What is Ethereum? The difference between ETH and BTC before investing

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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.

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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.

The Birth and Development History of Ethereum

How was ETH born?

In October 2013, Vitalik Buterin, a young and passionate Bitcoin programmer, proposed an improved solution for the Mastercoin project (now OmniLayer). In this proposal, Vitalik presented a plan for MasterCoin to support multiple types of contracts without adding complex features.

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Although the Mastercoin development team was impressed with Vitalik’s proposal, they did not integrate the solution into their project.

After Mastercoin did not apply its own solution, Vitalik continued to research and realized that smart contracts could be fully generalized.

In November 2013, Vitalik shared the first draft of the Ethereum whitepaper. Only a few people had access to and read this draft, and they provided feedback to help Vitalik finalize the Ethereum whitepaper.

After sharing the whitepaper, Vitalik gained another teammate, Gavin Wood, who was the first to contact and propose to help with his C++ programming skills.

In the summer of 2014, Gavin Wood released the yellow paper for Ethereum. During this time, Vitalik announced that Ethereum would be developed by the non-profit organization Ethereum Foundation.

After a year of building and developing, in June 2015, the first block of Ethereum was mined, marking the official formation of the Ethereum Blockchain – one of the most important blockchains in today’s cryptocurrency ecosystem.

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.

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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 Operating Principle of Ethereum

Before delving into Ethereum, readers should have a solid understanding of how Blockchain works in this article. Ethereum’s Blockchain has a structure similar to other blockchains, formed by a network of computers, also known as Nodes.

To join the network, nodes need to install Ethereum Client software like Geth, Parity, and run the Ethereum Virtual Machine (EVM). The EVM is a virtual machine program that executes Smart Contracts.

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When developers want to build decentralized applications (dApps) on Ethereum, they must deploy smart contracts using the Solidity programming language.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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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.

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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

In addition to ERC20 and ERC721, Ethereum has two other important token standards that you should know about:
  • 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.

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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.

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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.

Compare Bitcoin and Ethereum

The fundamental difference between Ethereum and Bitcoin lies not only in the visions of these two blockchains but also in various technical aspects. While Bitcoin was established with the goal of becoming a peer-to-peer payment system, Ethereum aims to be a platform that supports the easy development of decentralized applications (Dapps).

Name ETH BTC
Launch date June 30, 2015 January 9, 2008
Creator Vitalik Buterin Satoshi Nakamoto
Native token ETH BTC
Release Method Initial coin offering Genesis block mined
Max Supply Unlimited 21,000,000
Market Cap ~16.6 billions ~135.6 billions
Consensus Proof of work Proof of work
Algorithm Ethash SHA-256
Block time 12 seconds 240 seconds
Max TPS 25 7
Smart Contract Yes No

In addition, looking at the technical aspects, Ethereum and Bitcoin have distinct differences:

  • Total supply: While Bitcoin’s total supply is fixed at 21 million BTC, Ethereum has no limit on its total supply.
  • Algorithm: Although both use the Proof of Work (PoW) consensus mechanism, Ethereum employs the Ethash algorithm, which is entirely different from Bitcoin (SHA-256).
  • Transactions per second: Bitcoin has a transaction processing speed of about 7 TPS/second, while Ethereum achieves a figure from 20-25 TPS/second, nearly three times that of Bitcoin.
  • Initial appearance: Bitcoin appeared after Satoshi Nakamoto mined the first block (Genesis Block), while Ethereum emerged through an ICO funding activity after pre-mining nearly 72 million ETH.
  • Founders: Satoshi Nakamoto, an anonymous individual or organization, is the founder of Bitcoin. Conversely, Vitalik Buterin, a Canadian programmer, is the founder of Ethereum.

Where to buy Ethereum?

You can trade ETH through many exchanges in the Crypto space, and there are two main types:

  • Centralized Exchange (CEX): These are exchanges where a third party controls and acts as a bridge for exchanging crypto assets. Some typical examples include Binance, Huobi, OKX, Bybit, Gate.io, Kucoin, and many others. These exchanges often provide a convenient and fast trading experience, while supporting many different types of assets.
  • Decentralized Exchange (DEX): These are exchanges built and operated in a decentralized manner, based on the blockchain platform. Some typical examples include Uniswap, Sushiswap, and many other decentralized projects. DEXs often offer high transparency and greater control of assets for users, while often directly integrating with personal crypto wallets, increasing safety and security during transactions.

How to Store ETH?

Ethereum Wallet and Ethereum Address are safe and popular storage platforms for altcoins like ETH.

Ethereum Wallet

The Ethereum Wallet is an important tool that allows users to create Ethereum addresses to store tokens issued on the Ethereum blockchain, including ETH. Similar to a bank account, choosing a reliable Ethereum wallet is crucial. This requires understanding information about reputable wallet types for safe ETH storage.

Ethereum Wallet Address

This is a string of characters, often starting with “0x” and can be checked on the Etherscan tool. To access an Ethereum address, users need to hold a string of characters called a Private Key. On the blockchain, the Private Key is an immutable value, with each wallet address corresponding to a fixed Private Key. Therefore, carefully safeguard the Private Key, keeping it as an absolute secret, much like protecting a bank account password.

For an easier understanding, consider the following:

  • Ethereum Address is equivalent to a bank account.
  • Private Key is the password that protects the bank account.

What is the future of Ethereum?

Organizations that are key contributors to the development of the Ethereum ecosystem include

Three organizations play a significant role in the comprehensive development of the Ethereum ecosystem:

Ethereum Foundation

The Ethereum Foundation, a non-profit organization, is responsible for developing features for the Ethereum Blockchain. Established in 2014 and based in Switzerland, the Ethereum Foundation plays a crucial role in shaping and continuously improving the Ethereum platform.

Enterprise Ethereum Alliance (EEA)

The EEA has an important role in expanding the use of Ethereum blockchain technology for all businesses. By creating collaboration and connections between enterprises, the EEA contributes to the adoption of Ethereum in the business environment.

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ConsenSys

A company with significant influence on Ethereum and the overall crypto industry, is the parent company of major projects such as Metamask, Infura, and CodeFi. Providing tools and applications that support projects running on the Ethereum platform and other EVM chains, ConsenSys is a significant contributor to the development and expansion of the Ethereum ecosystem.

The next stage of Ethereum’s development

Currently, Ethereum is led by the Ethereum Foundation, the developer community, and the user community. The overall goal is to solve the blockchain trilemma to achieve widespread adoption of Ethereum, however, this is a journey that requires time and caution.

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Each upgrade of Ethereum is carefully tested through testnets before being deployed to the mainnet, as each change can impact assets worth billions of dollars.

The Development Phase After The Merge

  • The Surge (Scheduled for 2023): Focus on expanding processing capabilities through the Sharding mechanism.
  • The Verge: Apply the Verkle Trees model to reduce proof size, support the expansion of access to Ethereum nodes.
  • The Purge: Reduce the required hard drive capacity for verification, optimize storage, and reduce network congestion.
  • The Splurge: Upgrade and fix bugs to make Ethereum run smoother after the four previous upgrade phases. Each phase takes about 3-5 years to complete, bringing Ethereum into a stronger and more flexible state.

Closing Remarks

With strong collaboration between the Ethereum Foundation, projects/developers, and the end-user community, Ethereum promises to continue experiencing significant development in the future. However, to address and resolve security, application, and scalability issues thoroughly, the Ethereum Foundation estimates that it will need a time frame of 10 to 20 years.

While this is a substantial period, the goal of the Ethereum Foundation is to ensure that each upgrade is implemented without errors, thereby ensuring the stability and security of the system.

Tiệm Coin hope this article has helped you understand more about Ethereum and the ecosystem behind this altcoin.