What is Ethereum – A Simplified Explanation

Last Updated: December 1, 2022

There is hardly any news report that mentions cryptocurrency coins without featuring Ethereum. You will also find references about Ethereum on scholarly journals, finance news, and many other media platforms. But what is Ethereum?

Ethereum is a decentralized Blockchain network designed to facilitate financial transactions, store tokens for crypto trading while generating interest for stakeholders. Ethereum network also accommodates gaming and social media. The achievements that can be accomplished with Ethereum are endless. So much more is left to be discovered.

That is why it is quite improper to compare Ethereum with Bitcoin. The two networks are crypto-based, but the Ethereum features and applications are so much more.

Ethereum network supports the Ether (ETH), which is the cryptocurrency token used on the platform. The Non-fungible tokens (NFTs) are stored on the network by users who would like to hold their assets for a while.

The developers are working tirelessly to improve the Ethereum network. It is currently a facilitator of the Proof of Work (PoW) Blockchain, and the newer version Ethereum 2.0 now supports business growth by promoting scalable and environmentally friendly business methods.

Ethereum has often been described as the biggest advancement on the internet. According to them, Ethereum works with features that make the network qualify to be addressed as Web 3.0 to accommodate the complex decentralized apps (Dapps), decentralized exchanges (DEXs), and the decentralized finance (DeFi).

So you can see that the Ethereum network has been leveraged as a unique platform that can accommodate automated versions of processes that could transform the finance industry. For example, the decentralized finance system has been widely accepted worldwide, and the network currently facilitates billions through different projects.

Invention and growth

Ethereum was developed by a team led by Vitalik Buterin, a writer, programmer, and entrepreneur. He designed Ethereum with features that could complement the problems encountered when using Bitcoin. According to Vitalik, the Ethereum project features an automated, secure, and flexible Blockchain platform that could be used for diverse functions. The Ethereum project created the opportunity to develop the decentralized applications, DApps.

At inception, Ethereum was described as a one-stop platform that could accommodate hundreds of applications working autonomously on the network. Developers could determine the rules to guide how the DApps function. Also, major decisions about the network would be made by the entire stakeholder’s community instead of the developers.

The team who created the Ethereum network are as follows; Vitalik Buterin, Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Iorio, and Amir Chetrit. The network was founded under the authority of the Ethereum Foundation, which is a non-profit organization located in Switzerland. The project was funded with money raised through crowd sale events where people could buy Ether tokens.

Some of the co-founders resigned from their positions when it was revealed that the Ethereum network would run as a non-profit organization. Over the years, the Ethereum network has become sustainable with adequate funding from business partners and investors.

The DAO concept

DAO concept was introduced to establish an ordered Ethereum community. The DAO can be regarded as the powerhouse that makes decisions. Its members are stakeholders in the Ethereum community. Decisions are made by voting through a democratic process.

A hacking incident led to the loss of over $40 million, which was stolen. A vote was organized, and the DAO decided to permit a hard fork to reverse the Ethereum network and stop the heist. A new version of Ethereum was formed. It had the same features as Ethereum Classic, the name given to the first network. A hard fork can be described as a complete reset done when cryptocurrency networks face a deep crisis.

How does the Ethereum network function?

Thousands of computer users from all over the world can access the Ethereum network because it is a decentralized system. This lowers the chances of hacking or data loss since the network can hardly be taken down.

The network works with the Ethereum Virtual Machine (EVM), which is replicated across the different nodes on the network. Each user on the Ethereum Blockchain has this node, and it is updated regularly.

Interaction between different users on the ETH network is called ‘transactions’ the details of these interactions are stored in blocks within the Ethereum Blockchain and are accessible by other members of the community. Miners are responsible for checking and confirming the block details before the data is uploaded on the Blockchain. The function of miners is known as the proof of work consensus, a process involving the verification of transactions. Every block is unique; it features a 64-digit identification code. To verify a transaction, miners find the code to confirm it is unique. Miners earn ETH in return for their services.

All transactions on the Ethereum Blockchain are done in public to increase transparency and discourage fraudsters from using the platform. Miners send the public information after they complete their verification tasks for transactions. After confirmation, it will be impossible to change the data stored in blocks.

How Miners get paid

Gas is the name of the fee charged when miners complete their tasks. The fee is paid by the person who initiated the transaction. Miners receive the gas payment as their fee. Also, a fee is charged to discourage users from performing random transactions, which may clog the network. Knowing there is a fee, users will make careful plans before proceeding to initiate a transaction. Miners are always willing to perform their tasks because of the incentive received after completing their job.

We think it was brilliant to pay miners a fee generated through the ETH network because it is a non-profit entity. Ethereum is more like a utility token that is always available to meet demand. This means miners will always earn significant profits every day.

However, only a limited number of blocks can be processed daily. This means the money earned by miners could be limited. To overcome this hurdle, miners lookout for transactions with the highest fees to earn more money. Consequently, there is competition among miners to find and complete high valued transactions. On the other hand, the users make plans to perform high-valued transactions because they know smaller transactions could be delayed. After all, the miners are all looking for opportunities to earn more money.

DApps and Ethereum

As earlier mentioned, the Ethereum network supports a wide range of apps. However, you should know how the two entities interact. DApps are created to function with ETH tokens. This means cryptocurrency is the gateway to use the features of the app. Decentralized apps are different from the regular apps you find online because your information is inaccessible. This means anyone can play games, use banking apps, or make purchases without worrying about their personal information being compromised.

Also, anyone can use the DApps without discrimination. There are no requirements that restrict users. For example, all genders and races can use the apps regardless of their financial status. Also, DApps gives you control over their features.

Comparing Ethereum and Bitcoin

Bitcoin was the first DAO to be introduced to the world. It has a remarkable reputation and so many fans. Ethereum has exceeded all expectations considering how the network started. It has come so close to Bitcoin in every way. Here are some of the observations after comparing ETH and BTC;

BTC was predominantly created to be used as a digital currency, while ETH is so much more than a digital currency. It is a vast platform that offers users an opportunity to perform many tasks.

BTC has had some limitations in the marketplace due to its PoW network, which means you can basically buy and hold the coin in expectation that the value will rise and you can sell to earn a profit. The situation is much different with ETH, which is an entire DAO system that also facilitates business transactions between two or more parties, both locally and internationally.

BTC was created to have a limited capital base of 21 million. However, the Ethereum network can support a much higher volume of tokens and transactions.

The developers of Ethereum have announced their plans to enhance the system to become a global internet base. They plan to make the ETH network a platform that supports all apps and offers financial companies more opportunities to improve their services. They also want to focus on growing the ETH community to promote the platform as a secure place where people can interact and do business.

While BTC is one entity that serves as digital currency, the ETH can be created for particular DApps which means you will need to buy a specific ETH token before making a purchase from the DApps that only accept the token.

How people are using Ethereum

The Ethereum network has brought significant changes to the global financial sector. The establishment of a decentralized financial platform is one of the most important contributions of the Ethereum network to its community.

So far, the DApps have been the Ethereum feature with the most interaction. So many people are using the apps and keeping the ETH network busy. Also, the decentralized financial platform on the network has recorded massive interactions and usage. Over the years, fund managers, lending companies, and other stakeholders in the finance sector have realized they can achieve amazing things with the DeFi network.

Also, Artists have been earning much more money by avoiding intermediaries during sales of their artwork. The artists advertise their work as nonfungible tokens (NFTs) and get paid in full. Fans of good art will be delighted to directly find and own unique artwork purchased from the original artist. After all, we all know the value of the original artwork compared to a useless screenshot of the NFT online.

The Ethereum network supports the next big thing to happen in social media. Social media users can receive tips on the platform for their posts. The social media apps on the network cannot be censored. So users can publish their thoughts and receive appreciation from their audience. All this can be done without any platform collecting a percentage of the poster’s earnings.

It is going to be a big break for freelancers who can sell their services without paying any platform a commission.

Advantages of using the Ethereum network

A long list of benefits can be written in this part of the post. That is possible because Ethereum is such a vast and flexible network.

Here are the notable benefits of using the network;

Full autonomy

The freedom to use the different features of the ETH network is refreshing. We all know how platforms such as Twitter and Facebook make fast decisions to suspend accounts even when the user did not break any rules. Those companies have the final say. However, on social media platforms linked to Ethereum Blockchain, decisions are made through a voting process, every member of the community decides what should be done. It is free, fair, and democratic.


Transactions, deals, gaming, purchases, and so much more can be done on the network without revealing your identity. The records published on the Blockchain only show the details of the transactions, such as the value, time, and date. Many users applaud the anonymity they enjoy with Ethereum.


No leader or president can wake up one morning and order Ethereum to be shut down. The computing network is shared across thousands of computers all over the world. It is completely decentralized, beyond the power or control of any country. To influence the Ethereum network, you will have to control 51%, which is practically impossible.

The use of smart contracts

The smart contract concept has eliminated the need for middlemen who cause delays and create more problems during deals. Smart contracts create an opportunity for a freelancer to deal directly with clients even though they are in different countries. The smart contract settings can use milestones which means the freelancer is paid when they deliver the task before the deadline. It is a much better option when compared to freelancing sites such as Upwork, where each user pays a commission because the platform needs to pay huge bills to maintain their server.

Ethereum tokens are easily accessible

Unlike many cryptocurrencies, you can find and buy ETH tokens from exchanges, online payment platforms such as PayPal and Venmo.

Are there disadvantages of using Ethereum?

So far, Ethereum seems like a flawless cryptocurrency network, but can you experience any disadvantages while using it? There have been some observations that indicate potential issues with the system.

For example, Ethereum has become so popular. Everyone wants to use the network, and that has caused a problem because the transactions can only be completed after the gas fee is paid and the block is validated. Also, the decentralization has caused some challenges. The process of perfecting transactions has taken too long because many people are involved. In centralized systems, they can quickly make decisions and proceed with projects to improve their systems.

Beginners may also encounter some challenges while using the ETH network. For example, some DApps only accept payments from particular wallets. This means the user will need to have multiple wallets for different applications they use often.

Many of the online payment platforms such as PayPal that have accepted cryptocurrency only allow the users to deposit and hold their coins on the platform.

We know the developers working behind the scenes don’t stop pushing to make things better. The feedback system on the network is excellent, so it is expected that many of the challenges users experience will be sorted out soon.

Explaining Ethereum 2.0 (Eth2)

Ethereum 2.0 is currently under construction. It is a reviewed version of the Classic Ethereum with new features such as the proof of stake consensus. The new version is expected to be available by the end of 2022 or maybe sooner. The change is done by combining the existing Ethereum network with the Beacon Chain, which is a new feature.

The Beacon Chain will be used to introduce features to allow necessary changes whenever an upgrade is needed. It will also make the Ethereum network scalable.

Scalability issues will be sorted with the introduction of the Shard chain. The process of using the Shard chain is called Sharding. It involves breaking down transactions and allocating the tasks to smaller Blockchain networks which users manage with less powerful computing power. These users are tasked with storing information, which requires minimal computing power. They play a significant role that will decongest the network and increase the rate of validating Ethereum transactions.

Every fan of the Ethereum network is anticipating the launch of Ethereum 2.0. It is an event that can significantly create more awareness about the Blockchain. The Ethereum 2.0 will permanently resolve issues such as high gas fees and slow validation processes. It will significantly enhance the consumer experience.

Introducing proof of stake with the Ethereum 2.0 will see a reduction in the number of miners, whose tasks will be more focused on validating transactions.

The criteria to work as a validator include staking nothing less than 32 ETH tokens soon after Ethereum is launched. Validators who stay connected to the internet longer will earn tokens for their effort. Breaking the rules will put the validator at risk of losing their ETH tokens.

The developers claim that introducing the proof of stake will make the Blockchain consensus processes more accessible and faster because there is no need for any special hardware. The new version will allow people who have sufficient funds and a compatible device to get involved; encouraging participation will attract more validators which will improve the current block validation processes while decentralizing the Ethereum network further.


  • Joseph Campbell

    Joseph Campbell is a tech protocols reporter for CoinDesk and other tech websites. He is a graduate of Claremont McKenna College, where he double majored in Economics and Philosophy with a concentration in Data Science. He holds BTC, ETH, DOGE and a few NFTs.

  • William Foster

    William Foster is a editor for the Central Asian and European region. Before he worked as an editor at Acuris (Mergermarket) where he was responsible for documents on startups, private equity deals, fundraising, developments and editorial direction. His most memorable time was at Reuters, where he was both a reporter and editor for various teams.

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