By Peter

Ethereum was created in 2013 by Vitalik Buterin to let anyone “write smart contracts and decentralized applications (dapps).” (whitepaper)

How does Ethereum work?

As of February 2022, Ethereum is the 2nd most popular cryptocurrency. Like Bitcoin, it's built on the blockchain and is decentralized, immutable, and open.

Unlike Bitcoin, Ethereum's goal is to become the world's decentralized computer (called EVM or the Ethereum Virtual Machine). To understand what that even means, let’s define the following:

1. Ether is Ethereum’s digital token. Ether is a store of value like Bitcoin, but its main purpose is to reward nodes on the ethereum blockchain for processing transactions.
2. Gas is the amount of Ether that's paid to a node to process a transaction.
3. Smart contracts are code that runs on the Ethereum blockchain. This code is decentralized (stored across all nodes in the network), immutable (can’t be changed once committed to the blockchain), and open (anyone can view the code and use it).
4. Decentralized apps (dapp) combine a backend smart contract with frontend UI.

Ethereum has the largest web3 developer ecosystem thanks to its composability. Like legos, anyone can build on an existing smart contract to create something new. This has led to the creation of thousands of dapps that power web3 use cases such as:

1. Buying and selling NFTs (OpenSea)‍
2. Swapping tokens (Uniswap)
3. Lending and borrowing tokens (Compound)
4. Earning income from playing games (Axie Infinity)

Due to Ethereum's popularity, it costs a lot in gas to process transactions. We'll cover how to pay less gas using Ethereum, L2 chains, and other L1 chains later in this learning path.

History of Ethereum

• 2013: Vitalik Buterin published the Ethereum whitepaper. After failing to convince the Bitcoin community to support decentralized apps on Bitcoin, Vitalik crowdfunded Ethereum as a new cryptocurrency.
• 2014-2015: Ether officially went on sale, people could buy it with Bitcoin.
• 2016: The DAO raises $150M to provide a new decentralized business model for organizing companies. Unfortunately, hackers were able to use an exploit to steal 1/3 of the DAO's funds. This led to Ethereum doing a hard fork to restore lost funds.
• 2020: Ethereum ships the beacon chain as part of its eth 2.0 plans to migrate from proof of work to proof of stake. The foundation plans to merge the main Ethereum chain to staking sometime in 2022.

Now that we covered Bitcoin and Ethereum, let's take a look at the overall cryptocurrency market next.

Up next: Why invest in crypto?

Learn more

• Ethereum whitepaper (Ethereum.org)
• Introduction to Ethereum, Ether, and Gas (Ethereum.org)
• How to pay less gas? (Odyssey)
• How to use L2 chains? (Odyssey)