2/29/2024

Ethereum: principles of operation and future

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The two main cryptocurrencies by capitalization – Bitcoin and Ethereum – are now experiencing noticeable and sharp price growth. But if Bitcoin is always in the news, then Ethereum often remains in the shadows, despite its potential and prospects. Therefore, we decided to take a closer look at how this tool works.

Ethereum is a decentralized platform built on the blockchain that allows the creation of various secure digital technologies. Ethereum is based on the cryptocurrency Ether (ETH). It, like Bitcoin, is used not only for online payments, but also for purchasing goods and services offline, if this function is provided by the seller.

Features of Ethereum

Ethereum has 4 key characteristics:

  • Scalability: The platform is capable of processing a large number of transactions.
  • Programmability: It can build decentralized applications (dApps) using smart contracts.
  • Security: All online transactions are protected by cryptographic methods.
  • Decentralization: There is no single governing body, which ensures smooth operation and resistance to censorship.

Ethereum and other products based on it, as well as other cryptocurrencies, are based on blockchain technology. If you don’t know the essence of this technology, then imagine a long chain of blocks. Each block contains information about transactions, as well as a hash (a unique cryptographic signature) of the previous block. This ensures immutability and transparency of the entire chain.

A copy of the Ethereum blockchain is distributed throughout the network. This means that there is no single control center, which makes the system more resistant to censorship and failures. A network of automated programs (validators) constantly checks the blockchain. They reach a consensus on the validity of transaction information before it is added to a new block.

Ethereum vs Bitcoin

The choice between Ethereum and Bitcoin depends on your goals; The main thing to remember is that Ethereum has a higher volatility compared to Bitcoin. Therefore, before investing in cryptocurrency, thoroughly research both platforms.

Ethereum has great functionality and is positioned as the “global programmable blockchain,” a platform for creating decentralized applications (dApps) and smart contracts. Bitcoin was created exclusively for use as a cryptocurrency. Accordingly, ether is used in more projects, such as dApps, DeFi, NFTs, and the metaverse. Bitcoin is mainly used as a means of saving and investing.

The emission of ether is not limited, but is limited by the mining speed. At the same time, the creation of Bitcoin is limited to 21 million coins and very soon the number of coins is expected to be halved.

As for the transaction speed, Ethereum can generally be slower due to the complexity of smart contracts. Ether technology is actively developing solutions for scaling (L2), while Bitcoin has limited scaling, but improvements are underway.

What does the future hold for ETH?

In 2022, Ethereum switched to the Proof-of-Stake (PoS) protocol. This means that users can now verify transactions and create new ETH. This update is part of a major upgrade to Ethereum, formerly known as Eth2. Now the platform is simply called Ethereum, but has two layers:

  • Execution level: Transactions and checks are carried out.
  • Consensus Level: Attestations and chain of consensus are supported.

The transition to PoS was implemented to increase the power of the Ethereum network. and addressing network congestion.

To solve the scalability problem, Ethereum uses sharding. Sharding divides the Ethereum database across the entire network. This is similar to cloud computing, where the load is distributed among many computers. Sharding allows more validators to work simultaneously. This reduces the time required to reach consensus.

Overall, Ethereum’s transition to PoS and the use of sharding should make the network more powerful, scalable and accessible.

Following the approval and success of Bitcoin spot ETFs, investors and traders are already building hopes of similar products for Ether, making it more accessible to buy and sell.

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