What is Ethereum: what its essence, what is it for, what is better?

03.06.2021 13:52
What is Ethereum?

    The second most prominent cryptocurrency project after Bitcoin is Ethereum. Unlike the 'first digital', Ethereum has more features and offers more opportunities for users to implement fintech projects.


    The classic definition describes Ethereum as a platform for creating decentralised services to implement smart contracts and a cryptocurrency to power them.




    The Ethereum platform is referred to as the virtual computing machine, Ethereum Virtual Machine, EVM. It is the backbone of the Ethereum platform.


    The IT industry uses virtual machines that replicate the properties of one computing device on another, but EVM differs from known IT solutions in that the Ethereum virtual machine is not installed on a single computer but is distributed across a network of computers as a complete copy. The Ethereum virtual machine is a global 256-bit computer that stores all Ethereum transactions. It is used by the owner of the network node or wallet program to move funds during transactions. 


    The operation of a virtual machine on the Ethereum network is not limited to transactions and storage of information. An Ethereum user can create applications on the virtual machine to provide financial services in the cryptocurrency market, similar to those of banks in the real world. Financial applications on Ethereum operate autonomously, without intermediaries or oversight. Financial transactions in the applications take place without external intervention or oversight.


    Financial applications on Ethereum have become a new development in blockchain-based financial technology, collectively called DeFi, or decentralised finance.




    DeFi projects came to prominence and popularity in 2019. The goal of financial applications on the Ethereum platform is to create an alternative to banks, replacing the usual banking system technologies with open source applications to give more users access to decentralised lending and investments.


    Through DeFi, users will be able to save on service fees and earn passive income from their cryptocurrency assets.




    The backbone of financial applications built on Ethereum is smart contracts. 


    Smart contracts are financial contracts written in a programming language. They are agreements to transfer funds between accounts on the network when the conditions set by the user who created the contract are met.


    A smart contract is distributed across the network and stored on each node. A smart contract sets aside assets and moves them from one owner to another when the conditions of the transaction are met. 




    Ethereum cryptocurrency, ticker symbol ETH, is the platform's internal currency.


    Ethereum uses a special unit, gas, to measure the complexity of calculations. Gas is a unit of work, not a sub-currency, it cannot be stored or accumulated. Gas measures the effort of the network to perform each step of a transaction computationally. The cost of gas is paid in ETH from the user's account. The price of gas is measured in gwei. Gwei is referred to as one-billionth of an ETH ether.


    Before starting a transaction, the user sets the gas price. The gas price is determined based on the network load. 


    The gas price determines how long it takes to execute the transaction. There is a queuing of payments on the Ethereum network.  Transfers with a high price are executed first, followed by all others. 


    In addition to paying for gas, ETH is also used to pay for the services of miners to maintain the network.




    Ethereum miners are defined as computers running Ethereum nodes that receive ethers for executing smart contracts and checking the order of the network's transactions. The amount of remuneration depends on the number of calculations that a miner performs on behalf of the network.


    Transactions on the Ethereum network are validated using the Proof-of-Work consensus algorithm. To be successful on the Ethereum network, a miner requires equipment with a performance of 45.0 MH/s. 


    Ethereum miners are grouped into pools to increase the amount of computation. 


    A pool is a server to which miners' equipment is connected; the purpose of a pool is to distribute the computational workload among participants and share the reward for a mined block in proportion to the computational resources expended.


    Each miner's contribution is assessed by the pool using share. A share is a variant solution to a block mined by an individual miner. The pool checks the share for validity - whether the solution proposed by the miner meets the requirements of the blockchain. "Good" shares are accepted by the blockchain as a hash, and the pool is rewarded for this. Shares that fail validation are counted by the pool as proof of the miner's performance when distributing the reward among the participants.


    All shares are taken to calculate the reward, regardless of whether the share is accepted by the blockchain or not. This achieves a fair distribution of coins among pool participants. In the process, some shares get "discarded" due to untimely results; these are called stale shares. The number of stale shares is no more than 1.5% of the total volume of calculations.

    Participation in the pool makes it possible for a miner with low computing power to earn rewards for mining on the Ethereum network.




    Ethereum has become the second most capitalised digital currency. ETH is growing steadily. Between January and May 2021, ETH gained more than 400%. 


    A significant influence on the growth of ETH is user interest in DeFi applications and other business uses of the Ethereum platform. Another factor affecting the Ethereum exchange rate is the development team's work to modernise the platform's protocol.


    The Ethereum team is preparing to update the platform to improve scalability, increase network bandwidth, and reduce fees. The network upgrade will make ETH mining more accessible, improve network security, and create the opportunity for widespread adoption of DeFi protocols. The Ethereum team believes that the upgrade will make the network more attractive and user-friendly, increasing the need for ETH to power the network. Consequently, the exchange rate of ETH will rise after the transition to the new algorithms.




    Weiss Ratings analysts have noted an increase in the value of transactions on the Ethereum network. The increase is not percentages - times.


    The analysts see the reason for this in the growing popularity of DeFi applications and other projects running on the Ethereum platform. The bandwidth of the Ethereum network is finite. DeFi applications and other network-based products are causing slowdowns. Users have to pay more to have their transactions processed faster, the developers' stated update to the Ethereum network is focused on scaling up - increasing the network's ability to process more transactions per unit time.


    To achieve this, the Ethereum network is scheduled to switch from the Proof-of-Work consensus algorithm to the Proof-of-Stake algorithm.


    The first phase of the upgrade, Istanbul, took place in December 2019. In April 2020, the Topaz network, the full configuration of Ethereum 2.0 network zero, was launched. In April 2021, the Berlin upgrade was conducted, a transitional step towards the Ethereum 2.0 network, which will use the PoS algorithm.


    The move to the new consensus algorithm will solve the problem of rising fees, reduce energy costs and open up a new way of making money on the Ethereum network through stacking. In the Proof-of-Stake algorithm, mining will replace stacking, the locking of a certain number of digital coins provided by users to enable the validation mechanism.


    For providing their ETH, users who provide coins will be rewarded. Validators need to contribute 32 ETH to get into the pool and participate in the creation of new blocks. The amount of the reward depends on the number of coins pledged.


    Cryptanalysts see the Ethereum update as an opportunity to develop the project's latent potential.


    Large investors have emerged on the network, looking to generate income from stacking. Investors are buying coins to make a profit from stacking. This is causing a supply shortage, resulting in a rise in the value of ETH.


    Trustology platform CEO Alex Batlin believes the upcoming update will open up opportunities for widespread adoption of DeFi. With Ethereum 2.0, DeFi projects will completely replace banking financial instruments and fiat currencies - claims Batlin.




    Beginners make the mistake of comparing which is better - Bitcoin or Ethereum. Bitcoin, the first digital currency, remains a means of payment and a payment system, despite the advanced idea at the core of the project.


    Ethereum, thanks to DeFi and other projects on its platform, surpasses the capabilities of the 'first digital'. 


    Ethereum's creator, Vitalik Buterin, believes: once updated, Ethereum Virtual Machine will become a real-world machine.

    At Broex, you can buy ETH at the current exchange rate by paying by card or through a payment system.


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