Ethereum: definition, operation and use

Ethereum: definition, operation and use

Ethereum refers to a blockchain and its cryptocurrency Ether. Behind Bitcoin, Ether enjoys a high reputation in the cryptocurrency market.

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Discover in this article its definition, its operation and its use.

Where does Ethereum come from?

Ethereum was created in 2015 by Vitalik Buterin, a Russian-Canadian computer scientist and his 7 co-founders Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Hood and Jeffrey Wilcke. Vitalik Buterin’s goal was not just hosting a cryptocurrency. Above all, he wanted to create collaborative and decentralized applications. Vitalik Buterin was very inspired by Bitcoin and is part of its continuity, but its Ethereum protocol allows to expand the use of blockchain technology. Decentralized applications can now be created by anyone.

What is the purpose of Ethereum?

The creator of Ethereum wanted it to work as a decentralized internet, so he multiplied the possibilities of this “world computer”. Ethereum allows the creation of its own cryptocurrency. Like Bitcoin, Ethereum therefore makes it possible to send and receive Ether without a bank or intermediary service provider. With this protocol, it is also possible to program and publish smart contracts. These smart contracts are used in particular to manage autonomous and decentralized organizations (DAO). It also allows to create, distribute and use dApps (decentralized applications). The dApps are not limited in users or uses and can include any service that may have required the intervention of an intermediary.

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Among the existing Apps, we can notably identify:

  • token games (NFT) to collect;
  • insurance;
  • online banking services;
  • video games ;
  • digital art buying and selling services;
  • online cryptocurrency management applications;
  • social networks;
  • a computer computing power rental service;
  • sending encrypted SMS;
  • prediction markets;
  • crowdfunding applications;
  • automated invoice sending.

How does Ethereum work?

Ethereum drew its inspiration from the functioning of Bitcoin and its blockchain, but incorporating modifications that allow it to run complex applications. Indeed, the Ethereum blockchain is similar to that of Bitcoin, because it makes it possible to store the history of transactions that are carried out on the network. Ethereum nodes store the state of accounts, the balance and movements of each account, the code of the relevant smart contracts and where they are stored. Ethereum therefore functions as a kind of bank account where each address corresponds to the user’s account.

Ethereum blockchain transactions can therefore generate and automate smart contracts, or smart contracts in English, with specific software created by developers. A programming language has also been specially designed for Ethereum smart contracts: “Solidity”. Solidity was submitted in August 2014 by Ethereum co-founder Gavin Wood and later developed by Christian Reitwiessner, Alex Beregszaszi, and Yoichi Hirai. A smart contract is neither censored nor verified by an outside person. It consists of automating credible transactions without third parties on the blockchain. Indeed, it is a computer program respecting a set of rules governing behaviors that update the blockchain when certain conditions are met. After being drafted, the smart contract is deployed on the Ethereum network, stored and executed there.

The smart contracts code is stored on the blockchain and executed in the EVM (Ethereum Virtual Machine). The EVM designates a so-called “Turing Complete” system, a system possessing the computing power of the Turing machine. It is an abstract concept of the operation of mechanical computing devices such as computers. The EVM is a decentralized operating system that allows the execution of smart contracts. For each operation of the EVM, the user must pay a fee in Ether. Depending on the complexity of the operation, the fees may be higher or lower if they require more computing power. These costs are called “gas”.

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The EVM is used to interpret the Solidity code. Controllers, called “miners”, are responsible for validating network transactions, executing the code of smart contracts, and making the modifications that come from the execution of the blockchain. This work allows them to receive the rewards in Ether in their virtual wallet.

For these miners to perform their mission, the Ethereum blockchain needs a consensus algorithm, an agreement on a single version of the blockchain data from all network actors. The consensus algorithm used today is the same as for the Bitcoin blockchain, the Proof of Work (PoW for proof of work). Miners validate new transactions that take place on the network and propagate them through the network.

The Ethereum protocol is currently encountering two major problems. The first concerns the relative slowness of transaction validation and the second, the excessive fees charged on the network. An update is therefore planned to solve these problems: Ethereum 2.0. The objective is to change the consensus algorithm to move from the Proof Of Work mechanism to the Proof of Stake mechanism (PoS for proof of stake) which is less energy-intensive. Securing by PoS therefore designates a new method of consensus. It consists of randomly designating a user to add a block to the blockchain. This draw is made according to the amount of cryptocurrency held by the user. When a user has a certain amount of cryptocurrency, the system considers network security to be very important to them. He will then have a better chance of being chosen to carry out a block and of increasing his Ether capital.

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The implementation of Ethereum 2.0 began in December 2020 and is divided into three phases.

  • The Beacon Chain designates the announcement of the transition between Proof of Work and Proof of Stake.
  • The Shards Chains, or Sharding phase, which corresponds to the fragmentation of the chains which will allow an improvement in the capacity and scalability of the Ethereum blockchain.
  • The replacement phase of the current execution engine of smart contracts by the EWASM (Ethereum Web Assembly) which will improve the performance of Ethereum.

How is Ethereum used?

As with Bitcoin, Ether is considered a safe haven for investors, who are currently very interested in cryptocurrency assets. You should know that their value is not controlled by any central body, it is the evolution of inflation and interest rates in the major economies that influences supply and demand and therefore the value of the Ether. It is also a relatively risky asset, as its value is highly volatile. Unlike Bitcoin, there is no cap on the amount of Ether held, however the system imposes an annual production limit of 18 million on the market.

Beyond speculation, other uses of Ether are also listed:

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  • the purchase and sale of cryptocurrencies (Ether, Bitcoin, etc.) on an exchange site;
  • participation in an Initial Coin Offering (ICO), raising funds to finance the launch of a project;
  • the use of a credit card to purchase goods and services in Ether in stores that accept this cryptocurrency;
  • games on an Ethereum casino, etc.

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