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What is Ethereum & How Does Ethereum Work?

8 April 2020

What is Ethereum
Bastien Muster

Bastien Muster

Head of Growth and Data

Ethereum is a blockchain-based platform that completely revolutionises the way transactions are carried out thanks to smart contracts.

Although they both have massive appeal, Ethereum and its rival Bitcoin are quite different, and the thing that sets them apart the most is Ethereum's goal of being more than just a medium of exchange.

Ethereum offers a lot to its users. From making transactions with the Ether (ETH) token and staking it to earn rewards to playing games, powering NFTs, transforming DeFi and more, all of this is made possible thanks to Ethereum.

So, let's explore how this decentralised blockchain network started and how it works, shall we?

A brief history of Ethereum

In an attempt to find a solution for the weaknesses of the crypto giant Bitcoin, Vitalik Buterin, a Russian-born Canadian programmer, came up with Ethereum's initial concept in a 2013 whitepaper.

The whitepaper described something quite revolutionary called smart contracts. These computer programs serve as the building blocks of decentralised applications, but more on that later.

To officially launch the platform, Buterin teamed up with seven others now known as Ethereum's co-founders. They all had a shared vision of blockchain technology being used for more than just cryptocurrency trading. 

To fund the project's development, the team behind Ethereum did a token presale that raised $18,439,086 in Ether.

How does it work?

Even though it was created to overcome Bitcoin’s flaws, Ethereum does share similarities with the first decentralised digital cryptocurrency. 

Both Bitcoin and Ethereum are decentralised networks made up of thousands of computers. The Ethereum network runs the Ethereum Virtual Machine (EVM) - a software platform used to create DApps.

Each computer in the network is a node and has a copy of the EVM.

One important thing to note is that each interaction with the network has to be verified, and then each node has to update its copy of the EVM.

To interact with the network and execute a smart contract, you have to pay a fee in ETH. This fee is also known as a "gas fee".

Ethereum gas fees are something the blockchain is notorious for and often a source of dissatisfaction. Depending on how busy the network is, fees vary, peaking at $71.72 per transaction in May 2021.

Concerns around high fees and scalability issues are two main reasons behind the already-initiated transition to ETH 2.0 - a new version of the Ethereum blockchain.

The benefits of Ethereum

Ethereum has many benefits. Exactly that is what enabled it to revolutionise the way we use blockchain technology and put it to good use in areas other than trading crypto.

Ethereum utilities
Ethereum utilities

Today, as this network has been in operation for quite some time, we can highlight some of its most important benefits:

  • Constant growth and innovation
  • One of the biggest crypto and blockchain ecosystems
  • Dedicated community
  • Facilitation of financial transactions
  • Storing of data for third-party applications
  • Enabling the creation of decentralised applications and smart contracts

What are smart contracts?

A smart contract is simply a small piece of code that contains all the instructions for a given transaction. Like a contract written on paper, it contains all the information necessary for the smooth running of a transaction and introduces new possibilities for automation.

Smart contracts have infinite possibilities and facilitate exchanges that were previously impossible.

To illustrate the power of smart contracts, let's look at the following example.

Person A wants to buy person B's house. As things are done now, to ensure that the transaction is executed in the best possible way, we would need to have:

  • A real estate broker
  • A notary 
  • Insurance companies

Each of these intermediaries charges significant fees, requires time, and is not necessarily trustworthy, depending on where this transaction takes place.

Executing the same transaction with a smart contract would require just the smart contract. It contains all the steps and information necessary to validate the transaction in a secure, decentralised, and cost-effective manner. In addition, this transaction would be stored permanently on the Ethereum blockchain.

Smart Contracts
Smart Contracts

Thanks to Ethereum, person A can buy person B's house safely, quickly and without expensive intermediaries!

Use cases of smart contracts:

  • Decentralised finance - deploy all transactions securely, from a loan to a transfer
  • Voting systems - combat manipulation and provide valid results 
  • Digital identity - have a secure validation of identities 
  • Insurance - conduct insurance with cost reductions, accuracy, and automation of refunds
  • Product authenticity - validate the authenticity of any object or creation 
  • Project creation and fundraising - create your own project and issue tokens for a fundraising event (ICO)

As you can see, smart contracts play an important role in many areas, but decentralised applications are where they get the biggest spotlight, securing, decentralising and automating transactions. For that reason, it is natural to see them heavily used in exchanges, collection games, card games, and even gambling (casino, poker, etc.), getting rid of any intermediaries.

In addition to this, it is even possible to create a decentralised autonomous organisation (DAO) using smart contracts.

Where is Ethereum today?

According to CoinMarketCap, Ethereum and its cryptocurrency Ether are in second place in terms of total market capitalisation ($419,367,003,083 in April 2022), just behind Bitcoin. 

Its number of transactions is currently four times higher than Bitcoin's, with more than 1 million transactions per day.

Ethereum Daily Transactions Chart
Ethereum Daily Transactions Chart

The pace at which new Ethereum smart contracts are created continues to impress, peaking at 2.5 million in June 2021. This can be explained by the large number of projects running and developing on the blockchain.

Ethereum Daily Verified Contracts Chart
Ethereum Daily Verified Contracts Chart

As mentioned earlier, the Ethereum blockchain enables you to issue your own token for the development of your project. The utilities vary from token to token, but all circulate on the same blockchain. Our CHSB token is an ERC-20 token.

To put it simply, we can say that the Ethereum blockchain serves as a highway, with the Ether token being its main car that runs with many other cars with different characteristics. 

Attesting to the attractiveness of Ethereum is the number of new developers joining it every month. This highlights the dominance Ethereum has asserted on the market.

New Developers Joining Ethereum
New Developers Joining Ethereum

The intrinsic value of the Ethereum network

Thanks to smart contracts, the number of use cases for Ethereum is exploding compared to Bitcoin, leading to increased speculation about its future use.

For the moment, or at least till the drop of the "difficulty bomb"- the increase in mining difficulty intended to encourage moving away from proof-of-work mining - it is necessary to provide computational power to validate transactions on Ethereum. Therefore, the value of Ether is also linked to its production cost.

When looking at the Ethereum network itself, it’s safe to say that thanks to its size along with other factors, the network has reached an impressive value.

Ethereum Market Capitalisation
Ethereum Market Capitalisation

Ethereum 2.0: The Future of Ethereum

According to the Ethereum Foundation, we can expect to see a full implementation of Ethereum 2.0 by 2023.

For those unfamiliar with it, Ethereum 2.0 represents a major upgrade of the Ethereum network that will make it more secure, efficient, scalable, and faster. 

How is this major upgrade possible? Largely thanks to the transition to the Proof of Stake protocol. So, it will no longer be necessary to mine with computational power but only stake Ether to validate transactions.

In addition to becoming greener and more sustainable, this change from Proof of Work to Proof of Stake will allow the network to be divided into multiple sub-networks (sharding) to gain a factor of 1,000 on the number of transactions. 

This way, Ethereum will address network congestion which is the root of its high gas fees and potentially become a globally usable technology.

Ethereum future developments
Ethereum future developments

How to buy Ethereum?

Thanks to its wide popularity, buying Ethereum is easy, especially using the SwissBorg app. In fact, did you know that, with the SwissBorg app, you can buy Ethereum using fiat currencies like Euros, Swiss Francs and British pounds?

Here are all the steps you need to take:

  • Step 1: Download and install the SwissBorg app.
  • Step 2: Set up your SwissBorg account. You can find detailed information on the Opening an Account page in the SwissBorg Help Center.
  • Step 3: Transfer (fiat or crypto) funds into your SwissBorg account. 
  • Step 4: Go to the Marketplace section of the SwissBorg app.
  • Step 5: Find the Ethereum token listing in the app by simply typing ETH into our search feature, marked with a magnifying glass icon in the top-left corner of the screen.
  • Step 6: Tap "Deposit", select the fiat or cryptocurrency you want to use for the purchase, enter the amount you wish to spend on the purchase, and tap on "Next". 
  • Step 7: Tap on "Confirm exchange" to complete the process. 

Conclusion

Ethereum is a technology completely changing the way we transact. Thanks to smart contracts, the game-changing concept developed by one of Ethereum's co-founders, it is possible to replace existing standard contracts to improve transaction security, limit costs and potentially decentralise the world. 

In terms of use and further development, Ethereum is becoming more mature, with a higher number of transactions than Bitcoin.  

As the implementation of Ethereum 2.0 continues, we can safely assume that the network will grow and remain one of the biggest players in crypto. 

Many believe this advancement will make it possible to have a sustainable and scalable protocol for future global use, so let's see if Ethereum 2.0 will live up to the expectations.

Invest in Ethereum with the SwissBorg app today!

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