What is Ethereum?


A next generation blockchain


In Bitcoin’s case the distributed database is conceived of as a table of account balances, a ledger, and transactions are transfers of the bitcoin token to facilitate trustless finance between individuals. But as bitcoin began attracting greater attention from developers and technologists, novel projects began to use the bitcoin network for purposes other than transfers of value tokens. Many of these took the form of “alt coins” - separate blockchains with cryptocurrencies of their own which improved on the original bitcoin protocol to add new features or capabilities. In late 2013, Ethereum’s inventor Vitalik Buterin proposed that a single blockchain with the capability to be reprogrammed to perform any arbitrarily complex computation could subsume these many other projects.

In 2014, Ethereum founders Vitalik Buterin, Gavin Wood and Jeffrey Wilcke began work on a next-generation blockchain that had the ambitions to implement a general, fully trustless smart contract platform.

Ethereum Virtual Machine

Ethereum is a programmable blockchain. Rather than give users a set of pre-defined operations (e.g. bitcoin transactions), Ethereum allows users to create their own operations of any complexity they wish. In this way, it serves as a platform for many different types of decentralized blockchain applications, including but not limited to cryptocurrencies.

Ethereum in the narrow sense refers to a suite of protocols that define a platform for decentralised applications. At the heart of it is the Ethereum Virtual Machine (“EVM”), which can execute code of arbitrary algorithmic complexity. In computer science terms, Ethereum is “Turing complete”. Developers can create applications that run on the EVM using friendly programming languages modelled on existing languages like JavaScript and Python.


This massive parallelisation of computing across the entire Ethereum network is not done to make computation more efficient. In fact, this process makes computation on Ethereum far slower and more expensive than on a traditional “computer”. Rather, every Ethereum node runs the EVM in order to maintain consensus across the blockchain. Decentralized consensus gives Ethereum extreme levels of fault tolerance, ensures zero downtime, and makes data stored on the blockchain forever unchangeable and censorship-resistant.

The Ethereum platform itself is featureless or value-agnostic. Similar to programming languages, it is up to entrepreneurs and developers to decide what it should be used for. However, it is clear that certain application types benefit more than others from Ethereum’s capabilities. Specifically, ethereum is suited for applications that automate direct interaction between peers or facilitate coordinated group action across a network. For instance, applications for coordinating peer-to-peer marketplaces, or the automation of complex financial contracts. Bitcoin allows for individuals to exchange cash without involving any middlemen like financial institutions, banks, or governments. Ethereum’s impact may be more far-reaching. In theory, financial interactions or exchanges of any complexity could be carried out automatically and reliably using code running on Ethereum. Beyond financial applications, any environments where trust, security, and permanence are important – for instance, asset-registries, voting, governance, and the internet of things – could be massively impacted by the Ethereum platform.

How does Ethereum work?



  • Externally Owned Accounts (EOAs), which are controlled by private keys

For most users, the basic difference between these is that human users control EOAs - because they can control the private keys which give control over an EOA. Contract accounts, on the other hand, are governed by their internal code. If they are “controlled” by a human user, it is because they are programmed to be controlled by an EOA with a certain address, which is in turn controlled by whoever holds the private keys that control that EOA. The popular term “smart contracts” refers to code in a Contract Account – programs that execute when a transaction is sent to that account. Users can create new contracts by deploying code to the blockchain.


Like in Bitcoin, users must pay small transaction fees to the network. This protects the Ethereum blockchain from frivolous or malicious computational tasks, like DDoS attacks or infinite loops. The sender of a transaction must pay for each step of the “program” they activated, including computation and memory storage. These fees are paid in amounts of Ethereum’s native value-token, ether.

These transaction fees are collected by the nodes that validate the network. These “miners” are nodes in the Ethereum network that receive, propagate, verify, and execute transactions. The miners then group the transactions – which include many updates to the “state” of accounts in the Ethereum blockchain – into what are called “blocks”, and miners then compete with one another for their block to be the next one to be added to the blockchain. Miners are rewarded with ether for each successful block they mine. This provides the economic incentive for people to dedicate hardware and electricity to the Ethereum network.

Just as in the Bitcoin network, miners are tasked with solving a complex mathematical problem in order to successfully “mine” a block. This is known as a “Proof of Work”. Any computational problem that requires orders of magnitude more resources to solve algorithmically than it takes to verify the solution is a good candidate for proof of work. In order to discourage centralisation due to the use of specialised hardware (e.g. ASICs), as has occurred in the Bitcoin network, Ethereum chose a memory-hard computational problem. If the problem requires memory as well as CPU, the ideal hardware is in fact the general computer. This makes Ethereum’s Proof of Work ASIC-resistant, allowing a more decentralized distribution of security than blockchains whose mining is dominated by specialized hardware, like Bitcoin.