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Ether (ETH): The fuel for the Ethereum blockchain



Whether you are creating a digital collectible or collateralizing a crypto loan, you pay the usage fees for the Ethereum network with Ether or "gas".



SUMMARY


Ethereum was designed to be a decentralized, global supercomputer that cannot be controlled or censored by third parties. Since every single operation that takes place on the Ethereum network requires a certain amount of computing power, this emphasis on decentralization requires an alternative model to facilitate on-chain transactions and incentivize network usage. To address these challenges, Ethereum's developers created Ether (ETH), the blockchain's native coin, to power the network.



CONTENT

  • What is Ether (ETH)?

  • ETH fees: Who receives them?

  • Multifunctional ETH: the lifeblood of the Ethereum ecosystem.

Ethereum is a decentralized blockchain platform that allows users to transfer and exchange value and data without intermediaries. This is made possible by Ethereum's smart contracts, which are hard-coded rules that are automatically executed within the network once certain predefined conditions are met. While this system eliminates the need for centralized validators, it has also led to a unique new challenge: how to pay for processing transactions up the chain in a fair yet trustworthy way. The solution is Ether (ETH), the Ethereum platform's own coin.



WHAT IS ETHER (ETH)?


As the second largest blockchain by market capitalization, Ethereum hosts an ever-growing ecosystem of decentralized applications (dApps) that enable peer-to-peer interactions between users. Every action on the Ethereum network - whether you are creating a digital collectible or securing a crypto loan - involves a transaction, and each of these transactions requires a certain amount of computing power. These transactions are paid for with ETH.


The ETH fees involved in transactions on the Ethereum blockchain are called gas. In this sense, ETH is the fuel that powers the Ethereum network. This ensures a continuous demand for ETH, as both service providers and end users on the Ethereum network need to constantly buy and spend ETH in order to interact with each other via the network's smart contract protocols.


Among Ethereum users, the cost of gas is expressed in GWEI, a denomination of Ether equivalent to 0.000000001 ETH. The exact amount of this cost per on-chain operation depends on the computational effort required to perform that action and can therefore be affected by how congested the network traffic is at the time of the action. For transparency purposes, users are typically told the approximate gas fees before they are asked to initiate a transaction, and many services built on Ethereum allow users to pay a higher gas fee than recommended to speed up their transaction or increase the likelihood that it will be successfully executed by the network.


As gas fees can fluctuate depending on the volatility of network usage, Ethereum users who want to avoid excessive Ether transaction fees can set a gas limit for their transaction, meaning that the planned transaction will not be executed if the associated cost exceeds a certain value. ETH gas fees also serve as a spam deterrent, as nefarious actors who would otherwise attempt to disrupt the system through a cascade of low-value transactions are financially deterred by the prospect of paying ETH gas fees.



ETH FEES: WHO RECEIVES THEM?


Ethereum currently uses a proof-of-work (PoW) consensus algorithm that relies on miners - users who provide computing power to verify and record blockchain transactions in exchange for newly minted ETH coins. This is the only way to mint new ETH. Within the Ethereum network, miners create new blocks every 12 to 15 seconds. Historically, they are rewarded with two ETH coins for each successfully validated block, in addition to the accrued gas fees associated with the transactions that took place within that block.


Gas fees depend on what the initiator of the transaction is willing to pay and what the miner is willing to accept. Since there are multiple transactors and miners at any given time, the network's gas fees naturally adjust to the dynamic conditions of usage and demand on the chain. This reward system is necessary to incentivize miners to participate in the Ethereum network and run the system's decentralized processes. In general, the more miners a network has, the safer and more efficient it is. A healthy relationship between miners and transactors is therefore essential for a thriving network.



MULTIFUNCTIONAL ETH: THE LIFEBLOOD OF THE ETHEREUM ECOSYSTEM


ETH is not only used to compensate miners and pay transaction fees but has also proven to be an effective medium of exchange within the Ethereum ecosystem. Transactions using ETH can be much faster and potentially cheaper than traditional payment services, and due to Ethereum's decentralized architecture, the network's transactions are also censorship-resistant. This means that third parties are unable to intercept or prevent transactions on the chain. ETH is also essential for the functioning of the rapidly expanding decentralized financial system (DeFi), where ETH is commonly used as collateral for crypto loans and earns interest. According to reports, over $22 billion worth of ETH was locked up in DeFi platforms as of January 2021.


Due to the explosion of interest in Ethereum's distributed computing technology, Ethereum has faced scalability issues and higher gas fees, especially with the recent surge in DeFi platforms. In response, and in line with the original vision of the network laid out by its creator, Vitalik Buterin, Ethereum developers are transitioning the network to a proof-of-stake (PoS) consensus algorithm with the Ethereum 2.0 upgrade. With Ethereum 2.0, Ether will be used as collateral on the network, allowing users to deploy ETH coins to validate new blocks in exchange for newly minted ETH and gas fees. This next stage of Ethereum development is expected to increase the scalability of the Ethereum blockchain while keeping the utility of ETH intact.


As Ethereum evolves and enables new use cases, Ether will continue to play a central role in the operational success of the network. With its increasing usage thanks in part to the DeFi explosion, ETH will likely continue to be one of the world's most widely used, trusted, and valued digital assets.


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