An Introduction to Ethereum

Reading Time: 3 minutes
  • Ethereum was the first cryptocurrency to combine blockchain with smart contracts
  • It survived a major hack in 2016 to become the basis of the DeFi movement
  • How did Ethereum start and where is it headed?

Ethereum is arguably the second-best known cryptocurrency after Bitcoin, and for good reason. A pioneering project dreamt up by a man with a taste for unicorn t-shirts, Ethereum is the bedrock on which thousands of decentralized cryptocurrency projects have been built and is the home to entire movements, including NFTs and DeFi. But how did Ethereum get started, how does it work, and what might the future hold for it?

Seeds Sown in 1997

Those with a technical mind will tell you that the seeds of Ethereum were sown by Nick Szabo in 1997. One of the cypherpunks whose work led to the creation of Bitcoin, Szabo is a pioneering cryptographer who coined the term ‘smart contract’, an immediately executed pre-agreed transaction that takes place the moment the terms of the contract are met. This simple yet revolutionary idea turned into a reality when an unknown teenager named Vitalik Buterin released a white paper in late 2013 entitled ‘A Next-Generation Smart Contract and Decentralized Application Platform’.

Russian-born Buterin was first introduced to Bitcoin in 2011 by his computer scientist father, and began to write for Bitcoin websites and online magazines. When his suggestions that Bitcoin should have a scripting language for application development were rebuffed, he created a new project. His platform, called Ethereum, would combine the principles of smart contracts with blockchain technology to create a platform on which anyone could create decentralized applications with smart contracts built in. It’s safe to say that upon launch it changed the course of cryptocurrency and blockchain forever.

The DAO Hack

After completing Ethereum’s ICO in 2014, Buterin and the Ethereum developers created a digital decentralized autonomous organization (DAO) in 2016, which was a form of investor-directed venture capital fund based on the Ethereum platform. Investors put money into the DAO in the form of ETH, in the hope that the projects that resulted from it would turn their investment into a profit.

Six weeks after the launch of the DAO, and with $150 million worth of ETH in the pot, a hacker managed to find a way in and steal a third of the ETH, around four million, before the leak was stopped. The hack led to the Ethereum network experiencing a ‘hard fork’, resulting in a second coin, Ethereum Classic, being born. Like Coca Cola Classic, Ethereum Classic is the original version and Ethereum was the clone, although it seems in this case that people like the taste of the ‘new’ Ethereum enough to keep both.

ERC20 Standard

Ethereum quickly grew into a platform on which a huge number of crypto projects launched in 2017 and 2018, now referred to as the ICO boom. Any project that launches on the Ethereum blockchain is part of the ERC token protocol, which has the benefit of being able to be stored in the same wallet as Ethereum itself and all other ERC tokens, rather than a wallet being required for each one.

The ETH token fuels all the processes within the Ethereum network (this is sometimes referred to as ‘gas’). There are also several decentralized exchanges that run off the Ethereum platform, the most famous being Uniswap, where Ethereum-based coins often get listed first. However, as the popularity of the Ethereum network grew, gas fees reached insane levels, with three and sometimes four-figure transaction fees being demanded for simple transactions.

This led to suggestions that Ethereum wasn’t fit to be the platform that could take the decentralized world forward, especially with other faster and cheaper blockchains now knocking at the door.

Ethereum 2.0

With questions being raised over its long term suitability and the Ethereum network getting clogged to choking point, in late 2018 Ethereum developers realized they needed to act fast. A series of upgrades was planned, the most drastic of them being a move away from the existing proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS), as well as implementing a system where transaction fees were scrapped in favour of a burnable ‘basefee’ plus a miner tip.

These changes, and others such as improved scaling, were announced as being part of the overall upgrade to Ethereum 2.0, which entered its first phase in November 2020. Ethereum developers and supporters hope that these changes will be enough to ensure that the decentralized ecosystem, most crucially the burgeoning DeFi world, remains on the Ethereum platform and doesn’t become split over disparate blockchains.

A Bright Future Ahead

Ethereum has retained second spot in the crypto charts by market capitalization since late 2015, and some even predict that Ethereum 2.0 will see it eventually overtake Bitcoin in market cap due to its new deflationary tokenmonics. Whether this eventuality comes to pass or not, Ethereum has played a massive part in cryptocurrency’s past and will very likely play an equally important role in its future.