Ethereum is a decentralized, open-source blockchain featuring smart contract functionality. First proposed in 2013 by Vitalik Buterin, Ethereum went live in 2015 and has since grown to become the world’s second-largest cryptocurrency after Bitcoin.
Ethereum sets itself apart from Bitcoin in a few key ways. Most notably, Ethereum enables developers to build and deploy decentralized applications (dapps) and smart contracts. This massive ecosystem of dapps provides use cases that Bitcoin cannot offer. As a result, Ethereum tends to attract more mainstream adoption than Bitcoin.
In this comprehensive guide, we’ll cover everything you need to know about Ethereum, including its history, key features, tokenomics, and outlook.
A Brief History of Ethereum
In 2013, programmer Vitalik Buterin proposed Ethereum in a white paper titled “Ethereum: The Ultimate Smart Contract and Decentralized Application Platform”. Buterin envisioned Ethereum as a blockchain-based distributed computing platform featuring smart contract functionality.
Smart contracts are self-executing agreements encoded in lines of code that execute automatically based on predefined conditions. For example, a smart contract could automate insurance payouts if flight delays pass a set length of time.
Ethereum launched via a crowdsale in 2014, raising over $18 million in Bitcoin. The network then went live in July 2015. To fund ongoing development, Ethereum implemented a native cryptocurrency called ether (ETH).
Initially, Ethereum ran on proof-of-work (PoW) using an Ethash mining algorithm similar to Bitcoin. However, Ethereum has been transitioning to a more eco-friendly proof-of-stake (PoS) consensus model called Casper. This transition to PoS will significantly reduce Ethereum’s energy usage.
Ethereum 2.0 refers to a series of phased network upgrades aimed at improving scalability, security, and sustainability. The Merge, completed in September 2022, represented a major milestone in Ethereum’s transition to PoS consensus.
Key Features of Ethereum
Here are some of the key features and capabilities of the Ethereum network:
- Smart contracts — These are executable programs uploaded to the blockchain that run as programmed without risk of downtime or manipulation. Smart contracts power dapps and enable programmatic agreements like tokenized assets, decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and more.
- Ethereum Virtual Machine (EVM) — The EVM executes smart contract code on the network. It provides a runtime environment for dapps.
- Gas fees — Executing transactions and smart contracts costs gas fees paid in ETH. This compensates miners or validators for processing transactions and deploying smart contract code.
- Turing completeness — Ethereum is Turing complete, meaning it can compute anything computable given enough resources. This flexibility enables a wide variety of dapps.
- Public blockchain — Ethereum is public and permissionless, allowing anyone to participate without centralized oversight. Transactions are transparent and immutable.
- Native token (Ether) — ETH is the native cryptocurrency used to pay for gas, transactions, and storage fees. It also serves as a speculative digital asset.
Let’s break down Ethereum’s tokenomics including its native cryptocurrency ETH:
- Limited supply — Ethereum has a limited total supply of 120,204,432 ETH. This immutability creates digital scarcity. However, the annual inflation rate is currently around 4.5% as new ETH enters circulation with each block.
- Mining/Staking rewards — Transactions fees and newly minted ETH go to miners or stakers as rewards for validating transactions and producing blocks.
- Gas fees — Users bid for their transactions to be included in blocks. Gas fees are paid in ETH, removing tokens from circulation and providing income for validators.
- Burning — Following EIP-1559, a portion of gas fees are burned, permanently destroying those ETH tokens. This deflationary mechanism increases scarcity over time.
- Circulating/Total supply — Currently, around 121 million ETH tokens are in circulation out of a total supply cap of ~120 million ETH. The remaining ETH will enter circulation through mining over coming decades.
- Market Capitalization — With price around $1,500 at the time of writing, Ethereum’s market cap is around $180 billion. This makes it the second most valuable cryptocurrency behind Bitcoin.
Noteworthy Dapps Built on Ethereum
Here are some examples of popular dapps running on Ethereum:
- CryptoKitties — This blockchain-based game allows players to adopt, raise, and trade virtual cats. It gained significant traction in 2017.
- Decentraland — A virtual world where users can create avatars, buy land, play games, and more. The platform uses the ERC-721 NFT token standard.
- Axie Infinity — A Pokémon-inspired universe featuring collectible fantasy pets known as Axies. Players can battle, breed, raise, and trade Axies.
- Uniswap — An automated decentralized crypto exchange using liquidity pools instead of order books. Users can swap tokens and provide liquidity.
- MakerDAO — Creator of DAI, a decentralized stablecoin whose value stays near $1. DAI plays a crucial role in decentralized finance.
- OpenSea — The largest NFT marketplace where users can mint, buy, and sell NFTs representing digital art, music, videos, collectibles, virtual worlds, and more.
Ethereum Future Outlook
As the second-largest cryptocurrency and the foundation for Web3 and the metaverse, Ethereum appears poised for continued growth and mainstream adoption if it can overcome some key challenges:
- Competition from alternative layer 1s like Solana, Cardano, Polkadot, etc.
- Scaling limitations resulting in congestion and high gas fees.
- Difficulty transitioning to proof-of-stake.
- Complex user experience hampering mainstream adoption.
- Looming regulation presenting legal uncertainty.
However, Ethereum maintains a vibrant developer community. Upcoming Eth2 upgrades promise to dramatically improve throughput and reduce gas fees.
The rise of decentralized finance, NFTs, metaverse and Web3 experiences also provide strong tailwinds for Ethereum adoption. If it can successfully scale and keep innovating as a smart contract platform, Ethereum has a bright long-term outlook.
As the first programmable blockchain capable of running decentralized applications, Ethereum pioneered the concept of Web3 backed by blockchain networks. Today, Ethereum’s decentralized finance system holds over $20 billion in value across lending protocols, decentralized exchanges, stablecoins, derivatives, and more.
Meanwhile, NFTs built on Ethereum are powering new models of digital engagement, ownership, and monetization across gaming, sports, music, art, and beyond. Ethereum still faces scaling challenges in order to reach its full potential. But with a vibrant community of builders and the largest developer ecosystem in crypto, Ethereum is poised to remain a dominant force in Web3 and blockchain technology for years to come.