Ethereum (ETH): definition
Blockchain like Bitcoin
Ethereum is a blockchain like Bitcoin, Litecoin or Solana whose native cryptocurrency is ether. It is generally defined by the abbreviation ETH.
Crypto to pay transaction fees
This cryptocurrency is mainly used to pay transaction fees and fees for using applications based on this blockchain, which we call gas fees. The gas is called a gwei, which is a unit of ether: one billion gwei equals one ether.
When was Ethereum invented?
Ethereum was invented by Vitalik Buterin in 2013 and created along with several developers and traders Gavin Wood, Charles Hoskinson, Joseph Lubin and Anthony Di Ioro. This blockchain was originally designed to address the perceived limitations of Bitcoin.
The capacity of Bitcoin smart contracts, then essentially multi-signature and time-stamping contracts, was not sufficient in the eyes of Vitalik Buterin. He wanted to see the equivalent of modern software or applications running on the blockchain. ETH was thus supposed to form a kind of decentralized computer.
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How does Ethereum work?
The first proof-of-work (PoW) consensus protocol.
Like other blockchains, Ethereum is a decentralized network of nodes. From its inception until 2022, its protocol was based on a consensus similar to that of Bitcoin, proof of work (or proof-of-work).
Blocks were actually mined by subjects (miners) equipped with powerful graphics cards. Energy-intensive process.
A second protocol based on proof-of-stake (PoS)
In order to reduce its energy footprint, the ETH community, under the influence of Vitalik Buterin, decided on a new consensus: proof-of-stake. A system where validators of blockchain transactions must deposit, i.e. stake, their tokens (in this case their ethers) in order to join the network and earn rewards for that work.
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There is no question of important graphics cards, but it is necessary to have a significant number of ethers (32) in order to be able to apply the role of a validator, which represents a considerable cost.
What are the differences between Ethereum and Bitcoin?
Ethereum is able to host Turing complete smart contracts
In addition to its proof-of-stake consensus, which is different from Bitcoin’s (proof-of-work) consensus, the ETH blockchain is capable of hosting Turing-complete smart contracts.
That is, autonomous programs capable of performing all computable functions, and therefore particularly complex. However, using these contracts is particularly resource-intensive, and since these programs run directly on the network, they can overwhelm the network if the number of users becomes too large.
Network congestion also leads to an increase in transaction fees (or gas), which sometimes prohibits the cost of day-to-day operations (like transferring tokens or minting NFTs).
For this reason, secondary networks (layer 2) such as Arbitrum, Optimism or Polygon were created to lighten the ETH blockchain and wait for updates to optimize its hosting capacity.
The genesis of Bitcoin is different from that of Ethereum
There is one more major difference to Bitcoin, which time tends to erase from collective memory: its genesis. Unlike Bitcoin, Ethereum was pre-mined: that is, a significant number of tokens were sold to private investors, but also a significant portion was reserved for a foundation created to manage it and also for its creators.
This refers to 72 million of the 120 million Ether in circulation. According to Galaxy Digital, almost 10% of the tokens are in the hands of the ETH Foundation and the project’s native contributors: tokens regularly sold on the market. In this case, even though Satoshi Nakamoto mined 1 million bitcoins, they were never used.
How is the value of Ether determined?
Depending on market demand
As with other cryptocurrencies, the value of Ether is set according to market demand.
Constantly increasing price
However, it should be emphasized that the use of the Ethereum blockchain has been steadily growing since its inception in 2016. In addition, speculation about its potential future, and especially its status as a globally adopted blockchain, has helped boost its value.
Since its initial launch in 2016 (around $10), the price of ether in January 2024 was over €2,100, an increase of almost 20,000%.
Ether emission is not limited
In terms of emissions, Ether is inflationary, that is, unlike Bitcoin, it is not limited. However, starting in 2021, a new mechanism is introduced to destroy part of the transaction fees, i.e. part of the ether in circulation.
This means that gradually, depending on the activity of the network, Ethereum can acquire deflationary dynamics with the flow of new ethers in circulation lower than the ethers destroyed. These cycles can lead to an increase in the demand for Ether and mechanically its price.
Ether remains very sensitive to crypto bitcoin price changes
However, the entire cryptocurrency market remains highly correlated with the value of Bitcoin itself, which means that ether is very sensitive to price fluctuations of the leading cryptocurrency.
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How to monitor the evolution of the ether price?
There are many ways to track the price of Ether, either through specialized price reference sites such as Coingecko, Coinmarketcap, the more specialized Messari, Kaiko or Tradingview.
Obviously, all platforms for selling bitcoins and cryptoassets also offer an interface for price visualization and tracking.
Why keep Ether in your wallet?
Keeping Ether in your wallet is important to ensure ownership of your digital asset. Furthermore, it is necessary to delegate their ethers to the validator in case the user wants to participate in the validation of the network.
However, the use of a wallet should be taken with a grain of salt, as the loss of the private key, or seed, leads to the loss of digital assets.
There are several types of wallets for storing Ethereum, the most famous being hot wallets (i.e. wallets connected online), such as:
- metamask,
- Rainbow,
- Coinbase wallet.
It is entirely possible to keep Ether on physical wallets (hardware wallets) such as Ledger or Trezor, which are often more secure.