What Is the Ethereum Protocol?

Ethereum was first introduced back in 2013 by crypto super-dev Vitalik Buterin. The motivation was simple: Bitcoin was limited in its ability to host smart contracts and decentralized applications, so an alternative was needed. Thus, Ethereum was created as the first decentralized smart contract platform.

Three key components allow Ethereum to run smoothly and securely: 

1. Proof-of-Stake (PoS)
2. The Ethereum Virtual Machine (EVM)
3. The token ETH.

With the successful completion of the Merge in September 2022, proof-of-stake is Ethereum’s consensus mechanism. In other words, PoS is how Ethereum’s 440,000 validators agree on which blocks to add to the chain. To partake in securing the chain, each validator must stake (put up as collateral) 32 ETH. If the validator does their job correctly, they are rewarded with new ETH. If they misbehave, their stake is burned (slashed), making it very costly to attack the chain. 

If PoS is Ethereum’s spine, then the Ethereum Virtual Machine is its brain. The EVM is essentially the software running on each Ethereum node. This software allows for the creation and execution of smart contracts, which are written in the coding language Solidity (and, less frequently, Vyper). 

The token ETH is Ethereum’s blood. ETH is crucial to the functioning of Ethereum, as it is used in various critical ways. Whether it be through securing the network through staking, paying gas fees, or as currency for NFTs, the importance of ETH can not be overstated. 

These three components have allowed Ethereum to become the dominant layer-1 blockchain, with a peak total value locked of $110 billion in the early part of 2022 (around $23B at the time of publication of this article), countless innovative dApps, and the most developer activity. 

Ethereum’s success really comes down to three things: its design, its willingness to improve, and good timing.

Ethereum’s design, although not perfect, as we will soon discuss, is what enables its success more than anything else. Whereas other blockchains prioritized speed and scalability, Ethereum has often prioritized security, giving developers the confidence they need to build on the chain and consumers the confidence they need to use it, ultimately producing the thriving ecosystem we see today.

Ethereum’s willingness to improve is another massive factor in its success. Whether it be scaling solutions such as rollups or sharding, or the years-long transition to PoS, the Ethereum core devs have shown that they are always looking for ways to improve Ethereum. This has ensured that Ethereum has stayed at crypto’s vanguard, even after all these years.

Finally, we can not discount the impact of good timing on Ethereum’s success. Just as Bitcoin benefits from being the first cryptocurrency, Ethereum benefits from being the first smart contract platform. While Ethereum’s native coding language Solidity is challenging to learn, the headstart Ethereum had in development and gaining users’ trust is an immense advantage over its competition.

A blockchain is only as strong as the applications built on top of it. As the dominant blockchain, Ethereum is home to some of the most important and influential projects ever built.

Ethereum’s impact on DeFi is undeniable. Nine of the top ten most valuable DeFi projects call Ethereum home. These include names like MakerDAO, Curve, Lido, Aave, and Uniswap.

Ethereum is also the birthplace of NFTs. Any talk of NFTs has to begin with NFT marketplace giant OpenSea, which regularly does tens of millions in daily trading volume. However, competitor marketplaces LooksRare and SudoSwap are no slouches either, both handling solid volumes. Finally, you have the creation of NFT lending protocols, such as JPEG’d, which aim to merge the best of DeFi and NFTs.

Last but not least, Ethereum is also home to entire other blockchains. Layer-2 blockchains Arbitrum and Optimism are built on top of Ethereum, and both have a TVL of around $1B, along with countless innovative dApps such as GMX, Synthetix, and Dopex. 

Ultimately, no blockchain can match Ethereum’s quantity and quality of projects. 

Even though Ethereum does a lot of things right and has experienced a ton of success, it has often suffered from high gas fees.

Gas fees on Ethereum are based on network activity. The more people using Ethereum, the higher the gas fees. Because Ethereum prioritized decentralization and security over speed and scalability, it does not take much for the network to become congested and, thus, for gas fees to skyrocket. For context, Ethereum averages about 15 transactions per second (TPS), while Solana averages 2,000 TPS. 

While the gas fees have reduced significantly in the latter part of 2022, the issue resulted in many seeking cheaper chains and led to the development of alternative layer-1s like Solana, Avalanche, and Fantom and the steady erosion of Ethereum’s TVL advantage. 

Ethereum might not reach its full potential until these scalability issues are addressed. 

Thankfully, the devs and the Ethereum community are well-aware of these issues and are working on solutions.

First and foremost among these scaling solutions are Layer-2 blockchains. These are separate blockchains built on top of Ethereum that inherit its security but have greater transaction speed and throughput. Basically, all of the good parts of Ethereum but none of the bad. Arbitrum and Optimism currently dominate the L2 space, but many more, including those that run promising zero-knowledge technology, are in development.

The other scaling solution currently being worked on is sharding. Sharding can be a complex topic, but at a high level, it is just the act of splitting data horizontally to lighten the load. So instead of having validators verify each block, they would only have to verify fractions of a block. This would significantly reduce network congestion and, by extension, gas fees. Sharding is currently scheduled to come out sometime in 2023. 

It is impossible to predict a crypto project’s success with absolute certainty. However, with a proven track record, a vibrant ecosystem of apps and developers, and a token quickly becoming the currency of the metaverse, Ethereum is primed for years of future success.