What Is Ethereum?

Ethereum is a software platform based on a blockchain. Its chief goal is to support the second-largest cryptocurrency globally by market capitalization. Ethereum can be used to send and receive cryptocurrency in the absence of an external entity such as a bank or financial institution.

The Ethereum blockchain is primarily used for value exchange, usually in its native token, Ether. However, developers envision a much broader purpose for Ethereum. Their goal is to utilize Ethereum to give users more control over their online data and finances.

This vision has been met with a fair amount of criticism, but if it were to be successfully executed, it would lead to the origin of various decentralized applications that widely differ from Google and Facebook.

With the help of blockchain technology, developers strive to give users control by decentralizing data that cannot be altered or interfered with by the creators or anyone else, for that matter.

All the transaction data performed on the Ethereum platform is safely stored in the blockchain employing smart contracts. These smart contracts remove the need for a central authority as an intermediary by allowing users to participate in transactions while having full ownership and transparency into transaction data.

Transaction records are unchangeable and distributed across the blockchain network. Senders sign transactions and pay Ether as a transaction fee.

The History Of Ethereum

The concept of Ethereum first originated in 2013 in a white paper written by Vitalik Buterin, a co-founder of Bitcoin Magazine. This programmer had an alternative outlook on decentralized applications. He argued that blockchain technology could be applied to more than just finance-related applications and that the proper alterations could connect the blockchain to real-world assets like property and stocks.

Buterin first worked with the CEO of eToro, Yoni Assia, in developing the Colored Coins project. During his involvement in this project, Buterin explored and investigated alternative use cases for blockchain technology.

Buterin and Assia failed to agree on the future proceedings of the Colored Coin project, leading to Buterin developing a new platform that included a more vigorous scripting language called a Turing-complete programming language. This would eventually grow to become Ethereum.

Ethereum was officially announced in 2014 at the North American Bitcoin Conference. For the duration of the conference, Charles Hoskinson, Gavin Wood, and Anthony Di Iorio shared a house in Miami with Buterin intending to gain a thorough comprehension of what Ethereum could become.

After six months, the founders met in Switzerland, where Buterin informed them that Ethereum would function as a non-profit. Hoskinson retracted from the project and went on to develop the blockchain company accountable for Cardano.

The list of founders is unusually long as the development of Ethereum was an ongoing and interactive task that required various expertise. The primary founders are Vitalik Buterin, Charles Hoskinson, Anthony Di Iorio, Mihai Alisie, and Amire Chetrit. Later on, Joseph Lubin, Jeffrey Wilcke, and Gavin Wood got involved in the project.

Buterin came across the name "Ethereum" while browsing elements from science fiction and immediately knew the right name when he saw it. The word "ether" refers to the imperceptible medium present in the universe that allows light to travel. Buterin was drawn to this concept as he wanted Ethereum to be the invisible medium on which applications run.

Development Of Ethereum

The software underwent formal development by a Swiss company in 2014. Successful incorporation of functioning smart contracts into the blockchain needed to be perfected before the software could be applied.

Gavin Wood was the chief technology officer at that time and elaborated on the Ethereum Virtual Machine in the Ethereum Yellow Paper. The Ethereum Foundation, a non-profit Swiss foundation, originated around the same time. Further development of Ethereum was funded by a public crowd sale where participants bought Ether with a different cryptocurrency, Bitcoin.

The Ethereum Foundation's proof-of-concept series included several codenamed Ethereum prototypes that were developed over 18 months in 2014 and 2015. Since then, several protocol upgrades have been implemented that improved the underlying operations and incentive structures of the Ethereum network. These upgrades were achieved by means of a hard fork.

The DAO (decentralized autonomous organization), a collection of smart contracts developed on the Ethereum platform, raised an astonishing $150 million in 2016. However, concerns about the platform's security escalated when an unknown hacker stole $50 million of the DAO tokens.

After this disastrous event, the crypto-community started debating whether Ethereum should execute a hard fork in order to reappropriate the funds that were lost.

Hereafter, Ethereum was divided into two blockchains: Ethereum, where the theft was reversed, and Ethereum Classic, which continued to function on the original blockchain.

Thirty members founded the Enterprise Ethereum Alliance in March 2017. Various enterprise members got involved, leading to Ethereum becoming the second-largest cryptocurrency by market cap in existence. This position has been relatively maintained to this day.

A major upgrade to open-source development will soon be implemented in Ethereum. This upgraded version is referred to as Ethereum 2.0 and will entail a drastic increase in transaction throughput. Currently, Ethereum can process fifteen transactions per second. Ethereum 2.0 will allow up to tens of thousands of transactions to be processed per second.

The fundamental idea behind this upgrade is to split the workload between many blockchains that run parallel to each other and share a common consensus proof-of-stake blockchain. This would mean that if a hacker wishes to interfere with any one of the chains, they would have to tamper with the common consensus. Doing this would cost much more than could ever be gained from the attack.

Ethereum's Design


The Ethereum blockchain has a global network of over two million computers that maintain transaction records. These computers are known as "nodes", and anyone can run such a node with the appropriate knowledge, time, and hardware.

Three chief types of nodes operate on the Ethereum network:

  1. Full nodes - Full nodes execute instructions from smart contracts and verify all the transactions taking place on the Ethereum blockchain.
  2. Light nodes - Light nodes only partially keep record of the events on the blockchain and request the remaining data from full nodes. Light nodes can run on less complex devices like smartphones.
  3. Full archive nodes - These nodes store the complete history of all events on the blockchain. Tools like block explorers use these nodes.

Miners are responsible for discovering new blocks in the Ethereum blockchain. These blocks are like digital boxes where data and transaction information is stored. Miners do this with the help of computing equipment and compete with each other, aiming to be the next participant to add a new block to the chain. They then get rewarded with block rewards and transaction fees.

Block rewards are created when a user discovers a new block. These rewards are new Ether coins given to the miner to reward their efforts. When someone adds a new block, the remaining mining network must verify it by checking if the balances are correct. If the block proves not to be a "double-spend", full nodes record the data.

Ethereum's full nodes differ from that of Bitcoin in that they have to keep track of all the current information regarding these applications. This information includes all the smart contract code, the user's balance, where everything is stored, and all changes that have been made. This extensive process results in Ethereum requiring significant storage capacity and capital.

What's Stored In Each Node?

  • Smart contract code containing all the rules needed for money to be utilized and transferred.
  • The accounts that show how much Ether the user possesses.
  • The state of the smart contracts.


Ether is Ethereum's cryptocurrency which is granted as a reward to miners in a proof-of-work system. Miners are rewarded for adding valid blocks to the blockchain. Ether is the only currency that is accepted in transaction fees.

Block reward fees together with transaction fees, incentivize miners to keep developing the blockchain and processing transactions. The network is thus completely dependent upon Ether for its success.

Each participant holds an Ethereum account with an ETH balance. Transactions can be effected between these accounts.


Two types of accounts exist on the Ethereum network, namely contracts and user accounts. User accounts are also commonly referred to as externally-owned accounts. Both accounts consist of a balance of Ether that can be sent to other accounts. These accounts can also call any public function of a contract, create a new contract, and are identifiable on the blockchain.

Only user accounts can create new transactions. A transaction must be signed using the private key of the sender's account. The account's address is derived from this 64-character key. ECDSA is the algorithm that is used to produce a signature.

Contract accounts contain contract storage and have variable declarations and a set of functions, known as the associated code.

Such a contract function can have return values and may take arguments. In addition to control flow statements, the body of a contract function includes a contract code with instructions on how to send ETH, write its storage, create storage that expires at the end of the function, perform arithmetic operations, create new contracts, call public functions of other contracts, and enquire information about the blockchain and the current transaction.

Virtual Machine

Essentially, the Ethereum Virtual Machine refers to the runtime environment for all transactions that take place on Ethereum. This machine includes a memory, gas balance, stack, program counter, and continuing storage for all accounts.

If a transaction calls the function of a contract, the call's arguments are added to the stack, and the Ethereum Virtual Machine translates the bytecode of the contract into the stack operations.

The Ethereum Virtual Machine is kept isolated from other processes and files to guarantee that every node produces the same post-transaction state as the pre-transaction state. This enables the network consensus.


Gas is used in calculating the Ether amount that a sender must pay for a transaction in the blockchain to take place.

For every operation performed by the Ethereum Virtual Machine, there is an associated gas cost. The gas cost is roughly equivalent to the amount of computing and storage resources that a node expends when performing the operation. A sender has to clarify a specific gas limit and a gas price when creating a new transaction. The gas limit is the maximum gas amount that the sender is willing to pay. The gas price represents the amount of ETH that the sender wants to pay for every gas unit.

If a sender selects a relatively high gas price, the miner will have more incentive to include the transaction in their block. The transaction will also be included in the blockchain much more rapidly. Before the operation commences, the sender must pay the full gas amount. Any residual gas at the end of the operation will be refunded. If the sender does not produce enough gas fees, the transaction will be reverted without the option of a refund.


Non-fungible Tokens

NFT's are unique, immutable tokens that are useful in authenticating ownership of rare assets. Ethereum allows for the creation of NFTs. Because each of these tokens is one-of-a-kind, they are commonly used to represent the value of art, collectables, and virtual real estate.

Etheria was the first NFT project to make its debut on the Ethereum platform in 2015 and entailed a 3D map of customizable and tradable tiles. A digital image by Beeple was sold for an NFT value of $69.3 million by Christie's in 2021. Evidently, the contribution of NFTs should not be underestimated. Many assets such as land, avatars, and buildings can be sold as NFTs in blockchain-based virtual worlds.

Decentralized Finance

Ethereum has a renowned presence in the world of decentralized finance, or Defi. This specific use case allows users to participate in various financial activities in the absence of centralized authority. Decentralized finance applications are rapidly growing in popularity and can typically be accessed through the use of a Web3-enabled browser extension such as MetaMask. Various of these DApps can interconnect to create composite financial services.

A decentralized exchange for tokens, called Uniswap, grew tremendously on the Ethereum network in the last year. Investors are recognizing the potential of Defi on the Ethereum platform, and it is sure to grow in success substantially in the coming years.

Enterprise Software

Networks and software based on Ethereum that are entirely independent of the public chain of Ethereum are being tested by various enterprise software companies such as Microsoft, JPMorgan Chase, Deloitte, and IBM, among others.


All of Ethereum's smart contracts are securely and publicly stored on every node of the blockchain. Being secure by design, every new transaction needs to be recorded on a new "block" connected to all other blocks.

This system makes it extremely difficult for hackers and fraudsters to interfere with the operations in the blockchain, but it does bring about its own challenges. Because every node calculates all the smart contracts in real-time, the processing speed is low.

Ethereum developers are adamantly working on solutions to this problem. In January 2016, the Ethereum protocol could process 25 transactions per second. Within a year, it reached a new record of processing one million transactions in a day. Ethereum undoubtedly proved its potential, and Visa has displayed interest in getting involved in processing NFT and ETH transactions.

What Makes Ethereum Unique?

Ethereum has been the pioneer of incorporating smart contracts into blockchain networks, reducing dependence on intermediaries and thereby also transaction costs and time while increasing transaction reliability.

According to Gavin Wood, Ethereum's co-founder, Ethereum's blockchain was designed to be one computer to the whole planet. One computer that can enrich any program, is resistant to censorship, and is less susceptible to fraud as the entire network is globally distributed.

The most common recent use of Ethereum is enabling its blockchain to host other cryptocurrencies. Many other currencies are compatible with the Ethereum platform and can utilize its security and advancements in their procedures.