What is Ethereum (ETH) and how does it work?

Ethereum is the blockchain that is home to the native cryptocurrency ether (ETH). The Ethereum blockchain is also where smart contracts are developed. Smart contracts enable peer-to-peer transactions without a central authority and are essentially codes that execute automatically when specific criteria are met. This is how Ethereum is seen as more of an application blockchain, hosting technology like non-fungible tokens (NFTs) that grew in popularity a few years ago. Ethereum is the second largest blockchain in terms of market cap, only behind Bitcoin.

Ethereum is a decentralized blockchain and platform in which developers can create smart contracts for practical applications. With a proof-of-stake (PoS) transaction verification process, Ethereum is known to be a much more efficient energy consumer relative to Bitcoin, and network participants are rewarded with the native cryptocurrency ether (ETH).

ETHEREUM SMART CONTRACTS EXPLAINED

A smart contract is a program that runs on the Ethereum blockchain. This program’s code and data are stored on the blockchain at an address, and interactions with the smart contract are irreversible. Some describe a smart contract as a digital vending machine in which the correct inputs guarantee a certain output. Smart contracts are permissionless, which means anyone can write a smart contract and run it on the Ethereum network. Smart contracts further exemplify how Ethereum gets its “software” comparison.

Ethereum was proposed by Vitalik Buterin and was co-founded by Anthony Di Iorio, Charles Hoskinson, Gavin Wood, and Joseph Lubin in 2015. A few years prior in 2011, Buterin co-founded Bitcoin Magazine as well, so he was not a newcomer to the crypto space. Many of the co-founders also have their hands in other aspects of the cryptocurrency and blockchain realm.

Ethereum mining used the same proof-of-work (PoW) process as Bitcoin mining, in which participants verified transactions, added them to the Ethereum blockchain, and were rewarded with ethereum for successful verifications.

In 2022 Ethereum switched to a proof-of-stake process, which was known as “The Merge”. Proof of stake is much more energy efficient than proof of work, and the switch has made the Ethereum verification process much greener in terms of energy consumption.

With proof-of-stake, participants stake cryptocurrency to verify transactions. The proof-of-stake verification process requires less computing hardware, and consumes less energy to execute, making it a greener process than the previous proof-of-work verification process.

Unlike Bitcoin miners that are rewarded a specific amount of bitcoin for verifying transactions, Ethereum miners receive a reward that combines newly minted ethereum and network transaction fees. It is said that network participants that stake Ethereum make 4-7% annually.

To start trading Ethereum, you need to open a brokerage account that connects to a crypto exchange, or trade directly on a crypto exchange. At tastytrade, you can trade Ethereum, Ethereum futures, and Ethereum ETFs all on one platform. You can even link your tastytrade account to the tastycrypto wallet. To trade Ethereum at tastytrade, follow these steps:

1. Research Ethereum to understand how Ethereum trading works
2. Create a tastytrade cash or margin account or log in
3. Once the account is open, head to “trading preferences” under the “my account” section and enable cryptocurrency trading after reading through the Zero Hash connection process
4. Create a trading plan and a risk management strategy
5. Open and monitor your Ethereum positions
6. Manage your Ethereum strategy and create an exit plan for potential profit and loss thresholds

Ethereum and Bitcoin are similar in that they are both blockchains with native cryptocurrencies—ether and bitcoin.

Bitcoin is known to be “digital gold” and the “hardware” component of the crypto space. Bitcoin transactions are verified with a proof-of-work (PoW) method, which requires extensive computing power and energy consumption. Only transactions can be stored on the Bitcoin blockchain.

Ethereum is known as the “application” or “software” component of the crypto space with the surge in smart contract development. Ethereum transactions are verified with a proof-of-stake (PoS) method, which requires much less computing power and energy than PoW. Ethereum can store both transactions and code on the blockchain, which is a differentiating factor when compared to Bitcoin.

One big difference between the two native cryptocurrencies that live on each blockchain is the supply cap. Bitcoin supply is capped at 21 million coins, which gives bitcoin an inherent valuation difference when compared to ether—which has no supply cap.

While both are popular in the public eye, bitcoin has a stranglehold on transaction volume in 2024. Ether is second only to bitcoin in market cap when it comes to cryptocurrency comparisons.

Ethereum 2.0 was an informal name for the upgrades that Ethereum executed to improve efficiency, move from proof-of-work (PoW) to proof-of-stake (PoS), and ultimately set the blockchain up for scalability. Many ether investors were worried about the transition, fearing that their cryptocurrency would become worthless overnight. Instead, "The Merge" gave ether another layer of flexibility. Participants had the ability to stake their cryptocurrency in exchange for fees paid in ETH. It also removed a lot of the competitive nature that was abundant in the PoW verification process. In PoW, it’s a race to solve the algorithm to obtain the cryptocurrency reward at the cost of hardware and energy consumption. In PoS, network participants are randomly selected to verify transactions.

WHEN DID ETHEREUM 2.0 LAUNCH?

The shift from the PoW k to PoS transaction validation process took place in September of 2022, along with several other efficiency and scalability improvements. Ethereum 2.0 was an unofficial term for the blockchain upgrades. Ethereum now has a consensus layer ETH 2, and an execution layer ETH 1.

Ethereum is more than just a cryptocurrency. It enables the creation of decentralized applications and smart contracts within the blockchain, surpassing more limited transaction-based blockchains. The movement to ETH 2, the consensus layer, has made its proof-of-stake more energy efficient, while also allowing rewards through staking. Non-fungible tokens are often executed on the Ethereum blockchain due to its executable programmable contracts. The lack of a supply cap supports a flexible economic model, positioning it as a vital tool for numerous blockchain-based applications.