Originated by Vitalik Buterin in 2015, Ethereum is a global blockchain platform on which dApps (decentralized applications) are running. While similar to regular mobile and web applications, dApps utilize blockchain technology to offer decentralized services. Ethereum and its decentralized ecosystem are often described as a world computer that’s impossible to be shut down. Most DeFi dApps are running on the Ethereum blockchain. They take advantage of Ethereum’s secure smart contract capabilities.
What are smart contracts?
A smart contract is an agreement between two parties that has been programmed into the blockchain, making it practically impossible to be altered by one of the parties or hacked by a malicious third party. As soon as a certain condition of the agreement is fulfilled, the algorithm of the smart contract will execute the programmed transaction. This guarantees that transactions cannot be altered or forged in any way. All smart contract transactional operations require some Ether to be spent.
What is Ether (ETH)?
Ether is the native cryptocurrency on the Ethereum blockchain. Think of it as Bitcoin but with some extra features. Ether (ETH) can be used as a digital asset for storing value, as well as digital money – it can be sent to blockchain wallets and used to purchase goods and services, similarly to Bitcoin. Additionally, ETH is the digital asset most often used as collateral for DeFi loans and other DeFi functions. The time-tested secure system of the Ethereum blockchain provides a solid foundation for DeFi smart banking to work smoothly. People use ETH to pay the operational fees of smart contracts used by dApps. These operational fees are known as gas.
What is gas?
All smart contract executions occurring on the Ethereum blockchain require a certain fee (gas) to be paid. Gas is the unit of measure on the amount of calculations required to execute a transaction or a smart contract. The amount of gas charged depends on the complexity of the operation and the current load (demand) on the Ethereum network.
When network demand is high, the blockchain often becomes congested. When this happens, Ethereum miners try to prioritize the validation of those transactions offering the highest gas fees. Any user is free to manually set the amount of gas they want to pay, but if they set it too low, the transaction will most likely get queued and take longer to complete. As more people transact ETH and utilize smart contracts on the Ethereum network, gas prices can spike up dramatically. This happens because of the still relatively limited compute power on the network.
What is the future of Ethereum?
While Ethereum’s popularity keeps increasing due to the growth of the DeFi ecosystem, the number of daily transactions rises exponentially as well, challenging the Ethereum network’s capacity to handle these operations without considerable delay. Extremely high gas fees during busy hours is a major issue regularly discussed amongst the blockchain community. This has led to competing smart-contract-enabled blockchains gaining popularity. Blockchains such as Polkadot, Solana, Avalanche. These Ethereum challengers offer the same functionalities as Ethereum but at significantly faster speeds of transaction, as well as much lower fees. Of course, such advantages do come at a cost – less decentralization compared to Ethereum.
But Ethereum isn’t giving up that easy. Major updates of its blockchain protocols have been scheduled for 2022, including the ETH 2.0 upgrade. This update will introduce the much improved scaling features sharding and Beacon chain. The blockchain community is hoping that Ethereum 2.0 will deliver adequate scalability at last and, ultimately, lower gas fees on all transactions occurring on the Ethereum network.