What is Ethereum - CryptoRefills

What is Ethereum

Author: Massimiliano Silenzi

Ethereum was first proposed in 2013 by Vitalik Buterin, a programmer and a co-founder of Bitcoin Magazine [1]. The Ethereum white paper [2] outlined a vision for a decentralized platform that would enable the creation of decentralized applications (DApps) and smart contracts. The Ethereum project officially was launched in 2015, with the release of the Frontier network [3]. Frontier was mainly used by developers to test and experiment with this new platform. Also, the first version of the Ethereum Virtual Machine (EVM) was also introduced at this time, [4], becoming the foundation for the execution of smart contracts on the Ethereum network.

Table of Contents

1. History of Ethereum

Vitalik Buterin, a programmer and co-founder of Bitcoin Magazine, first proposed Ethereum in 2013 [1]. The Ethereum white paper [2] outlined a vision for a decentralized platform that would enable the creation of decentralized applications (DApps) and smart contracts. The Ethereum project officially launched in 2015, with the release of the Frontier network [3], which was primarily used by developers to test and experiment with this new platform. The first version of the Ethereum Virtual Machine (EVM) was also introduced at this time [4], which provided the foundation for the execution of smart contracts on the network.

In 2016, the Homestead network [3] was released, which marked the first stable version of the Ethereum network. This release also included changes to the EVM, making it more secure and efficient. The same year, Ethereum saw the launch of its first decentralized autonomous organization (DAO) [5][6], which was a revolutionary concept at the time and sparked the emergence of the decentralized finance (DeFi) ecosystem [7]. By 2017, Ethereum was experiencing a significant increase in popularity and market value [8], leading to a significant increase in transaction volume on the network. However, this also resulted in network congestion and high transaction fees. In fact, following the launch of Cryptokitties the Ethereum network had registered a 6 fold increase in pending transactions [9], highlighting the need for scalability solutions.

In 2018, the Constantinople hard fork was launched, which introduced several upgrades to the network, including changes to the EVM and the introduction of the Ethereum Improvement Proposal (EIP) 1234, which reduced the block rewards for miners to combat inflation [3].

In 2020, Ethereum 2.0, also known as Serenity, was proposed as a solution to Ethereum’s scalability issues. This upgrade aimed to introduce a Proof-of-Stake (PoS) consensus mechanism, which would replace the current Proof-of-Work (PoW) mechanism, and also includes changes to the EVM and the introduction of shard chains [10].

The roll-out of Ethereum 2.0 is in progress and is expected to be completed in several phases. One of the main milestones of Ethereum 2.0 was reached with “the Merge” which was completed on September 14th 2022. The Beacon Chain, which uses PoS and staking to validate transactions, had been running in parallel to the PoW mining-based blockchain for the prior 18 months. The Merge was the process of swapping out the PoW system that kept the Ethereum blockchain functioning with the new PoS mechanism of the Beacon Chain [11].
Ethereum’s future milestones include the continued development and implementation of Ethereum 2.0, such as sharding and other technological improvements which are expected to bring significant improvements in terms of scalability and security.

2. How Ethereum Works

Ethereum is a decentralized platform based on blockchain ,that enables the creation of smart contracts and decentralized applications (dapps). Ethereum uses a virtual machine, called the Ethereum Virtual Machine (EVM).

The EVM executes code via a global network of nodes.
The platform uses its own cryptocurrency, which is called Ether (ETH), as a form of payment for the transaction fees and for computational services of the network. Users can send and receive ETH and interact with the smart contracts and dapps through Ethereum wallets. Transactions on the network are recorded in blocks and added to the Ethereum blockchain [2].

2.1 What is a Smart Contract?

A smart contract is a self-executing contract which sees the terms of the agreement (e.g. between buyer and seller) being directly written into the lines of code. By self-executing we mean that the terms of the contract are therefore executed automatically without the need of humans (e.g. lawyers, or judges). These contracts are stored and replicated on the Ethereum blockchain network. Smart contracts allow for the automation of certain processes and can reduce the need for intermediaries in various industries [12].
Smart contracts can be used for a variety of purposes, such as for the creation and management of digital assets, for the facilitation of peer-to-peer transactions, and for the management of supply chain logistics. They also have potential applications in areas such as voting systems, real estate, and financial services [12].

One of the key benefits of smart contracts is that they can increase transparency and trust in transactions, as the terms and conditions of the contract are encoded and publicly accessible on the blockchain. They can also increase efficiency, as they can automate processes and reduce the need for intermediaries. However, there are also some concerns about the security and regulatory compliance of smart contracts.
The properties of smart contracts include:

  • Autonomy: Smart contracts are self-executing (they do not require the intervention of a third party to enforce the terms of the contract).
  • Trustlessness: Smart contracts are based on blockchain technology (this allows them to be executed trustlessly, meaning that the parties do not need to trust each other in order for the contract to be executed).
  • Immutability: Once a smart contract is deployed to the blockchain, the terms cannot be changed (contract’s execution is tamper-proof and transparent).
  • Efficiency: Smart contracts can automate repetitive tasks (by removing the middlemen and automating the execution we decrease the time and cost of contract execution).

Smart Contracts also have their own programming language, like Solidity for Ethereum, which is used to write the code of the Smart Contract and deploy it on the Ethereum network.

2.2 The Ethereum Virtual Machine

The Ethereum Virtual Machine (EVM) is the runtime environment for smart contracts on the Ethereum blockchain. It is responsible for executing the code of a smart contract. Furthermore, it ensures that the contract’s rules and conditions are followed. The EVM is also responsible for managing the state of the contract, including the storage of data and the transfer of Ether [5].

3. Ethereum Applications and Services

3.1 What are Dapps?

Dapps (Decentralized Applications) are open-source software that runs on a decentralized blockchain network like Ethereum. They are built on smart contracts, and they are designed to be censorship-resistant and to operate autonomously. They can be used for a wide range of purposes (e.g. creating digital marketplaces, decentralized exchanges, and prediction markets, etc.) [13].

3.2 What are DAOs?

A Decentralized Autonomous Organization (DAO) is a type of Dapp that is governed by its users. In other words, a DAO is a digital organization that is run by code, rather than by human administrators. DAOs on Ethereum are autonomous and operate based on a set of rules encoded in smart contracts [5].

3.3 What are Ethereum Tokens (ERC-20 standard)?

Ethereum tokens, also known as ERC-20 tokens, are digital assets that are built on the Ethereum blockchain. They are created and managed using smart contracts, which are self-executing contracts with the terms of the agreement written directly into code. ERC-20 tokens follow a specific set of standards, making them compatible with various Ethereum-based wallets and decentralized applications. One of the most popular types of Ethereum tokens is the utility token, which is used to access a specific service or product within a decentralized application. Other types of Ethereum tokens include security tokens, which represent an investment in a company or asset, and stablecoins, which are pegged to the value of a fiat currency or commodity. Ethereum tokens can be bought, sold and traded on various cryptocurrency exchanges, and they can also be used to participate in decentralized finance (DeFi) protocols, as well as to buy non-fungible tokens (NFTs) [14].

3.4 Ethereum and Stablecoins

Stablecoins are digital assets that are pegged to the value of a fiat currency, like the US dollar or euro. Many stablecoins are ERC20 Tokens built on the Ethereum blockchain, taking advantage of its smart contract functionality to create decentralized, programmable money. Some popular stablecoins on the Ethereum blockchain include DAI, USDC, and Tether. Some stablecoins are backed by real assets (such as cash or treasury notes) while others instead are algorythms through which they aim to stabilize their value. Stablecoins can be used to make fast and cheap transactions, as well as for trading and lending purposes [15].

3.5 Ethereum and NFTs

Non-fungible tokens (NFTs) are digital assets that are unique and cannot be replaced by another identical item [16]. They are built on the Ethereum blockchain, using the ERC-721 [17] or ERC-1155 [18] token standards. More recently EIP-2039 has been proposed as a solution to mint NFTs more efficiently [19]. NFTs can be used to represent digital art, collectibles, and in-game items, among other things [16].

3.6 Ethereum and DeFi

Ethereum is one of the most popular blockchain for DeFi development due to its ability to support smart contracts. The Ethereum Virtual Machine (EVM) allows for the creation of dApps that can provide a wide range of financial services, such as lending, borrowing, and trading of digital assets. The use of smart contracts in DeFi allows for transparent, tamper-proof, and self-executing financial transactions, which is a major advantage over traditional financial systems [7].

The most popular DeFi applications on Ethereum include decentralized exchanges (DEXs), lending and borrowing platforms, and stablecoins. DEXs allow for the trading of digital assets without the need for centralized intermediaries, lending and borrowing platforms allow for the creation of decentralized lending pools, and stablecoins are digital assets pegged to the value of a fiat currency. Other popular DeFi applications include yield farming, insurance, and prediction markets [20].

DeFi could allow for greater financial inclusion, as it is accessible to anyone with an internet connection. It also provides transparency and security, as transactions are recorded on a public blockchain. Additionally, DeFi allows for more accessibility to credit as lending and borrowing platforms can connect borrowers with lenders directly.

3.7 Ethereum Applications in Gaming

The Ethereum blockchain has also been used to create a new type of gaming experience, known as “crypto-games” or “blockchain-games”. These games allow players to own in-game assets in the form of ERC-721 [17] or ERC-1155 [18] tokens, which can be bought, sold, and traded on the open market. This is quite disruptive as it allows players to earn money by playing games. It also creates a new type of economy for the gaming industry. You can learn more here about Ethereum and Gaming.

4. Obtaining, Storing, and Exchanging Ether

4.1 How to buy or obtain Ether

Obtaining Ether, the native cryptocurrency of the Ethereum network, is a relatively straightforward process. There are several methods to acquire Ether, but the most common ones include buying on a cryptocurrency exchange, mining, or earning through a faucet.

  • Buying: The first and most popular method of obtaining Ether is by buying it on a cryptocurrency exchange. Cryptocurrency exchanges are online platforms that allow users to exchange fiat for cryptocurrencies and vice-versa. Some of the most popular exchanges include Coinbase, Binance, and Kraken. To buy Ether on an exchange, you’ll need to create an account, verify your identity, and connect a payment method such as a bank account or credit card. Once your account is set up, you can place a buy order for Ether at the current market price or set a limit order at a specific price.
  • Validating Transactions (Mining & Staking): Another method of obtaining Ether is supporting the network by validating transactions and being rewarded with Ether for this activity. Prior to the merge this was done entirely by mining the Ethereum network. Mining is the process of using specialized computer hardware to validate transactions on the Ethereum network and earn rewards in the form of Ether [22]. Following “the Merge” to Proof of Stake, validators use their own Ether as collateral to validate transactions on the network and earn rewards. This process is known as “staking” [23].
  • Faucets: Finally, you can also obtain small amounts of Ether through faucets. Faucets are websites or apps that give away small amounts of cryptocurrency for completing simple tasks or solving captchas. While the amounts given away on faucets are usually small, it’s a good way to get started with a small amount of Ether without spending any money (CryptoRefills offers its customers some free cryptocurrency, including Ethereum for their support in promoting CryptoRefills services and for answering surveys for research conducted by CryptoRefills Labs)

4.2 Ethereum POS Validation: From Mining To Staking

Ethereum, the second largest cryptocurrency by market capitalization, has already transitioned from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) mechanism, four months ago. This transition, part of the upgrade project known as Ethereum 2.0 or Serenity, brought significant changes to the Ethereum network, including a shift in the way new Ether is created and distributed. Under the PoS system, Ether is created by validators who use their own Ether as collateral to validate transactions and secure the network. These validators are chosen randomly to create new blocks and are rewarded with a portion of the transaction fees, rather than newly created Ether [10].

This process is much more energy-efficient and sustainable than the PoW system [10]. It is estimated that the move from PoW to PoS could reduce carbon emissions 99.95% [23]. Vitalik Buterin, the Ethereum founder said that the Merge cut global carbon emissions of 0.2% [24].

The transition to PoS has also changed the way in which individuals can obtain Ether. Instead of mining, individuals can purchase and hold Ether in a wallet, and then stake their Ether to become a validator and earn rewards. Additionally, there are protocols such as liquidity pools and staking pools that allow individuals to earn rewards on their staked Ethereum without having to run a validator node themselves [25].

The PoS system has proven to be more energy-efficient and sustainable than the PoW system. It has also led to increased security and scalability for the network. However, it’s important to note that the transition to Ethereum 2.0 is ongoing, and it’s expected to take several years before it is fully implemented. For now, miners can still mine Ethereum and earn rewards, but as the transition continues, the mining rewards will decrease and eventually disappear.

4.3 Storing Ether

Storing your ETH properly is very important for keeping your cryptocurrency assets secure. There are different types of Ethereum wallets that you can use to store your ETH, each with its own set of advantages and disadvantages, also depending on the use you intend to make of the ETH.

Different options according to Ethereum.org [26] are:

  • Physical hardware wallets (aka cold wallets) are physical devices, such as a USB drive, that are designed to store your cryptocurrency offline. This means that your private keys, which are required to access your funds, are stored on the device, and not on a computer or other internet-connected device. This added security feature makes physical hardware wallets one of the most secure options for storing cryptocurrency.
  • Mobile wallets are apps that can be downloaded to your smartphone. These wallets allow you to access your funds from anywhere, as long as you have your mobile device with you. They might also include some additional features, like the ability to make transactions using QR codes and the ability to view your transaction history. However, mobile wallets are considered to be less secure than hardware wallets. This is because they are connected to the internet, so they can become vulnerable to hacking or malware.
  • Browser wallets, also known as web wallets, are web-based applications that allow you to interact with your account directly through a browser. They are easy to use and accessible from any device with an internet connection, but the security of your funds may be at risk if the web wallet provider is hacked or if for example you accidentally send funds to a phishing website.
  • Browser extension wallets are browser extensions that you can download and install on your browser. For example, Metamask is an example of a Browser Extension wallet (to not be confused with the Metamask mobile wallet). They work similarly to browser wallets, but they also allow you to interact with decentralized applications (dApps) that are built on top of the Ethereum blockchain.
  • Desktop wallets are applications that can be downloaded and installed on a computer running macOS, Windows, or Linux. These wallets tend to provide a higher level of security than web wallets as the private keys are stored on your device. However, they are still considered less secure than hardware wallets (because they are connected to the internet and can be vulnerable to hacking or malware).

4.4. How to exchange or cash out Ether (ETH)

Ether can be exchanged into other cryptocurrencies, into fiat currency, or into real goods and services.

  • Ether to other cryptocurrencies: Trading ETH for other crypto on an exchange usually involves placing a sale order of a certain amount of ETH at a certain market or limit price on a crypto exchange service. The system will automatically match the sale order with a buyer, that is looking to sell its crypto in exchange for Ether and then execute the trade. Crypto to Crypto exchanges can be grouped into two main categories, Centralized Exchange (CEX) and Decentralized Exchanges (DEX), with the first being controlled and operated by a central authority (e.g. a company and management team), while the latter being automated and governed by a smart contract. Example of CEXs include Kraken and Coinbase, while popular DEXs include Uniswap and Curve.
  • Ether to fiat: Just like trading ETH to other crypto, the process to exchange ETH to fiat currencies is quite similar. However, since fiat currencies such as the USD or Euro are not on the blockchain, it is not possible to exchange these through Decentralized Exchanges. Therefore, it is necessary to use proper Crypto to Fiat gateways such as centralized exchanges that can maintain Fiat liquidity and balances for their users and operate crypto to fiat trades. The process of reclaiming funds so they can be used for real world fiat payments or financial transactions is generally called “offramping” or cashing out. In order to cashout Ether into fiat currencies it is necessary to use an exchange or service provider that can move the user’s fiat funds from the exchange account (where the converted fiat funds are being held) to the user’s traditional financial institutions such as banks.
  • Ether to Goods and Services: Another ETH cashout or offramp option is to use Ether just as if it were fiat currency to purchase goods and services. There are three main methods for doing this. The first way is to purchase goods and services from stores that accept Eth as a payment method. While this may sound simple, as of June 2022 only 15.000 merchants worldwide were accepting Cryptocurrency [27]. Most major retail stores and ecommerce platforms are still reluctant to accepting crypto, and this is likely why the number 1 ranking issue for spending crypto to buy goods and services (faced by 49.3% of crypto-shppers) is the unavailability of stores that accept it as a payment method [28]. However there are two workarounds to use ETH for buying virtually from any brand or merchant, including Amazon, Apple or Walmart. The first way is to use a crypto credit or debit card such as the Nexo or Swipe cards. These work like normal credit or debit cards and use the traditional payment rails such as Visa and Mastercard, except they are linked or backed by a crypto account. The other possibility is to use ETH to buy gift cards from top major brands like Amazon, Apple, Airbnb, Netflix, or Sony through platforms like CryptoRefills.


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