Ethereum’s use cases range from gaming and NFTs to DeFi apps and smart contracts, and with the blockchain’s switch from Proof of Work to Proof of Stake, Ethereum’s utility continues to grow. 

Ethereum’s emergence sparked debates on the true utility of crypto with many arguing that the world needed more than just Bitcoin if we wanted a brighter future for Web3 and blockchain technology.

This article aims to guide you through the myriad use cases of Ethereum, shedding light on its revolutionary applications, such as smart contracts, decentralized finance (DeFi), non-fungible tokens (NFTs), liquid staking and more. 

Understand the basics of Ethereum as we delve into the network’s history, important milestones and the pros and cons associated with both the blockchain and its native cryptocurrency ETH.

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Understanding Ethereum: An Overview

Before diving into Ethereum's use cases, let's grasp the fundamentals. 

Ethereum is a decentralized platform that enables the creation and execution of smart contracts and decentralized applications (dApps). It was founded by Vitalik Buterin in late 2013 and went live on July 30, 2015, with the release of its first version, Homestead.

At its core, Ethereum is a blockchain-based platform that extends the capabilities of Bitcoin beyond simple peer-to-peer transactions. While Bitcoin primarily focuses on being a digital currency, Ethereum is designed to be a global, open-source platform for decentralized applications.

One of Ethereum's key innovations is the introduction of smart contracts. Smart contracts are self-executing contracts with the terms of the agreement written directly into the code. 

They automatically execute and enforce the terms when predefined conditions are met, removing the need for intermediaries in many transactions. This capability opens up a wide range of possibilities across various industries. 

Read on to learn more about the use cases of smart contracts.

Ether (ETH) is the native cryptocurrency of the Ethereum platform. Initially it was  used to compensate miners for securing the network, processing transactions, and executing smart contracts. 

Ether also serves as "gas," a unit to measure computational work within the network. Users pay gas fees to deploy smart contracts and execute transactions on the Ethereum network.

And now that Ethereum has moved from a Proof of Work consensus to Proof of Stake, ETH is used by validators to stake on the network, and is the currency validators are rewarded with. 

Ethereum's decentralized nature makes it resistant to censorship and fraud. It operates on a global network of nodes, which are computers that validate and store data on the blockchain. This distributed network ensures that no single entity has control over the entire system, promoting transparency and security.

Developers can create decentralized applications on the Ethereum platform using various programming languages. The most commonly used language is Solidity, specifically designed for writing smart contracts on the Ethereum Virtual Machine (EVM). 

The EVM is a runtime environment that enables the execution of smart contracts on the Ethereum blockchain and manages the state of it also.

EVM’s are contained with client software that are needed to run nodes through Ethereum. Client software allows you to interact with the Ethereum blockchain in a number of ways such as sending transactions, and also setting up and running smart contracts.

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Ethereum Use Cases Explained

Since its inception in 2013 and the eventual update in 2022 to Proof of Stake, Ethereum’s use cases have evolved impressively. 

For many it’s the all in one package, here are a few of its key use cases. 

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Smart Contracts: Revolutionizing Contracts Execution

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. Smart contracts were first introduced on Ethereum in 2015 when the main blockchain was launched. However the first ever contract was actually proposed in 1994 by ​​Nick Szabo. He created a digital currency called “Bit Gold” in 1998 a decade before Bitcoin!

Ethereum's smart contract functionality opens the door to various applications across different industries:

Automated Finance (DeFi): Smart contracts power decentralized finance applications, allowing users to lend, borrow, trade, and earn interest without relying on traditional financial intermediaries.

Supply Chain Management: Ethereum smart contracts enable transparent and automated supply chain processes, reducing fraud and ensuring the integrity of goods from production to delivery.

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Decentralized Finance (DeFi): Democratizing Finance for Everyone

DeFi has emerged as one of the most impactful use cases for Ethereum, bringing financial services to a global audience without the need for traditional banks. Ethereum has allowed DeFi to blossom and  continues to innovate with the recent Ethereum 2.0 update.

Users now have more control of their finances and can get more utility from them. Ethereum’s growth has sparked further advancements throughout DeFi whether it be for layer 2 solutions on top of Ethereum or on other networks such as Solana!

Some key aspects of Ethereum DeFi include:

Decentralized Exchanges (DEXs): Platforms like Uniswap and SushiSwap leverage smart contracts to enable users to trade cryptocurrencies directly from their wallets, without relying on a centralized authority.

Lending and Borrowing: DeFi platforms like Aave and Compound allow users to lend their crypto assets and earn interest or borrow assets by collateralizing their holdings.

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GameFi: Transforming the Gaming Industry

Ethereum's blockchain has found applications in the gaming sector, giving rise to GameFi. Non-fungible tokens (NFTs) play a pivotal role in this domain. 

Some of the biggest games in DeFi like The Sandbox and Axie Infinity utilize Ethereum. Thanks to the security and infrastructure it allows projects to onboard vast numbers of players into their games.

NFTs in Gaming: Ethereum-based NFTs represent unique in-game assets, such as characters, skins, or items. Players can buy, sell, and trade these assets securely on the blockchain.

‍Ownership and Interoperability: Ethereum's blockchain ensures true ownership of in-game assets, allowing players to use them across different games or sell them in secondary markets.

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Data: Enhancing Security and Privacy

Ethereum's decentralized nature and smart contract capabilities contribute to secure and privatize data management. Through the use of Merkle Patricia Trie data structure, it is shaped like a tree, with each node representing a singular piece of data.

Decentralized Storage: Projects like Filecoin and Arweave utilize Ethereum's blockchain to create decentralized storage solutions, enhancing data security by eliminating a single point of failure.

Identity Management: Ethereum facilitates decentralized identity solutions, allowing users to control and manage their digital identities without relying on centralized authorities.

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Non-Fungible Tokens (NFTs): Tokenizing the Creative Economy

NFTs, unique digital assets represented on the blockchain, have gained immense popularity on Ethereum. OpenSea and Blur are two of the biggest NFT marketplaces built for Ethereum based NFT collections, boasting billions of dollars since their inception. 

The first NFT collections were made on Ethereum, along with it being the second most popular network behind Bitcoin. This makes it a popular choice for investors and development teams.

Some of the most popular Ethereum NFTs are:

Digital Art and Collectibles: Artists can tokenize their creations as NFTs, proving ownership and authenticity thanks to the immutable and open ledger of blockchain technology. Platforms like OpenSea, Blur and Rarible enable the buying and selling of digital art and collectibles with their marketplaces.

Gaming and Virtual Real Estate: NFTs extend to virtual worlds, where users can buy, sell, and trade virtual real estate and in-game items as unique digital assets.

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Layer 2 Scaling Solutions: Building a Better Ethereum

Once Ethereum was born this then gave rise to the creation of scaling solutions. These are used to build on top of a preexisting blockchain such as Ethereum and offer a hand in creating a more scalable and sustainable network, helping to increase transaction throughput and decrease costs like gas fees.

The best way to see Layer 2 is like a DLC package for a game. The game is the Layer 1 blockchain, in this instance Ethereum and then the Layer 2 compliments the experience much like downloadable content for a game.

Ethereum itself has a number of Layer 2 solutions such as:

Arbitrum: One of the leading Layer 2 solutions on Ethereum. It aims to lower the congestion and transaction costs which are a notable flaw of Ethereum. It offloads data storage from the mainnet to create a more streamlined network. Offchain Labs created Arbitrum in 2018.

Polygon: Allows blockchain developers to create scalable dApps on Ethereum, prioritizing performance, user experience and security. While using a PoS consensus mechanism, it does so using a unique version called Commit Chain and its More Viable Plasma. Commit chains act adjacently to the Ethereum mainnet allowing congestion to be alleviated for transactions. 

Polygon has become a popular choice for gaming projects thanks to its high throughput, The Sandbox metaverse being the most prominent example.

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Ethereum 2.0: A Glimpse into the Future

The Ethereum community eagerly anticipated the Ethereum 2.0 upgrade, a multi-phase process designed to address the scalability and sustainability issues of the current network.

The primary focus of Ethereum 2.0 was the transition from PoW to PoS. As a result the transaction speeds were improved and energy consumption was reduced.

Ethereum 2.0’s main features are:

Proof of Stake (PoS): Ethereum 2.0 replaces the energy-intensive PoW with PoS, where validators are chosen to create new blocks based on the number of coins they hold and are willing to "stake" as collateral. The Merge and the Shanghai Upgrade were the two key events that saw this successful evolution. 

Sharding: The Ethereum blockchain is broken down into smaller parts called shards. They allow multiple transactions to be processed simultaneously. This significantly enhances the network's capacity.

Beacon Chain: Launched as part of Ethereum 2.0, The Beacon Chain operates in parallel with the existing Ethereum network. It manages the PoS consensus and is a crucial step toward achieving the complete upgrade.

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Pros and Cons of Ethereum: A Balancing Act

Ethereum currently has 251.41M cumulative unique addresses on the network, making it one of the most popular blockchains.

It is good practice though to understand the drawbacks, despite many people using it. Use cases vary depending on the individual or organization’s goals with Ethereum and blockchain technology.

Pros

Smart Contracts: Ethereum introduced the concept of smart contracts, self-executing contracts with the terms of the agreement directly written into code. This feature automates and enhances the efficiency of various processes and can be leveraged by a range of industries.

Decentralization: Ethereum operates on a decentralized network of nodes, making it resistant to censorship and interference. This ensures greater security and transparency.

Ethereum 2.0 Upgrade: The ongoing transition to Ethereum 2.0 promises scalability improvements and a shift to a PoS consensus mechanism, enhancing efficiency and reducing environmental impact.

Vibrant Ecosystem: Ethereum has a thriving ecosystem with a plethora of DApps, enabling a wide range of applications, from financial services to gaming.

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Cons

Scalability Challenges: Ethereum faces scalability issues, leading to network congestion and high transaction fees during periods of heavy demand. While more scalable than Bitcoin, the blockchain trilemma persists due to security and decentralization being considered more important than scalability

Energy Consumption: The current Proof of Work (PoW) consensus mechanism requires substantial energy consumption, contributing to environmental concerns. Ethereum 2.0 aims to address this with the transition to PoS.

Competition: With the rise of competing blockchain platforms, Ethereum faces stiff competition, necessitating constant innovation to maintain its leading position. Direct competition of Ethereum includes Solana and Binance Smart Chain.

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Embracing Ethereum's Evolution

Ethereum's use cases extend far beyond being a simple cryptocurrency. 

Its innovative features, such as smart contracts and the Ethereum 2.0 upgrade, position it as a cornerstone in the blockchain space. 

Exploring the diverse applications in DeFi, GameFi, data management, and NFTs can provide valuable insights into the vast potential of Ethereum's technology. With so much built on the Ethereum blockchain it plays a crucial role in the emerging world of Web3.

Ethereum is not without its flaws due to scalability and energy consumption issues that over the long term can become detrimental for projects, protocols and the people using them. Time will tell though whether these drawbacks will restrict Ethereum, or give birth to new technologies that solve the problems.

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