When Bitcoin hit the market in 2009, it did so in a relatively simple style. BTC and the Bitcoin blockchain were and are still straightforward, requiring little research to fully understand. When Ethereum (ETH) followed in 2015, it was a very different story.
Just a few years separated the launch of BTC and the launch of ETH. But the differences in technology are astronomical. Bitcoin launched in a simple state, and since its initial launch little has been done to improve the overall blockchain. Save, of course, for a few small tweaks and adjustments. Ethereum, on the other hand, has been on a trailblazing journey of improvement.
If you have an interest in ETH and the Ethereum blockchain it’s probably because you want to buy Ethereum. But before you buy you also want to understand how Ethereum works. It’s a good approach to study a commodity before you invest in it, so we commend you for finding this ETH guide. Stick with us now and we’ll take a closer look at how Ethereum works. If you decide to buy Ethereum after reading, that’s great. The decision to invest will always be up to you. We’re just here to share important information.
The story of ETH is also the story of Vitalik Buterin. Unlike Bitcoin, Ethereum has a definite founder and current leader. When Bitcoin went live it was under the guidance of a strange, mysterious figure known only as Satoshi Nakamoto. There is no real answer as to who Satoshi is, or if the person even really exists. It is just as likely that Satoshi is a group of people rather than a single person. Either way, Bitcoin doesn’t have a founding face.
Ethereum, on the other hand, is due entirely to the initial work of Vitalik Buterin. Vitalik is the son of computer scientist Dmitry, a Russian immigrant that made the move to Canada in search of a better life. It was Dmitry that originally told his son to keep an eye on Bitcoin. But, by the time he was 17, Vitalik was already obsessed enough with cryptocurrency to start Bitcoin Magazine. This was in 2011.
In 2013, Vitalik began to travel the world looking for support for his ideas. He realised that a better version of the Bitcoin blockchain could exist, and that making it was not only possible but very doable. However, at the time Vitalik got little support for his ideas. Those with a commitment to Bitcoin were hesitant to move away from what they had already invested effort into.
Vitalik went on to launch Ethereum in 2014, backed by support from a group of like-minded individuals. This original group did eventually split up, but not without making a valuable contribution to crypto.
Learning how the ETH blockchain is different is key to understanding how Ethereum works. Of course, like Bitcoin, the Ethereum blockchain is also decentralised. This means that the blockchain has no overlord, can’t be controlled by a single individual or organisation, and operates entirely on numerous physical nodes. Nodes are, essentially, created by miners that decide to sign up as part of the blockchain.
The first and biggest difference between Ethereum and Bitcoin is that the Ethereum blockchain operates on a foundation of Smart Contracts. Smart Contracts automate systems that handle transactions within the blockchain. You can initiate, organise, and execute a Smart Contract simply by requesting a transaction. At no point during the Smart Contract will third-party human intervention ever be necessary. More importantly, with each Smart Contract, both parties are guaranteed an outcome. There will be more on how Smart Contracts work later, as well as a look at how the platform gave birth to much of what the crypto sphere has become.
The second way in which Ethereum is different is the proof-of-stake model. When the blockchain launched it was based on proof-of-work, like Bitcoin, but made the transition to proof-of-stake. The proof-of-work model requires that numerous computer hardware farms be online permanently, all working at full capacity. The proof-of-work system is, therefore, clearly poorly thought out as far as energy consumption is concerned. The proof-of-stake model is far less demanding, ultimately saving a fortune in energy costs. We’ll take a closer look at how proof-of-stake works later.
The technology in the Ethereum blockchain sounds impressive. But you might be wondering what purpose it all serves. The bottom line is that the blockchain is the foundation for a great many useful digital asset services. First of all, of course, the blockchain is primarily a means for the ETH cryptocurrency to be transacted. You would not be able to buy Ethereum were it not for the blockchain.
More to the point, however, the Ethereum blockchain acts as an automated, fraud-proof network for all digital asset transactions. Since Smart Contracts are all automated and the proof-of-stake system is completely tamper-resistant, no one can manipulate the system in any way. So, regardless of if you intend to buy Ethereum or transfer an NFT to a friend, you can be 100% sure that nothing will go wrong.
The core concept is that the blockchain is not owned or run by Vitalik Buterin or anyone else. The miners that make up the day-to-day operations of the system serve the blockchain, rather than owning it. The blockchain is a foundation that is free from all manipulation or intervention. As has been said many times, a blockchain is a decentralised system.
We took a look at Smart Contracts already in this ETH guide, but let’s dive deeper into what the software has made possible. Virtually all blockchains that launch today are built on Smart Contract systems, though the idea is thanks to Vitalik Buterin and Ethereum. With Smart Contracts decentralised apps (dApps) are possible. A dApp is automated software that handles an important function, operating entirely without human intervention.
A primary example is blockchains that now offer decentralised finance (DeFi.) DeFi is a system within a blockchain that allows for direct financial transactions between traders, ultimately making brokers and exchanges unnecessary. Smart Contracts and DeFi go hand in hand, essentially achieving almost everything that happens at a traditional bank, but without third-party human intervention.
NFTs (non-fungible tokens) are another dApp that came about entirely due to Smart Contracts. NFTs are digital artwork with a built-in signature. Because of how Smart Contracts work in combination with the infallibility of blockchain you can buy, trade and sell digital artwork. Blockchain, in a nutshell, allows for the accurate tracing of ownership of digital assets.
The proof-of-work blockchain model is often thought of as a blunt-force solution. This assessment is accurate, given that proof-of-work is perhaps the most energy-consuming way in which a blockchain can operate. Proof-of-stake is equally as effective a solution but requires just a fraction of the energy consumption.
To become part of the node you first have to download the appropriate software to your computer. Importantly, the computer does not need to be cutting-edge, and will still work even if it’s lagging in terms of hardware specifications. Once the software is installed you will have to set it up, though this is a relatively simple process. Importantly, to activate the node you must also stake 32ETH.
Given the cost of a single ETH, 32ETH is no small change. But if you consider the cost of buying and running cutting-edge hardware for the proof-of-work model, proof-of-stake still works out far cheaper. Once the node is correctly set up it forms part of the blockchain. It will begin to operate automatically. Each time the node processes a block, a percentage of the initial stake will be rewarded. Eventually, over time the initial stake will be matched and each reward becomes 100% profit. Note that you may also stake and operate multiple nodes if you choose to do so.
If you have an interest in setting up a node for the Ethereum blockchain check out our dedicated ETH guide on the topic.
There is no doubt that the Ethereum blockchain is cutting edge, with most of the crypto-sphere based on Vitalik Buterin’s initial technological innovations. Though, just because ETH is ahead in terms of innovations, it doesn’t mean that it is the biggest crypto. Bitcoin still easily dominates the market in a big way, with ETH coming in at a distant second. If you want to buy Ethereum you may be doing so on the assumption that ETH will eventually take over from Bitcoin. There are, however, no signs that Ethereum is leaning towards market domination. At least not right now or in the near future. There are some groups, though, that predict that Ethereum will eventually pull ahead.
Looking at innovations, Ethereum is leading the charge in a big way. The Ethereum blockchain now runs on the revolutionary proof-of-stake system, making the system 99% more energy efficient than Bitcoin. Built-in Smart Contracts also put Ethereum ahead as far as processing efficiency is concerned. Virtually all of the blockchain’s internal workings are run by AI, guaranteeing those transactions tick off with infallible clockwork efficiency. Plus, if it weren’t for Smart Contracts dApps also wouldn’t exist either. This would mean no DeFi, no NFTs and none of the other associated crypto-sphere innovations.
Ethereum is, all in all, the superior blockchain. The cryptocurrency may not be as valuable or as far-reaching as Bitcoin but is still a sound investment. You can check out our ETH guide on how to buy Ethereum if you want to start investing.
If using Bitcoin and Ethereum as the baseline, then yes Ethereum is the technologically superior blockchain. Ethereum works on a foundation of Smart Contracts, meaning that the whole system functions, from the ground up, without any third-party human intervention.
Smart Contracts also serve as the basis for dApps, with DeFi and NFTs being primary examples. If it weren’t for Ethereum and Smart Contracts the crypto-sphere would not be as diverse or far-reaching as it is today.
The Bitcoin blockchain still uses the proof-of-work blockchain model. Proof-of-work is based on specialised computer hardware racing to calculate an enormous equation first. The computer that solves the sum is the winner, therefore allowing the system to update the blockchain with new information. The winning computer gets the BTC reward. The downside of the proof-of-work model is that it is very inefficient and requires an enormous amount of energy to operate.
The alternate proof-of-stake model is far more efficient in every way. Instead of miners having to buy specialised hardware, they instead make an initial minimum stake of 32ETH. Once the node is operational the miner will officially form part of the blockchain. Each time the node processes a block the miner earns a percentage of their stake. The proof-of-stake model is more than 99% more energy effective than proof-of-work.
If you want to buy Ethereum, rest assured that it is a good investment. ETH may not be as big or well-known as Bitcoin, but still holds a big part of the market. Plus, ETH is steadily gaining value and overall market share. If you choose to invest in ETH the chances are that your investment will gain overall value in the long run. There is, of course, no guarantee that this will happen. As with all cryptocurrencies, investing in ETH is a risky endeavour. You should thoroughly investigate all investment opportunities before settling on making a financial commitment in the crypto-sphere.
Ethereum is the work of computer science and cryptographic expert Vitalik Buterin. After seeing the success of Bitcoin Vitalik sought to make a better blockchain. He thus wrote the original Ethereum, intending that it be better than Bitcoin in every way.
Vitalik is still the face of Ethereum to this day. He is even considered the face of the crypto-sphere as a whole.
