What is Ethereum and how does it work?

What is Ethereum and how does it work?

Ethereum definition

If Bitcoin (BTC) is the alleged future of money, then what is Ethereum? For someone new to the cryptocurrency space, that’s the logical question to ask, considering they probably see Ethereum and its native Ether (ETH) cryptocurrency next to Bitcoin everywhere on exchanges and in the news. However, it’s not exactly fair to consider Ethereum to be in direct competition with Bitcoin. It has different goals, features and even technology.

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.

This guide will provide you insights on the history of Ethereum, ethereum mining, how does Ethereum work, how to buy Ethereum, ETH vs BTC, Ethereum benefits and a glimpse of Ethereum 2.0.

History of Ethereum

Ethereum wasn’t always the second-largest blockchain project in the world. Vitalik Buterin actually co-created the project to answer for Bitcoin’s shortcomings. Buterin published the Ethereum white paper in 2013, detailing smart contracts — automated immutable “if-then” statements — enabling the development of decentralized applications. While DApp development already existed in the blockchain space, platforms weren’t interoperable. Buterin intended Ethereum to unify them. To him, unifying the way DApps run and interact was the only way to maintain adoption.

Thus, Ethereum 1.0 was born. Think of it as Apple’s App Store: one space for tens of thousands of different applications, all abiding by the same ruleset. Only that ruleset is hardcoded into the network and enforced autonomously with developers able to enforce their own rules within DApps. There isn’t a central party, like with Apple changing and enforcing regulations. Instead, the power is in the hands of the people who act as a community.

Of course, building such a network isn’t cheap. So, Buterin and his co-founders — Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Iorio and Amir Chetrit — held a token presale to raise $18,439,086 in Ether, funding Ethereum’s present and future developments.

The group also founded the Ethereum Foundation in Switzerland with the mission to maintain and develop the network. Soon after, Buterin announced that the foundation would run as a nonprofit, which caused some co-founders to leave.

Over time, developers came to Ethereum with their own decentralized ideas. In 2016, these users founded The DAO, a democratic group that voted on network changes and proposals. The organization was backed by a smart contract and circumvented the need for a CEO heralding power over Ethereum. Instead, a majority needed to vote on changes for them to be implemented.

However, this all went south when an unknown hacker stole $40 million in funds from The DAO’s holdings due to a security exploit. To reverse the theft, The DAO voted to “hard fork” Ethereum, diverging from the old network and upgrading to a new protocol, essentially undergoing a major software update. This new fork retained the name Ethereum, while the original network exists as Ethereum Classic.

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