Ethereum Guide: How the Programmable Blockchain Works

Ethereum changed the crypto landscape by creating a platform where developers can build applications, not just transfer money. This guide explains how Ethereum works, the uses of its Ether (ETH) token, and how you can trade it on LeveX.

What is Ethereum?

Ethereum is a blockchain platform that allows developers to create applications that run exactly as programmed without downtime, censorship, or third-party interference. Unlike Bitcoin, which focuses primarily on being digital money, Ethereum serves as a foundation for decentralized software.

Created by Vitalik Buterin and launched in 2015, Ethereum introduced the concept of "smart contracts" – self-executing agreements with the terms written directly into code. This innovation expanded blockchain technology beyond simple transactions to a wide range of applications.

Key features of Ethereum include:

• Programmable blockchain: Allows developers to build applications using smart contracts
• Decentralized operation: Runs on thousands of computers worldwide, with no central point of control
• Native cryptocurrency: Powered by Ether (ETH), which serves multiple purposes in the ecosystem
• Evolving technology: Regularly updated to improve security, efficiency, and capabilities

The History of Ethereum

Ethereum's journey from concept to global platform has several notable milestones:

2013: Vitalik Buterin publishes the Ethereum whitepaper, describing a platform for decentralized applications.

2014: Ethereum Foundation is established and conducts a crowdsale to fund development, raising 31,000 BTC (worth about $18 million at the time).

July 2015: Ethereum mainnet launches, allowing developers to start building on the platform.

2016: A project called The DAO is hacked, leading to a controversial split that creates Ethereum (ETH) and Ethereum Classic (ETC).

2017-2018: Initial Coin Offering (ICO) boom sees hundreds of projects launching tokens on Ethereum.

2020: Ethereum 2.0 development begins with the launch of the Beacon Chain, starting the transition to Proof of Stake.

September 2022: "The Merge" successfully transitions Ethereum from Proof of Work to Proof of Stake, reducing energy consumption by ~99.95%.

This ongoing development reflects Ethereum's commitment to evolving and addressing challenges as the platform grows.

How Ethereum Works

Ethereum operates through several key mechanisms that enable its programmable capabilities:

Smart Contracts

Smart contracts are self-executing agreements where the terms are directly written into code. When predetermined conditions are met, the contract automatically executes.

For example, a smart contract could:

• Automatically transfer ownership of a digital asset when payment is received
• Release insurance payments when verified conditions occur
• Facilitate lending and borrowing without traditional financial intermediaries

These contracts run on the Ethereum Virtual Machine (EVM), which executes the code exactly as written across all nodes in the network.

Consensus Mechanism

Ethereum secures its network through a Proof of Stake (PoS) consensus mechanism, which replaced the energy-intensive Proof of Work system in 2022.

In PoS, validators (similar to miners in Bitcoin) stake 32 ETH as collateral to participate in the block validation process. The system randomly selects validators to create new blocks and verify transactions, with validators earning rewards for honest participation and facing penalties for malicious behavior.

This approach significantly reduces energy consumption while maintaining security and decentralization.

Gas System

Every operation on Ethereum requires computational resources. "Gas" is the fee system that compensates for these resources:

• Gas fees are paid in ETH
• More complex operations require more gas
• Fees fluctuate based on network demand
• Recent upgrades have made fees more predictable

This system prevents spam and ensures efficient use of the network's resources.

Understanding Ether (ETH)

Ether is the native cryptocurrency of the Ethereum platform, serving multiple functions in the ecosystem:

Supply and Distribution

Unlike Bitcoin's fixed supply of 21 million coins, ETH has no maximum supply cap. However, after the transition to Proof of Stake, new ETH issuance decreased significantly, and some ETH is even removed from circulation (burned) with each transaction.

This economic model aims to balance security needs with maintaining ETH's value over time.

Utility of Ether

ETH serves several essential functions:

Transaction Fees: Users pay ETH as "gas fees" to perform any operation on the network.

Staking: Validators stake ETH to secure the network and earn rewards.

Storage Deposit: Applications pay ETH to store data on the blockchain.

Medium of Exchange: ETH is widely accepted for payments both within and outside the Ethereum ecosystem.

Store of Value: Many people hold ETH as a long-term investment, similar to Bitcoin.

These multiple use cases create ongoing demand for ETH as the Ethereum ecosystem grows.

Real-world Applications of Ethereum

Ethereum's programmable nature has enabled numerous applications across various industries:

Decentralized Finance (DeFi)

DeFi applications recreate traditional financial services without intermediaries:

• Lending platforms where users earn interest by lending crypto assets
• Decentralized exchanges that allow direct trading between users
• Stablecoins pegged to traditional currencies
• Insurance products without traditional insurance companies

These services typically offer greater accessibility, transparency, and potentially higher returns than traditional finance, though with increased complexity and risk.

Non-Fungible Tokens (NFTs)

NFTs represent ownership of unique digital or physical items on the blockchain:

• Digital art and collectibles
• Virtual real estate in metaverse platforms
• Music and media ownership rights
• Game items and characters

The NFT market exploded in popularity in 2021, with some digital artworks selling for millions of dollars.

Decentralized Autonomous Organizations (DAOs)

DAOs are organizations governed by smart contracts and token holders instead of traditional management:

• Members vote on proposals using governance tokens
• Treasury funds are managed according to established rules
• Operations run through automated processes where possible

These organizations range from investment groups to grant-giving entities to social communities.

Enterprise Solutions

Many large companies have begun implementing Ethereum-based solutions:

• Supply chain tracking and verification
• Digital identity management
• Cross-border payment systems
• Document verification and certification

The Enterprise Ethereum Alliance includes hundreds of companies working to implement blockchain technology in business contexts.

Trading Ethereum on LeveX

LeveX offers multiple ways to trade Ethereum based on your strategy and risk tolerance:

Spot Trading

Spot trading allows you to buy and hold actual ETH. This approach:

• Gives you ownership of the underlying asset
• Lets you benefit from long-term price appreciation
• Enables participation in the Ethereum ecosystem

Perpetual Contracts

Perpetual contracts let you trade ETH price movements with leverage without owning the actual tokens. These derivatives offer:

• Up to 100x leverage to amplify potential returns
• Ability to profit from both rising and falling prices
• No need to manage wallet security or storage

LeveX provides competitive fees and an intuitive interface for both trading options, making it easy to incorporate Ethereum into your trading strategy.

Advantages and Challenges

Ethereum's Strengths

First-Mover Advantage: As the pioneer of programmable blockchains, Ethereum has the largest developer community and ecosystem.

Network Effects: The more applications and users join Ethereum, the more valuable the network becomes.

Continuous Innovation: Regular upgrades address limitations and add new capabilities.

Institutional Adoption: Many businesses and financial institutions have begun using Ethereum-based solutions.

Challenges to Consider

Scalability: Despite improvements, Ethereum still faces challenges handling large transaction volumes, leading to potential congestion and higher fees during peak times.

Competition: Several "Ethereum killers" claim to offer similar functionality with better performance, though none have yet matched Ethereum's ecosystem size.

Complexity: The learning curve for developers and users can be steep compared to simpler blockchains.

Regulatory Uncertainty: Evolving regulations around cryptocurrencies and decentralized applications may impact Ethereum's growth.

Getting Started with Ethereum

Whether you're interested in trading ETH for potential returns or exploring the wider Ethereum ecosystem, understanding this platform provides insight into the future of decentralized technology.

For traders, creating a LeveX account gives you access to both spot trading and leveraged perpetuals for Ethereum, with competitive fees and an intuitive interface.

If you're new to cryptocurrencies, our Help Center provides resources to help you understand trading basics and platform features. For more information about other cryptocurrencies, check out our Crypto in a Minute series.