Ethereum is an open-source, decentralized blockchain protocol that enables users to deploy and run decentralized applications via smart contract integrations. Ethereum is the second-largest cryptocurrency by market capitalization, and this article explores its use cases, how its blockchain works, and why it’s a cornerstone of the blockchain industry.
- Ethereum is a decentralized blockchain network with smart contract integrations
- Developers can build and run decentralized applications without intermediaries
- Ethereum transitioned from proof of work to proof of stake to help scale the network
What is Ethereum
Ethereum is a decentralized blockchain protocol that functions as a global computing network, connecting multiple smart contract networks. Launched in 2015 by a team of co-founders, with Vitalik Buterin as the original whitepaper publisher, the protocol was designed to enable broader use. Through the smart contract functionality pioneered by Ethereum, the network allows anyone to build, deploy, and run decentralized applications (dApps) without a central authority.
Ether (ETH) is the native currency of the blockchain and is used to pay transaction fees and to validate transactions. The token is also used as a store of value, but its main role is to reward miners who provide computational power to the network.
How the Ethereum blockchain works
Ethereum uses a blockchain consensus mechanism that records all network transactions on a distributed public ledger. Since the network is decentralized, it uses thousands of nodes (computers that own and store Ether) across the globe to validate transactions and make it resistant to censorship.
Similar to Bitcoin, all transactions are grouped into “blocks” and are cryptographically linked to the previous one. Validators are randomly assigned to verify transactions. Ethereum transitioned from energy-intensive Proof-of-Work to Proof-of-Stake in 2022 in a process known as “The Merge.”
The network requires validators to approve transactions. These validators are participants who stake a minimum of 32 ETH and are incentivized by rewards to act in the network’s best interest. Validators are rewarded for their participation but can also be penalized (slashed) if they fail to validate transactions.
Once a transaction is validated (e.g., a token transfer or a token burn), the block remains vulnerable until it reaches finality. A block is successfully added to the network when it reaches finality and cannot be changed.
How is Ethereum mined?
Ethereum is mined using a Proof-of-Stake (PoS) consensus mechanism. Validators are required to stake a minimum of 32 ETH to become validators. To work in the network’s best interest, they are rewarded a portion of the mining fee. Validators are randomly assigned to validate and add a block. Instead of using energy-intensive hardware like PoW, Ethereum now uses only PoS.
Miners – or validators in the current case – are rewarded for their contribution. Still, they can also be penalized through slashing, which removes some of their staked assets as a penalty for not validating or misusing the network.
What is the EVM?
For the Ethereum network to act as a global decentralized computer, it built the Ethereum Virtual Machine (EVM). The EVM is a computing engine that runs the majority of nodes (validators) on the network. For example, because other protocols can deploy smart contracts on Ethereum, the EVM acts as a hub that executes smart contracts and processes transactions. The virtual machine’s standardized environment ensures that all blockchains produce the same results for every smart contract execution across the network. That’s why Ethereum has also developed the ERC-20 token standard, turning it into a programmable blockchain that enables developers to build complex applications on top of it.
Ethereum and smart contracts
Ethereum’s smart contracts use programming and validators to automatically execute contract terms, with agreements and conditions written directly into code. Smart contract characteristics and agreements are distributed across the Ethereum network to ensure encryption and security.
The development of smart contracts eliminates the need for intermediaries to validate and approve them. That’s why smart contracts have pioneered on-chain financial and artistic revolutions through DeFi, NFTs, RWA, or stablecoins. For example, as a stablecoin is an on-chain representation of a 1:1 parity with USD, smart contracts can embed these characteristics into their code and remain relevant across the network.
Once a smart contract is deployed on the blockchain, its rules are immutable and cannot be changed, ensuring all parties can trust the outcome without relying on a central authority.
Why is Ethereum staked?
Staking is done on Ethereum to help validate transactions and add them to the blockchain network. Staking isn’t native to Ethereum alone; protocols like Cardano and Binance Smart Chain have introduced staking, though the process is similar. Validators are required to lock up 32 ETH to become integrated into the validator circuit.
Staking has two main functions. For one, it helps maintain network security by requiring validators to have a financial stake in its integrity. Dishonest validators risk losing their staked ETH, creating a strong incentive to act truthfully.
The second function of Ethereum staking is validation, where staked ETH allows validators to participate in the consensus process, confirming transactions and adding new blocks to the chain. Investors who don’t have 32 ETH to continue staking can join staking pools and earn smaller rewards in proportion to their contributions.
How is Ethereum different than Bitcoin?
While both are built on blockchain technology, Ethereum and Bitcoin were created with different goals in mind. Bitcoin was designed primarily as a decentralized digital currency and a store of value, often referred to as “digital gold.” Its scripting language is intentionally limited to prioritize secure monetary transactions. In contrast, Ethereum was built as a platform for running smart contracts and decentralized applications (dApps), with a more flexible programming language that allows developers to create sophisticated applications.
The two cryptocurrencies also differ in their economic models and consensus mechanisms. The supply of Bitcoin is capped at 21 million coins, creating scarcity. Ethereum has no hard cap on its total supply, although the rate of new ETH issuance has decreased significantly since it transitioned to Proof-of-Stake (PoS). This move also distinguishes it from Bitcoin, which uses the more energy-intensive Proof-of-Work (PoW) consensus mechanism to validate transactions.
Are Ethereum and Bitcoin correlated?
Historically, the prices of Ethereum and Bitcoin have shown a strong correlation. As the two largest cryptocurrencies, they are often influenced by the same macroeconomic factors and market sentiment. When Bitcoin’s price rises or falls, Ethereum and other cryptocurrencies (altcoins) tend to follow suit. However, as the Ethereum ecosystem matures and its use cases expand, this correlation may weaken over time.
What is Ethereum used for?
Ethereum’s smart contract functions have helped unlock a wide range of use cases and decentralized applications. Here are some concrete examples.
- Decentralized Finance (DeFi): DeFi platforms built on Ethereum or other EVM networks can replicate traditional financial services —like lending, borrowing, and trading—without intermediaries. Platforms like Aave and Uniswap allow users to interact directly with smart contracts to manage their assets.
- Staking: As discussed, staking is integral to the network’s security and enables ETH holders to earn passive income. New products use staking to incentivize DeFi through liquidity pools
- Non-Fungible Tokens (NFTs): NFTs are unique digital tokens that represent ownership of an item, such as art, collectibles, or in-game assets. Most NFTs are built on Ethereum using token standards like ERC-721, creating a thriving market for digital creators and collectors.
Final words
The Ethereum network, through its smart contracts, transformed how users and decentralized applications evolve. This shift moved crypto beyond a simple payment system, establishing it as a global, interconnected computing platform. It now supports a new generation of finance, art, gaming, and many other applications.
Under the hood, Ethereum is a complex and highly secure network that unlocked additional possibilities for decentralized networks to grow. Ethereum is now used not only as a utility tool but also as a store of value, and is accessible through cryptocurrency brokers and traditional financial services.
Frequently Asked Questions
Are Ethereum ETFs approved?
Yes, the U.S. Securities and Exchange Commission (SEC) has approved several spot Ethereum ETFs (Exchange-Traded Funds), allowing investors to gain exposure to ETH through traditional brokerage accounts.
What can you do with Ethereum?
You can use Ethereum to pay for transactions, interact with decentralized applications (dApps), buy and sell NFTs, participate in DeFi protocols to lend or borrow assets, and stake your ETH to help secure the network and earn rewards.
How is Ethereum created?
New ETH is created when new transactions are added to the block in the form of validator rewards. Validators who successfully propose new blocks and validate transactions receive newly issued ETH.
Are Ethereum addresses case-sensitive?
While Ethereum addresses are not technically case-sensitive, they often use a mixed-case checksum (EIP-55) to help verify their accuracy. It is always best to copy and paste addresses to avoid errors.
Who created Ethereum?
Ethereum is a project co-founded by several developers, with Vitalik Buterin being the most well-known, as he published the original Ethereum white paper in 2013.
Is Ethereum an altcoin?
Yes, any altcoin other than Bitcoin is considered an altcoin; however, Ethereum’s size and market dominance in the crypto ecosystem rank it similarly to Bitcoin. Most investors view Bitcoin and Ethereum as the two primary “blue-chip” assets of the crypto market.
