Ethereum 101 – Understanding The Basics
Cryptocurrency is a type of Money and Ethereum (ETH) is one, renowned among all. It does not exist in physical form; rather digital files are used as money for the transaction purpose. These virtual or digital currencies are not controlled by any government or organization (decentralized currency).
The most common example of CryptoCurrency is Bitcoin (BTC). Nowadays many governments are accepting Bitcoin as a mode of financial transaction. Bitcoin is being considered as the future of all monetary and financial transactions.
What Exactly is Ethereum?
Ethereum is a network of decentralized blockchain; Ether Token is the powerhouse for Ethereum. With the help of Ethereum and Ether token, users can complete financial transactions, earn additional benefits on interest through staking. Users can store and utilize non-fungible tokens (NFTs), play games, trade cryptocurrencies and use social media, etc.
Ethereum is a PoW (proof of work) blockchain but it is easily moving towards PoS (proof of stake blockchain). Ethereum 2.0 is upgrading for more environment-friendly ways for its users.
At present time Ethereum is being considered as the next step of the Internet. Ethereum is a more advance, decentralized network powered by its users. If we compare a centralized platform like apple to Ethereum, then its app store portrays web 2.0 whilst Ethereum represents web support of the next generation that is Web 3.0.
Ethereum not only supports decentralized finance (DeFi) but also decentralized exchanges (DEXs) and decentralized applications (DApps). These are general examples of what Ethereum can do.
These areas are trustless and automated types of traditional ways in the field of finance and the internet.
The user number is increasing day by day. Some of the fields like Decentralized finances already have billions of total value. This number is expected to increase in the future.
At the present time, Ethereum is the second-largest blockchain network across the globe but it was not the case at the beginning. The main reason for Ethereum to exist was to overcome the flaws of Bitcoin. It was created by Vitalik Buterin.
The white paper for Ethereum was published in 2013 by Buterin. This proved to be a revolutionary step as it enabled the development of applications that are decentralized (DApp). Although the development of DApp was already in progress under the blockchain network, the platforms were not able to exchange data.
The co-creator of Ethereum wanted to solve this issue and unify all the platforms. This became the reason for the existence of Ethereum 1.0. Ethereum works as a common platform for many developers. It functions similar to the app store of apple, abiding by the rules. The developers could also regulate and enforce their own set of rules within DApps.
Ethereum is not related to any centralized authority but it functions under the command of its users. To build such a network was not an easy task nor was it cheap. The founders of Ethereum held a pre-sale to raise funds to bolster the development of Ethereal.
Ethereum foundation was also established in Switzerland. Its mission was dedicated to the development and maintenance of the network. Soon it was declared that the Ethereum Foundation would function as a Non-profit. Some of the co-founders left the foundation after this declaration.
With time the Ethereum gained many new decentralized ideas. A democratic body, DAO was founded to vote on any proposals or changes. With the help of a smart contract, there was no need for a CEO. There needed a majority of votes for any change to be implemented officially.
But the plans got ruined when the funds of DAO got stolen by a hacker. This required DAO to upgrade its software and protocols. The “New Fork” kept the original name Ethereum but the original network was renamed as Ethereum Classic.
How does Ethereum Work?
Ethereum like Bitcoin is available on numerous computers because of huge user participation. These users participate as “nodes” and not as a centralized server. Because of this, the Ethereum network has a large decentralized network and high immunity to cyber attacks. The networks do not collapse because of one collapsed computer because the other computers are supporting the networks.
A single and decentralized system called Ethereum Virtual Machine (EVM) helps the computers to function in the Ethereum network. Every interaction must go through a verification process to update their copy. A copy is owned by each node.
The other interactions are considered transactions. They are stored in the Ethereum blockchain. These blocks are validated by each miner who acts like a digital ledger. The process of Mining and verifying transactions is called the PoW consensus method.
An individual block consists of a special 64 digit number. Miners have to find and prove with the help of their computer power that the code is unique. The proof is computer power and the miners are rewarded accordingly in ETH.
The transactions made by Ethereum are public just like blockchain. Completed blocks are broadcasted to the rest of the networks. This confirms the change and adds the block to every user’s ledger copy. These confirmed blocks cannot be corrupted. This becomes a source of history for all transactions on the network.
Every miner earns ETH while working. The fee while processing the transaction is called “Gas”. The user has to pay this transaction fee. The validation of the transaction is completed by the miner. It helps in securing the network. The actions related to the transactions are restricted for the user. It also prevents any spam in the network. The supply of ETH as a utility token is infinite. The miner rewards are in the form of Ether. The demand for Ether will always be there and inflation will not cause the asset to get devalued.
The gas fee for Ethereum can be a bit high. This depends on the activity of the network. The fee depends on the type of transactions and amounts. This leads the miners to choose a transaction with the highest “gas”. The users compete to validate the transactions. This causes the price of “gas” to rise. This can lead to congestion in the network. Ethereum 2.0 is trying to solve this issue.
To interact with Ethereum, you need cryptocurrency. The cryptocurrencies are connected to a wallet. This wallet is connected to DApps. The wallet acts as a passport. From there users can buy things, play the game or even lend money. These activities are similar to all the other traditional actions performed on the internet. Traditional websites are free to their users because they collect and sell the user data to earn money.
With the help of Crypto, currency users can interact and browse anonymously. The use of DApps is unbiased as the financial transactions will not be based on financial or racial status. Even if an intermediary thinks that a transaction is suspicious, he cannot block it. This is the main reason for Ethereum to be called the Web 3.0- Future of web interactions.
Ethereum Vs Bitcoin Comparison
At present, Bitcoin is considered the mainstream cryptocurrency. It has become known to every person out there. But Ethereum also wants to expand its reach. Bitcoin is digital money with limitations; people believe that Bitcoin is good for a store of value like gold while Ethereum dreams of taking over the internet by providing a more anonymous and secure network.
ETH is a mode of interaction with the network rather than a mode for monetary transfer. A Unique token based on Ethereum can be developed by the developers to provide an exchange facility between Ethereum based networks. While the Bitcoin network is only for Bitcoin users.
Ethereum: Plus points
- Decentralization and anonymity- Ethereum provides security and anonymity to its users.
- No censorship- The decision against a particular action is made by the vote of the users.
- Community-based- It is not a centralized service. It solely depends on the votes of users. No accumulation of authority to one entity.
- Hardcoded rules and smart contracts- The rules are unchangeable and the same for everyone without any discrimination.
- Easily acquired- Major online transaction service providers like PayPal support the purchasing of cryptocurrencies. The service is provided within the application for its users.
For people who are new to cryptocurrency, it is a bit confusing to understand these things and it is totally fine. We often hear these unfamiliar terms like Ethereum, Bitcoin, and Ether in the news, on the internet, and in the financial market but we must understand that these areas are still developing and there are many aspects of this revolution in the field of digital currency and network.
But is good to know these concepts beforehand, because we never know how things will function in the future. While Ethereum provides many options and a secure network to its users, it would not be wrong to say that t does have the potential to change the internet infrastructure. So it’d be presumptuous to compare Ethereum to Bitcoin, maybe it can provide us even more.