What is Ethereum: Explained for Complete Beginners

As far as 2021 is concerned, things are going great for cryptocurrencies so far. Take Ethereum, for instance. Visa, a prominent payment processing network, has initiated a crypto payment on the Ethereum blockchain to expand its service card industry. The increased adoption of digital currencies has encouraged more and more individuals and businesses worldwide to explore Ethereum blockchain technology from a closer perspective.

As an enthusiast or an investor, you must have heard that Ethereum is a digital currency like Bitcoin. Nevertheless, it is much more than a virtual coin. Ethereum is the second-largest cryptocurrency by market capitalization, after Bitcoin. At the time of creating this post, Ethereum (ETH) was trading at US$1,793.44. However, Ethereum greatly differs from Bitcoin and other cryptocurrencies.

It is an open-source, decentralized, and distributed computing platform that allows for the creation of decentralized applications (Dapps) and smart contracts. Along with Ethereum comes ‘Ether.’ Now, most people may confuse the two for the same. While they are used in the same context, they differ from each other significantly.

We know that it is just the beginning, and we have put a lot on your plate. That’s why we have created this ultimate guide discussing what Ethereum is. Carefully go through each point as we get up-close with this blockchain technology, learn how it differs from Ether ETH, how it works, find out what is encouraging developers to build smart contracts and dApps using the Ethereum network, among other things.

Let’s jump right into it.

What Is Ethereum

As said, Ethereum is an open-source, decentralized, global platform that enables developers to build and write codes to create applications and control money that can be accessed from across the globe. The Ethereum network uses the Ethereum protocol based on the principles of blockchain technology. It allows developers to build and implement dApps or decentralized apps and operations based on their requirements. Therefore, developers can build hundreds and thousands of different decentralized applications.

This also includes the creation of smart contracts. A smart contract is a self-executing contract where the agreement between the seller and buyer is directly written into the lines of code. Also, smart contracts have certain significant technological implications. For starters, the lines of code cannot be altered, tampered with, or hacked.

Moreover, Ethereum works in a way that it uses nodes to replace individual servers and cloud systems owned by internet providers. The idea behind the use of nodes is to connect to become a single entity or a ‘world computer,’ providing infrastructure to businesses and people around the world. These nodes are looked after and operated by a large Ethereum community or volunteers.

To conclude, on Ethereum, you can build distributed systems and applications with no censorship or regulation and use smart contracts to conduct reliable and safe transactions.

What Is Ether

Now that you have got a basic idea of what is Ethereum, you might be curious about Ether. While nobody owns Ethereum, the services and programs with the Ethereum network need computing power. To start with, this computing power is not free, and thus, the role of Ether arises. Ether ETH is a digital asset bearer, just like a bond or security, and provides a solution to the payment issue.

Simply put, token Ether functions like cash in a way that it doesn’t need any third-party to process or approve the transactions. However, many people confuse Ether for a true-blue digital currency. In reality, it acts as a fuel for the applications on the decentralized Ethereum network.

To help you get a better understanding, let’s take an example. Suppose there is an application on the Ethereum network that enables users to create, modify, and delete notes. Now, in order to complete the task, the application needs computational power through the ETH network. To cover the cost of this computing power, users need to pay a marginal fee, which will allow them to make modifications to the existing notes or create a new note.

This is where Ether comes into the picture. It is a token that the users can use to make payments. In this regard, Ethereum Ether is a digital oil that fuels the whole process.

So, the users will have to pay transaction fees in the Ethereum network to get the computing power they need for the service.

Who Created Ethereum?

The Ethereum blockchain was created by a Russian-Canadian programmer and entrepreneur, Vitalik Buterin when he was just 19 years old. After the launch of Bitcoin, Vitalik’s interest in blockchain technology and digital currency grew significantly. He is also the co-founder of Bitcoin Magazine, an online news website. He wrote hundreds of informative articles on the crypto world. In 2011, he also went on to code for the Agora marketplace and Dark Wallet, a privacy-minded digital wallet.

As he gained more exposure to the crypto world, he came up with Ethereum. But unlike Bitcoin, Vitalik wanted Ethereum to go beyond the financial use cases. That is, he didn’t want to limit Ethereum to just decentralized finance purposes.

In 2013, Vitalik released a white paper describing a robust and alternative blockchain platform for decentralized app developers. With its release, more and more developers were drawn towards the idea of developing decentralized apps or apps because these applications would be accessible globally.

In 2014, Vitalik was awarded a $100K Peter Thiel Fellowship to work on Ethereum. A year later, Ethereum was live, and today, it has a market cap of over US$222 million.

How to Use Ethereum?

The best way to get Ethereum is from Ethereum exchanges. All you have to do is follow this simple procedure to buy Ethereum from an ETH exchange:

• Choose a Bitcoin Ethereum
• Sign up and create an account
• Add your preferred payment method (credit/debit/bank transfer included)
• Buy Ether

There are plenty of Ethereum exchanged from where you can buy ETH. Some of the most trusted and popular Ethereum exchanges include:

• Coinbase
• Gemini
• Kraken
• HitBTC
• Bittrex
• Poloniex
• Uphold
• GDAX
• Bitfinex

Once you choose an exchange platform, it is time to create an account. Now, the account can be created directly via the exchange’s website or from its official mobile app. You will have to provide personal data like your name, photo of your ID, social security number, etc.

Next, you will have to add a payment method. The payment options can differ from country to country. Nevertheless, most ethereum exchanges offer the following payment options:

• Bank wires
• Debit cards
• Credit cards
• Some only accept payment via Bitcoin only

Finally, it is time to buy Ether. The price of Ether changes all the time. Therefore, the amount you get for each Euro, dollar, or Yen varies.

Pro TIP: Don’t buy a complete ETH coin. Instead, invest in a small fraction of the Ether, say 0.0001 or 0.1 ETH. This is enough to get you started, even if the price is high.

You are all done! Just make sure that you learn how to use, secure, and store your Ether.

What can I do with Ether?

Like Bitcoin, Ethereum is a cryptocurrency, but it does a lot more than that. For starters, users can build blockchain-related applications using Ethereum. When you hear people say they ‘bought Ethereum,’ they are actually referring to ETH or Ether. Ether is a tradable digital coin designed to fuel the Ethereum blockchain ecosystem.

Nevertheless, it can also be used as a traditional currency (fiat). The following are some ways to cash out of Ethereum:

1.   Trader Ether for Goods and Services:

Like any liquid crypto assets, Ethereum can be traded with users who have associated ETH wallets. ETH is highly scalable for p2p transactions, and as compared to Bitcoin, it is incredibly cheap and fast. Moreover, users can leverage the benefit of smart contracts to program or implement certain parameters or protocols into a transaction. This ultimately eliminates the need for third-parties, like a banking institution or a lawyer. You can buy groceries or get a haircut with ETH.

2.   Trade with other Cryptocurrency assets on the Exchange Platform:

One of the best ways to use Ether is to exchange it for ‘altcoins’ or other crypto assets. There are many cryptocurrency tokens that are seemingly popular as Bitcoin and Ethereum. You can use ETH for buying and selling these altcoins. The value of these altcoins fluctuates on a daily basis. Keeping an eye on your preferred token may get you a good deal.

3.   Trade Ether for Fiat Currencies:

ETH can be used to pay for ‘real money.’ It is a fairly straightforward process. All you have to do is find an exchange that offers you the desired currencies in exchange for Ethereum. This is one of the best ways to liquify your digital money.

4.   Participate in an ICO:

An Initial Coin Offering or ICO is a process in which new projects sell their newly-minted cryptocurrency tokens in exchange for ETH or BTC. Similar to crowdfunding, ICO lets startups sell to initial shareholders or investors.

What is an Ethereum wallet?

Ethereum wallets are interactive applications that allow users to access their Ethereum account. Simply put, ETH wallets are just like internet banking apps, but without the bank. With an ETH wallet, you can connect to applications, send transactions, and read your available balance. In order to manage and send funds, you need an Ethereum platform that lets you store your tokens.

The wallet is just a tool to manage your ETH account. This means that you can change and swap ETH wallet providers any time you want.

Types of wallet:

• Desktop applications if you prefer to manage your funds via Linux, Windows, or Mac operating systems
• Web wallets if you prefer interacting with your ETH account with internet browsers like Google Chrome, Mozilla, Safari, Bing, etc.
• Mobile applications if you want to access your funds on the go any time and from anywhere
• Physical wallets if you want to ensure your tokens are 100% secure and offline

There are different varieties of wallets available from different companies. Choose the one that best suits your needs. Please note that the decision you make isn’t “forever.” Once chosen, you will not be tied to your wallet provider for the rest of your life. You have the freedom to choose and change your wallet provider whenever you want.

All we can say is take responsibility for your own funds and triple-check everything.

How Ethereum Works?

Ethereum is based on blockchain technology. It consists of a secure or cryptographic public ledger that is linked together. This public ledger is difficult to change or modify because it is stamped with user data, date, and time. Therefore, in order to make changes, it must be approved by all the users.

So, is Ethereum better than Bitcoin in terms of how it works? What are their complexity levels? Well, each cryptocurrency works on the same application and uses the same blockchain technology. However, the functionality of Ethereum is a bit different. Because of its sweeping scope and size, ETH’s primary technical concern has been storage and speed. Ethereum has operated at only a few transactions per second, whereas other applications can carry out hundreds. So, this is one area where the community is working to improve. For any new change made to the platform, there has to be a distributed consensus among the crypto users. Nevertheless, the updates are always welcome if they address Ethereum’s significant shortcomings.

What Is a Decentralized Application?

Decentralized applications or dApps are programs or applications that run on a blockchain instead of a single computer. That is, it runs on a p2p network of computers that are outside the control and purview of a single authority.

To better understand what decentralized applications are, let’s take an example. Twitter and Reddit are standard web applications that run on a computer system owned and controlled by two different organizations. These organizations have complete autonomy over their web apps and their workings. There are millions of users on Twitter but its backend is controlled by a single entity.

Decentralized applications, on the other hand, run on a peer-to-peer network, also called a blockchain network. One of the finest examples of a p2p network is BitTorrent. BitTorrent is an application that runs on multiple computers, allowing multiple participants to consume the content, seed or feed content, or perform both the functions simultaneously.

In the context of cryptocurrency, a decentralized application runs on a blockchain network in an open source, public, decentralized environment. These apps are free from interference and control by any single authority. If you are a dApp developer, you can build a decentralized application like Twitter and place it on a blockchain, allowing users to post and publish messages. Once the message is posted, no one, including you (the creator of the app), can delete or edit the messages.

Overall, decentralized applications are somewhat similar to web apps. The frontend of both types uses the exact same technology in order to render the page. However, in dApps, there is a ‘wallet’ instead of an API that is designed to communicate with the blockchain.

What Is a DAO?

DAO stands for Decentralized Autonomous Organization. It is the brainchild of a group of developers who came up with this idea of automating decisions and facilitating cryptocurrency transactions. It was established in 2016 and acted as a type of venture capital fund. DOA works without a typical management structure and is based on open source code, and doesn’t even need a board of directors as well.

While it was unaffiliated with any specific nation/state to ensure it remains fully decentralized, DAO made use of the Ethereum network. The purpose behind the development of DAO is to eliminate manipulation of investor funds or human error by placing decision-making power into the hands of a crowdsourced process and an automated system.

Ether fuels DAO, and it allows the investors to anonymously make transactions irrespective of where they are on Earth. It then provides the investors with tokens and gives them voting rights on prospective projects.

How Do Ethereum Smart Contracts Work?

You must have now understood that Ethereum is not just any cryptocurrency. It is the second-largest cryptocurrency with a significant market cap. For enthusiasts and those who are new to the crypto world, the term ‘smart contracts’ may appear to be a little confusing.

In 1994, a cryptographer named Nick Szabo came up with the idea of having the ability to record contracts in a computer code format. When certain conditions or terms of use are met, this contract would be automatically activated. This idea holds the potential to remove the need for intermediaries or trusted third-parties like banks.

So, why the need? Because you don’t need an intermediary for making transactions anymore. Smart contracts are self-executed on a blockchain network and completely controlled by computers.

Simply put, a smart contract is an agreement between two entities (seller and buyer) in the form of a computer code. These agreements are stored on a public database; hence, they cannot be changed. The blockchain processes the transactions occurring in the Ethereum smart contract.

Suppose you are buying your friend’s car. The agreement will be created on an ETH blockchain using a smart contract. This smart contract holds the agreement between you and your friend. Simply put, the agreement will look something like this:

When ABC pays XYX 35 ETH, then ABC will receive the ownership of the car.

Once the agreement is created, it cannot be altered or deleted. This means that you will feel safe to pay your friend 35 ETH for the car. If you go with the traditional agreement involving third-parties like the bank, agent, and even the lawyer, you will have to pay a lot of fees.

See how straightforward, fast, and safe it is as compared to traditional agreements?

How Ethereum Mining Works

Similar to Bitcoin, Ethereum’s mining process requires miners to use high computational systems for repeatedly and quickly producing random numbers until one of the miners stumbles upon the right one. In other words, it requires miners to solve complex math problems. The right answer unlocks Ether. This equation-solving mechanism is called proof of work (PoW). It is almost impossible to cheat at solving the mathematical equations because miners have to show the proof of work for every equation solved.

Apart from PoW, nodes are a crucial part of Ethereum mining. Each node contains a copy of the ledger that has the data of all ether transactions. These nodes are used to verify whether the hash value is correct or not. When a miner discovers a hash that fits the target, they unblock the ETH and broadcast the block across each node for validation.

How to Mine Ethereum

You will need specialized computers powerful enough to perform complex computations that are necessary to create new ETH tokens. From choosing the right mining hardware (GPUs, CPUs, ASICs) to installing Ethereum software, installing ETH mining software, joining a mining pool (Nanopool, Sparkpool, F2pool, Ethermine), and finding cheap electricity, ETH mining can be a bit overwhelming for the beginners. In short, it is expensive, and you may need multiple systems just to increase your odds of success.

FAQs

Conclusion

This is everything you need to know about Ethereum. We have covered almost everything about cryptocurrency to help you get started. You are advised to study the market before you make any decisions regarding buying ETH. Ethereum holds a bright future in the crypto world because of its applications and diversity, which makes it different from other cryptocurrencies.