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Ethereum is a decentralized open-source blockchain platform with smart contract and dApp capabilities. It quickly shot to success after its launch and now stands as the second-largest cryptocurrency by market capitalization. Ethereum was the birthplace of Decentralized Finance (DeFi) and is fueled by its cryptocurrency, Ether (ETH).
Ethereum was first conceived of in a whitepaper by the programmer, Vitalik Buterin in 2013. He envisioned blockchain technology as a way to create a virtual decentralized computer with more functions than simply trading tokens. The cryptocurrency was a pathway to a decentralized and borderless financial system without the influence of governments and banks.
In 2014, Buterin met up with a group of like-minded developers at a Bitcoin conference and together founded the Ethereum network. The network known as the Ethereum Virtual Machine was launched on 30 July 2015 with an Initial Coin Offering that raised $17.3 million. In the ICO investors could trade their Bitcoin (BTC) tokens for Ether (ETH) tokens and more than 50 million ETH tokens were sold.
What set Ethereum apart from its competitors was the deployment of smart contracts. Originally conceived in the ’90s by cypherpunk Nick Szabo but never fully realized until Ethereum, smart contracts are self-executing codes that are enacted automatically once certain conditions are met.
They allow permissionless transactions and remove the need for a trusted intermediary. They can be used for trading cryptocurrencies without a centralized exchange, creating dApps (Decentralized Applications) or defining the parameters of a Decentralized Autonomous Organization (DAO) and much more.
Smart contracts and dApps paved the way for DeFi and Web 3.0 to grow into what it is today. The term DeFi was first coined by Ethereum developers in 2018 and has come to mean the ecosystem of trustless and decentralized financial services available through blockchain technology that can be accessed without traditional banking or government regulation.
The token, ETH, is used to pay for the deployment of smart contracts and dApps. Ethereum users pay a “gas” fee based on the network resources needed and the network congestion at the time. Users can pay a higher fee to have their transactions processed quicker.
Ethereum allows the creation of other tokens such as the ERC-20 token, tokens built to the Ethereum standard with smart contract capability. Many new blockchains have built their tokens to this standard. Ethereum also allows for non-fungible tokens (NFTs) which have seen a recent explosion in use and value.
Although Ethereum has quickly grown into one of the largest cryptocurrencies, it has faced issues with scaling. Due to the Proof-of-Work consensus mechanism used and high network use, transactions can take days and incur high gas fees.
To tackle this, Ethereum is launching Ethereum 2.0 over the coming years and moving to a Proof-of-Stake consensus mechanism. They will also employ sharding, where different nodes process transactions in parallel.
This will vastly reduce the environmental impact of Ethereum as they move to a less computationally-intense consensus mechanism. This development will help Ethereum maintain its lead over competitors (including Avalanche and Polkadot) which have already deployed sharding and Proof-of-Stake.