The Ethereum Network
Ethereum is currently the second largest blockchain network by number of users and its main feature is the ability to create and run decentralised applications. Its flexible and programmable architecture allows developers to use smart contracts to automate the execution of agreements and transactions on the network, and it currently uses a Proof of Stake (PoS) consensus algorithm to validate transactions.
Ethereum is the first blockchain in which the creation and execution of decentralised applications can be carried out.
Ethereum introduced several unique features that have become popular and are now used by other blockchains: smart contracts and token standards.
According to the Ethereum Foundation definition, the organisation responsible for its development: “Ethereum is a technology for building applications and organisations, storing assets, conducting transactions and communicating without the intervention of a central authority”.
Ethereum’s native token is ether (ETH) and, like bitcoin, it is characterised by being decentralised and divisible up to 18 decimal places, so users do not have to buy a whole ether, but can purchase fractions.
Transactions on Ethereum are approved by validator nodes, through the Proof of Stake (PoS) mechanism.
History of Ethereum
The development of Ethereum began thanks to the work of Vitalik Buterin, a Russian-born developer living in Canada, in 2013.In 2014, Buterin published the Ethereum whitepaper, with the aim of solving some limitations he detected in the Bitcoin network, especially the lack of use cases, since Bitcoin could only be used for transactions between addresses, that is, to move value (expressed in bitcoin units).
Gavin Wood joined the initial project, contributing technological concepts such as the Ethereum Virtual Machine (EVM), the main feature of the network. This minimal virtual machine allows smart contracts to be executed: the virtual machine is launched, the smart contract is executed with the input parametres, the blockchain record is updated, and the virtual machine is closed.
Following a crowdfunding campaign (the first of the so-called Initial Coins Offering or ICO) in which ETH was offered and $18 million was raised, the first fully operational version of the Ethereum blockchain, called Frontier, was launched in 2015.
Originally, Ethereum was a blockchain with a mining-based Proof of Work (PoW) consensus mechanism. This changed in September 2022, when it came to have a Proof of Stake (PoS, based on validation nodes) mechanism, after an event known as The Merge.
ETH, the Ethereum token
As we have explained, the network’s native token is ether (ETH). It is a vital element for the network, as this token is necessary to perform any operation on Ethereum, and validator nodes receive their reward in this token, making it necessary for the operation and security of the network.Every transaction carried out on Ethereum (when a transaction is made, when a smart contract is executed, etc.) requires the payment of a fee or commission in ETH (called gas fees) for the use of the network. These fees depend on the complexity of the operation and serve as an incentive for validator nodes to process and verify the blocks that are then added to the network.
Validators are like Bitcoin miners: they are responsible for recording new transactions and adding blocks to the chain. Their job is to check and verify that all transactions are correct and that there are no double spends or malicious transactions.
Validators who perform this work receive small amounts of newly issued ETH as a reward, as well as a portion of the gas fees. Gas fees are calculated in gwei, which is the minimum unit of Ethereum: 1 gwei = 0.000001 ETH.
Each transaction within Ethereum has a stipulated gas value, which does not change due to the volatility of the ETH price. However, the greater the activity within the network, the higher the price paid for gas.
This is because the network becomes saturated as transactions accumulate, so some users increase the commission attached to their transactions so that validators prioritise them. This means that during periods of high activity on Ethereum, gas fees are higher, as validators can incorporate transactions that offer a higher commission, leaving the rest on hold, which is an obstacle to the widespread use of this network.
One of the features of the Ethereum network is that it allows for the creation of new tokens (beyond ether, the native token of the network). The most widely used are those created based on the ERC-20 standard, a standard created by the Ethereum community specifically for the development of tokens on its network, or NFTs, based on the ERC-721 standard. These tokens are actually a smart contract with a pre-established structure, which facilitates the programming work of developers who want to create new projects and guarantees the interoperability of the entire network.
In this way, inside Ethereum we can find many other tokens such as stablecoins or Non-Fungible Tokens (or NFT).
What is the difference between Ethereum and Bitcoin?
Although Ethereum is based on the same technology as Bitcoin (a decentralised network where information is recorded in the form of a blockchain), it has some notable differences.
- Origins:
Bitcoin had a private and independent development. The software was created without resorting to third-party funding.
Ethereum, on the other hand, resorted to an Initial Coin Offering (or ICO), also called an “initial token offering.” In an “ICO,” a company or individual issues crypto assets or tokens and offers them for sale in exchange for either legal tender, such as the euro, or other crypto assets or tokens.
- Progaamability and decentralised applications:
Both blockchains are designed to enable the decentralised transmission of crypto assets between peers. However, Ethereum is programmable, which also allows applications to be built and maintained and other tokens to be created on its infrastructure.
This feature makes Ethereum more versatile than Bitcoin, which only offers a transfer network.
- Centralisation of networks:
They also differ in terms of centralisation. While Bitcoin has no centralised authority and any decision must be accepted by the various mining nodes, Ethereum, although also decentralised, allows the Ethereum Foundation to centralise certain decisions regarding updates, standardisation and the implementation of new features. - Issuance:
In the case of Bitcoin, issuance is limited to a total of 21 million bitcoins and can never exceed that amount. In addition, its issuance as a reward for miners decreases over time until it reaches 0. In contrast, Ethereum has inflationary issuance, as the issuance of tokens is not limited; it is infinite. - Consensus protocol:
The consensus protocol is another of the great differences between Bitcoin and Ethereum.
Bitcoin uses the Proof of Work (or PoW) protocol. Nowadays, this type of mining requires high computing power, so special hardware is used. Another important feature of Bitcoin mining is that it generates a new block approximately every 10 minutes, adjusting the difficulty of the cryptographic challenges every 2016 blocks (about 14 days). In addition, every 210,000 blocks (approximately every 4 years) there is a halving (division of the block reward by half).
In Ethereum, the time is much shorter. Currently, a new block is generated approximately every 12 seconds.
Since the arrival of The Merge in September 2022, Ethereum uses the Proof of Stake (or PoS) protocol.
- Scalability:
Another difference lies in scalability. While Ethereum has the capacity to process between 16 and 20 transactions per second, Bitcoin can only process between 4 and 5. However, Ethereum tends to experience more congestion than Bitcoin, which means that transactions end up being slower or more expensive. - Ethereum Virtual Machine and the ability to execute smart contracts:
Finally, one of the main differences with Bitcoin is Ethereum’s capacity to manage smart contracts through the Ethereum Virtual Machine (or EVM). This software creates an additional layer of abstraction that is the key to translating smart contract codes into concrete and precise instructions. It is, therefore, the element capable of interpreting the instructions encoded in each smart contract.
Cases of use of Ethereum
Ethereum creates a peer-to-peer network (P2P networks) that allows the exchange of crypto assets between two users.It also allows different applications to be used within the network without having to share sensitive data (identity, personal data, etc.), as only an Ethereum address is required to connect.
One of the main uses of Ethereum is the issuance of other crypto assets, through the creation of an issuance smart contract that is incorporated into the blockchain where it is recorded and allows different functions to be executed on this new token, such as transfers between addresses. These issuance smart contracts are usually created following standards such as ERC-20 for fungible tokens or ERC-721 for NFTs.
Among the most common uses of the Ethereum network are those related to decentralized finance (DeFi). These are decentralized applications that allow users to use a range of financial services, such as crypto asset swaps or loans.