If Bitcoin is considered representative of cryptocurrency 1.0 and only serves as a currency, then Ethereum is evaluated as cryptocurrency 2.0 when applying smart contract technology to solve a variety of issues in the cryptocurrency market. So, what is Ethereum?
What is Ethereum?
Ethereum is a decentralized computing system and open-source, built on blockchain technology, with the ability to execute smart contracts – meaning that the terms written in the contract will automatically be executed when the conditions are met, without external intervention.
Known as a Layer 1 Blockchain project, Ethereum allows multiple programmers to build decentralized applications (DApps) and decentralized autonomous organizations (DAOs). In this context:
- Decentralized Applications (DApps) are independently deployed software, not dependent on a single server and stored in a decentralized manner on distributed storage, can be written in any language.
- Decentralized Autonomous Organizations (DAOs) are organizations that operate based on rules encoded in source code, with each member having voting rights in the organization’s important decisions.
Ethereum Upgrade Phases
Ethereum has gone through many remarkable ups and downs. Forks are blockchain upgrade versions, with two common types: Hard Fork and Soft Fork.
Hard Fork: This is a change in the cryptocurrency protocol that is not compatible with previous versions. This means that nodes that have not been updated with the new version will not be able to process transactions or push new blocks onto the blockchain. Soft Fork: This is a change in the cryptocurrency protocol in a backward-compatible manner. Nodes that have not been updated can still process transactions and push new blocks onto the blockchain, as long as they do not violate the rules of the new protocol.
Ethereum has gone through nearly 20 Soft Forks or Hard Forks to address existing issues and enhance the network.
One of the most important and noteworthy recent developments is EIP-1159 and The Merge.
EIP-1559 is a proposal to help Ethereum reduce inflation by applying a Burn mechanism to Ethereum’s Base Fee.
The Merge is the event of transitioning Ethereum from the Proof of Work consensus mechanism to Proof of Stake, while also reducing up to 90% of the ETH created from the POW chain.
With these changes, Ethereum is expected to become one of the coins with the lowest inflation rate, and inflation may even decrease if the number of DeFi users increases again.
The DAO Hack Event and the Birth of Ethereum Classic (ETC)
At present, Ethereum is considered a decentralized blockchain with high security. However, in its early stages, Ethereum faced a notorious attack called The DAO Hack.
The DAO of Ethereum was established and conducted a fundraising campaign in May 2016 with a total value of up to $150 million. By June 17, 2016, a hacker had exploited a vulnerability in The DAO smart contract code. This allowed the hacker to create a “child DAO” from The DAO and transfer about $50 million to the “child DAO” wallet.
Fortunately, to access that amount, the hacker had to wait 28 days according to the smart contract rules. Therefore, Vitalik and the community quickly passed a soft fork proposal, blocking all transactions from The DAO and “child DAO” wallet addresses. They also called on miners to continue confirming transactions as usual and be ready to deploy once the soft fork was passed.
To protect the network, the Ethereum community agreed on the only option: Hard Fork Ethereum. This hard fork not only helped recover the lost funds in the “child DAO” but also protected the Ethereum network from DoS attacks.
The entire Ethereum community decided to implement the hard fork at block 1,920,000. Although the lost funds were recovered, the consequence of the hard fork was that the network was divided into two parts – Ethereum and Ethereum Classic.
The Ethereum Virtual Machine (EVM) on the Ethereum Blockchain
To perform activities such as smart contracts, transaction commands, the Ethereum network requires a fee called “Gas Fee.” Gas fees on the Ethereum network are paid in Ether (Ξ or ETH).
During the execution of a transaction, the network must confirm its validity. This task belongs to a component called the Miner Node.
To ensure the network operates independently and consistently, all miner nodes must adhere to consensus rules, also called Consensus. Previously, Ethereum used a consensus mechanism called Proof of Work (PoW), where miner nodes had to prove the work they had completed and broadcast it to the entire network. This work may include:
Creating a new block by finding a solution through the algorithm – Ethash. Confirming transactions on the network. When the evidence is accepted, the transaction data will be recorded on the Ethereum blockchain and cannot be changed.
On September 15, 2022, the event of The Merge took place, transitioning Ethereum from the Proof of Work (PoW) mechanism to Proof of Stake (PoS). After this event, Ethereum continued with the Shanghai upgrade in March with The Surge event – a significant step to optimize the transaction TPS speed of the Ethereum network.
Ethereum is a decentralized and transparent network. All activities on the Ethereum network can be verified through Etherscan.
The Role and Applications of Ethereum
The ETH coin plays a significant role in various applications, including:
- Gas Fee for Ethereum: Similar to BTC, ETH is used to pay Gas fees on the Ethereum network. This fee is not fixed and depends on tbhe network conditions. When the network is overloaded, the Gas fee will increase, and vice versa.
- Gas Fee for Layer 2: In addition to its use in Ethereum itself, ETH also serves as Gas fees for scaling solutions such as Arbitrum, Optimism, helping to optimize the system’s scalability.
- Staking to become a Validator: Since transitioning from Proof of Work to Proof of Stake, ETH has become a coin that can be staked to become a Validator, bringing profits to participants.
- Participating in DeFi: With the second largest market capitalization, ETH is not only accepted in the Ethereum system but is also widely used in other ecosystems such as BNB Chain, Arbitrum, Optimism. ETH can be used for activities such as staking, farming, lending, enhancing the flexibility of users.
- Payment currency in NFT Marketplace: Some NFT Marketplaces accept ETH as a payment currency for NFT transactions, demonstrating the flexibility and global payment nature of ETH in the digital art field.
What is the ETH token standard?
ERC (Ethereum Request for Comments) is an important set of rules applied for deploying tokens on the Ethereum network. These standards play a crucial role in the development and deployment of smart contracts on the Ethereum Blockchain platform.
Before being implemented on the Ethereum blockchain, ERC rules must go through a process of modification, evaluation, and be accepted by the community through EIP (Ethereum Improvement Proposal), also known as Ethereum Improvement Proposal.
ERC20
ERC20 is a common set of rules with provisions for issuing tokens on the Ethereum platform, first proposed by Vitalik Buterin in June 2015.
The emergence of the ERC20 standard has set a benchmark for deploying Fungible Tokens on the Ethereum platform. At the same time, ERC20 has made the process of creating tokens on the Ethereum blockchain easier than ever, especially in the context of the ICO boom in 2017.
ERC721
ERC721 is a standard set of rules for issuing Non-Fungible Tokens (NFTs) on the Ethereum platform, proposed by William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs in January 2018.
With the ERC721 standard, the Ethereum development community has opened up a new ecosystem for decentralized applications (dapps) using NFTs. One of the first notable projects is CryptoKitties, a cat breeding application on the Ethereum platform, which created a wave in the cryptocurrency community for a long time.
Other ERC standards
- ERC-777: This standard is designed to address the issues that ERC20 faces, and is expected to replace ERC20 due to its advantages.
- ERC-1155: This is a versatile standard, applicable to both Non-Fungible Tokens and Fungible Tokens. Proposed by the CTO of the Enjin Coin project in June 2018, ERC-1155 is a combination of ERC20 and ERC721.
You can also refer to new Ethereum Improvement Proposals (EIPs) and Ethereum Request for Comments (ERCs) at https://eips.ethereum.org/erc.
Wrapped Ether (WETH)
Wrapped Ether, or WETH, is an ERC-20 token that represents ETH, with equivalent value and functionality to ETH. You can “Wrap” and “Unwrap” it at a ratio of 1:1.
WETH cannot be used to pay gas fees, but it helps ETH to easily function in ecosystems other than Ethereum. Therefore, with its widespread adoption, WETH can be more liquid than ETH.
How is ETH allocated?
- Token Name: Ethereum.
- Ticker: ETH.
- Blockchain: Ethereum.
- Token Standard: ERC-20.
- Type: Utility & Governance.
- Max Supply: Unlimited.
- Circulating Supply: 120,491,528 ETH (as of 20/2/2023)
Before The Merge and the EIP-1559 improvement, while facing an annual inflation rate of about 3.5%, ETH has undergone significant volatility. The Merge has significantly contributed to reducing the inflation rate of ETH, even the possibility of negative inflation if the amount of ETH burned exceeds the amount newly issued. Currently (February 2023), the inflation index of ETH is at -0.056%, meaning it is undergoing a deflation process.
The development team pre-mined over 72 million ETH and allocated them as follows:
- The Ethereum Dev Team holds 12 million ETH.
- The rest will be sold to investors through an ICO.
The process of selling Ethereum coins went through 42 days with different prices at different times:
- The initial price was set at 1 BTC for 2000 ETH.
- By the end, 1 BTC could only buy 1337 ETH.
The result of the sales after the upgrade was that Ethereum sold about 60 million ETH, receiving over 31.5 thousand Bitcoin (BTC) – an equivalent value of about $18 million at that time.