How the Ethereum (ETH) Cryptocurrency Works

Ethereum

Ethereum has been a game changer in the world of cryptocurrencies and blockchain technology. The innovations that have occurred since the ETH blockchain came into existence have taken cryptocurrencies from being sidelined into slowly gaining mass adoption. With the Ethereum news of “The Merge” going through successfully in September 2022, the possibilities are endless. 

The transaction throughput and the gas fees on the network have gone down significantly, ushering in a new wave of adoption. Given the current state of the crypto markets and the fear that has gripped investors, traders, developers, etc., many more potential benefits of ETH are yet to be discovered. So, if you have ever wondered how the Ethereum cryptocurrency works, read along. 

What is Ethereum?

It is not just a cryptocurrency, it is a blockchain network that has been the backbone of decentralized finance. It defined itself as a technology and was launched in 2015. Since then, it has become the backbone of decentralized finance and all the innovations in the blockchain industry. 

It is programmable and can be used to develop and launch decentralized applications, deploy smart contracts, NFTs, etc. Hence, it is a general-purpose blockchain that can be used to do almost everything over the blockchain distributed ledger. 

How does Ethereum work?

It works on the decentralized, distributed ledger technology which verifies and records all the transactions and data on the network. The transactions are verified using an algorithmic consensus mechanism. When Ethereum was launched, it worked on the Proof-of-Work consensus mechanism. But the biggest Ethereum crypto news was the transition to the Proof-of-Stake consensus mechanism. 

In this mechanism, individual validators need a minimum of 32 ETH to validate transactions and earn rewards. People can join validator pools as well if they do not have 32 ETH tokens and start receiving staking rewards. Validator nodes are responsible for verifying data and creating new blocks on the blockchain. Dishonest validators are punished, whereas honest validators are rewarded in ETH tokens. 

Where do Ether coins come from?

Ether is the native cryptocurrency of the Ethereum blockchain and is used to pay for performing various actions, including gas fees on the blockchain. It has become the world’s second-largest cryptocurrency in terms of market cap. 

Earlier, Ether tokens were given out to people mining ETH, i.e., validating transactions on the blockchain. But in a Proof-of-Stake mechanism, new ETH tokens are given out as staking rewards to the validators. ETH has a circulating supply of 122 million tokens, whereas its maximum supply is unlimited, unlike the supply of BTC which is limited to only 21 million BTC. 

Pros and cons of Ethereum

Pros

  1. It is the foundation of decentralized applications, web 3.0, NFTs, smart contracts, etc. 
  2. It is a permissionless network that is not controlled by any single individual or entity. 
  3. It already has millions of users and hundreds of thousands of validators providing a very robust ecosystem for new developers. 
  4. The new tokenomics involving staking and burning of gas fees make Ether a deflationary cryptocurrency. 
  5. It has the first-move advantage by being the first blockchain to deploy smart contracts.

Cons

  1. It faces the issue of scalability and low transaction throughput. The effect of The Merge on these issues remains to be seen. 
  2. Developers need to learn Solidity to make DApps on the network making it accessible to only a particular niche of developers. 

Conclusion

Ethereum is one of the biggest innovations of our times and any ETH news has the capability of making or breaking the cryptocurrency market. While there are a large number of blockchains that claim to be ETH killers, their exact impact is still minimal. 

With innovations like sharding and forks due on the Ethereum network in the coming years, the future remains very bright. It is believed that ETH will very soon be flipping BTC and becoming the foundation for a decentralized financial system that is permissionless, trustless and secure.

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