Ethereum : DeFi’s Greatest Match

Ethereum is a blockchain technology for building apps and organizations, holding assets, transacting, and communicating without being controlled by a central authority. Users hold control of their own data and what is being shared. Ethereum has its own native cryptocurrency, Ether (ETH), used as a transaction fee on the Ethereum network.


What is Ethereum

It's nearly impossible not to know about Ethereum today. At the very least, you've heard of it as the second-largest digital currency, behind Bitcoin in market capitalization. Some will preach that Ethereum is the future, while others will tell you it's bygone with more innovative chains in the market now.

At its core, Ethereum is a blockchain with a distributed network of computers (nodes) built to run decentralized applications, also known as dApps. These dApps are built with smart contracts that make agreements or conduct transactions without a middleman. This allows builders to develop applications across financial services, games, social networks, and others that respect your privacy and are censorship resistant. It makes Ethereum exist like a marketplace ecosystem, unlike Bitcoin, which only operates as a payment network.

Let's use big tech as an example. How often do you use Google, Facebook, Twitter, Amazon, or other faceless technology? These companies gather and store your data on their servers, usually kept in only a few locations. This is centralization and is exactly what Ethereum wants to remove.

If one of these companies were to get hacked, much of your personal information could be exposed to unsavory attackers. Cue Ethereum, which wants to reduce the need to trust these organizations and applications that contain private information. How? With the use of a blockchain feature called decentralization.

Ethereum currently has the largest Web3 developer ecosystem. The blockchain’s composability has now paved the way for a broad spectrum of markets: from swapping tokens (Uniswap), to lending and borrowing crypto (Compound), to buying and selling non-fungible tokens, aka NFTs (Opensea), and even earning from playing games (Axie Infinity).

Related: Learn more about Ethereum here.

Who founded Ethereum

Ethereum — developed and founded by Vitalik Buterin and Gavin Wood — launched in 2015 as a platform to democratize everything using the technology that powers Bitcoin and other cryptocurrencies. Buterin wanted to provide a way to take power wielded by the world's centralized financial institutions and give it back to the individual.

History of the Ethereum hard fork split

For those unfamiliar with the project, Ethereum split into two distinct but similar projects: Ethereum (ETH) and Ethereum Classic (ETC). This hard fork was the result of differing opinions within the Ethereum community. It started when a startup called DAO was introduced to the Ethereum platform. Within weeks, the project managed to raise USD 150 million in ETH.

Unfortunately, USD 50 million was stolen from the platform due to a developer error. However, because of how the DAO was built, the hacker could not access their stolen funds until after a 28-day waiting period. Two options were presented: create a hard fork or do nothing.

Even though it meant people would lose their money, a significant group believed the blockchain should remain untouched. This group remains loyal to the original Ethereum blockchain, now known as Ethereum Classic (ETC). Those who chose to hard fork voted to give everyone who invested in the DAO their money back by changing the original blockchain code.

ETH has far and away been the better investment option of the two. When new cryptocurrency projects are created, they are often developed on the Ethereum blockchain. The digital assets associated with these projects are often called ERC20 tokens. To date, many projects have chosen to launch Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), and Initial DEX Offerings (IDOs) on Ethereum to raise funds, which continues to drive up the value of ETH.

Related: Learn more about the history of Ethereum here.

Ethereum and smart contracts

As a type of Ethereum account, a smart contract is a program that resides and runs on a blockchain network like Ethereum. These open-source programs run on the blockchain, allowing users to perform transactions without needing a third party. They make Ethereum extremely flexible and programmable in what it can do, like building and deploying dApps on its network.

Smart contracts can enforce penalties and rules associated with an agreement. This works the same way a traditional contract works, but instead of resorting to litigation, the penalty automatically initiates when certain parameters are or are not met. These conditions are coded into the contract, so the code automatically executes when an event is triggered — like if an agreed-upon date passes.

That's just one of the many advantages and use cases of smart contracts. There’s no confusion and no need to involve another entity or person. They're well-suited for many use cases, i.e., healthcare, finance, real estate, supply chain, and many other industries. Smart contracts offer speed, autonomy, trust, and safety, which you won't always get with a traditional agreement.

Related: Learn Solidity and Vyper (from our Lead Smart Contract Programmer).

Ethereum and Decentralized Finance (DeFi)

Today, Decentralized Finance, or DeFi, offers an alternative to traditional financial systems where the monetary **system revolves around cryptocurrencies. This system built on smart contracts using those currencies is accessible to anyone with an internet connection that uses a decentralized network like Ethereum. Financial markets in DeFi are a lot more efficient - they’re always open, with no centralized bodies of control that can block payments or deny access to services. It gives users scale, speed, and connectedness, especially in parts of the world where money is needed most. The transparency and censorship resistance levels with DeFi are also unprecedented, allowing anyone (regardless of demographic) to transact, verify, audit, and build on top of it.

While DeFi arguably has been around since the introduction of Bitcoin in 2009, the growth of modern DeFi is believed to have started after 2017 with ICOs and the founding of key projects like MakerDAO, Compound Finance, Uniswap, and Balancer. These protocols started on Ethereum and were popularized during the 2020 DeFi Summer. The term “DeFi” is believed to be coined by Ethereum developers and entrepreneurs in a Telegram group chat in August 2018.

The Merge

The Ethereum Merge, or “The Merge,” was successfully executed on September 15, 2022. It was the most anticipated event in crypto for upgrading the Ethereum Mainnet from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus, reducing energy consumption by 99.95%.

Essentially, the environmentally unfriendly mining mechanism of PoW in its legacy consensus was replaced with a staking mechanism where consensus is more decentralized amongst a minimum of 16,384 validators (currently over 500k, as of Jan 2023) to secure the network using economic incentives with staked ETH.

How does Ethereum work

Since Ethereum is an aggregate of its nodes, these notes are run by validators - or individuals and businesses worldwide to secure the network. Every node is a machine storing its own EVM state (Ethereum Virtual Machine, its native processing system) as part of the block verification process. Validators are randomly selected to propose a block of transactions. These validators are rewarded with small amounts of newly-issued ETH. Essentially, they replace Web2 servers and cloud system providers to continuously run client software that verifies the validity of blocks and transactions on computers or dedicated hardware. Gas, the amount of ETH paid as a fee to a node, is required to process every transaction.

Ethereum’s decentralized nature allows participants to own a copy of the blockchain and provides resiliency to the Ethereum network infrastructure, making it less vulnerable to hacks or shutdowns. Ethereum has never suffered downtime since its launch in 2015.

Fundamentally, the blockchain consists of smart contracts, its consensus mechanism, native token, and EVMs to operate and achieve its goal.

About Ether (ETH) Token

Ethereum’s native cryptocurrency is called ether (ETH). It powers Ethereum and is the currency of applications and fees on Ethereum. It’s purely digital, and users can instantly send it to anyone anywhere. ETH is decentralized and completely transparent; no centralized government, company, or single party controls the supply of ETH.

The ETH token has value and is used differently by different people, i.e., as payment, collateral, to earn interest, or to swap tokens in DeFi. It is also used to earn rewards as incentives for staking ETH to help secure the network.

Where to get ETH

There are several ways to acquire ETH, depending on where you reside. Most commonly, you can purchase ETH via exchanges or directly from Web3 wallets:

  • Centralized exchanges - e.g., Coinbase, Kraken, and Binance.
    They allow users to buy crypto with fiat currencies. They hold custody over your crypto until you send it to a wallet you control.
  • Decentralized exchanges - e.g., Uniswap, Kyber, and 1inch.
    They allow users to swap crypto on an open marketplace directly with traders without giving up control of funds.
  • Web3 wallets - e.g., Metamask, Torus (Web3Auth), Ledger, and Trezor.
    They allow users to buy crypto with a debit/credit card, bank transfer, or Apple Pay.

Earning yield on ETH

There are several ways users can choose to earn yield on ETH they’ve invested in or own. Here are some key ways to explore doing so:

Liquidity Provision

  • Lending
    Depositing ETH to lending pools on protocols like Aave, Compound, and MakerDAO allows users to earn interest in ETH or other tokens for their contribution. Rates can vary depending on market conditions.
  • Automated Market Makers (AMMs)
    Providing liquidity to AMMs like Curve, Uniswap, and Balancer in ETH liquidity pools allows users to earn yield from platform trading fees and liquidity provider (LP) tokens.
  • Yield Farming
    This is the process of staking LP tokens earned from providing liquidity into other DeFi protocols to boost APY and earn additional LP tokens at a much higher risk. Depending on a user’s market sophistication, strategies can range from simple to complex, involving single or multiple protocols of varying steps in the process. DeFi risks apply and increase with more protocols.
  • Yield Aggregators
    Depositing ETH into a yield aggregator like Unagii App’s DeFi Vaults allows users to automatically yield farm assets across DeFi protocols for the highest returns. Think of it like a robo-invester for crypto. Strategies are pre-set, and the rebalancing of assets is automatically adjusted for users. This simplifies DeFi benefiting those new to crypto and passive earners who prefer convenience with a decent yield.

Staking ETH

Staking ETH involves depositing 32 ETH to activate validator software to help secure the Ethereum network for everyone and earn ETH. The network strengthens against attacks when more ETH is staked because it’ll require more ETH to hold majority control.

There are multiple ways to stake ETH, depending on resources and how much you’d like to stake. Note that staking risks apply. Penalties include slashing for dishonest behavior or downtime, where validators will lose a percentage of their staked ETH when this happens.

  • Solo staking
    Earn maximum rewards of ETH by staking 32 ETH on your own hardware.
  • Staking-as-a-service
    Earn maximum rewards of ETH minus service commission by delegating operations of running a validator to a staking provider. No hardware is required.
  • Pooled staking
    Earn rewards in a collaborative approach with a lower barrier of entry by swapping any ETH amount into a "liquid staking derivative” or a yield-bearing staked ETH token. Lido is the leading Ethereum staking pool.
  • Centralized exchanges
    Earn rewards from staking any amount with the least effort if you hold ETH on centralized exchanges or are uncomfortable holding your own wallet keys.
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