In this article, we will explain what Ethereum is and what it does. We will also briefly take a look at its advantages and disadvantages.
What Is Ethereum?
Ethereum is a blockchain platform that has its own cryptocurrency called Ether (ETH). It was launched in July 2015 and created to be more than just a decentralized public ledger for verifying and recording transactions.
Ethereum describes itself as “the world’s programmable blockchain,” so it was designed to allow developers to build and publish smart contracts and decentralized applications (dApps) that can be used without the risks of fraud, downtime, or interference from third parties.
It has become the most popular blockchain for DeFi, NFT projects, and games, with over 50% of dApp being built on it.
Ether can be used as a digital currency in financial transactions, as an investment or a store of value, and as a token that powers various apps. It is the second-largest cryptocurrency by market cap, after Bitcoin.
What Does Ethereum Do?
Unlike Bitcoin, the Ethereum network powers and offers various functions:
- Cryptocurrency transactions – using a crypto wallet, users can send and receive ETH. They can also pay for goods and services where ETH is accepted as payment.
- DeFi – people using the network can access a variety of financial products and services, such as lending and borrowing, without there being a central authority to block payments or deny access.
- dApps – Ethereum could be seen as the playground for dApps. Numerous such applications have been built on it, allowing users to play games, send money, invest, track an investment portfolio, and engage in various such activities.
- Smart contracts – these contracts automate the execution of an agreement when predetermined conditions are met. They have become a symbol of Ethereum, and you can find out more about them in our video on this topic.
- NFTs – the network also powers non-fungible token projects, thus allowing artists to monetize their art and sell directly to buyers using smart contracts.
Advantages of Ethereum
Ethereum comes with several benefits, such as:
- A wide variety of functions as we’ve just mentioned;
- Peer-to-peer transactions – Ethereum allows you to move money or make agreements, directly with someone else, without intermediaries.
- Censorship-resistance – without a central authority such as a government to control Ethereum, anyone with an Internet connection can access the many products and services built on it.
- Privacy – you don’t need to provide all your personal details in order to use Ethereum.
Despite its many innovations and benefits, Ethereum still faces a few downsides:
- High transaction fees – the network has become notorious for its high gas fees – transaction fees are called “gas” because they vary depending on the amount of computational power used. As a result of the network’s popularity, congestion has become an issue and transaction fees have grown significantly.
- Potential for ETH inflation – there is no limit to the number of ETH coins that can be created. In the long term, this could mean that ETH, as an investment, may not appreciate as much as Bitcoin, which has a maximum supply of 21 million coins.
- Ethereum may prove to be challenging for developers who migrate from centralized processing to decentralized networks.
To overcome some of these drawbacks and make the network more scalable, secure, and sustainable, the network is currently undergoing a long-awaited upgrade known as Ethereum 2.0, with the London upgrade going live in August 2021. It is switching from the Proof of Work to the Proof of Stake consensus mechanism to reduce energy consumption and increase the transaction speed to about 100,000 TPS.
Ethereum is a decentralized open-source blockchain system that works as a platform for the execution of smart contracts and the development of dApps. Its native cryptocurrency is Ether, which is the second-largest cryptocurrency in value. What sets Ethereum apart is that it serves various functions, besides enabling crypto transactions, which renders it suitable for a variety of use cases.