Ethereum is a blockchain-based platform used primarily as a decentralized support for collaborative applications. Ether is the native token used to execute operations on its platform.
The Ethereum platform is mainly used to store digital information and data without an intermediary. The data shared there (through a network of computers called nodes) cannot be manipulated or modified. For example, housing contracts can be drawn up without real estate agents, and money transfers can be made without banks. Ether (ETH), the token of the network, is used to facilitate the payment of transactions around the world.
The Ethereum blockchain was first proposed in 2013 and subsequently introduced in 2015 by developer Vitalik Buterin. Although Ethereum has similarities to Bitcoin, using the same proof-of-work consensus and a decentralized public ledger, it is meant to be more scalable (i.e. facilitate more transactions per second or TPS). For example, Ethereum London’s recent hard fork is a springboard for their 2.0 update to address some of Ethereum existing issues — such as network congestion.
Today, the Ethereum ecosystem is thriving, with nearly 3,000 decentralized applications powered by the Ethereum community. At the same time, Ether remains the top altcoin with a market capitalization of over $350 billion on August 17, 2021.
How Does Ethereum work?
Ethereum is an open software platform based on blockchain technology allowing developers to create and deploy decentralized applications (DApps) and smart contracts. A user who wants to operate these applications has to pay gas fees since computing resources are limited on Ethereum.
The Ethereum blockchain is sometimes dubbed “the computer of the world”. Not only is it seen as a way to give users greater control over their digital information and personal data, but Ethereum smart contracts also allow developers to automate terms on DApps, which is a big plus. for the success of Ethereum. And of course, Ether (ETH) is the cryptocurrency that powers these DApps.
For example, a smart contract that runs on the Ethereum blockchain helps define the rules and agreement to enforce the contract when those conditions are met. This is achieved through pre-determined terms and codes (functions and states) that reside on a particular blockchain address. Gas fees are used as a payment method to compensate for the computing power used to validate the transaction on the Ethereum blockchain. Usually, when a transaction is more complex, a user must pay higher transaction fees, or gas fees, in order to process a smart contract.
Smart contracts are self-executing contracts whose terms of agreement are written into the digital code of the blockchain. The functions of these smart contracts can include insurance, supply chains, real estate and gaming.
Managing transactions and tracking token balances is also the responsibility of a smart contract. ETH must be sent to the smart contract in order to receive tokens in return. In contrast, ERC20 refers to the standard of token creation and issuance rules on the Ethereum blockchain that all tokens must follow.
These tokens can take the form of utility tokens and security tokens. Utility tokens are explicitly designed to be used on DApps or to promote a product. A security token, on the other hand, is an investment, for example stocks or even company funds. Security tokens are subject to strict regulatory frameworks, which is not the case for utility tokens.
What is Ether?
Ether (symbol: ETH) is the native cryptocurrency that serves as the “fuel” for Ethereum transactions within the network. For example, a program associated with the Ethereum network needs computing power to execute the request. When a user pays a node the Ethereum transaction fee, the node executes the transaction.
However, ETH transaction fees generally vary depending on demand and the complexity of the service required. For example, the recent demand for decentralized finance ( DeFi ) has increased the number of transactions, such as sending tokens through decentralized exchanges ( DEX ), causing the entire network to become congested. Because of this, ETH gas fees have skyrocketed.
Ethereum derives its value in several ways. These include receiving gas fees, as well as borrowing and lending Ether through autonomous smart contracts using networks like AAVE, Compound, and Yearn Finance to earn interest. At the same time, the growing interest in DeFi and NFTs (non-fungible tokens ) has increased the value of Ether.
Advantages and Disadvantages of using Ethereum
Like any other blockchain technology, Ethereum has its pros and cons. Here are some of the main ones:
Advantages of Ethereum
It is stable and supports wide area network. The platform supports over $1.5 billion in trading volume and Ethereum staking just surpassed $21 billion after the London hard fork. Over 1,900 DApps are built on its blockchain. The entire network is secured and maintained by over 250,000 developers, more than any other blockchain community.
Good coordination of data. Network participants are less reliant on third-party intermediaries to write and interpret contracts and validate transactions because Ethereum is built on a decentralized architecture. This means that all information is transparent. Additionally, written smart contracts are immutable, allowing for smoother and more reliable execution.
Better scalability and interoperability. Ethereum is one of the most scalable networks, processing around 7-15 transactions per second. More than 14,000 active nodes contribute to the processing of each transaction, which is a challenge during periods of congested transactions. Thus, sharding is a necessary step for Ethereum 2.0 to solve its scalability problems.
Also Get Answer For: What is Decentralized Finance (DeFi)?
Disadvantages of Ethereum
The growing popularity leads to high transaction costs. Gas fees on Ethereum peaked at $23 per transaction in February 2021 due to the explosion in the number of DeFi protocols. When gas fees are high, it follows that your net profit will be low if you are a blockchain user.
Unpredictable result of Ethereum 2.0. The project has been repeatedly delayed, even though it promises to solve the scalability problem. Still, the proposed efficiency increase is questionable, as migrating from centralized to decentralized transactions is a painstaking process that DApps developers have to adapt to.
Subject to cryptocurrency inflation. Unlike Bitcoin, which has a quantity cap of 21 million, ETH does not have a fixed total quantity. ETH inflation is therefore monitored. The store of value might not be as impressive as BTC when assessed from a supply and demand perspective.