What is Ethereum (ETH) and how does it work?

Anyone who has delved deep enough into the world of cryptocurrencies has heard of Ethereum. But what it really is and how it works is not explained in the simplest of terms. On this page, you will find everything you need to know about this cryptocurrency and platform that hosts some of the largest decentralized applications in the world.

Ethereum (ETH) is an open-source platform built on blockchain that gives life to various applications ranging from the world of business and decentralized finance to games and entertainment. The platform is powered by its own cryptocurrency called Ether, abbreviated as ETH. Additionally, Ethereum also has its own programming language called Solidity, which is Turing-complete, meaning that it is possible to write a program that can complete any operation when given reasonable instructions, time, and resources.

Smart Contracts

Ethereum is an altcoin that introduced a revolutionary concept in the crypto world: the smart contract. A smart contract is a contract that has two primary characteristics, namely self-executing and irreversible. The terms of the agreement between the buyer and seller are written directly in lines of code and executed on the blockchain.

The truly revolutionary element of a smart contract is the lack of need for trust between parties. Because anyone on the blockchain can verify the terms of the agreement, there is no need for an intermediary, and there is no way to secretly write a condition in the code without it being visible to all participants, there is no need for trust between parties. Simply when the conditions are met, the contract is executed.

A basic form of a smart contract that we can take as an example in the real world can be a coffee vending machine. You insert the necessary amount of money, press the button corresponding to the type of coffee you want with sugar, and you get the coffee. There is no need for an employee to deliver the product for which we spend money because everything is already encoded in the vending machine, following a very simple logic.

How Ethereum technology works and is applied

The combination of smart contracts and the nature of the blockchain, which by definition is decentralized, immutable, and transparent, has allowed for a new approach to the management of sensitive information, with finance at the forefront.

This means that now it is possible to do things faster, cheaper, and with significantly greater transparency than usual, which has led to the rise of decentralized finance (DeFi). Today, DeFi goes beyond Ethereum as a base platform, although most projects still use Ethereum.

Ethereum is a blockchain-based software platform. Its purpose is to offer a platform for all decentralized applications (dApps) that aims to offer services without requiring users to entrust their sensitive data to them. Since they also eliminate the need for intermediaries, thanks to the use of smart contracts, their use is cheaper than conventional applications and therefore more advantageous.

Ethereum has also been the basis for many projects without their own blockchain. A project that needs funding, for example, can build a prototype of its product on Ethereum, in order to sell tokens to raise funds. Later, it could use these funds to build its own platform with a completely native token that would be exchanged with that of Ethereum, such as the ERC-20 token. The process of selling these tokens is called Initial Coin Offering, or ICO.

n the heart of Ethereum lies a blockchain, made up of blocks linked together by complex cryptographic protocols that guarantee immutability, transparency, and decentralization. The blocks are added to the blockchain through a process called mining, which requires special hardware. Currently, miners are the ones who keep the network secure and healthy, enable transactions, and are rewarded for doing so. However, the problem with this approach (also called Proof of Work consensus mechanism) is that it is very computationally intensive, which means it uses a lot of energy and is harmful to the environment, among other issues.

Ether is the name of the currency itself: it is needed to make transactions and execute smart contracts. It is often referred to as “gas”. Everything done on the network costs a certain amount of ether: every transaction made, every smart contract invoked, each of these has to be paid for, while the amount depends on the complexity of what one wants to do. Ether storage occurs in accounts, which can be of two types:

• Contract accounts: belonging to smart contracts.

• Externally Owned Accounts (EOA): as the name suggests, belonging to something else (like smart contracts) within the network; in this case, it is where users store their ether.

Currently, Ethereum is relatively slow and inefficient. To keep the network decentralized and thus eliminate the risk of a single point of failure, thousands of nodes around the world compile and run the same code. The more people use the network, the more gas fees increase, as competition is high and everyone wants their transaction or smart contract to be executed before others. These problems have been addressed with Ethereum 2.0.

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