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What is Ethereum? A Complete Guide to the Ethereum Ecosystem

Learn everything you need to know about Ethereum, its history, what makes it run, why it’s so important, and where you can start exploring the ecosystem.
What is Ethereum? A Complete Guide to the Ethereum Ecosystem

Ethereum is by far the best-known blockchain when it comes to DeFi, NFTs and dApps. In fact, it was on Ethereum that many of these innovations first emerged, helping to position the smart contract-enabled Layer 1 as the leading blockchain for decentralized applications. 

While the Web3 ecosystem has grown significantly since the launch of the Ethereum mainnet in 2015, with plenty of new blockchains in the mix, Ethereum has managed to retain its position as the most popular, natively programmable Layer 1 blockchain. 

In this comprehensive Ethereum guide, you will learn everything you need to know about Ethereum, from how it got started to what this thriving ecosystem can offer you today.

TL;DR

  • Ethereum is a natively programmable blockchain platform with a vast and rich ecosystem of different use cases and applications.
  • It’s powered by ether (ETH), its native cryptocurrency, which is also the second-largest cryptocurrency by market cap.
  • Ethereum is also known for its proof-of-stake consensus mechanism, Ethereum Virtual Machine (EVM) and smart contracts. 
  • You can use the Magic Eden marketplace to buy, sell and swap ETH and other Ethereum-based tokens and explore NFTs on this blockchain.

What Is Ethereum?

Ethereum is a decentralized, open-source blockchain and network that lets devs create smart contracts and, in turn, decentralized applications (dApps). It’s powered by a native cryptocurrency called ether (ETH), which is currently the second-biggest cryptocurrency by market cap.

While Bitcoin is mostly used for payments and as a store of value, Ethereum’s strength is its programmability, which allows for the creation of various applications on this blockchain.

Ethereum was conceived in 2013 by programmer Vitalik Buterin and the mainnet went live on July 30, 2015. Other members of the founding team include Gavin Wood, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin. 

In 2016, the Decentralized Autonomous Organization (DAO) led a crowdfunding campaign that raised $150 million to fund Ethereum. However, it was later hacked and $50 million worth of ETH was stolen. This forced the Ethereum community to hard fork the blockchain in order to restore the funds.

The next year, 2017, saw the launch of the immensely popular CryptoKitties collection and blockchain game. In January 2018, the improved NFT token standard, ERC-721, was introduced, allowing devs and users everywhere to start creating their own NFT collections.

Another important technological change Ethereum went through was called The Merge: in 2022, the network shifted its consensus mechanism from proof-of-work (which relies upon mining) to proof-of-stake (which relies on staking and validators). The blockchain is being constantly updated to introduce new functionalities and help it run more efficiently. The Merge was the final part of an upgrade usually called Serenity, which moved Ethereum towards Ethereum 2.0.

What is ETH (Ether)?

Ether, shortened to ETH, is the native cryptocurrency of the Ethereum blockchain. Ether is the driving force behind every transaction, smart contract and dApp: every fee is paid with ETH. 

You’ll hear these transaction fees referred to as ‘gas fees’: they’re denominated in gwei, but are actually just smaller parts of ETH.

One ETH is made up of one billion gwei, and one gwei is equal to one billion wei, which means there are one quintillion (18 zeroes) of wei in one ETH.

Additionally, you can stake your ether and earn yield. Meanwhile, contrary to BTC, ETH’s supply is not capped and fluctuates depending on network activity.

How Does Ethereum Work?

Ethereum works by leveraging its decentralized nature, reaching consensus via its proof-of-stake mechanism, while its computation engine, or Ethereum Virtual Machine, executes smart contracts and all operations are paid for in gas fees.

Let’s explore these important aspects in more detail.

Decentralized Ledger 

The decentralized ledger is one of the foundational parts of Ethereum. 

The blockchain itself serves as a ledger where all the transactions on this chain, their origin, their target, the amounts paid and much more are being stored. What makes it decentralized is that copies of this ledger are stored by a network of independent validators across the globe, decreasing the risk of a network takeover by a centralized party.

Proof-of-Stake (PoS) Consensus Mechanism 

Ethereum has been using the proof-of-stake (PoS) consensus mechanism since 2022, moving away from a proof-of-work (PoW) mechanism, used by Bitcoin. 

PoS is a mechanism in which a group of so-called validators are responsible for the creation of new blocks, validating the data proposed in each block and making sure that everything is in order, plus punishing any validators who work against the well-being of the network. Validators are rewarded in ETH for this important work.

To become a validator, you need to stake at least 32 ETH. Alternatively, you can stake lower sums via third parties, but you won’t be able to participate in the network consensus process.

Ethereum Virtual Machine (EVM) 

The Ethereum Virtual Machine (EVM) is a virtual environment for executing smart contracts on the Ethereum network. 

The Ethereum Virtual Machine is so widely understood and used that many newer blockchains, protocols and blockchain-adjacent solutions simply adopt it so their developers don’t have to adapt to other environments. The EVM is as close to becoming an industry standard as any environment could be, given the decentralized nature of the whole industry. Recently launched EVM chains include Abstract, ApeChain, Sei, and Monad.

Smart Contracts

Smart contracts are self-executing digital programs on the blockchain. 

You set the terms under which the contract will execute and once they’re met, it triggers. This means there’s no need for intermediaries checking the terms, helping the processes along, etc.

Smart contracts are the foundation for other, more complex programs and solutions on Ethereum and a lot of other similar blockchains. Decentralized applications (dapps) are also powered by smart contracts.

Gas Fees

Gas fees exist to pay validators to include your transaction into a block, therefore legitimizing it. 

These fees depend on how busy the network is at the moment. You can also set your fees higher manually if you want to make it more likely for a validator to quickly pick up your transaction, so you increase the chances of it going through sooner.

Gas fees are calculated in gwei, where one billion gwei makes up one ETH.

Key Components of the Ethereum Ecosystem

The Ethereum ecosystem refers not only to the basic blockchain, but to all the things that were built on top of it, because of it and thanks to the innovations Ethereum presented.

Smart Contracts

Smart contracts are both a key feature of the blockchain’s design and an equally important part of the ecosystem. Everything relies on their functionality. If you want to program something to execute by itself, keeping it decentralized and distributed, you want to write a smart contract.

Ethereum Token Standards

Ethereum’s programmability means that you can create different tokens on the blockchain, which are categorized into one of three main token standards:

  • ERC-20: the token standard for creating fungible tokens, or tokens that are interchangeable;
  • ERC-721: the standard for creating non-fungible tokens (NFTs), where they share most attributes, but every single token is unique compared to the rest of the collection;
  • ERC-1155: another NFT token standard, with the difference that this one allows for easier bundling and is used for creating both NFTs and utility tokens.

Decentralized Applications (dApps)

Decentralized applications, or dApps, are the programs running on the Ethereum blockchain. Dapps are powered by smart contracts and function just like your usual programs built for a specific task, only in a more decentralized way.

dApps can be used for anything that’s programmable, like exchanges, wallets, asset transfers, identity verification, prediction markets, and a lot of real-world uses like healthcare, education, supply chain management and more.

Decentralized Finance (DeFi)

Decentralized finance (DeFi) is an umbrella term for all the financial tools we usually associate with traditional finance, transported and adapted for a blockchain-based ecosystem. 

This means things like borrowing, lending and trading (but on decentralized exchanges), as well as things that the decentralized environment needs to function, like providing liquidity and yield farming.

The biggest difference between traditional and decentralized finance is that decentralized finance is significantly less likely to be censored, restricted or closely surveilled. DeFi apps give users the ability to swap tokens, lend and borrow assets, onramp and offramp assets, bridge assets across chains, and pay for "real world" goods.

Non-Fungible Tokens (NFTs)

Non-fungible tokens (NFTs) are one of the most fun ways Ethereum can be used. While the NFT technology can be used as a digital signature for many things, in this context, it’s mostly known for collections of unique tokens that represent entertaining digital collectibles. 

The NFT mania on Ethereum started with the CryptoKitties collection, which also had a game that let users breed their cats and create new combinations that could potentially be even rarer and more valuable.

Nowadays, the best-known Ethereum-based NFT collections include Bored Ape Yacht Club, Pudgy Penguins, CryptoPunks and more.  You can find a whole host of them on the Magic Eden Ethereum NFT marketplace. Magic Eden is the largest NFT aggregator today, providing the widest selection of Ethereum NFTs.

Decentralized Autonomous Organizations (DAOs)

Decentralized Autonomous Organizations (DAOs) are organizational structures that don’t have a central leadership. When we talk about The DAO, we mean the first such instance, which was the DAO behind Ethereum. In the meantime, many blockchain projects are using DAOs to govern themselves.

Layer 2 Scaling Solutions 

Layer 2 scaling solutions refer to the blockchain projects built on top of the Ethereum main chain to increase its scalability and throughput. Some of the best-known projects include Arbitrum, Base, Polygon and many others.

5 Real World Use Cases of Ethereum

Ethereum has seen its share of real-world adoptions. Some examples include:

  • Real estate tokenization: Real estate is represented as tokens on the Ethereum blockchain for easier tracking, ownership changes and more, increasing liquidity in this market. Examples include the projects Propy and RealT.
  • DePIN: Decentralized physical infrastructure networks, including computer power and energy.
  • Synthetic assets: These projects help represent real-world assets on the blockchain, including stocks, commodities and fiat currencies. An example is Synthetix.
  • Contract management: Professional services giant EY is offering businesses an Ethereum-enabled solution for contract management. 
  • Healthcare: The U.S. National Institutes of Health published a research paper detailing the different ways Ethereum could be used in healthcare.

Benefits & Limitations of Ethereum 

Like any other blockchains, Ethereum comes with its own share of pros and cons. Let’s take a look at some of them.

Pros

  • Huge ecosystem: Ethereum’s ecosystem and community are still the biggest by far, and they keep growing.
  • Decentralization: Ethereum is considered to be the most decentralized and censorship-resistant smart contract platform. 
  • Industry-standard interoperability: Ethereum has set most of the currently active standards in the smart contract industry, and many devs are building solutions that are EVM-compatible.
  • Huge support: For both users and developers, there’s a lot of documentation, guides and answered questions on all things Ethereum-related.

Cons

  • Relatively low scalability: Base chain is much slower compared to newer blockchains and with the rising number of users, transactions get more expensive; this is addressed through a series of different L2 solutions.
  • Competition: Other blockchains, such as Solana, are trying their best to offer a good alternative to Ethereum, so many are flocking there.
  • Gas fees: Ethereum’s gas fees are higher than those of comparable blockchains, which can deter some.

How to Get Started With Ethereum on Magic Eden

Magic Eden offers a great way to start exploring the Ethereum ecosystem. With the Magic Eden Wallet, you can buy ETH for fiat using your bank card.

When you already own ETH, you can use the ‘Swap’ feature to swap ETH for other Ethereum-based tokens. Also, you can connect your Ethereum wallet to the Magic Eden marketplace and swap tokens there.

Additionally, once you’re funded, you can start exploring different Ethereum-based NFTs here. 

Find them under the Ethereum tab on the home screen of the marketplace. You can browse, use the search bar to find something specific, filter by floor price, current top offer, volume, the number of sales and more. You can also track price changes for any collection from here.

Once you’ve chosen which collection you want to explore, click on it to bring up the NFTs available for sale.

When you find something you like, click on it to see how much the seller is asking for. You can either match their asking price and immediately start the purchase, or offer them a lower price and hope they’ll accept.

Either submit your offer or initiate the purchase at full price. You’ll get notified if the seller accepts your offer. 

If you’re buying outright, you’ll be notified when the NFT lands in your wallet. It’s that simple!

What Lies in the Future for Ethereum?

Ethereum developers are now working hard to help this blockchain become more efficient, scalable, cheaper, more user-friendly and private, as competition in this space intensifies. 

Therefore, we might see more solutions would help achieve exactly that. 

For example, it’s expected that Ethereum will get even more improved account abstraction, which will help you interact with the blockchain in a more intuitive, organic way, more similar to the way they usually use applications. Sharding, or its improved version, known as danksgarding, is another potentially implementable solution that will improve scalability of this blockchain.

Long term, Ethereum is aiming to be a global, scalable and sustainable platform that can easily handle the requirements of its community, offer alternative approaches to building real-world solutions, and present innovative ways to approach privacy, security and censorship resistance.

Explore Ethereum on Magic Eden

To start exploring the Ethereum ecosystem, you can always start on Magic Eden. Buy and sell the ETH token, explore other tokens, find new and novel NFT collections and more.

Connect your wallet to Magic Eden today to start exploring Ethereum.

FAQs

What's the difference between Bitcoin and Ethereum?

Bitcoin and Ethereum are two completely separate blockchains. Bitcoin uses proof-of-work to reach consensus, while Ethereum uses proof-of-stake. Ethereum is also natively programmable, while Bitcoin, which is considered to be more decentralized than Ethereum, is mostly focused on monetary and store of value use cases. Recently innovations on Bitcoin have adopted Ethereum functionality, including Bitcoin Ordinals, Bitcoin Runes, Layer 2's, and Bitcoin stablecoins.

What is the difference between Ethereum and Ether?

Ethereum refers to the blockchain and the network, while ether is the cryptocurrency that powers the blockchain. Ether is just one part of the larger whole called Ethereum. Ether is needed to pay gas fees for transactions on Ethereum.

How do I buy ethereum?

You can buy Ethereum (ETH) on different crypto exchanges or through compatible Web3 wallets, like Magic Eden Wallet, which offers a fiat onramp. Simply use your credit or debit card to purchase ETH. Alternatively, you can use other cryptocurrencies to swap them for ethereum. You can trade for ETH on Magic Eden Swap.

What wallets support Ethereum NFTs?

Ethereum-compatible wallets usually support Ethereum NFTs. This includes the very versatile Magic Eden Wallet, which lets you store NFTs, ETH and other Ethereum-based tokens. Additionally, you can use the same wallet to explore many more assets on different blockchains.

How do I pay gas fees on Ethereum?

When you initiate a transaction, you’ll be prompted to enter the amount of gas fees you’re going to pay. There’s a minimum that you usually can’t go below, but you can increase the amount to speed up the transaction process. You can check current gas fees on Ethereum blockchain explorers, such as Etherescan, and even check hours and days when the network is less busy, so you can save on fees if you’re not in a hurry.

Is Ethereum secure?

Ethereum is widely considered to be one of the most secure blockchains in the world. It uses a decentralized approach to remove a single point of failure, different cryptographic protocols to ensure data integrity. Also, its proof-of-stake consensus mechanism rewards honest players and punishes dishonest ones.

Does Ethereum have popoular NFTs?

Yes! NFT's were pioneeered on Ethereum and still have some of the most sought and expensive NFTs. Popular NFTs include Pudgy Penguins, Azuki, Lil Pudgy's, Moonbirds, Doodles, and many others.

The information provided on this website is provided for general educational purposes only and is in no way financial or investment advice. Certain information may have also been provided to us or prepared by third parties; these materials are provided for convenience and are not an endorsement by Magic Eden. Magic Eden is not liable for any errors, changes or amendments to such information, including any actions taken in reliance on such information.

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