage also led to the network benefitting massively from what is known as a “network effect.”
Simply put, because Ethereum is, by far, the largest smart contract layer one network, it attracts new users as it has the most users, developers, and community. This is comparable to Twitter being the dominant social media platform, because if all your friends and people you follow are already on Twitter, why would you go anywhere else?
Unlike software programs which are stand-alone products, many of the DApps built on Ethereum can integrate with each other or build on top of one another to offer a rich experience for users. Examples of this are in decentralized finance (DeFi) as stablecoin projects work with DeFi lending and borrow protocols and bridges to move assets from one blockchain network to the next.
Given the amount of activity happening on Ethereum, it would not be unreasonable to see occasional downtimes due to extreme peak periods. Yet, one thing Ethereum can boast about is not having suffered any downtime since its launch in 2015. Not even The Merge, as good a reason as any, could bring it down. This has since become a kind of gold standard for other blockchain networks to aspire to.
Although Ethereum does have its troubles with network congestion and high gas fees during peak usage, Ethereum is one of the very few networks that can boast that it has had zero downtime. It is also interesting to note that some competing networks like Solana have suffered outages while only experiencing mere fractions of the network activity as Ethereum, so while other networks may claim they have had zero downtime, none have come close to being as "battle-tested" as Ethereum.
The security risk on Ethereum is very small given the robust number of validators on the network. It is also relied on by many of the Layer 2 projects on Ethereum to safeguard their own network.
- High gas fees - blockchain space on the Ethereum blockchain is a premium, therefore, the amount of gas fees, representing the cost of storing data on the blockchain, reflects this reality.
- Not quite decentralized - Ethereum has suffered from criticisms of not being as decentralized as it would like to be. Under the PoS model, instead of network miners, the focus shifted to network validators with the most amount of staked tokens. As these tokens are pooled together, the number of validators isn't as many as some would like to be. LIDO protocol, holding 31.28% of all staked ETH tokens within its network of validators, gives Ethereum that unpleasant air of centralization. What LIDO does is it allows ETH token holders to stake their ETH with the validators in its network and provides liquidity tokens, known as stETH, as proof of receipt. These tokens can then be used in various DeFi protocols, thus unlocking liquidity for the token holders.
- Not censorship-resistant - another criticism lobbed against the Ethereum network is the presence of OFAC-compliant network validators. According to mevwatch.info, it hit an all-time high of 58% for OFAC-compliant blocks, down to 38% since. That's still a bit too high for a cryptocurrency project that has roots in the cypherpunk ethos.
Does Ethereum have a Future?
Yes, we certainly believe so. There are big plans ahead for Ethereum in both the near and not-too-far future. Vitalik Buterin, the face of Ethereum, outlined future developments in detail during a two-part interview with the Bankless podcast team. We're going to list the highlights here:
Shapella upgrade - sometime in March or April 2023, two upgrades are happening concurrently on the network: Shanghai on the execution level and Capella on the consensus level. After this upgrade, staked ETH can officially be unstaked from the network. This will have quite an effect on the various liquidity tokens floating in the market such as stETH, rETH etc.
'The Verge' - this phase mainly focuses on the speed of processing Ethereum transactions. Every minute there are more transactions wanting to be added to its blockchain than it could reasonably handle. This upgrade introduces sharding and addresses the scalability issue. Once completed in 2023/2024, Ethereum transactions will be processed much faster and it will also ensure more seamless integration with the current batch of Layer-2 protocols.
'The Purge and The Splurge' - these are two phases in the further future that involves some clean-up and doing fun stuff after the clean-up to make the network more robust. Here is a look at what each stage of development entails:
These transitions are part of the evolution of the Ethereum network. The version we currently see is by no means the final outlook. Any of the phases listed above could face unknown difficulties, which may prove to be of future concern. Once all the phases have been deployed, it is assumed that Ethereum will enter a maintenance phase. By that time, it would be interesting to see how many of its competitors have managed to distinguish themselves from Ethereum.
As the premier blockchain currently reigning supreme in the cryptocurrency space, it would take quite a lot for any blockchain projects of similar ilk to dethrone it from its position. Confidence in the project is at an all-time high, and its roadmap shows that it is here to stay.
Frequently Asked Questions
Ethereum is the second most well-known blockchain network aside from Bitcoin. There is a lot of activity happening on it and it is the breeding ground for discovering new ways to use crypto and blockchain technology. Both retail and institutional interest in Ethereum is growing at a rapid pace as many believe Ethereum will become "the next internet," and be the foundation that supports the next evolution of our online lives.
The easiest way to buy Ether (ETH) is through a cryptocurrency exchange or a trading platform. Most of them will require some kind of KYC that will allow you to transfer funds from your bank account to the exchange. Alternatively, you can buy using your credit or debit card but the fees will be a lot higher.
You can find our top picks for the best centralized and decentralized exchanges in our aptly named article: Best Crypto Exchanges in 2023.
Guy also put together his top 5 picks for secure crypto exchanges, all suitable places for buying Ethereum:
The best place to store ETH depends on what you intend to use it for. Users who actively access DApps and DeFi frequently will likely keep a small amount in a browser extension wallet like MetaMask for easy access. Other users who like to access DApps directly from a wallet or use their crypto on the go might prefer the convenience of a mobile wallet. Most crypto users agree that for long-term safe storage, hardware wallets offer a much higher level of security than the "hot" wallets mentioned above, while still offering a greater level of convenience over paper wallets.
Just like any blockchain network, Ethereum's revenue comes from transaction fees and data transfers. It represents the cost of storing and transacting with data on the blockchain. If you're curious about this topic, check out our article on Blockchain Revenue and Profit.
Criminal activity exists everywhere and that is no exception when it comes to Ethereum. However, it's not the hotbed of criminal activity as most people would expect. This is because Ethereum is a public blockchain, which makes all transactions visible to the public. Companies such as Chainalysis are able to trace transactions down to the user's IP address if necessary, making cryptocurrency not well suited for nefarious purposes as criminals don't want their activity publicly traceable forever. For more stats on this subject, check out the Chainalysis Crime Report 2023
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.