At its core, Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether, or ETH.
Ethereum can be used by anyone to create any secured digital technology. It has a token designed for use in the blockchain network, but it can also be used by participants as a method to pay for work done on the blockchain.
Ethereum is designed to be scalable, programmable, secure, and decentralized. It is the blockchain of choice for developers and enterprises that are creating technology based upon it to change the way many industries operate and how we go about our daily lives.
It natively supports smart contracts, the essential tool behind decentralized applications.1 Many decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology.
Learn more about Ethereum, its token ETH, and how they are an integral part of non-fungible tokens, decentralized finance, decentralized autonomous organizations, and the metaverse.
How Does Ethereum Work?
Vitalik Buterin, credited with conceiving of Ethereum, published a white paper to introduce it in 2014.
The Ethereum platform was launched in 2015 by Buterin and Joe Lubin, founder of the blockchain software company ConsenSys.
The founders of Ethereum were among the first to consider the full potential of blockchain technology beyond just enabling the secure virtual payment method.
Since the launch of Ethereum, ether as a cryptocurrency has risen to become the second-largest cryptocurrency by market value. It is outranked only by Bitcoin.
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.
Consensus is reached using a protocol referred to as a consensus mechanism. Ethereum uses the proof-of-work protocol, where a network of participants runs software that attempts to prove that an encrypted number is valid.
This is called mining. The first miner to prove the validity of the number is rewarded in ether. A new block is opened on the blockchain, information from the previous block is encrypted and placed into the new block along with new data, and the mining process begins again.
Proof-of-Stake Protocol
Currently, Ethereum uses the proof-of-work consensus protocol. At some point, it will move to another consensus protocol called proof-of-stake, where ETH owners stake a certain amount of their ether.
Staking ether keeps it from being used in transactions. It serves as incentive and collateral for the privilege of mining.
Mining will work differently under this protocol because it won’t require everyone on the network to compete for the rewards. Instead, the protocol will randomly choose users with staked ether to verify the transactions. These validators are then rewarded in ether for their work.
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.
Historic Split
One notable event in Ethereum’s history is the hard fork, or split, of Ethereum and Ethereum Classic.
In 2016, a group of network participants gained majority control of the Ethereum blockchain to steal more than $50 million worth of ether, which had been raised for a project called The DAO.
The raid’s success was attributed to the involvement of a third-party developer for the new project. Most of the Ethereum community opted to reverse the theft by invalidating the existing Ethereum blockchain and approving a blockchain with a revised history.
However, a fraction of the community chose to maintain the original version of the Ethereum blockchain. That unaltered version of Ethereum permanently split to become the cryptocurrency Ethereum Classic (ETC).