What is Ethereum?
Ethereum is a blockchain platform for decentralised applications, and the second-largest cryptocurrency by market value (ETH). Most popular DeFi and NFT projects run on Ethereum.
Who created Ethereum, and when?
The main creator and public face of Ethereum is Vitalik Buterin. He was born in 1994 in Kolomna, near Moscow. At the age of six he moved with his parents to Canada, where he still lives. From childhood he was keen on programming and computer science; at university he studied cryptography.
In 2011 Vitalik Buterin became a co-founder of one of the first media outlets about cryptocurrencies—Bitcoin Magazine.
In 2013 he published Ethereum’s whitepaper—a blockchain on which developers could create decentralised applications powered by smart contracts. Other co-founders included Gavin Wood, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin.
After the whitepaper, Buterin received a $100,000 grant from the Thiel Fellowship, created by entrepreneur Peter Thiel. He used this money to conduct an ICO. The token sale raised 31,550 BTC—about $18.5m at the time.
Ethereum’s main network launched in the summer of 2015. Since its inception, the project’s development has been overseen by the Ethereum Foundation, a non-profit organisation registered in Switzerland.
What are Ethereum’s key features?
Smart contracts
Ethereum’s chief distinction from Bitcoin was support for full-fledged smart contracts—computer programs that allow deals to be executed without a third party. In effect they are “digital contracts” with pre-set terms that self-execute when conditions are met. This moves business operations onto the blockchain and reduces the “human factor”. The use-cases for smart contracts are myriad.
Virtual machine (EVM)
The EVM (Ethereum Virtual Machine) is a “distributed computer” responsible for executing smart contracts. If Bitcoin’s main function is recording transactions between accounts in a distributed ledger, the EVM can handle much more complex operations encoded in smart contracts (which, nonetheless, ultimately represent transfers between blockchain addresses).
User-created tokens
Ethereum enabled users to issue their own tokens. For such tokens developers created the ERC-20 standard. These tokens derive value from utility within a particular application. Ethereum became the first popular blockchain for startups that monetised via native tokens.
Non-fungible tokens (NFTs)
Ethereum also became popular as a blockchain for NFTs thanks to the ERC-721 standard. These are non-fungible tokens, each of which encodes unique information—an image or another file. An NFT is a unique digital item that cannot be reproduced. In 2022 soulbound tokens also began to gain popularity.
What is the ether (ETH) cryptocurrency?
Ether (ETH) is the colloquial name for Ethereum’s native cryptocurrency. It is needed to run decentralised applications and to pay transaction fees on the network.
After The Merge was activated in September 2022, staking of ether began on Ethereum: holders of ETH can lock coins and earn income. However, withdrawing cryptocurrency from staking will be possible only after sharding is implemented—this was expected during 2023. To participate in ether staking, you must run your own node (requiring hardware and 32 ETH) or use a centralised service such as Everstake, Lido or Binance.
ETH is the second-largest digital asset by market capitalisation. As of late October 2022 the total value of all ether exceeded $192bn. The Ethereum price rose tenfold in less than two years: in July 2020 one coin cost $300, but by late 2021 its price had settled above $3,000. Ethereum can be bought on practically any cryptocurrency exchange.
How did The DAO hack shape Ethereum’s development?
Ethereum’s first major crisis was the hack of The DAO. This decentralised autonomous organisation (DAO) sought to run an investment fund through member voting. The DAO was to operate via Ethereum smart contracts. Following an ICO in 2016, its founders raised $150m.
In June 2016 a hacker exploited the project’s smart contract and withdrew DAO tokens worth $50m. After that the Ethereum team conducted a hard fork to return the stolen funds to victims. Part of the community, disagreeing with this decision, continued the original chain, calling their project Ethereum Classic.
Did token sales take off because of Ethereum?
In 2017 the cryptocurrency market began to soar and drew global attention. Retail investors started buying actively. Hundreds of projects tried to replicate Ethereum’s success: they published whitepapers and conducted ICOs. Thanks to the accessibility of ERC-20, anyone could issue a token.
Activity peaked in the first quarter of 2018—total proceeds were about $7bn. Public token sales then almost ceased: cryptocurrency prices began to fall, and authorities in various countries criticised token sales.
Investor trust in ICOs fell because they became a popular tool for fraudsters.
New token-sale formats gradually appeared: IEOs (Initial Exchange Offerings)—selling a project’s tokens through a special service on an exchange—and IDOs (Initial Decentralised Offerings), raising investment through asset farming.
How did Ethereum lead to DeFi’s creation?
The emergence of decentralised finance (DeFi) owes much to Ethereum. In 2017–2018 several landmark projects on this blockchain gained popularity and led to the flowering of DeFi:
- MakerDAO. The first popular protocol that allows any user to issue the DAI stablecoin against collateral in various cryptoassets. The protocol is governed by a DAO in which holders of the Maker (MKR) token can vote.
- Compound. This project first applied liquidity pools for various cryptoassets. In addition, Compound held the first IDO in history for its users, distributing the COMP governance token via farming.
- Uniswap — a decentralised exchange for trading cryptocurrencies that first applied an automated market maker. It creates an order-book analogue and matches orders without a central order book. Uniswap became the first protocol with relatively fast on-chain trading.
Today hundreds of DeFi projects with various functions are live, such as Aave, Curve Finance, 1inch, Balancer, dYdX, Notional and others. They use different technologies and blockchains, but Ethereum was the first.
Does Ethereum have competitors?
The blockchain-platform model proved itself, and Ethereum became the leading crypto project alongside Bitcoin. But its main components did not change for several years, while the crypto industry moved on. The throughput for which the main blockchain platform was designed is no longer sufficient.
Today Ethereum can process no more than 13–15 transactions per second (TPS), its network has repeatedly suffered overloads and delays, and fees for transfers are consistently high.
Meanwhile, modern “Ethereum killers” boast performance tens or hundreds of times higher. Tezos exceeds 1,000 TPS, Polkadot up to 3,000 TPS, Solana up to 50,000 TPS.
Each blockchain platform offers its own scalability solution—the ability to increase throughput as load grows. For example, Solana uses an implementation of the Practical Byzantine Fault Tolerance consensus algorithm, and Polkadot consists of several interconnected blockchains.
However, higher scalability comes with drawbacks described by the blockchain trilemma. It holds that of three key properties—performance, security and decentralisation—a decentralised network can simultaneously guarantee only two. Both Ethereum and its competitors are trying to overcome this, but there is no broadly accepted solution yet.
How is Ethereum being developed?
Developers have devised several ways to increase Ethereum’s throughput while reducing fees. One approach is Layer-2 solutions.
These are applications and frameworks deployed on top of the Layer 1 base chain. The additional “layer” lowers transfer fees and increases transaction speed.
L2 solutions on Ethereum are implemented using rollups, which allow hundreds of Layer-2 transactions to be included in a single Layer-1 transaction. Examples include Arbitrum, Optimism, dYdX and StarkNet.
Another direction is sidechains. These are “parallel” networks linked to the main blockchain, between which transactions can be conducted. An example of an Ethereum-compatible sidechain is Polygon PoS (one element of the Polygon network).
What is Ethereum 2.0 (Eth2)?
Ethereum 2.0 (Eth2) is a major upgrade, announced back in 2017, intended to improve the platform’s scalability through far-reaching architectural changes. In early 2022 Ethereum’s developers dropped this term.
The upgrade is divided into several major steps:
- Transition to the Proof-of-Stake consensus mechanism (completed successfully on 15 September 2022);
- Introduction of sharding technology: splitting the blockchain into managed segments (shards) and executing operations in parallel in each of them;
- A new virtual machine, eWASM, which will support smart contracts developed in popular programming languages.
The upgrade is being rolled out in stages; the exact timing of all components is unknown. Rough estimates suggested completion in 2023–2024.
What else to read?
What are Layer-2 scaling solutions?
What are rollups and how do they help scale Ethereum?
What are hashrate and mining difficulty in cryptocurrencies?
What is the Ethereum Name Service (ENS)?
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