What is Ethereum and How Does It Work?

If you have been active in crypto, you probably have heard of the term ‘Ethereum.’ If you haven’t, Ethereum is a decentralized blockchain platform that grew to fame along with Bitcoin, and its Ether native cryptocurrency, Ether, became one of the most popular ones. 

The crypto market is huge, and Ethereum holds a significant position. As of 2024, approximately Ethereum captures around 20% of the global $1.1 trillion cryptocurrency market. This article acts as your guide to understanding what Ethereum is and how it works. 

What is Ethereum?

Ethereum is a cryptocurrency founded in 2015 by Gavin Wood and Vitalik Buterin. This decentralized blockchain platform helps establish secure peer-to-peer networks that can be used in smart contracts. 

The transactions conducted through this are verifiable and securely distributed across different networks. Although individuals get full ownership of the data, these are not visible, thereby adding to complete transparency and security. In the case of Ethereum, transactions can only be carried out by Ethereum account holders. 

How does Ethereum work?

Ethereum usually works with blockchain technology, which is a distributed ledger. Data is usually stored in blocks that contain encrypted and encoded data, continuing the history from the previous block. Since each block contains information from the previous block, a series of blocks containing important information is formed. Moreover, the information is encrypted, so there won’t be any risk of the data being changed. 

Every new block that is created contains new ether information established for the respective stakeholder. This information needs to be validated for one block, and then a new one must be proposed. The new ether will be assigned to the respective validators. 

The automated network program will validate the information on the new blocks once they are proposed. This is to ensure the validity of the transaction information. The data and hash need to be passed via the execution and consensus layers on the Ethereum blockchain. The block will be finalized when the validators have confirmed that they all received the same comparative results. 

What are Ethereum Wallets?

Several Ethereum owners also use wallets to store their ether cryptocurrency. Wallet refers to the digital interface wherein you store all your cryptocurrencies and can get easy access to them. Every wallet acts in the same manner as the email address the users may need to send ether. 

It is important to note that the wallets do not contain ether. Instead, the wallets will have private keys that act as a password you must enter to initiate a transaction. Every ether that you own has a specific private key assigned to it. If you forget your private key, you cannot access the respective ether as well. Therefore, using the security keys for different security methods of protecting the ether is essential. 

Future of Ethereum

The proof-of-stake protocol transition was one of the most commendable ones for Ethereum. However, as of now, Ethereum has two layers: 

• The first layer is the execution layer, where transaction validation will occur.
• The second layer is the consensus layer, which will maintain the consensus chain for attestations.

These new upgrades in Ethereum will support its growth. It is expected that one ETH will have a value of around $40,000 by 2030. Upgrades to Ethereum will also be important in addressing potential chronic network challenges. 

Ethereum is very active in publishing a roadmap for future development. Their latest roadmap release was in 2024 when they envisioned the primary categories that Ethereum would work on. The changes in the four primary categories will push for:

• Ethereum will introduce cheaper transactions. Currently, the rollups are expensive, putting pressure on the users who trust their operators too much. Ethereum will aim to solve this problem by introducing cheaper transactions.
• Cyber attacks have become very common. Research showed that around 2,200 cyberattacks happen daily. Therefore, Ethereum aims to upgrade its security by staying prepared for all types of attacks in the future.
• Ethereum aims to provide an unmatched user experience. Therefore, they aim to support smart contracts with lightweight nodes.
• With each passing day, many problems arise across the finance sector. Ethereum, therefore, aims to stay prepared to solve these problems that are yet to be presented.

Final Words

Ethereum is being implemented actively across different sectors, like gaming and especially non-fungible tokens. The price of ether is expected to rise in the future. However, different factors can affect the valuation, which can lead to several changes within a week rather than years. Throughout the day trading sectors, Ether prices drop and grow rapidly. 

Ethereum, a decentralized blockchain platform, has been allowing developers to build smart contracts and applications. It uses its native cryptocurrency, ether, to maintain and record all transactions. However, as of now, the exact impact of cryptocurrency is still very vague for the future. Nonetheless, it is sure to have a huge positive impact on personal and corporate finance.