What is Ethereum?

Ethereum operates as a global network of computers, all of which adhere to the Ethereum protocol. As covered in our course ‘How does a Blockchain work?’, we understand that a blockchain protocol is the predefined set of rules and procedures that dictate how a blockchain network operates. In essence, the protocol serves as a guideline for how transactions are validated, recorded and added to the blockchain.

For Ethereum, it serves as a foundation for various communities, applications, organizations, and digital assets. Put simply, Ethereum is an open-source blockchain-based platform where smart contracts are deployed without the requirement of a central authority.

The native token for Ethereum is called Ether (ETH) and this is how dApps are charged for using its processing power. It is the combined efforts of all the computers in the network that record all the transactions and balance the ETH accounts, state of smart contract information within the Ethereum blockchain. 

Based on this, let’s dive a little deeper into what Ethereum actually offers:

Banking for all:

Access to financial services differs on a global scale, creating an inequality as the distribution of financial resources and opportunities isn’t available amongst all groups and individuals in society. Ethereum is open to anyone with an internet connection, offering those who typically have banking services available to them to access lending, boring and saving products.

Open Internet:

Anyone, anywhere can build applications on the Ethereum networks, allowing groups and individuals across the globe to have ownership of their assets and identity - all without the influence or control of a third party.

A Peer-to-Peer Network:

Similar to Bitcoin, the Ethereum network enables individuals to make agreements or transfer digital assets with their peers, all without the need for a third party or intermediary. 

Censorship Resistance:

The decentralized nature of Ethereum supports its resistance to censorship. No third party or institution has any influence or control over Ethereum, meaning there’s nobody to block or prevent an individual from using services on the Ethereum network.

Commerce guarantees:

For both customers and developers on the Ethereum network, there are guarantees that the rules won’t suddenly change. Meaning, developers have this certainty when building on the network, and consumers feel confident their funds will only be exchanged if the terms of the agreement are met.

Composable products:

The shared global state approach, where all the apps are being built on the same Ethereum blockchain, enables the apps to build off of one another. As a result, this enables stronger product offerings and consumer experiences, as there’s also the assurance that no individual can randomly remove any of the tools that the apps rely on.

Following the success of Bitcoin, in 2013 Ethereum was created as limitations were spotted in the Bitcoin network. The founder of Ethereum, Vitalik Buterin, aspired to create a platform that would support more than just the digital money transfers. Instead, he came up with the concept of smart contract, a type of digital agreement that can trigger automatically once the conditions are met. Meaning, smart contracts can fulfill a lot of different use cases without the need of a third party, such as money transfers, storing records or even running programs.

If we use the analogy of Ethereum being a large computer that is shared by individuals all across the world, we need to understand that this computer has to follow one set of rules that all the global players have to follow and agree upon. This is what makes up the Ethereum protocol, and leveraging this developers can build upon it all the while following the same set of rules. The flexibility in which developers can build on the network can range from anything like social networks, games or even systems that track supply chains. This degree of flexibility encourages innovation amongst developers and gives them the space to test new ideas without concerns for technical limitations.

The main objective behind Ethereum is enabling anyone, anywhere to create and use decentralized applications (dApps). Considering that decentralization means that there is no influence or interference from a central authority, all of the dApps run on the network which increases the difficulty of any individual cheating the system or attempting to shut things down. 

Ethereum also enables, on a global scale, access to a range of financial services and applications where the only requirement is having connection to the internet. Meaning, there’s no need for a traditional bank or government to grant permission. As a result, this opens up access to financial services to individuals who typically would struggle with access to these services, helping bridge the gap for the unbanked population. 

Tokenomics refers to how a tokens distribution and reward system impacts the availability of a particular cryptocurrency over time. When we consider that increased supply creates inflation, we can also understand that in turn this reduces the purchasing power of the cryptocurrency and the extent to which it serves as an effective store of value over time.

With this in mind, when Ethereum first launched a specific amount was released, this is also known as a ‘pre-mine’. A small amount of Ethereum was then released to the public via an Initial Coin Offering (ICO), where some was also distributed to the founders and other contributors.

At first launch the consensus mechanism in place was Proof of Work (PoW), the same mechanism that Bitcoin uses. However, unlike Bitcoin who had a supply cap of 21 million bitcoins, Ethereum did not put this in place and block rewards produced an annual supply inflation in ETH of 4.5%.

At present, Ethereum now operates using a Proof-of-Stake consensus mechanism. This transition, known as The Merge as it shifted to Ethereum 2.0, was completed in September of 2022 and means that validators are still incentivized to add transactions and make state changes to new blocks. However, where PoW approaches the problem by combining effort and reward, PoS relies on a financial commitment from the validator in requiring they stake their crypto. 

In understanding that Ethereum operates using an open network, this global network of computers all adhering to the same protocol are referred to as Nodes.

We can think of a Node as one of the many computers in the network that is running the software application, also referred to as client, and enables Ethereum to function. All of the Nodes are connected to one another within the network, and they work together on a voluntary basis to complete the verification process and maintain the Ethereum blockchain. 

If we dive a little deeper into the types of Nodes, there are Full Nodes, Lightweight Nodes and Archive Nodes.

Full Nodes focus on maintaining the Ethereum blockchain, and keep a copy stored at all times. They serve to manage the size of the blockchain, verify and validate new blocks, as well as provide data on request.

In a similar way, Lightweight Nodes also maintain and store copies of the Ethereum blockchain. However, they do so on a more limited basis as they only maintain and store the minimum amount of data required to complete a transaction. Hence, the ‘lightweight’ reference as opposed to ‘full’.

Archive Nodes are essentially a historical archive of all the state changes of the blockchain. This Node type isn’t required in the process of validating blocks.