Ethereum, an open-source platform that allows the construction of smart contracts and decentralized applications, has transformed the way we interact with blockchain technology.
Ethereum was proposed in 2013 by cryptocurrency researcher and programmer Vitalik Buterin, and was officially launched in 2015.Ethereum’s goal was to provide a platform that allowed developers to build and deploy smart contracts: self-executing computer codes that can facilitate, verify, or enforce the negotiation and performance of a contract.
Like Bitcoin, Ethereum is based on blockchain technology. However, Ethereum is not only used as a digital currency. Ethereum’s true innovation lies in its ability to run software programs, called smart contracts, directly on the blockchain. These contracts are essentially programs that run as they are programmed, without the possibility of censorship, fraud, third-party interference, or downtime.
These smart contracts can be used to create a wide variety of applications, from games to financial systems, voting platforms, and much more.
Ether: Ethereum’s cryptocurrency
Ethereum’s native cryptocurrency is known as Ether (ETH). Ether is used to pay for transactions and computational services within the Ethereum network.
In addition to being a method of payment, Ether is also used as “gas” to power transactions and interactions with smart contracts on the Ethereum network.
"Gas" in Ethereum
“Gas” in Ethereum is like a kind of fuel for the network. It is the unit that measures how much “work” is needed to perform an operation, such as a transaction or a smart contract.
Gas is not a cryptocurrency, but a measure. This gas is paid with Ether, Ethereum’s cryptocurrency. So, when someone says that Ether is used as gas, it means that Ether is used to pay for operations on the Ethereum network.
The cost of gas helps to keep the network secure and efficient, by preventing people from performing too many unnecessary or malicious operations.
Limitations of Ethereum
- Scalability: The first version of Ethereum can process about 15 to 20 transactions per second. Compared to the thousands of transactions that conventional payment systems can process, Ethereum falls short, limiting its utility in high-demand applications.
- Energy consumption: Ethereum currently uses the Proof of Work (PoW) consensus mechanism, which requires a lot of energy and computing power.
- Transaction delays: When the network is congested, transactions can take a long time to process unless the user is willing to pay a higher gas fee.
- Storage problems: Ethereum’s blockchain is quite large and continues to grow, which could cause storage and synchronization problems for nodes.
How Ethereum 2.0 seeks to solve these limitations
- Scalability: Ethereum 2.0 introduces a process called sharding, which divides the network into multiple pieces (shards) that can process transactions and smart contracts in parallel. This should significantly increase the number of transactions that Ethereum can handle per second.
- Energy consumption: Ethereum 2.0 switches to a Proof of Stake (PoS) consensus mechanism. Instead of requiring miners to solve complex mathematical problems, PoS allows Ether holders to “stake” their coins for the chance to validate blocks. This change drastically reduces Ethereum’s energy consumption.
- Transaction improvement: With sharding and proof of stake, Ethereum 2.0 will provide faster and more predictable transaction times.
- Storage: Ethereum 2.0 will address storage problems through sharding and techniques such as pruning, compacting, and encoding data.
PoW vs PoS
Proof of Work (PoW) is the original consensus mechanism used in many cryptocurrencies, including Bitcoin and the original version of Ethereum. In PoW, miners use powerful computers to solve complex mathematical problems. The first to solve the problem gets the right to add a new block to the blockchain and receives a reward in cryptocurrency. This process consumes a lot of energy and computational power.
Proof of Stake (PoS), on the other hand, is an alternative consensus mechanism in which users “stake” an amount of their cryptocurrencies for the chance to be selected to add the next block to the chain. No complex calculations are required, so PoS is considerably more energy-efficient than PoW. In Ethereum 2.0, PoS has been adopted to improve the network’s energy efficiency and scalability.
In Phase 0 of Ethereum 2.0, initiated in December 2020, Ethereum took the first step towards transitioning to Proof of Stake (PoS) with the launch of the Beacon chain. However, the full implementation of PoS across the network was not completed until the “The Merge” phase in September 2022. This milestone has drastically reduced the network’s energy consumption, with a decrease of 99.99% according to a report by the Crypto Carbon Ratings Institute (CCRI).
In addition, the transition to PoS has strengthened security and increased the scalability of Ethereum. Soon, sharding will be introduced to further increase the network’s efficiency and capacity.
However, cryptocurrency mining in general remains an energy-intensive activity, as many miners have migrated to other blockchain networks that still use Proof of Work (PoW) after the implementation of PoS in Ethereum.
