Understanding Ethereum: Fundamentals and Mechanisms Explained [ETH]
Ethereum has garnered significant attention over the years as a project that could potentially surpass Bitcoin in the future. But what exactly makes it remarkable? In this video, we will clearly explain the key features of Ethereum, a pivotal infrastructure supporting the future of the Internet, along with its long-term prospects and the benefits of this cryptocurrency.
Launched in 2015, the Ethereum network emerged through the collaboration of eight co-founders, inspired by the vision of Vitalik Buterin. Among these co-founders are notable figures such as Gavin Wood, who later established Polkadot, and Charles Hoskinson, the founder of Cardano. This project is recognized for cultivating many of the members who are currently at the forefront of Web3 development.
Ethereum’s infrastructure enables the creation of decentralized applications (dApps) using smart contracts. Today, projects spanning multiple fields—including NFTs, decentralized finance (DeFi), and game finance—operate atop the Ethereum platform. A key characteristic of Ethereum is its decentralized, blockchain-based network, which mitigates the risk of total downtime in the event of a failure at a single point in the system.
Additionally, Ethereum offers an unprecedented level of transparency and resilience against censorship, distinguishing it from conventional development platforms. While frequently compared to Bitcoin, it’s important to note that Bitcoin was developed as a means of transacting without a central authority, such as banks. In contrast, Ethereum was designed to serve as the foundational infrastructure for the new Web3.
Though Ethereum includes Ether (ETH), a currency for transactions, its primary function is as a platform for creating decentralized applications. At the heart of Ethereum’s innovation lies the concept of smart contracts. Simply put, these are programmable codes that execute automatically when predetermined conditions are met. While one might initially perceive them as mere programming, the introduction of smart contracts by Ethereum revolutionized the cryptocurrency industry.
By enabling smart contracts to automate complex transactions, Ethereum eliminates the need for intermediaries. Consequently, the existence of services like NFTs and DeFi relies heavily on the functionalities provided by these smart contracts. Users can easily create smart contracts utilizing Solidity, Ethereum’s proprietary programming language, and have these contracts executed by numerous nodes across the Ethereum network. Although this might seem complicated, an apt analogy is a vending machine: a drink is dispensed only when the machine receives a dollar, mirroring how Ethereum operates on fulfilling specific conditions to trigger automated responses.
This automation streamlines service utilization and transactions, removing the need for mutual agreement between users. As a result, Ethereum provides numerous benefits, such as reduced costs, increased efficiency, and speed. Its reputation as a premier platform for developing decentralized applications spans various sectors, including social networking, advertising, and data management. However, its most notable impact has been in the realm of decentralized finance.
Traditionally, financial transactions necessitated intermediaries, like banks and brokerage firms. With smart contracts now fulfilling those roles, investors have seen greater returns, leading to a surge in user adoption in recent years. Major DeFi services like Aave, MakerDAO, Compound, and Curve Finance operate primarily on Ethereum, which currently holds several trillion yen in assets, and this sector is expected to continue its growth trajectory.
As the development on the Ethereum platform accelerates, the demand for Ether has simultaneously increased. The NFT boom has inflated transaction gas fees, propelling the DeFi sector further. Consequently, Ether is not only viewed as a popular investment asset but is also recognized as a utility currency.
Moreover, alongside facilitating decentralized application development, Ethereum allows businesses to issue their own tokens. For instance, USDT, USDC, and Shiba Inu are categorized as ERC-20 tokens, which are cryptocurrencies created using Ethereum’s smart contracts. While there are other cryptocurrencies utilizing their unique blockchains, the prevalence of assets circulating on Ethereum underlines its significance in the crypto ecosystem.
Despite the optimistic outlook painted by the previous discussion, it’s important to acknowledge the potential challenges Ethereum may face in maintaining its dominant position. The rise of projects like Cardano, Polkadot, and Avalanche, which also feature smart contract functionalities, poses competitive threats. Furthermore, Ethereum has encountered issues related to transaction speed and costs on its network, arising from its sole focus on decentralized security in recent years. As the demand for NFTs and DeFi has surged, user experiences have been hindered by slowing transaction speeds and rising fees, creating hurdles for the average user.
This context presents opportunities for competing projects to establish themselves within the expansive market. While increased competition may benefit the overall growth of the industry, Ethereum’s short-term status is expected to remain stable. Recently, Ethereum 2.0 successfully transitioned to a proof-of-stake model, yielding enhancements to transaction speed and cost management.
For years, Bitcoin has maintained an unquestionable position at the top of the cryptocurrency hierarchy. However, should Ethereum continue to evolve at its current pace, the prospect of a future where Ethereum supplants Bitcoin as the leading cryptocurrency becomes increasingly plausible.
