Ethereum

Definition

Ethereum is a decentralized blockchain platform that enables developers to create and deploy smart contracts and decentralized applications (DApps). Its built-in cryptocurrency, Ether (ETH), is used to facilitate transactions and compensate participants for computations performed on the network. Ethereum revolutionizes how digital agreements are made, providing an environment where trust is established through code rather than intermediaries.

5 Must Know Facts For Your Next Test

1. Ethereum was proposed by Vitalik Buterin in late 2013 and went live in July 2015, bringing significant advancements in blockchain technology.
2. The Ethereum platform allows developers to create tokens that can represent assets or utilities, facilitating fundraising through Initial Coin Offerings (ICOs).
3. Ethereum 2.0 is an upgrade that aims to improve the network's scalability, security, and sustainability by transitioning from a Proof of Work to a Proof of Stake consensus mechanism.
4. Gas is the term used to describe the fees required to execute transactions or smart contracts on the Ethereum network, helping prevent spam and allocating resources efficiently.
5. Ethereum has become a foundational platform for decentralized finance (DeFi) applications, enabling users to lend, borrow, and trade assets without traditional financial intermediaries.

Review Questions

• How do smart contracts on the Ethereum platform enhance trust and efficiency in digital transactions?
  • Smart contracts on Ethereum enhance trust and efficiency by automating the execution of agreements without requiring a trusted intermediary. These contracts are self-executing with the terms coded directly into the blockchain, ensuring that once conditions are met, actions are taken automatically. This reduces the risk of fraud and increases transaction speed since all parties can trust that the contract will execute as intended without delays or manipulation.
• Discuss the impact of Ethereum's transition to Ethereum 2.0 on its scalability and energy consumption compared to its original structure.
  • The transition to Ethereum 2.0 significantly impacts scalability and energy consumption by moving from a Proof of Work to a Proof of Stake consensus mechanism. This shift allows for faster transaction processing and increased capacity for handling more transactions simultaneously. Additionally, Proof of Stake reduces energy consumption dramatically since it doesn't require extensive computational power for mining, making Ethereum more environmentally friendly while maintaining security.
• Evaluate how Ethereum has influenced the development of decentralized finance (DeFi) and what challenges it faces moving forward.
  • Ethereum has fundamentally influenced DeFi by providing a versatile platform for building decentralized financial services, such as lending, borrowing, and trading without intermediaries. This has democratized access to financial services and enabled innovative financial products. However, challenges remain, including scalability issues during peak usage times, high gas fees that can limit participation, regulatory scrutiny, and potential security vulnerabilities in smart contracts that could lead to loss of funds. Addressing these challenges will be critical for Ethereum's continued growth and adoption in the DeFi space.

Related terms

Smart Contracts: Self-executing contracts with the terms of the agreement directly written into code, allowing for automated execution without the need for intermediaries.

Decentralized Applications (DApps): Applications that run on a peer-to-peer network, rather than being hosted on centralized servers, offering greater security and user control.

Blockchain: A distributed ledger technology that securely records transactions across many computers so that the recorded transactions cannot be altered retroactively.