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The Bankless Guide to Ethereum

A Comprehensive Guide to Ethereum (ETH)
Bankless Bankless Feb 9, 20247 min read
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The Bankless Guide to Ethereum

Ethereum, first proposed by Vitalik Buterin in 2013 and launched in 2015, is a decentralized, open-source blockchain that introduced the world to smart contracts. These self-executing contracts automate transactions and processes, expanding blockchain's utility far beyond simple asset transfers.

Key takeaways

  • Ethereum is the first and most widely-adopted smart contract platform. The network is home to over 4,000 projects and 53 million smart contracts and currently secures over $410 billion in economic value. 
  • Ethereum supports around 15 transactions per second (TPS), so it scales through external execution environments known as Layer 2s (L2s) and Layer 3s (L3s). Today, there are over 150 active or upcoming Ethereum scaling solutions, all of which make Ethereum transactions cheaper and faster. 
  • This modular shift signifies the Ethereum ecosystem’s strategic move towards solving the blockchain trilemma, prioritizing scalability without compromising on decentralization or security at the base layer. 
  • Additionally, Ethereum’s status as the most popular smart contract platform has made it the leading hub for decentralized autonomous organizations (DAOs), decentralized finance (DeFi), and non-fungible tokens (NFTs) in the cryptoeconomy. 

What is Ethereum?

Ethereum is a decentralized network that enables developers to build and deploy smart contracts and decentralized apps. Unlike Bitcoin, which primarily focuses on peer-to-peer digital currency, Ethereum aims to serve as a global, decentralized computer and tokenization platform.

The Ethereum Virtual Machine (EVM) is the engine that executes smart contracts on Ethereum. It ensures that every contract runs the same way on every node, maintaining consistency across the network.

In September 2022, Ethereum transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS), a consensus mechanism that secures the network through validators who stake ETH. This shift reduced Ethereum’s energy consumption by 99% while also increasing network security.

What are Layer 2s?

via L2BEAT

L2 solutions are designed to enhance the scalability of Ethereum by processing transactions off the main Ethereum blockchain, or L1, while still benefiting from its robust security. 

L2s operate by bundling multiple transactions together and then settling them on the main Ethereum blockchain. This process reduces the number of transactions that need to be processed directly on the L1, thus lowering fees and increasing throughput. 

Today, there is over $43 billion in total value locked (TVL) on L2s. The most common L2 technologies are Optimistic Rollups and Zero-Knowledge Rollups. Rollups are designed to become totally trustless, though there are other L2 styles that introduce some trust assumptions for enhanced performance, including Validiums, Volitions, and Optimiums. 

via L2BEAT

Additionally, lately we’ve seen the rise of L3s built on L2s, like Degen Chain on Base and Xai on Arbitrum, to provide even more specialized and scalable environments. These appchains inherit the scalability benefits of L2s and the underlying security of Ethereum while offering additional customization for particular use cases, like crypto gaming applications. 

via rollup.wtf

Notably, the Dencun upgrade, implemented in March 2024, introduced Proto-Danksharding (EIP-4844), which significantly reduced gas fees for L2s through the introduction of "blobs." 

Blobs provide a more gas-efficient method for L2s to post transaction data to Ethereum, resulting in dramatically lower transaction costs. Looking ahead, full Danksharding is on the horizon, which will increase the number of blobs that can be attached to a block from 6 to 64 for greater scalability.

Also, the upcoming Pectra upgrade, scheduled for late 2024 or early 2025, will further optimize L2s. Notably, it includes EIP-7594, or Peer Data Availability Sampling (PeerDAS), which will improve the efficiency of L2s by optimizing data availability and transaction processing.

What are the use cases of Ethereum?

via ethereum.org

💰 Internet Money

Ethereum’s native currency, ETH, is programmable digital money. It can be used as a medium of exchange, a store of value, and, when staked, as a yield-bearing capital asset. It’s useful for borderless 24/7 payments and paying for interactions with apps built on Ethereum.

💻 Open Global Computer

Ethereum functions as an accessible global computer, enabling developers to build open applications and networks, including L2s, via smart contracts. This permissionless platform allows for innovative and varied use cases, extending Ethereum's utility beyond mere financial transactions.

💸 Stablecoins

Ethereum has become the leading home of stablecoins, digital currencies anchored to stable assets like the U.S. dollar. These tokens, like USDC and USDT, are designed to offer a shield against crypto market volatility and help facilitate everyday transactions. 

🧮 DeFi

Ethereum's decentralized finance (DeFi) ecosystem includes lending, borrowing, and trading platforms. They aim to revolutionize traditional financial services by removing intermediaries and supporting open composability. Popular projects here include Uniswap, Maker, and Aave.

🖼️ NFTs

Ethereum has become the leading platform for non-fungible tokens (NFTs), which are used to represent unique digital items and assets on the blockchain. NFT use cases have boomed atop Ethereum around art, digital collectibles, gaming, and beyond. An example project is Terraforms, whose NFT collection makes up a large 3D sculpture that exists entirely on Ethereum. 

🗣️ DAOs

Decentralized autonomous organizations (DAOs) on Ethereum are community-led entities with no central authority, operating through smart contracts. These smart contracts enforce the organization's rules and execute decisions based on the inputs of its members. An example here is Nouns DAO, which uses its infra to facilitate transparent, collective decision-making around creative and public goods projects.  

👋 Digital Identity

Services like the Ethereum Name Service offer blockchain-based digital identity solutions for simplifying and securing online identity management in the crypto space. More than 2.1 million ENS names have been created to date. 

👯‍♂️ Crypto Social 

Ethereum is home to a rising wave of crypto social platforms that are blending social media with blockchain tech. A prominent example here is Farcaster, which uses Ethereum wallets to underpin user accounts and manage in-app interactions. 

🎮 Onchain Games

Ethereum has become a popular hub for underpinning onchain gaming. These blockchain-based games offer crypto-linked gameplay, transparent rules, and a trustless environment, facilitating new types of gaming economies and player interactions that are not possible in traditional gaming settings. 

♻️ Restaking 

Restaking on Ethereum allows ETH stakers to support multiple networks, thereby extending Ethereum's security as a service for additional earning potential. An example platform is EigenLayer, which acts as a marketplace for Ethereum's security. 

🤖 AI

Ethereum is also becoming a frontier playground for AI experiments, from AI agents operating onchain to DAOs coordinating to create their own AI models. This is a very nascent crossroads, but it’s one worth watching closely in the years ahead. 

How to invest in Ethereum?

To invest in Ethereum, you will need two things: ETH and an Ethereum wallet. 

ETH is the native currency of Ethereum and is used for staking and paying for transactions on the network. If you think demand for using Ethereum will grow over time, investing in ETH is a way to capture the upside of that growth.

At the time of this guide's latest update, ETH was trading around $3,400 per coin with a market capitalization of $410 billion, making it the second-largest crypto today behind only Bitcoin's BTC.

The most straightforward way to acquire ETH is to purchase some on a crypto exchange platform like Coinbase or Kraken. You don’t have to purchase one whole ETH at a time and instead can buy fractional amounts as you please. For example, currently $100 would fetch you 0.029 ETH per the current ETH/USD exchange rate. 

Once you have some ETH ready to go, you’ll want to deposit it into a personal wallet that you control so you can start making transactions and connecting to projects in Ethereum’s app scene. Some great wallet options include Coinbase Wallet, MetaMask, and Rainbow. For tips on wallet safety practices and how to level up with hardware wallets, see the full Bankless wallet beginners guide

How to stake ETH?

To stake ETH and earn staking rewards for securing the Ethereum network, you have two main routes. For those technically inclined, running your own ETH validator involves setting up and maintaining hardware, requiring 32 ETH for staking directly on the Ethereum blockchain. 

This DIY avenue offers full control over your staking process and rewards and can be conducted through plug-and-go hardware devices like Dappnode and AVADO or custom-built setups. 

via Dappnode

Alternatively, liquid staking tokens (LSTs) like Lido's stETH or Rocket Pool's rETH provide a simpler, more accessible way to stake ETH.

By purchasing or minting LSTs, your ETH is pooled and staked on your behalf, allowing you to earn staking rewards without the complexities of running a validator. Both methods contribute to Ethereum's security while catering to different levels of technical expertise and involvement.

Top Ethereum projects

via ethereum.org

The Ethereum app ecosystem is the most teeming in the cryptoeconomy and features 1,000s of different projects today. Some of the top experiences to explore here include:

  • 🪪 Ethereum Name Service — a platform for onchain domains
  • 🪙 Maker — a DeFi borrowing and lending protocol centered around ETH
  • 🌊 OpenSea — a leading Ethereum NFT marketplace
  • 🌉 Relay — one of the best "fast bridges" for Ethereum L2s
  • 🦄 Uniswap — the Ethereum ecosystem's most popular decentralized exchange
  • 🎴 Zora — a DIY NFT creator platform, protocol, and L2 combo

More about Ethereum

👉 Bankless Ethereum Profile
👉 Hunt Airdrops on Ethereum

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