Ethereum is the second-largest cryptocurrency network by market capitalization after Bitcoin. The Ethereum blockchain is more versatile than Bitcoin, serving as a “world computer” of sorts. It supports decentralized programs called smart contracts that let anyone spin up new tokens and run applications.
Ethereum is the brainchild of Vitalik Buterin, who launched the network in 2015 when he was just 21 years old. In the spirit of decentralization, Buterin stepped back from building the network, but he remains its de facto philosopher-king and an inspiration for developers who work under the banner of a nonprofit called the Ethereum Foundation.
Ethereum’s native cryptocurrency, Ether (ETH), is popular among speculators but also serves a practical purpose. It is used to pay “gas fees”—industry lingo for transaction fees on the Ethereum blockchain. Most actions on Ethereum, such as sending tokens or buying an NFT, cost “gas” that’s paid for in ETH, with the amount varying according to network congestion.
The supply of ETH isn’t capped, but the network has a mechanism called EIP-1559, which removes some ETH, paid in gas, out of circulation. When network traffic is busy enough, Ethereum’s coin issuance becomes deflationary when more ETH is burned than minted.
Ethereum’s network becomes congested and expensive to use when the crypto market heats up. This has spurred the adoption of so-called “Layer-2” solutions—secondary blockchains that offer a cheaper way to process transactions but that are ultimately recorded on the main Ethereum blockchain.
Ethereum’s programmability attracted a marketplace of decentralized finance applications (DeFi) that at its peak in November 2021 commanded $111 billion worth of digital assets. Ethereum is also home to a sprawling industry of NFTs, or non-fungible tokens—unique tokens that represent ownership of digital assets such as images or music.
Like the rest of crypto, Ethereum’s DeFi and NFT markets are volatile and filled with scams. Anyone can launch smart contracts, some of which contain malicious pieces of code that drain funds from user wallets. In the first eight months of 2022, scammers siphoned $1.6 billion from Ethereum wallets.
Ethereum initially relied on the same energy-intensive process as Bitcoin to build and maintain its blockchain ledger. But in September of 2022, it switched to a “proof-of-stake” system that relies on so-called validators to process transactions. The switch, which saw Ethereum reduce its energy consumption by more than 99%, was regarded as an impressive technological feat.
Ethereum is currently in the process of implementing a series of additional upgrades that will make it faster and cheaper to use.
Go deeper:
Ethereum white paper—Vitalik Buterin
See also:
Layer 1 vs. Layer 2
What is DeFi?
What are NFTs?
Try it:
Etherscan—Ethereum’s blockchain explorer