What Is Ethereum and ETH 2.0 And How Does It Work?

Articles 07 What Is Ethereum and ETH 2.0 And How Does It Work?

Ethereum (ETH) is a decentralized open-source platform based on blockchain technology. It enables every interested developer, every private person, or every company to operate and develop their own dApp or even a decentralized organization (DAO) with the help of smart contracts.


Historical background of Ethereum

Before we look at the technical concept and how Ethereum works, it is worth taking a look back at the platform’s beginnings. On July 30, 2015, Ethereum saw the light of day – with much praise from the community.

The Ethereum Foundation, the company behind the blockchain platform, was able to raise over $16 m in debt capital in the form of crowdfunding from early investors. The hype about Ethereum arose early on in the scene, as it was supposed to solve fundamental questions and challenges in the field of blockchain technology.

Most cryptocurrencies at the time were designed for payment transactions and only differed in anonymity, security and performance. However, there was no decentralized development platform at all.

One name is often mentioned in connection with Ethereum: Vitalik Buterin. In 2013 the young Russian programmer published the white paper: “Ethereum: A Next Generation Smart Contract & Decentralized Application Platform.”

A year later, at a Bitcoin congress in Miami, he presented his concept to the general public. But Buterin was not the only one behind the project. He received support from co-founders Gavin Wood, Joseph Lubin, Jeffrey Wilcke, Mihai Alisie, Anthony Di Iorio, Amir Chetrit, and  Charles Hoskinson.

Above all, Gavin Wood, who also developed the Solidity programming language, subsequently made a name for himself in the crypto scene. A few years after Ethereum, he founded Polkadot (DOT), one of the biggest competitors of his former founding project.


How does Ethereum work?

Similar to classic cryptocurrencies, the basis for Ethereum is a decentralized network or a system distributed all over the world without a central server structure. The Ethereum blockchain forms the common database with which all network participants – nodes and clients – work.

A copy of the blockchain with all transactions and data is stored in parts (light nodes) or full (full nodes) on all participating clients and is continuously updated. Mining nodes take over the “mining,” thus confirming transactions and thus also generating new units of the internal cryptocurrency Ether.


What is Ether (ETH)?

The cryptocurrency of the Ethereum Blockchain is called Ether. It serves as a means of payment. Every transaction or creation of smart contracts, as well as the use of various services on the Ethereum platform, costs Ether. In addition, Ether will also be distributed as a reward to the Ethereum miners and soon also stakers.

In order to interact with the Ethereum blockchain, one has to buy Ether. Ether is the fuel of the entire platform.

At the time of writing, the price of Ethereum is $2,710, and it ranks second in terms of capitalization after Bitcoin, with a value of $315,438,900,024 according to CoinMarketCap.


Advantages of Ethereum

Ethereum offers developers the ability to use the platform’s infrastructure to build their own independent projects on it.

Developers can use the existing functionality of the protocol without having to develop it from scratch.

Examples of such functions are smart contracts, digital applications, the ERC-20 token standard, and Decentralized Autonomous Organizations (DAO).


Smart contracts

Smart contracts are a very important and indispensable part of Ethereum. These are digital contracts that are implemented in the Ethereum network and are automatically executed as soon as the agreed amount of Ether (ETH) has been received or another condition is met.

In practice, it works like this: An interested party transfers the required amount of ETH from their Ethereum wallet to the specified ETH address. Then, the smart contract automatically registers the incoming payment with the correct amount, enters it in the public and decentralized blockchain, and releases the corresponding consideration in the form of tokens, features, services, or other goods.

The big advantage: You no longer need an intermediary. Everything works transparently, comprehensibly, and automatically according to the if-then principle. Moreover, the blockchain, with its many copies distributed to clients around the globe, in which every transaction is practically forgery-proof, ensures the security of both sides with regard to manipulation.

Decentralized Apps (dApps)

Decentralized applications are the reason why a lot of hype about Ethereum broke out before the release. The applications are tamper-proof and offer an almost infinite number of use cases thanks to the integration of smart contracts.

Due to the distributed concept of the blockchain, dApps are practically fail-safe. The best-known dApps are the DEX UniSwap and SushiSwap as well as the NFT marketplaces Rarible and OpenSea. Video games (Axie Infinity) or decentralized financial applications (Synthetix) are also among the best-known decentralized applications.


Decentralized Autonomous Organization (DAO)

DAOs take organizations to a whole new level. Contrary to the centralised approach as we know it in the structures of common organizations in our world, the structure of a DAO is based on a smart contract. This defines the management and the rules of the organization in all facets. So there is no classic decision-maker or board member, but the community defines how to deal with the intelligent contract.


ERC-20 token

The ERC-20 format is the technical standard for smart contracts in the Ethereum Blockchain protocol. With the help of the standard, developers can create their own tokens and put them on the blockchain. These in turn serve as access keys to a digital ecosystem. The ERC-20 standard guarantees the compatibility and interoperability of the token with the various smart contracts of an Ethereum project.


Potential areas of application of Ethereum and Smart Contracts:

  • Political elections and voting
  • Financial transactions & capital market
  • Real estate: land registry entries, notarial services, etc.
  • Logistics & supply chains
  • Energy industry
  • Страховка
  • Health care
  • Personal details / identity
  • Cybersecurity
  • Internet of Things
  • and much more


Ethereum 2.0

On 1 December 2020, a new chapter officially opened in the history of Blockchain technologies: the Ethereum 2.0 Beacon Chain was released, thus starting phase 0 of the official transition to the new version of the platform.

Since its inception in 2015, Ethereum’s core developers had foreseen this future transition to a new version of the platform. However, Ethereum 2.0 is the most ambitious and radical change ever implemented on the network and will take several years to implement fully.

Ethereum 2.0 (or ETH2 ) refers to a series of interconnected upgrades that will make Ethereum more scalable, safer, and more sustainable. These are updates created not in a “centralised” way but come from multiple teams in the rich and diverse community of Ethereum, constantly striving to make this ecosystem even better.

Ethereum 2.0 is the transition from Proof-of-Work to Proof-of-Stake; even more briefly, it is an infrastructural change to increase transactions-per-second (tps) and reduce electricity consumption and costs.


What changes with Ethereum 2.0?

Already in the original paper of the launch of Ethereum 2.0, the promoters of this change underlined how to make Ethereum mainstream and better serve the community. It is necessary to make Ethereum more scalable, safe, and sustainable.

More specifically, the concept of scalability refers to the fact that Ethereum must support 100,000 transactions per second to make applications faster and less expensive to use. The difficulty of quickly processing an increasing number of operations is a known problem in all blockchains, and Ethereum is no exception (although it is already at a good point of efficiency when compared with other competitors). Ethereum 2.0 should make the network more scalable, allowing it to support more operations in a shorter time.

The second concept is that of security. From many sides, and for some time, the request to make Ethereum safer has been coming. And with the adoption of Ethereum 2.0, the protocol will become more secure against any form of attack, thus guaranteeing all investors and users greater peace of mind in the use of the ecosystem.

Finally, the third concept is that of sustainability. Ethereum 2.0 is considered significantly better for the environment, in the knowledge that the technology required too much computing power and energy. Therefore something needed to be done to create the expected change.


Trade Ethereum on coinflex.com


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