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What is Ethereum and how does it work?

If you’ve scrolled through any crypto market tracker in recent times, you would have come across “Ethereum” in the top ten rankings. Ethereum has emerged as one of the most popular and valuable cryptocurrencies, attracting …

If you’ve scrolled through any crypto market tracker in recent times, you would have come across “Ethereum” in the top ten rankings. Ethereum has emerged as one of the most popular and valuable cryptocurrencies, attracting the attention of investors, developers, and enthusiasts alike. But what exactly is Ethereum, and how does it work?

At its core, Ethereum is an open-source blockchain platform that enables the creation and execution of smart contracts. Unlike Bitcoin, which primarily functions as a digital currency, Ethereum serves as a decentralised platform that allows developers to build and deploy decentralised applications, commonly known as dApps.

Ethereum was proposed in late 2013 by Vitalik Buterin↗︎, a cryptocurrency researcher and programmer. The network officially went live on 30th July 2015 and has since become a significant player in the world of cryptocurrencies. Ethereum introduced a groundbreaking concept by incorporating a Turing-complete programming language into its blockchain, giving developers the ability to create complex applications on top of it.

The Ethereum Blockchain

The Ethereum blockchain operates through a network of computers, referred to as nodes, which collectively maintain the network’s integrity and process transactions. Unlike traditional centralised systems, Ethereum’s decentralised nature ensures that no single entity has complete control over the network, making it resistant to censorship and single points of failure.

At the heart of Ethereum’s functionality lies its smart contract capability. Smart contracts are self-executing agreements with predefined rules and conditions written directly into the code. These contracts automatically execute actions when specific conditions are met, removing the need for intermediaries and increasing efficiency and transparency in various industries.

The native cryptocurrency of the Ethereum network is called Ether (ETH). Ether serves multiple purposes within the ecosystem. Firstly, it acts as a medium of exchange, similar to Bitcoin, allowing users to send and receive value. Secondly, it fuels the network by compensating miners for processing transactions and validating blocks. Lastly, Ether is used as “gas” to power and execute smart contracts on the Ethereum network.

To interact with the Ethereum network, users can use various wallets and interfaces that provide access to the blockchain. These wallets allow users to store, send, and receive Ether, as well as interact with decentralised applications. Additionally, developers can use Ethereum’s programming language, Solidity, to create their own smart contracts and deploy them on the blockchain.

Ethereum Use Case

Ethereum’s capabilities have given rise to a wide range of applications and use cases. From decentralised finance (DeFi) platforms that enable lending, borrowing, and trading without intermediaries, to non-fungible tokens (NFTs) that revolutionise digital ownership and collectables, Ethereum has sparked a wave of innovation within the blockchain industry.

Ethereum Challenges

However, Ethereum faced challenges such as scalability and high transaction fees, especially during periods of high demand. To address these issues, Ethereum underwent a major upgrade known as Ethereum 2.0↗︎ or Eth2. This upgrade aimed to transition the network from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model, enhancing scalability, security, and energy efficiency.

Market Capitalisation

Ethereum is well-known for its smart contract capabilities and is traded on various exchanges. With a current market capitalisation of $225 billion (June 2023), it has proven to be one of the most valuable cryptocurrencies. Ethereum’s all-time high market cap was $542 billion (November 2021), while its price reached a peak of $4635.45 on that same day. Its widespread availability on multiple exchanges contributes to its liquidity and accessibility for traders and investors.

Takeaway

Ethereum has emerged as a pioneering blockchain platform that goes beyond being just a digital currency. With its smart contract functionality and a vast array of use cases, Ethereum has become the foundation for a new era of decentralised applications and financial systems. As the blockchain ecosystem continues to evolve, Ethereum remains at the forefront, driving innovation and transforming industries across the globe.

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