What is Ethereum (ETH) and how does it work?

What is Ethereum (ETH)?

Simply explained, Ethereum is a global computer that is safe, constantly on, and open to anybody to use and program. It’s also vital to note that anything done on this computer is open to the public.

Ethereum is a blockchain-based platform that allows developers to create and deploy decentralized applications (DApps) (for decentralized applications ). While Bitcoin’s principal function is to transmit virtual money, Ethereum’s is to run any decentralized application’s program. The developers will host the application on the Ethereum network rather than investing in servers.

The currency of Ethereum is ether (or ether), which has the abbreviation ETH and the sign ETH. Ether serves two purposes:

  1. It remunerates the validators (miners) who guarantee the validity of the blockchain;
  2. It is used to pay the fees for using DApps.

Ethereum is the network’s name, while ether is the native unit of account that is exchanged on the site. These are thus two distinct entities, despite the fact that the term “Ethereum” is still often used to refer to cryptocurrencies.

The Ethereum blockchain is now protected by Proof-of-Work (miners employ computational power to safeguard the network), however, with the move to Ethereum2.0, this security should develop to Proof-of-Stake.

Many applications are being developed on this decentralized network, including decentralized finance (DeFi) platforms that enable anybody to lend or borrow crypto-currencies.

How was Ethereum born?

Vitalik Buterin, a young Russian-Canadian, designed Ethereum to broaden the programmable component of Bitcoin. Indeed, while Bitcoin provides for a variety of more or less complicated transactions (multisignature, payment channels, atomic exchanges, tokens, and so on), its flexibility and scalability are severely constrained. In this case, Ethereum represents a development of Bitcoin aimed at improving its contractual functions, sometimes at the expense of decentralization and short-term stability.

Vitalik Buterin. Founder of Ethereum – Source: Google.com

The core concept of Ethereum was conceived by Vitalik Buterin at the end of 2013, and a first version of the white paper was given to a number of key actors in the ecosystem during the month of December. Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Hood, and Jeffrey Wilcke were among the eight persons who formally co-founded the project in January 2014.

What is Ethereum? Source: Pexels
What is Ethereum? Source: Pexels

The Ethereum Initial Coin Offering (ICO) took place in July 2014 on the Bitcoin network. At the time of the ICO, moreover 60 million ethers were pre-sold, raising 31,529 bitcoins, or more than $15 million. 12 million ethers were also minted to support the project’s pre-and post-development.

Initial Coin Offerings (ICOs) ushered in a new age of blockchain initiatives that have profoundly influenced Ethereum and the broader crypto ecosystem. Since its inception in 2017, initial coin offerings (ICOs) have raised billions of dollars for a wide range of cryptocurrency businesses. The rapid increase in token sales has aided Ethereum’s acceptance and solidified its position as a significant value actor in the crypto ecosystem.

The debut took place on July 30, 2015, after more than a year of development. Over the years that followed, the remaining ethers were mined. Today (April 2020), around 5 million ethers are minted every year, with a total of 110.5 million coins in circulation.

Ethereum, a smart contract platform

This platform’s primary function is to run smart contracts, often known as “intelligent” contracts or independent contracts.

A smart contract, also known as an intelligent contract, is a computer program that may be executed without the involvement of a trusted third party. In the context of the blockchain, it is software that may conduct activities when particular conditions on the ledger are satisfied.

💡 A smart contract may, for example, be used to set up a lottery. When a predetermined account’s balance reaches a specific threshold, it is immediately distributed to a randomly selected member.

Even if this type of contract can be implemented in a rudimentary way on Bitcoin, Ethereum is the first platform focused on this use. The platform thus brings together a multitude of autonomous contracts, which are executed on the blockchain and which are the basis of many decentralized applications (DApps).

The Ethereum Virtual Machine (EVM)

Ethereum, as previously said, aspires to be a decentralized global computer. It accomplishes this by running a virtual machine (the Ethereum Virtual Machine, or EVM) on each of the network’s nodes at the same time. Based on user activities and smart contract execution, this virtual machine changes the global state of the system (which is made up of Ethereum accounts, their balances, data in storage, and code). By agreement, the changes are reproduced on all of the machines on the network, which is why we talk about a “virtual” machine: it doesn’t exist, but it’s a convenient way to describe what Ethereum is.

The Ethereum virtual computer has its own language, which is made up of a variety of commands, each of which has a distinct impact on the system. This language, known as bytecode, is generally produced by compiling another contract programming language that is more accessible. As a result, smart contracts on this network are often written in Solidity. 

The key feature of Ethereum is that its virtual machine is almost Turing-complete, allowing autonomous contracts to conduct loops and recursion (a contract can call itself). On the one hand, it vastly improves things when compared to Bitcoin’s scripting system, which lacks the same features. On the other side, it complicates Ethereum’s operation: a gas mechanism (explained below) must be implemented to prevent smart contracts from executing indefinitely.

ERC-20 tokens

Without any prior understanding of blockchain technology, you may construct your own programmable money on the Ethereum network. The new currency is maintained by a smart contract that most typically adheres to the ERC-20 standard, which is why we refer to it as an ERC-20 token. Because these tokens run on the same platform as ethers (ETH), they use the same addresses as ETH, making it easy to maintain all of your tokens in the same Ethereum wallet (unlike other cryptocurrencies which require each a different portfolio). Also, to transmit ERC-20 tokens to another address, you’ll need at least ETH in your wallet: ether is used to pay transaction fees.

When we mention that sending ERC-20 tokens on an Ethereum wallet is feasible, we’re referring to wallets like MyEtherWallet or Ledger. Avoid sending your tokens to an exchange platform’s Ethereum wallet, such as Coinbase or Binance, as it may not be setup for this.

Non-fungible tokens (NFT)

Non-fungible tokens or non-fungible tokens, typically abbreviated as NFT, are another form of token available on the Ethereum blockchain. The non-fungible token, unlike the ERC-20 token, which serves as a unit of account (you can hold 3.6468 tokens, transmit 2.1936 tokens, and so on), is a single, distinct entity that cannot be divided or combined with other tokens. The ERC-721 standard is most commonly used for non-fungible tokens. Have a look at the Artieverse NFT project.

Non-fungible tokens may be used for a variety of purposes, including representing a piece of virtual land (Decentraland), trading card games (Gods Unchained), and raising virtual cats (CryptoKitties), and tokenizing items (RealT).

For more details on non-fungible tokens, do not hesitate to read the article: What is the difference between NFT and cryptocurrency?

The operation of the charges: the gas system

As previously stated, Ethereum transaction fees are always paid in ethers (ETH). However, because to the platform’s complexity, an intermediary computation method using what is known as gas, or gas in English, must be set up.

Consider gas as fuel for your automobile: each network transaction requires gas to complete a particular number of processes, just as your car consumes gasoline to drive forward. These operations include ether transfers, ERC-20 token transfers, as well as simple adds, multiplications, and other operations. They can be started either by users or by smart contracts themselves.

💡 The cost of gas is set for each activity. The higher the gas expense, the more complicated the procedure. An addition costs 3 units of gas, but a demand multiplier costs 5. An ETH transfer costs 21,000 gas.

It’s important to note that gas is a purely imaginary asset that acts as a middleman and that you can’t keep: you pay the fees in ether, and the validators recover ETH as well. You must specify how you wish to convert your ethers to pay the fees while making a transaction. The gas limit (or gas price) and the gas limit (or gas price) are two factors that may be changed for this (or gas price ). The remainder of this page will go over these two principles in further depth.

Gas limit

The gas limit (or gas limit ) allows you to set the maximum quantity of gas you may consume during a transaction. The system will use this limit to determine how much gas your transaction may consume. This parameter does not need to be changed for a transfer of ethers from one account to another (traditional transaction), as this transfer always consumes 21,000 gas. However, in the case of a contract interaction, it is vital to accurately estimate the amount of gas that might be utilized.

Three scenarios are possible:

  • If you specify a limit that is too low, your transaction will run out of gas before it can complete all activities. You will lose the amount of ETH utilized for the fees, and your transaction will be canceled, meaning that the funds transferred will not be deducted from your account.
  • Your transaction will be confirmed and added to the blockchain if you set a gas limit that corresponds exactly to the actual usage (like in a traditional wallet-to-wallet transaction).
  • Finally, if you specify an excessively high gas limit, your transaction will be processed, and the unused excess will be reimbursed to you. It is therefore advisable to overestimate this consumption if you cannot determine it with certainty in advance.

Although this isn’t necessarily a major issue, don’t set a gas limit that is too high. A gas limit that is too high may disturb miners’ economic calculations and cause your transaction to take longer to execute.

The price of gas (gas price)

Each block of Ethereum is restricted in gas to ensure the system’s decentralization: the quantity of gas spent by the transactions it contains must be below a particular threshold. As a result, gas is not abundant and so has a market-determined price.

Gas prices are commonly quoted in gigawatts or Gwei. The Gwei is the smallest unit on the Ethereum network and equals one altogether or 10 -18 ETH. It is named after the cypherpunk Gwei Dai. As a result, one Gwei equals one-billionth of an ether:

💡 1 ETH = 1,000,000,000 Gwei or 1 Gwei = 0.000000001 ETH

The fees paid for the transaction are determined by the price of gas when combined with the volume of gas utilized. Fee (ETH) = gas consumed x gas price is the formula.

The charge for a standard transaction (21,000 gas utilized) with a 3 Gwei gas price will be 0.000063 ETH, or 1 euro cent at the present rate (April 2020).

The price of gas is used to determine transaction priority: miners will prioritize transactions with a high gas price over those with a low gas price. The price of gas to be signaled for a transaction to be verified promptly will likely rise if the network is actively used.

💡 Indicate a high gas price if you want your transaction to be handled fast. Quote a low gas price if you can wait and want to spend as little as possible. On the ETH Gas Station website, you may discover the predicted confirmation timeframes dependent on the gas price.

Excited about Ethereum? Are you wondering if Ethereum can make you rich?

The evolution of Ethereum

Unlike Bitcoin, which has a conservative community, especially when it comes to monetary policy, Ethereum wants to be far more progressive and wants to move swiftly, even if it means sacrificing its own stability at times. The platform has been modified several times since its inception! The following is a list of Ethereum protocol updates, each with its own unique code name:

Code nameDate of applicationblock height
ice age08/09/2015200,000
DAO Forks07/20/20161,192,000
Tangerine Whistle10/18/20162,463,000
Spurious Dragon23/11/20162,675,000
Muir Glacier01/01/20209,200,000
Ethereum Evolutions

Although Ethereum has been upgraded a lot over the past few years, its evolution is far from over and more changes are already being considered. Many developers and researchers are working hard to make this evolution go smoothly. The next big upgrade planned by the development team, called Serenity or Ethereum 2.0, includes three major changes:

  • Casper has made the move to proof of stake.
  • Implementation of sharding to improve the platform’s scalability.
  • The use of eWASM to enhance the virtual machine.

Aside from sharding, additional so-called second-layer projects are being created to help Ethereum scale-up, including Plasma and the Raiden network, both of which are medium-term options.

Advantages of Ethereum

  • A network that is transparent, secure, and dependable.
  • Once a smart contract is live on the network, no one can change it.
  • More secure than a traditional smart contract.
  • There will be no downtime because the Ethereum network is available 24 hours a day.

Ethereum limits

  • DApps (decentralized apps) are reliant on the Ethereum blockchain’s scalability, which isn’t ideal. During the cryptokitties mania in December 2017, for example, the network was significantly slowed.
  • You can’t change a smart contract that has a defect or vulnerability in it.
  • In comparison to Bitcoin, monetary policy is less well defined.

How to buy Ethereum (ETH) cryptocurrency?

You may trade Ethereum on a variety of sites, including eToro, Binance, Coinbase, Kraken, and others. You may learn more about ether by reading our buying ether article. You’ll see that you may buy ETH using fiat currency immediately (euros, dollars…). Remember that Ethereum is the protocol name and Ether is the currency name (symbol ETH).

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Since its creation, Ether has seen a significant increase in value. Its price will have soared in 2017, jumping from €7 to more over €1000 in the span of a year, after trading for less than €1 in 2015 and less than €10 in 2016. As you may have guessed, the chances of seeing the price of ETH rise by 100 percent presently appear to be slim. For numerous years, Ethereum has been ranked second in the cryptocurrency rankings (after Bitcoin). As a result, it is a secure investment for anybody looking to diversify their portfolio.

How to store your Ethereum (ETH) tokens?

To save your crypto-currencies, as well as your valuable ETH, it is recommended that you utilize a hardware wallet.

But, first and foremost, what is a hardware wallet? It’s a highly secure electronic wallet that plugs into a USB port on a computer. This enables you to store your cryptos on non-interactive media. This means the assets are no longer saved directly on a computer or on the Internet. It is no longer possible to be hacked and lose everything. For best protection, the electronic safe must be kept in a secure location.

We are fortunate in that the most well-known wallet is produced in France. The Ledger Nano X is a product of the Ledger corporation.

Ethereum Classic (ETC): the original Ethereum

File:Ethereum Classic logo.svg - Wikipedia
Ethereum Classic Logo

You may be aware of Ethereum Classic’s existence (ETC). It is not to be confused with Ethereum (ETH), which is a different cryptocurrency. TheDAO, a cryptocurrency investment fund, was hacked in June 2016, and roughly $50 million worth of Ethers was stolen. It was the investment fund, not the Ethereum blockchain, that was hacked. It was decided to do a hard fork in order to refund these Ethers to their owners. However, some members of the community disagreed with the idea and wanted to keep mining the old Ethereum chain (the original chain), which is now known as Ethereum Classic. The Ethereum Foundation and its founder (Vitalik Buterin) continue to promote Ethereum (ETH), whereas Ethereum Classic (ETC) is now controlled by another community (Ethereum Classic).

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