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About Ethereum (ETH)
Ethereum is a blockchain built for facilitating smart contracts underpinning decentralized applications (dApps). The network's native token, ether (ETH), primarily serves as a means of payment for network transaction fees.
ETH is also used as collateral for borrowing specific ERC-20 tokens within the decentralized finance (DeFi) sector, as Messari points out.
“Disrupting everything imaginable through decentralization” could very well be Ethereum's mantra as it stood on the shoulders of Bitcoin and hurled blockchain technology toward a wide array of products and services, turning “fintech” on its head in the process.
Ethereum’s stated vision: to create a "world computer" that anyone could access to build applications in a decentralized manner, CoinGecko explained.
All states and data are distributed. And open to the public – total transparency.
At Ethereum’s core is its support for smart contracts, or programmable contracts i.e. coders write “if this, then that” type instructions and, if conditions are met, the contract auto-executes.
Developers of use Ethereum-run smart contracts to write code to securely program an array of digital technology services, value propositions and asset varietals, sans the need for any third-party intermediary.
Examples of projects built on Ethereum as of late August 2022 include tokens, NFTs, DEXs, AMMs, DeFi platforms; lending protocols, yield farms, prediction market platforms and more.
The coming "Merge" is one of the most anticipated events in the history of the blockchain. The “Merge” is shorthand for the long-awaited transitioning the Ethereum blockchain’s transaction verification method from a proof-of-work (PoW) consensus mechanism to a less energy-intensive proof-of-stake (PoS) approach.
What will happen is that the Ethereum PoW Mainnet protocol, used for ETH-based transactions, will become the Beacon Chain, a PoS network, meaning that going forward, post-Merge, transactions will be conducted on Beacon. ETH mining via PoW will cease. New ETH tokens will be minted by nodes running the network and staking ETH tokens into a pool to secure the network and validate transactions.
This change potentially puts Ethereum on a path to scalability, according to Messari. "Scalability is a known limitation for the current state of Ethereum, Messari said. "Periods of high user activity can cause transaction times and fees to skyrocket, which often prices out retail users and newcomers."
One of the most memorable network clogging periods unfurled in November of 2017 with the explosion of the CryptoKitties collectibles fad; traffic (and gas fees) spiked yet again during the so-called "DeFi Summer" of 2020, when yield farming activities rocketed to popularity, spawning numerous projects for borrowing, lending and staking.
One of Ethereum’s most infamous episodes, in 2016, involved not scalability but security.
A decentralized autonomous organization, The DAO, set up as venture fund and conducted an initial coin offering (ICO), raising $150 million in ETH. But within weeks, an attacker exploited a bug in one of The DAO's smart contracts resulting in the loss of 3.6 million ETH. In the wake of the incident, the majority of the members of the Ethereum community voted to do a hard fork, start the chain fresh, erasing The DAO from the ledger’s history. Remaining stakeholders, bent on preserving immutability, rebuffed all notions that the ledger could ever be amended and kept the transaction history unchanged. That legacy chain became known as Ethereum Classic (ETC).
When was ETH created and how much was it worth?
Ethereum is the brainchild of Vitalik Buterin, alongside an extensive roster of noteworthy tech industry members who advised him every step of the way (and then went on to start their own projects).
The Ethereum mainnet launched in July of 2015. One year earlier, Buterin received a Thiel Fellowship grant and set up a non-profit, The Ethereum Foundation, which issued 72 million ETH, 80% of which was sold to the public in an online crowdsale held that summer of 2014. Ultimately, the Ethereum Foundation raised roughly 31,000 BTC, which at the time was equivalent to $18.3 million.
The first year of trading saw ETH follow a flat line, in terms of its value in USD. It went from being barely $1 to nearly $10 by the end of 2016, according to CoinGecko.
How is the price of ETH determined?
Ethereum’s original token distribution event involved the sale of roughly 60 million ETH, or 80% of the initial supply of 72 million, according to Messari.
Some 12 million ETH (20% of the initial supply) went to the Foundation and early Ethereum contributors.
The supply of ether has been increasing 4.5% each year. Currently, the circulating supply is estimated to be 120 million ETH.
ETH has been an inflationary asset. As Blockworks explained, Ethereum has countered its token issuance to miners by removing from circulation, or burning, a gas fee paid by buyers that varies based on network demand. When more ETH is created for miners than there is ETH burned, inflation ensues, as has been the case lately (as of late August 2022). This dynamic was set to become more or less a moot point with Ethereum's transition to PoS.
Why does ETH have value?
Every transaction on the network requires "gas," which requires expenditures of ether and so it has been said that a virtuous cycle of constant purchase and spending of ETH inherently stokes demand. The transition to "Eth 2.0" means a change from PoW to PoS, and possibly a another shift for the second-largest crypto – from inflationary asset to a more deflationary one.
Here’s why. The PoW consensus approach involves miners creating blocks with 2 newly minted ETH distributed to miners per block.
The supply of ether has been increasing 4.5% each year. The change to PoS will no longer involve miners. Instead, validators will lock up, or stake, their ether in exchange for a yield on their tokens. Ethereum pays 90% less for the network’s security by rewarding stakers as compared to miners because of the difference in required computer power, according to research from Runa Digital Assets, per Blockworks.
If the gas fee exceeds the yield paid to stakers, more ether will be burned than created. This could, in turn, result in deflation, which would, in theory, put upward pressure on the price of ETH.
The PoS system “feels like a share buyback to equity investors,” said Runa's Max Williams. “The network is effectively buying back ETH shares – and destroying them.”
Is ETH secure?
Blockchain security comes down to decentralization. The more decentralized a network is, the better the odds of it preventing a chain from being unceremoniously commandeered by rogue validators, as CoinDesk explained.
A comparative analysis of Ethereum and its closest competitors illustrates that "it is the most decentralized smart contract blockchain in the space," CoinDesk said.
The chain's smart contracts are only as secure as any given developer builds it to be.
What are the main benefits of ETH?
- It facilitates the creation and execution of smart contracts. And here is why that’s important – because whereas Bitcoin gave the world a decentralized way to mint digital money, it was Ethereum's goal to go even further, presenting to the world a blockchain that featured, per the Ethereum white paper, "a built-in, fully fledged, Turing-complete programming language used to create 'contracts' that can be used to encode arbitrary state transition functions."
- Which is a technical way of saying Ethereum made it possible for software developers around the world to create their own multi-purpose networks on top of the baseline network, spawning a universe of all kinds of decentralized systems and markets – automatically trading coins, minting tokenized art, conducting prediction markets, swapping data, aggregating yield farms, you name it. And it's made possible by smart contracts, rendered by writing up the logic in a few lines of code.
- Indeed, the flexibility of Ethereum’s smart contracts, CryptoEQ said, "allows for a multitude of projects to build on the Ethereum blockchain and participate in Web 3.0."
- It is a bustling super-hub of dApp development. The Ethereum community openly acknowledges that it’s too clogged, which is a kind badge of honor. It's clogged because it boasts more developer and dApp activity – thousands built on the platform – than any other digital asset. And it has partnerships galore, as well as name recognition (second only to Bitcoin) and which has contributed to tremendous network effects (CryptoEQ).
- Adds CoinDesk: "The primary reason Ethereum remains superior to its counterparts, and thus worth the cost, is that it is fairly decentralized."
What do critics say about ETH?
- Primarily that it is a congested and expensive network on which to transact. Not being able to scale has confounded Ethereum since its inception and given birth to a cottage industry of rival smart-contract-execution-centric chains – Polkadot and Cardano come to mind – as well as "layer-2 scaling solutions," most notably Polygon and Optimism.
- Competition from rival blockchains could eat away at Ethereum's standing while efforts to solve for scalability drag on. Or there are worse fates, critics contend. They cite the network’s fees as a fatal flaw that makes it unusable, opening the door for an “ETH killer” to dethrone it as the primary smart contract execution platform, CoinDesk said.
- Currently, Ethereum is in the midst of a prolonged, multi-year upgrade. "Current scaling issues limit the ability of dApps and other projects to grow and create satisfying user experiences," said CryptoEQ. "The project is still incomplete."
- Scalability and gas fee issues dominate all conversations concerning Ethereum's drawbacks but there are some other commonly hurled critiques, such as the network's use of overly complicated programming language, a nitpick noted by the Analytics Steps blog. The authors also took issue with Ethereum's unfocused, overly sprawling build, build and build some more model, with platforms on top of platforms, "and so on, all of which may lead to errors, malfunctions, and hacks."
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