What is Ethereum: An In-Depth Analysis
Ethereum is the leading and well-established blockchain platform for developing decentralized applications, all founded on the fundamental technology of smart contracts.
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Ethereum is distinguished from Bitcoin by smart contracts. These contracts facilitate transaction automation while ensuring their security. These contracts can possess intricate logic, paving the way for the development of applications with a diverse array of functions.
Ethereum was the first cryptocurrency to incorporate the Solidity programming language, which underpins the majority of cryptocurrency networks based on the Ethereum Virtual Machine (EVM).
In this article, we will examine the Ethereum blockchain to reveal its unique characteristics and showcase its impact on the overall cryptocurrency industry.
The Genesis of Ethereum
In 2013, Vitalik Buterin, a young Canadian cryptographer, envisioned the creation of a platform that would offer increased flexibility and scalability compared to Bitcoin. This would allow for the development of a wide range of blockchain-based applications.
In January 2014, Vitalik published the “Whitepaper,” a document outlining Ethereum's technical specifications and guiding philosophy. Simultaneously, Vitalik assembled a team of developers and secured the necessary funding to initiate the project.
Vitalik Buterin, the creator of Ethereum
The Ethereum mainnet was launched in 2015, heralding the introduction of the platform's first smart contracts and leading to developers actively using Ethereum for the creation of various applications.
Financing the Project
Ethereum's financing was facilitated through an Initial Coin Offering (ICO) in 2014. Over a month, from July 12 to August 15, Ethereum attracted investments from a wide array of backers. In total, the ICO managed to raise 31,500 bitcoins. At the time, this amount was valued at approximately 18 million US dollars. The funds raised enabled the Ethereum team to begin working on the project.
Additional sources of Ethereum funding include sponsorships from various companies and organizations that employ the Ethereum platform to create their applications and smart contracts. In 2020, Ethereum introduced the Ethereum Foundation Grants Program, which offers grants to developers and projects utilizing the Ethereum platform.
Ethereum Foundation's investment activities in detail (Crunchbase)
Smart Contract Technology and the Rise of DeFi
Smart contracts are programs running on the Ethereum blockchain, capable of automating agreement execution between parties without intermediaries. They enable various financial transactions, including:
● Transferring cryptocurrencies or tokens without third-party involvement;
● Programming and creating new tokens;
● Launching decentralized applications that work with automated algorithms;
● Managing digital assets.
Thanks to smart contracts on Ethereum, the DeFi (decentralized finance) infrastructure emerged. Previously, trading was possible only on centralized cryptocurrency exchanges (CEX), which required registration, verification, and depositing funds on external platforms. DeFi provides a broad range of financial products and services, which can be used without transferring funds through banks, exchanges, or other intermediaries.
Decentralized exchanges (DEX) have become the primary feature of DeFi, where cryptocurrencies and tokens are traded. Users can access these platforms through personal wallets by connecting to the application. The blockchain's native cryptocurrency is used for paying fees.
Largest decentralized exchanges by trading volume (CoinMarketCap)
Cryptocurrency lending and borrowing protocols have also gained popularity, allowing users to lend and borrow cryptocurrencies, as well as staking and token mining protocols.
Transition from Proof-of-Work to Proof-of-Stake
Initially, the Ethereum blockchain was based on the Proof-of-Work consensus algorithm. However, after some time, Vitalik Buterin realized that PoW was too energy-intensive, environmentally unfriendly, and difficult to scale.
The network's transition to PoS began in 2020, with the final change completed on September 15, 2022. The update was named The Merge. Since then, the blockchain has operated with validators, requiring a minimum stake of 32 ETH in the pool.
ETH miners switched to other cryptocurrencies that can still be mined using graphics cards (mining BTC on these devices is unprofitable). Some of these coins include Dogecoin, Litecoin, Ethereum Classic, and Ravencoin.
The ETH Cryptocurrency
Ethereum blockchain's primary asset is the ETH coin. This cryptocurrency is used for paying network fees (including throughout the DeFi sector), earning from staking, and validating transactions.
Key characteristics of the ETH coin include:
■ Market capitalization – $213 billion;
■ Maximum supply – unlimited;
■ Total in circulation – 122,373,866 ETH coins;
■ Average daily trading volume – $9.2 billion;
■ Highest price – $4640;
■ Lowest price – $0.9.
Ethereum is the second-largest cryptocurrency by market capitalization after Bitcoin. Despite its unlimited issuance, the EIP-1559 update was implemented in 2021, allowing a portion of fees from each transaction to be burned.
During periods of high network congestion, the blockchain burns more ETH tokens than it produces. According to analytical resource Ultrasound.money, Ethereum's current deflation rate is 0.45% per year, with the network burning 2.2 ETH per minute.
Ethereum burn statistics after the EIP-1559 update (https://ultrasound.money/)
If blockchain technology continues to gain popularity among users, the amount of ETH in circulation could decrease quickly, turning the asset into a deflationary one. This may, in turn, lead to coin shortages and price increase. ETH is traded on cryptocurrency exchanges. You can find a complete list of trading platforms on CoinGecko and CoinMarketCap in the “Markets” section.
Ethereum's Disadvantages
Despite its numerous advantages, the Ethereum cryptocurrency network has a few drawbacks, including:
● Limited transaction speed (compared to newer blockchains);
● High level of censorship, with up to 60% of transactions being checked for violations of the US sanctions policy through official Ethereum validators;
● Expensive transaction fees.
These issues have led to frequent Ethereum updates, as developers continuously work to improve the system and eliminate these flaws.
Ethereum Blockchain Ecosystem
According to the analytical resource DeFiLama, the total value locked (TVL) in the Ethereum blockchain is $28 billion, the highest among all existing cryptocurrency networks. The largest amounts of funds are locked in projects such as Lido ($10.15 billion), MakerDAO ($7.5 billion), AAVE ($4.64 billion), and Curve ($4.27 billion).
Ethereum TVL (DeFiLama)
Interesting Facts
■ Ethereum founder Vitalik Buterin was awarded a scholarship from Montreal University at the age of 17 to study public blockchain theory.
■ The first NFT smart contract was developed and launched on the Ethereum blockchain.
■ In June 2021, Ethereum's lead developer, Vitalik Buterin, became a multi-billionaire due to Ethereum's value growth.
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