What is Ethereum?
Ethereum was developed to complement and improve Bitcoin by providing additional features that Bitcoin could not offer.
As described in a 2013 Whitepaper by Vitalik Buterin, a Canadian of Russian descent, its purpose is very different from bitcoin.
It is a cryptocurrency, in the same way as bitcoin, but its main utility is not to be a means of payment. Their goal is not to be “money.” Ether is fuel for a world computer.
Ethereum is an open-source blockchain-based decentralized platform that allows the creation of decentralized applications (dapps) and smart contracts. Proposed by Vitalik Buterin in 2013, Ethereum was officially released in 2015.
See also: What is Ethereum the Merge?
Why Was Ethereum Created?
Ethereum was developed out of a desire to use blockchain technology for more than just payments, which Bitcoin was mainly intended for. Ethereum was proposed and developed as a blockchain-based platform that can support the creation of decentralized applications (dapps) and smart contracts.
Smart contracts are decentralized, self-executing agreements constructed on a blockchain, with the contract conditions put directly into lines of code. Ethereum’s primary objective, unlike Bitcoin’s, is to create a framework for decentralized applications that can execute complicated activities without the need for middlemen or centralized servers.
The native cryptocurrency of Ethereum is known as Ether (ETH), and it is used to fund network transactions and encourage developers to build and update apps on the system. Ethereum is the second-largest cryptocurrency after Bitcoin.
With more flexibility than Bitcoin, Ethereum enables developers to construct various applications outside digital currency. Decentralized marketplaces, social networks, and prediction markets are examples of dapps created on Ethereum.
Decentralized autonomous organizations (DAOs), businesses run purely by code and without centralized management, are also supported by the platform.
To increase its scalability, security, and functionality, developers are always working on new features and upgrades for Ethereum. One of the most important updates was Ethereum 2.0, which switched the Ethereum network’s POW (Proof of Work) consensus process to POS (Proof of Stake). This migration aims to address the network’s scalability problems, which have caused the rise of substitute layer-2 solutions like Cardano and Solana over time.
Buterin recruited a group of developers who shared his enthusiasm for blockchain technology and decentralized apps with his ideas. They established the Ethereum Foundation, a non-profit that controls the platform’s development and ecosystem.
In July 2014, the Ethereum Foundation conducted a crowd sale of Ether (ETH), the Ethereum platform’s native cryptocurrency, to fund the platform’s growth. The sale was a tremendous success, raising almost $18 million and confirming the project’s strong community support.
Since then, Ethereum has become one of the most popular and frequently utilized blockchain systems, with a thriving developer community, user base, and application ecosystem. Its success has prompted the development of other blockchain-based platforms and projects that explore the viability of decentralized applications and smart contracts.
Ethereum’s Scalability Problems
Ethereum has historically struggled with scalability. This issue manifests itself in the TPS handled by the network. The present infrastructure of Ethereum can process between 15 and 45 transactions per second, much less than traditional payment processors such as Visa and Mastercard, which can handle thousands of transactions per second. This has resulted in delayed transaction times, high gas fees, and network congestion during peak usage hours.
Another factor that impacts Ethereum’s scalability is how transactions are validated on the network. At inception, transactions were validated through the proof-of-work (PoW) consensus mechanism, requiring miners to solve complex mathematical problems to validate transactions and add new blocks to the blockchain. This process is resource-intensive and slows down the network.
Ethereum is looking into several solutions to deal with these scalability issues. One of the most promising was September 15, 2022, move from a proof-of-work (PoW) consensus method to a proof-of-stake (PoS) mechanism. PoS is a more energy-efficient alternative to PoW, as it does not require miners to solve complex mathematical problems. Instead, validators are chosen based on their stake in the network.
Ethereum’s Move to Proof of Stake
By switching from a proof-of-work (PoW) consensus method to a proof-of-stake (PoS) consensus mechanism, Ethereum has made a significant advancement that aims to address scalability, security, and sustainability issues.
In accordance with the PoS protocol, validators are required to pledge a quantity of ether (ETH) as collateral. This collateral is utilized to ensure that validators have a stake in the network and are incentivized to behave in the network’s best interests. Validators are randomly selected to validate transactions and compensated with transaction fees and fresh ETH. However, if a validator is determined to have acted maliciously, their collateral can be slashed as a penalty.
What is the Ethereum Shangai Upgrade?
The switch to a proof-of-stake network (The Merge) for Ethereum is not the only solution being investigated to increase Ethereum’s scalability. The Ethereum community has been continuously developing novel approaches to solving scalability issues. One of them is sharding. This scaling method can potentially increase transactions per second while reducing network congestion.
The Shanghai update serves as a precursor to the implementation of sharding later in 2023. Ethereum will eventually be able to support all types of users, have more fascinating uses for its user base, and lower prices as transaction speeds rise. This will also draw in more investors.
The hard fork that will upgrade Ethereum to Shanghai is scheduled for March 2023. The ability of stakers and validators to withdraw funds from the Beacon Chain is one of the most important changes that will be made possible by the fork.
In accordance with Ethereum Enhancement Proposal-4895, or EIP-4895, the Shanghai upgrade will let validators remove staked tokens. Validators have staked over 16 million ETH to help secure the system. Since December 2020, validators have been staking ETH even if the Merge didn’t happen until 2022. The Beacon Chain, which uses proof-of-stake, was also launched at this time.
Statistics show there is currently $22.7 billion worth of ETH in the staking pool. Users will be able to access their momentarily unavailable ETH during the merger transition in September 2022 once the Shanghai upgrade is done.
See also: Layer 2 Blockchain Explained
The Shanghai update will happen in March 2023, allowing stakers and validators to withdraw their stake from the Beacon Chain. Validators can withdraw staked tokens after the upgrade, which complies with Ethereum Enhancement Proposal-4895. The staking pool currently contains ETH valued at around $22.7 billion. After the update has been completed, users will again have access to their ETH, temporarily locked out of their accounts during the merger transfer in September 2022.