Ethereum

Definition

Ethereum is a decentralized, open-source blockchain platform that enables developers to build and deploy smart contracts and decentralized applications (dApps). Unlike Bitcoin, which primarily functions as digital currency, Ethereum's versatility comes from its ability to facilitate programmable transactions through its native cryptocurrency, Ether (ETH), making it a critical component of the digital economy.

5 Must Know Facts For Your Next Test

1. Ethereum was proposed by Vitalik Buterin in late 2013 and launched in July 2015 as a way to enhance blockchain technology's capabilities beyond simple transactions.
2. The Ethereum network operates using a consensus mechanism called Proof of Stake (PoS), which is designed to be more energy-efficient than Bitcoin's Proof of Work (PoW).
3. Ethereum allows for the creation of Initial Coin Offerings (ICOs), enabling startups to raise funds by issuing tokens on the platform.
4. In 2021, Ethereum underwent a significant upgrade known as London Hard Fork, which implemented EIP-1559, changing how transaction fees are structured and introducing fee burning.
5. Ethereum is often seen as a driving force behind the DeFi (Decentralized Finance) movement, enabling financial services like lending and trading without traditional intermediaries.

Review Questions

• How does Ethereum differentiate itself from Bitcoin in terms of functionality and purpose?
  • Ethereum stands apart from Bitcoin primarily due to its focus on programmability and versatility. While Bitcoin is designed mainly as a digital currency for peer-to-peer transactions, Ethereum allows developers to create smart contracts and decentralized applications. This capability not only extends beyond simple transactions but also enables complex interactions and automated processes within its ecosystem, thus facilitating a broader range of use cases in the digital economy.
• Discuss the significance of smart contracts within the Ethereum network and how they impact transactions.
  • Smart contracts are fundamental to the Ethereum network as they automate and enforce agreements without needing intermediaries. By coding the terms of an agreement directly onto the blockchain, smart contracts ensure that once conditions are met, execution occurs automatically, reducing the risk of human error or fraud. This innovation has led to new applications in various fields, such as finance, real estate, and supply chain management, enabling trustless transactions and fostering greater efficiency.
• Evaluate the impact of Ethereum's transition from Proof of Work to Proof of Stake on its scalability and energy consumption.
  • The transition from Proof of Work (PoW) to Proof of Stake (PoS) represents a significant evolution for Ethereum, aimed at addressing concerns around scalability and environmental sustainability. PoW requires immense computational power and energy consumption for mining activities, which has been criticized for its negative environmental impact. In contrast, PoS reduces energy usage by allowing validators to create new blocks based on their stake in Ether rather than computational power. This shift not only enhances Ethereum's ability to process transactions more efficiently but also aligns with global sustainability goals by minimizing carbon footprint associated with blockchain operations.

Related terms

Smart Contracts: Self-executing contracts with the terms of the agreement directly written into code, allowing for automated and trustless transactions on the blockchain.

Decentralized Applications (dApps):

Applications that run on a peer-to-peer network, rather than being hosted on centralized servers, ensuring greater security and transparency.

Ether (ETH): The native cryptocurrency of the Ethereum platform used to pay for transaction fees and computational services on the network.