Created by Vitalik Buterin back in 2015, Ethereum is a global, open-source blockchain platform on which dApps (decentralised applications) operate.
dApps are like regular mobile and web applications, except they utilise blockchain technology to function in a decentralised manner. In fact, Ethereum and its decentralised ecosystem can be described as a world computer that is impossible to shut down.
Most DeFi (decentralised finance) dApps are currently running on Ethereum’s blockchain.
These dApps take full advantage of Ethereum network’s smart contract capabilities.
What are smart contracts?
A smart contract is an agreement that has been encoded into the blockchain, making it practically impossible to be breached, reneged or forged. In the context of DeFi, smart contracts eliminate the middleman and allow dApps to operate in a truly decentralised manner. Smart contracts work on the “if this, then that” principle. As soon as a certain condition is fulfilled, the smart contract will execute a pre-programmed transaction. This guarantees that no transaction can be altered or tampered with in any way. All these transactional operations require the use of Ether.
What is Ether (ETH)?
Ether, also known as ETH, is the native currency of the Ethereum blockchain. Think of it as Bitcoin augmented with some extra features.
ETH can be used as a store-of-value asset, as well as digital money – it can be sent to other wallets or can be used to purchase goods and services at certain vendors, very much like Bitcoin.
In addition, ETH is the asset of choice used as the collateral that is underlying many DeFi applications today. The transparency and time-tested security of the Ethereum network provide a solid foundation for decentralised finance to function smoothly.
ETH is used to pay the fees on the execution of smart contracts used by dApps. These fees are also known as gas.
What is gas?
All transactions and smart contract executions happening on the Ethereum blockchain require a small fee (gas) to be paid. Technically speaking, gas is the unit of measure on the amount of compute power required to execute any given operation or a smart contract.
The amount of gas that is charged depends on the level of complexity of the operation and the overall workload capacity (demand) on the Ethereum network itself.
Gas fees are denoted in gwei and are paid entirely in ETH.
When the network demand gets too high, the Ethereum blockchain can become congested. In this case, Ethereum miners typically prioritise the validation of the transactions that are offering the highest gas fees. Users can set the amount of gas fees manually, but if set too low, the transaction will be queued and will possibly take longer to complete.
As more and more people transact ETH or execute smart contracts on the Ethereum network, gas prices can increase dramatically. This is due to the still relatively limited amount of computing power on the network.
What is the future of Ethereum?
As Ethereum’s popularity keeps rising thanks to the growth of the DeFi ecosystem and the hype of NFT trading, the number of daily transactions keeps increasing, putting a strain on the Ethereum network’s capacity to handle them.
Extreme gas fees during peak hours are a major issue regularly bemoaned by the DeFi and NFT communities. This has led to the breakout success of competing smart-contract-enabled blockchains such as Solana, Polkadot and Avalanche.
These challengers are offering the same functionality at significantly faster transaction speeds and much lower fees compared to Ethereum.
Unfortunately, these advantages usually come at the cost of less decentralisation compared to Ethereum’s network.
But all is definitely not lost for Ethereum, as major overhauls of its blockchain protocols are planned for 2022, including the long-awaited ETH 2.0 upgrade. This upgrade will finally introduce viable scaling features such as sharding and Beacon chain functionality.
The Ethereum community is hoping that Ethereum 2.0 will finally deliver adequate scalability and, ultimately, low gas fees for all transactions on the global Ethereum network.
Ready to invest in the top DeFi assets on Ethereum, by market cap? Check out our first index, the Phuture DeFi Index (PDI).