What is Ethereum and how does it work?

Ethereum is an open source, public, blockchain-based distributed computing platform featuring smart contract functionality.



9/29/20226 min read


This article is about Ethereum, the second biggest cryptocurrency by market cap. It explains how to buy it and how it works, as well as discussing smart contracts and ETH2.

What is Ethereum?

Ethereum is the second-largest cryptocurrency. Digital money, land, or stocks can be bought and sold with the help of a type of cryptocurrency called Ethereum. Ethereum is a decentralized platform that can run a wide variety of applications, including the entire universe of DeFi.

It is the second-biggest coin by market cap after Bitcoin. It's a decentralized computing platform that runs on a custom-built blockchain. Instead, the creators of the platform set out to build a global platform that extends the security and openness of the network.

There are already thousands of applications running on the Ethereum blockchain, ranging from financial tools and games to complex databases. Developers only have to limit their imaginations to see how great the future could be. The Ethereum system can be used to do things like code, decentralize, secure, and trade things with just a few clicks.

  • Like Bitcoin, Ethereum can be used to send or receive value without the need for a central authority, making it a popular investment vehicle and means of storing wealth.

  • The Ethereum blockchain gives developers the ability to build and operate a wide range of applications, including everything from games and advanced databases to complex decentralized financial instruments. This means that these applications do not require a bank or any other institution to act as a middleman.

  • Apps built on the Ethereum platform use smart contracts. The terms of smart contracts are the same as those in regular papers. In contrast, smart contracts aren't like old-fashioned contracts. An automatic execution of the contract occurs when the terms of the contract are met, without either of the parties knowing what the other is doing, and without any kind of intermediary, such as an accountant, lawyer, or consultant.

  • Bitcoin and Ethereum are both open source projects that are not owned or operated by a single person. Interaction with the network can be done via an internet connection.

  • This means that people can use Ethereum's decentralized blockchain to create applications that cannot be changed or censored.

Stablecoins, DeFi apps, and other Dapps are all Ethereum-based innovations.

Is Ethereum secure?

The ether is secured by the ether block. This blockchain is similar to the one that secures Bitcoin. All the computers on the network verify and secure every transaction, making it difficult for a third party to interfere.

Cryptocurrencies are secure due to their fundamental design: permissionless systems are built on open-source software, which allows countless computer scientists and cryptographers to examine them for security flaws.

There is, however, only one guarantee that apps running on the Ethereum blockchain are as secure as the developers make them, so it is essentially up to them. Bugs in code, for example, can lead to a loss of funds. While their source code is also visible to all, the user bases of each individual app are much smaller than Ethereum’s as a whole, and so there are fewer eyes on them. It is important to conduct research on any decentralized app you plan to use.

There are currently updates being made to the Ethereum protocol that aim to make it both faster and more secure. For more information on Ethereum 2.0, please see the section below.

How does Ethereum work?

You might have heard that the ledger of the Bitcoin network is similar to a bank ledger. It is a total of all the transactions that have ever been done on the network. All the computers on the network work together to keep this total updated and safe.

A blockchain like Ethereum, on the other hand, works more like a computer: besides documenting transactions, it's much more flexible than Bitcoin's. There are literally thousands of Ethereum blockchain applications available to developers - from logistics management software to games to DeFi applications (which provide lending, borrowing, trading, and more).

  • It uses a form of computing which is known as a 'virtual machine' to perform all of these tasks, which is like a gigantic, global computer, comprised of many individual computers running the Ethereum software to accomplish this. Keeping all those computers running requires participants to invest both in hardware and electricity. To offset these costs, the network uses its own cryptocurrency, similar to Bitcoin, called Ether (or, more commonly, ETH).

  • ETH is a digital currency that helps keep the internet running. With Ethereum, you can pay the network to carry out smart contracts, which is how you interact with the network. The gas fees are the prices that people pay in ETH in order to use the Ethereum network.

  • The gas rate depends on network activity. As of December 2020, a new version of the Ethereum blockchain is being rolled out called Ethereum 2.0, which aims to make it even more efficient. It is planned to transition to the new blockchain over the next two years.

What is Ethereum 2.0?

The upgrade to the network is called ETH2. The Ethereum network is a decentralized platform that allows people to create and run smart contracts. This means that there is no central authority controlling the network, and instead it is run by all the users on the network. Ethereum also allows users to create their own programs, called smart contracts, which can be used to automate certain tasks or transactions.

It was made to let the network grow while making it faster, better, and more secure. ETH2 and Ethereum 1.0 will coexist in early 2021, but the original blockchain will merge with ETH2. You don't have to do anything if you hold ETH 1.0 - the ETH2 blockchain will automatically migrate your holdings. ETH2 transition began in December 2020 and will last two years.

Why is Ethereum 2.0 necessary? A complex endeavor is needed to move a popular cryptoasset to a new platform, but it is necessary for Ethereum to scale and evolve. This is due to the fact that ETH 1.0's blockchain relies on a verification method called "Proof of Work," which creates bottlenecks, raises fees, and uses a lot of resources (especially electricity).

What is Proof of Work? How do cryptocurrency networks prevent people from spending the same money twice? This means that they come to an agreement about something by discussion and mutual agreement rather than by voting. The Proof of Work consensus mechanism was initially developed by Bitcoin and was adopted by ETH 1.0 when it first went live. This mechanism was given its name for a reason.

  • Virtual "miners" around the world who compete to be the first to solve a time-Consuming math puzzle contribute a huge amount of processing power to the Proof of Work.

  • The person who wins gets to put the most recent verified transactions onto the blockchain, and they are rewarded with a set amount of ETH.

  • This process takes place every 30 seconds (as opposed to Bitcoins 10-minute cadence) As traffic on the network has increased, the limitations of Proof of Work have caused bottlenecks during which fees spike unpredictably.

How do you buy Ethereum?

If you want to get ETH, you will need to learn some basic things first. To manage your cryptocurrency holdings, you will require a wallet in addition to the public and private keys that are assigned to each address on the Ethereum network.

Public key: Think of this as the equivalent of an email address for crypto. Your Ethereum public key is like your bank account number - it's where people can send you ETH and other Ethereum-based tokens. You are free to hand this out to other people without worrying about their safety.

Private key: Think of this as your password. If you don't want people to know something, it's best not to tell them. An encryption key, or private key, is a lengthy series of characters. An idea can also be expressed as a series of words, known as a seed phrase. Private keys are crucial to keeping track of. In the event that you lose them, you will lose all your Ether forever.

Wallet: In order to store and secure your Ether, you will need a wallet. If you're just starting out, the easiest option is to make an account with Coinbase. You'll be able to store your private keys and have them secured by Coinbase. As you progress, you may want to investigate other wallet options built for interacting with decentralized finance (or DeFi) protocols. Some examples of these wallets are Compound, a lending and savings app, or Uniswap, a decentralized exchange that allows you to trade cryptocurrencies.

What’s next for Ethereum?

As of early 2021, the market cap of ether is $200 billion, with over $55 billion locked into the token on the network. Stablecoins are digital coins that are designed to stay at a stable price. Some popular stablecoins include USDC and USDT. Today, these coins mostly live on the Ethereum network because the Ethereum network has a lot of users and is therefore more likely to be used by people.

There are a variety of new smart contract blockchains competing. The Ethereum network is the most popular blockchain network today, but there is pressure for it to upgrade to Ethereum 2.0.