What is Ethereum? The Complete Guide – Part 1 (2024 Update)

This is our behemoth Ethereum guide, first published in 2018, with the last full update done in 2024. Recently, the U.S. Securities and Exchange Commission (SEC) approved several spot Ethereum ETF, marking a significant milestone toward mainstream adoption. Ethereum has undergone significant transformations, making this guide ripe for a thorough update.

In the past few years, Ethereum has seen major changes, including the landmark 2022 Merge, the 2023 Shanghai upgrade that unlocked staked ETH, and the implementation of Account Abstraction (EIP-4337). We are also closely watching the upcoming EIP-4844 Proto-danksharding upgrade scheduled for later this year, which promises to enhance Ethereum’s scalability further. Additionally, our layer-2 articles delve into the next generation of Ethereum scaling networks, paving the way for Ethereum to fulfill its vision as the world’s computer.

In this guide, we’ll revisit the basics, from the creation of ETH to the potential future of prominent blockchain projects. This guide is purely educational. So if you want to learn more about Ethereum and how it’s revolutionizing the crypto space, read on.

Introduction

Ethereum is currently firmly established as the second biggest digital asset after Bitcoin, in terms of market capitalization, with the latter dominating the crypto universe (over $2.54T market cap, May, 2024). As of May 2024, Ethereum is in second place, with a market share of over $456.94 billion, over $300 billion more than its next competitor, Binance Coin (BNB). 

But Ethereum’s worth must be measured in more than US dollars. It is a revolutionary virtual asset network that has changed the way we view cryptocurrencies and what they can do in terms of innovations like “smart contracts”, which has undoubtedly proven that blockchain’s use cases extend far beyond payments. 

For years, technologies like decentralized finance (DeFi) and non-fungible tokens (NFTs) were merely idealistic concepts. Today, you can see them in action through Ethereum-based decentralized platforms like the Uniswap exchange, Aave lending network, and OpenSea digital art marketplace, among many others. These technologies have brought a paradigm shift to the way platforms work, where rules are equally decided and enforced by everybody and middlemen or overseers are no longer necessary.

Moreover, the rise of boatloads of Ethereum play-to-earn games like Axie Infinity, My Crypto Heroes, ChainGuardians, etc. have not only entertained, but also empowered people to earn a livable income despite losing their jobs in the pandemic.

One could even argue that Ethereum has brought blockchain technology further than Bitcoin ever could, seeing as most of the innovations of the industry either came from Ethereum’s development or are built using its toolsets. 

Despite the rise of competitor smart contract blockchains Polkadot, Binance Smart Chain, and Solana, Ethereum’s market share is still three times larger than all of them combined. 

However, there is a major traffic bottleneck that makes transactions costly, which is exacerbated by Ethereum’s all-too-familiar upgrade delays, but at least we now have a working global computing network that allows anyone to build unstoppable programs on top of it. Not too many people understand the power that everybody now has access to thanks to this smart contract platform.

Then there’s the London Fork upgrade, which has made Ethereum more scarce due to a new mining scheme that burns transaction fees, which could possibly make Ethereum deflationary in the future.

1. What is Ethereum?

Ethereum is an open-source, public, decentralized computing platform and operating system that exists on a blockchain that supports smart contract functionality, and the deployment of decentralized applications (DApps). Since its inception Ethereum has developed into an ecosystem and birthing place for most of the crypto industry’s most innovative new fields and use cases, which includes decentralized finance (DeFi) and non-fungible tokens (NFTs).
Its native digital asset Ether (ETH) is the world’s second biggest cryptocurrency by market cap and was created by former Bitcoin Magazine co-founder, Vitalik Buterin, and British programmer, Gavin Wood, in 2013, and ultimately released in July, 2015. It has 8 listed co-founders, including Charles Hoskinson, Cardano’s frontman. 

If the description of Ethereum above does not ring any bells, another popular comparison is to that of a Turing-complete “world computer” that is open source, allowing anyone to run unstoppable applications on top of it. But, you might wonder, why does the world need such a system? Most of us already have our own PCs and mobile computers at home. 

Let’s explore a real-world scenario: 

John is an equal rights activist in the US who wants to exercise his right to free speech online. Unfortunately, he dreads the possibility of losing his Facebook and Twitter accounts due to the nature and sensitivity of the topics he discusses. 

Social media platforms have nearly absolute control over user accounts and can police them as they see fit. John realized that his work is far too important to be at the mercy of these giant tech corporations that could ban his account at any time and erase everything he’s built. 

He then decides to sign up to a new Ethereum-based social media platform, Sapien, and starts creating content there as well. When the day comes that Facebook and Twitter restrict his accounts or ban him completely, he already has a backup platform that’s unstoppable. Problem solved!

Ethereum can not only allow you to circumvent restrictions from corporations but also from authoritarian governments. This makes it an extremely valuable tool not only for building sophisticated applications but for attaining personal freedom as well.

Vitalik Buterin 2019 Taipei Ethereum conference

What are ERC-20 Tokens?

As we’ve been touching on this entire piece, the crux of Ethereum’s power and appeal is in its creation, powering, and diversity of smart contracts on the Ethereum network.

So, what happens when developers want to launch a project and token on the Ethereum network?
You get an Ethereum Request for Comment, also known as an ERC-20 token.

ERC-20 is an Ethereum token technical standard guiding smart contracts and their functionality in the Ethereum ecosystem. The ERC-20 standard exists to ensure predictability in performance and security amongst projects on the Ethereum blockchain. After all, given the vast number of applications built on the blockchain, it’s important for stability purposes to have some sort of uniformity. Simply put, ERC-20 exists so new applications and projects can work coherently with existing projects on the Ethereum platform.

After a terrible 2018, in which over $1.7 billion USD was stolen or scammed from crypto investors, many analysts blamed Ethereum’s easy ERC-20 token start-up capability as a breeding ground for ICO scams that were meant to rob the public blind or act as money laundering and terrorism funding vehicles.

In January, 2018, there were more than 21,000 ERC-20 token contracts on the Ethereum blockchain, including notable projects such as EOS, Qash, OmiseGO, Basic Attention Token, and more.

By the beginning of 2021 , there were 829 ERC-20 token projects and over 350,000 token contracts, according to Etherscan. In September 2021, it stood at over 450,000 token contracts!

Check out this comprehensive list on Etherscan.

CoolWallet Storage Tip: Steer clear of saving any exchange, wallet, or other cryptocurrency passwords online. Instead, write down your pin and recovery seed on a piece of paper, make copies, and store them safely in your home or at a bank.

What are Smart Contracts?

Broken down further, Ethereum’s smart contracts can be thought of as a vending machine, where instead of seeking out a lawyer, notary, or transcriptionist, users spend their cryptocurrency (tokens) in exchange for a drafted contract, escrowed transaction, or other transactional function.

Based on different computer languages, Solidity, Serpent, LLL, Mutan, etc., smart contracts are all-encompassing computer protocols, not only defining the parameters and penalties governing transactions, but automatically enforcing them as well, ultimately, eliminating “downtime, censorship, fraud or third-party interference.”

Ethereum’s smart contracts are developed through programming languages Solidity and Vyper, but the forthcoming Ethereum WebAssembly (eWASM) will allow developers to build Ethereum smart contracts using traditional languages like C++, Rust, and Javascript, etc.

What are Decentralized Applications (DApps)?

Commonly referred to as DApps, decentralized applications are based on the Ethereum platform and its smart contracts, running on a peer-to-peer network and boasting four key characteristics:

• Open-source and autonomously controlled,
• Use of the blockchain to store data,
• Use of a cryptographic token to store value, and
• Generation of such a token through a cryptographic algorithm.

What separates decentralized applications from standard applications is the infrastructure of their back-end servers, omitting the use of programming languages such as Rails or Django in favor of blockchain technology – removing centralized hosting services and putting power and autonomy back in the hands of its users.

As of October 2023, there are tens of thousands of DApps on the Ethereum blockchain, including, but not limited to, DApps for:

• Games,
• Collectibles platforms,
• Digital signatures,
• Smart locks,
• Digital proprietary rights management for copyrighted works,
• Prediction markets,
• Crowdfunding platforms,
• Remittance,
• Online casinos and gambling,
• Electric and clean energy car charging,
• Secure identity systems, such as KYC controls. 

Ethereum Virtual Machine (EVM) 

Fueling Ethereum’s security and code execution is the Ethereum Virtual Machine (“EVM”) – the protocol handling computation and its internal state. 

The EVM is a key innovation separating Ethereum from its narrowly functioning big brother, Bitcoin, which was constructed with one function in mind – to act as a currency.

The EVM however, was designed to act as a runtime environment for smart contracts based on Ethereum, allowing any user or developer to create applications via the Solidity language, while ultimately,

• Automating transactional processes,
• Performing specific actions,
• Preventing Denial-of-service (DoS) attacks, and
• Ensuring uninterrupted communication across the network.

The EVM’s distribution of computing across the network “gives Ethereum extreme levels of fault tolerance, ensures zero downtime, and makes data stored on the blockchain forever unchangeable and censorship-resistant”.

In simple terms, the EVM could be viewed as one giant environment conducive for building bigger, better, and more powerful smart contracts. Instead of the creation of an original blockchain for each new project, the EVM allows applications and users to build in one place on top of previously laid foundations.

Unfortunately, it has some real-world limitations, which is why the Ethereum Foundation is working on its successor, the Ethereum WebAssembly (eWASM), which is set for release sometime in 2022.

Ether (ETH) and Mining

When understanding Ethereum, it’s important to differentiate between the Ethereum blockchain and the fundamental cryptocurrency for its operation – Ether, abbreviated to ‘ETH’.

Ether is not the technology, but the token which pays computational costs – also known as gas – and transactional fees. It’s the fuel that keeps the car running.

Any time a user wants to execute a smart contract or send Ether to another user on the network, there needs to be confirmation and recordation of this – the task is not executed by a centralized server or company per se, but by thousands (and growing) of computers around the world – this consensus model is known as Proof-of-Work (PoW).

As a reward for validating and processing transactions via PoW – also known as mining – users – commonly referred to as miners – are rewarded in Ether (ETH), as their computational resources have not only solved a complex algorithmic problem, but contributed towards maintaining the security, integrity, and validity of the network.

In simple terms, the more complex and sophisticated the computational commands you want to execute, the more gas (Ether) you will be required to pay.

Once again, it’s important to understand that when purchasing Ethereum, you aren’t actually purchasing “Ethereum”, you’re purchasing “Ether” – the token powering transactions across the network.

Unfortunately, ETH mining was never meant to last as long as it has as Vitalik had proposed Ethereum’s transition away from PoW to Proof-of-Stake (PoS) due to PoW’s consumption of exorbitant amounts of energy and resources, as well as its lack of base-layer scaling solutions. 

Ethereum has a similar dynamic mining difficulty scheme to Bitcoin since both blockchains use PoW. But unlike Bitcoin’s difficulty that only adjusts according to the mining power in the network, Ethereum’s mining difficulty is programmed to increase until it ultimately becomes unprofitable, which would force miners to shift to staking, making mining obsolete. 

However, a new implementation dubbed as the “difficulty time bomb delay” was recently rolled out to amend the mining difficulty increase, which would allow mining to go on at least until the merge of Ethereum 1.x and 2.0 in 2022.

Second-Layer Solutions (Layer 2 and Off-Chain Scaling)

Layer 2 (L2) is a concept that describes various solutions aimed at scaling a blockchain’s capacity by handling transactions off the mainnet (layer 1), while still utilizing its decentralized security system. With the rising popularity of Ethereum, its current layer 1 is becoming a bottleneck, causing transaction delays and rising fees. A slew of new layer-2 chains like optimistic and ZK rollups such as Arbitrum, Optimism, Linea and zkSync have helped to alleviate these issues in the interim before Ethereum 2.0 is fully launched, but it’s not the be-all-and-end-all solution for scaling.

There are a couple of second-layer solutions that are already functional, such as Optimism, which recently deployed its bridge to the Ethereum network. Another L2 solution that is thriving is Polygon, an inter-blockchain scaling protocol that has its own native currency called MATIC, which boasts over 400 projects built on top of it, including The Graph, Poly Network, Terra Virtua, and many more.

2. What is Ethereum 2.0?

Ethereum 2.0, also known as Eth2 or Serenity, is a major upgrade to the Ethereum blockchain network. It aims to improve scalability, security, and sustainability, addressing some of the limitations of the current Ethereum network.

The main feature of Ethereum 2.0 is the introduction of a new consensus mechanism called Proof of Stake (PoS), replacing the current Proof of Work (PoW) system. PoS allows participants to become validators by locking up a certain amount of Ether (ETH) as collateral, which they can stake to propose and validate new blocks. This change reduces energy consumption and increases transaction throughput.

Another key aspect of Ethereum 2.0 is the introduction of shard chains. Currently, the Ethereum network operates as a single chain, processing all transactions and smart contracts. With shard chains, the network will be divided into smaller chains, or shards, each capable of processing its own transactions and smart contracts. This enhances scalability by allowing multiple transactions to be processed simultaneously.

Ethereum 2.0 will also introduce other improvements such as eWASM (Ethereum WebAssembly), which will enhance smart contract execution speed and flexibility, and crosslinks to improve communication between shard chains and the main Ethereum chain.

The transition to Ethereum 2.0 is being rolled out in multiple phases. Phase 0, the Beacon Chain, was launched in December 2020, which introduced the PoS consensus mechanism. Phase 1 is expected to introduce shard chains (starting with Q4 2023’s foundation-laying EIP-4844 Proto-danksharding upgrade), while Phase 2 will focus on enabling smart contracts on the shard chains.

Overall, Ethereum 2.0 is expected to significantly enhance the scalability and efficiency of the Ethereum network, enabling it to handle a larger number of transactions and applications while reducing energy consumption.

Beacon Chain (December 2020)

The Beacon Chain introduced proof-of-stake to the Ethereum ecosystem, serving as the foundational layer for a more scalable and sustainable Ethereum. Initially running alongside Ethereum 1.x in a dual PoW-PoS consensus mechanism, it formalized proof-of-stake as Ethereum’s consensus mechanism with The Merge upgrade on September 15, 2022.

The Beacon Chain’s primary functions include managing validators, introducing the consensus logic and block gossip protocol, and overseeing Shard Chains, the upcoming scaling mechanism. By transitioning to proof-of-stake, Ethereum significantly enhanced its security and decentralization compared to the proof-of-work system. Staking, which involves staking ETH to activate validator software, replaces mining and promotes greater participation and security. This shift also reduces energy consumption, making Ethereum more environmentally friendly and scalable.

Sharding can now safely enter the Ethereum ecosystem thanks to the proof-of-stake consensus mechanism introduced by the Beacon Chain. This paves the way for further scaling Ethereum, ensuring it remains secure, decentralized, and efficient.

Ethereum Merge (April 2023): The Move To Proof of Stake

The Ethereum Merge marked a pivotal shift in Ethereum’s blockchain, merging its original Mainnet with its new proof-of-stake consensus layer, the Beacon Chain. This transition moved Ethereum from a mining-based proof-of-work (PoW) model to a more energy-efficient proof-of-stake (PoS) model. This event eliminated the need for energy-intensive mining and enabled the network to be secured using staked ETH. It was a crucial step toward realizing the Ethereum vision of enhanced scalability, security, and sustainability.

From Proof-of-Work to Proof-of-Stake

Previously, Ethereum relied on miners to validate transactions and create new blocks—a process known for its high energy consumption. The Merge replaced this with a PoS model, where validators, chosen based on their held and staked coins, take up the role of transaction validation and block creation, significantly reducing energy usage.

The planning for the Ethereum Merge began as far back as 2017, making it a well-anticipated upgrade aimed at addressing scalability and energy efficiency issues inherent in the PoW model.

Eco-Friendly Outcomes

With the Merge, Ethereum slashed its energy consumption and carbon footprint by an impressive 99.99%, stepping towards a more environmentally friendly operation. This move also sets a sustainable precedent within the blockchain space.

The Ethereum Merge paves the way for further scalability enhancements, making Ethereum faster and more adaptable to growing user demands. This transition not only marks the end of the energy-intensive PoW era but also ushers in a new phase of eco-friendly and efficient blockchain operations, reinforcing Ethereum’s innovative standing in the blockchain community.

Ethereum Staking

Shortly after the launch of the Beacon Chain, Ethereum staking became readily available for the public. With PoS, instead of miners validating transactions via the solving of mathematical problems, transactions are validated by “stakers”, “forgers”, or “validators”, who place their coins and tokens in a specialized wallet to validate transactions, and are determined by their wealth or stake in the network.

Validators are rewarded based on the number of ETH they stake to incentivize the community to participate. Staking is crucial for the operation of the Ethereum network, especially after mining becomes obsolete. Ultimately, PoS serves as a far greener and cheaper consensus mechanism than PoW, making it practical for Ethereum’s mass adoption.

Perhaps you are entertaining the thought of becoming an Ethereum validator yourself. Before you begin your ETH 2.0 staking journey, there are a few factors and risks you need to take into account.

• Staking your ETH is no long-term commitment. Thanks to 2023 April’s Shanghai upgrade, ETH stakers can now unstake whenever they wish.
• Your validator node needs to be consistently online to receive full rewards.
• Cheat and you get slashed. Any attempt to cheat the system or act against the benefit of the network gets punished through slashing, where you get penalized with a fee. Note that the minimum amount for slashing is 1 ETH. You’d be wise to consistently be on your best behavior while staking.
• There might be bugs. Ethereum 2.0 is still an early-stage project, hence, it is bound to have bugs. As an early contributor and benefactor, you pay the price of possibly encountering bugs that could result in slashing, albeit unlikely.

If you’re still interested in staking even after learning all that then by all means do so. There are two ways to stake ETH 2.0, either by:

1. Running a full node yourself (if you have a lot of spare cash)
2. Joining a staking pool. For example, you can stake your ETH via CoolWallet and earn staking rewards. The ETH staking feature is supported by CoolWallet Pro, S, and HOT.

Running an Ethereum Full Node

If you can afford to, running a full Ethereum node is the recommended method of staking as it enables you to privately and trustlessly participate in the network’s operation while increasing its decentralization level. The more independent nodes, the more decentralized Ethereum gets.

Ethereum staking is far less demanding than Bitcoin mining when it comes to equipment costs. However, the 32 ETH minimum requirement of running a full node would cost slightly above $100K in today’s prices, which is beyond what an average person could afford. 

Here are the requirements to run an Ethereum full node and stake:

• At least 32 ETH 
• The mainnet software client
• A modest computing device
• Around 500GB of SSD storage
• A stable 24/7 uncapped internet connection of at least 900MB/hour, and is likely to increase.

If you opt to run a full node, you’ll need to set it up, which could be a hassle, especially for non-technical users. It is important for you to take your time and follow the instructions well to avoid making costly mistakes. Also, be sure that you’re ready for the commitment required, since you won’t be able to retrieve your funds possibly for more than a year.

If you’re one of the lucky few who have the budget for staking ETH via a full node, head over to the Eth2 Launchpad and follow the instructions to be part of the growing Ethereum staking community.

Staking Via Ethereum Pools

If you don’t have 32 ETH, there’s still a way for you to become a staker with what little ETH you have by joining a pool. In fact, if you do stake this way, you’ll be free of the burden of setting up and managing a full node. Most staking companies will do all that for you.

However, nothing is free, so you will likely be charged a fee for the maintenance of the validator node, which could eat up a portion of your earnings.

Note that outsourcing your validator node means you won’t have full control over the validator node let alone have access to the private keys.

Staking pools are valuable in their own way as they enable individuals of average income to participate in the staking community. Unfortunately, having too many stakers in pools over individual node runners could harm the network’s decentralization. But if you have no choice, you can stake your ETH via CoolWallet and earn staking rewards. The ETH staking feature is supported by CoolWallet Pro, S, and HOT.

Shard Chains

Sharding is the holy grail of Ethereum scaling, which would allow the network to go from roughly 15 transactions per second (tps) to over 100,000 tps, far surpassing Visa’s theoretical 50,000 tps. If fulfilled, it would be the answer to all Ethereum users’ prayers as all manner of ETH transactions from sending payments to yield farming, to liquidity mining, to minting NFTs, to taking out loans would become drastically cheaper than they are today.

Sharding is the process of splitting the Ethereum network into partitions known as shards, which would eliminate network congestion and increase transaction capacity and speed. The Ethereum network will be split into 64 partitions that run in parallel and interoperate smoothly.

The implementation of Shard Chains is slated for Summer 2022, however, they won’t be fully functional for a while so don’t expect 100k tps right after launch. But, they should be able to provide phenomenal transaction speed and capacity improvements when combined with second-layer scaling solutions by then.

Ethereum WebAssembly (eWASM)

The Ethereum WebAssembly (eWASM) is a new-and-improved virtual machine that offers several key advantages over the current EVM model.

• It adds support for common programming languages like C++, Go, Rust, etc., which eliminates the need for Solidity to build smart contracts and opens up Ethereum to the 26.9 million non-blockchain developers worldwide.
• It improves Ethereum’s runtime environments, allowing it to run on modern browsers.
• eWASM is an ultra-high performance system thanks to its high-adaptability to any machine-level code design.
• It is compatible with most modern hardware design.
• It executes as fast as most centralized platforms.

The original EVM prioritizes correctness over efficiency, which many developers believe to be unsuitable for real-world conditions. The eWASM upgrade, on the other hand, favors efficiency and speed, and is built for running real-world applications.

Stay tuned for Part 2, where we will delve deeper into Ethereum’s history, explore the differences between Ethereum and Bitcoin, and discuss the advantages and disadvantages of Ethereum.