The Complete Introductory Guide to Ethereum
The year 2022 has been a wild ride and along the ride, we witnessed several major events in the cryptocurrency space, most notably about Bitcoin (BTC) and Ethereum (ETH). Most people have some knowledge of Bitcoin but are unaware of what Ethereum is.
To that end, the Finvesting.net team has created this guide to introduce the Ethereum blockchain and help you understand how it works.
What Is Ethereum?
Just like Bitcoin, Ethereum is an open-source, blockchain-based software platform that is predominantly used to support Ether, which is the transactional token of the network. Launched in July 2015, it is the second-largest cryptocurrency, following the lead of Bitcoin.
Value exchange and transfer is the main use case on the platform but it’s certainly not the only one. Notably, several innovative concepts that aim to transform various parts of human endeavour, have been developed on the Ethereum blockchain. It’s the most actively used blockchain platform and Ethereum is where the real innovation is taking place.
The person behind the technology is Vitalik Buterin who came up with the idea in 2013 at the age of 19. His main motive was to develop a blockchain-based software more advanced than Bitcoin, which is primarily used to carry out transactions with more use cases than cryptocurrency. Ethereum was created as a smart contracts platform designed to remove third parties in any transaction and to give the users more control over their personal data and finances.
Ethereum can be used to create any kind of application, these apps are popularly known as dApps which work on the concept of smart contracts. 2020 was the year when we saw the rise of Decentralised Finance (DeFi) which is built around this ideology at its core. Since the technology is decentralized, it can be used by developers to create leaderless organisations which are considered to be better alternatives to traditional institutions by decentralisation advocates.
How Does Ethereum work?
Ethereum is essentially based upon the same technology as Bitcoin i.e. the blockchain, but it utilises it more extensively, not limiting it to transactions. Ethereum works using 6 main components that we will now understand:
- Smart Contracts: Smart contracts are programs coded on the blockchain that act as non-biased intermediaries. You can program a smart contract to do anything like posting a tweet if the temperature reaches 30 degrees Celsius or sending your friend some money when their wallet balance goes below $100. Smart contracts carry out commands when certain conditions are met, and money is transferred only when an exchange of value takes place from both sides. Once a smart contract is deployed on the blockchain, no one can change the code i.e. smart contracts are immutable.
- Ethereum Blockchain: It is the public ledger technology similar to Bitcoin. The participants in the Ethereum blockchain ecosystem are called ‘nodes’. This distributed characteristic of the blockchain makes it decentralised. Every smart contract or transaction is validated by all the nodes and this processing is carried out by thousands of computers. A node contains three types of information: Account info, smart contract code, and smart contract state.
- Proof-of-Work: To validate transactions on the blockchain, all the nodes on the network need to reach a consensus to verify that the transaction took place and this happens via the ‘proof-of-work’ algorithm that was originally used by the Bitcoin network. Miners prevent double-spending i.e. a user cannot spend an amount of Bitcoin twice. But with the advent of ‘Ethereum 2.0’ (implemented from 1st December 2020), we may see the usage of a new method of validation called the ‘Proof-of-Stake’ which aims to decrease the computing power required and make the system more efficient and safer overall.
- Ether: Every operation performed on Ethereum costs money in the form of the platform’s native token called ‘ether’. A user has to spend ether to use dApps or to call smart contracts or carry out transactions. This is similar to Bitcoin which is the token used on the Bitcoin blockchain. The value of Ether rises as the network gets more congested.
- Decentralised Applications (dApps): The feature that differentiates Ethereum from other blockchains and is probably its most important offering is decentralised applications. dApps offer types of assistance like those offered by ordinary applications, however, they use blockchain innovation to give clients more power over their information by not having the involvement of a central point of control or authority. All the data is secure on the blockchain which no one can tamper with. Several dApps are already in use in the DeFi space, but not only that we also have blockchain’s version of Twitter called ‘PeepEth’. There are virtual reality games based on Ethereum similar to normal VR games. dApps’ code is open-source and decentralised meaning anyone can view or use the code.
Some Popular Use Cases of Ethereum
Ehtereum has several uses although the most popular ones are related to finance like bitcoin but more considerably. Ethereum is known for its flexibility, i.e. developers can mold the platform to create complex financial solutions aimed at providing everyone better opportunities to participate in the economy. We will now briefly look at some of its most popular use cases:
- DAOs: Decentralised Autonomous Organisations were one of the earliest use cases identified by blockchain developers. These organisations as the name suggests have no central authorities managing the firm i.e. there is no central point of contact. These have been made possible solely by the use of smart contracts that ethereum offers.
- Enterprise Ethereum: Enterprise Ethereum refers to the adoption of the Ethereum blockchain by private corporations like Samsung, LVMH, Mastercard and Microsoft to develop unique solutions for their customers.
- Stablecoins: Stablecoins were developed to counter the high volatility of traditional cryptocurrencies like bitcoin and Ethereum, these coins are pegged to real world assets like fiat currencies or precious materials. Some popular stablecoins are Tether, USDT and USDC.
- Decentralised Finance (DeFi): Probably the most popular use case of Ethereum till date has been the decentralised finance sector that aims to remove intermediaries in the traditional financial landscape and to allow every individual unrestricted access to the financial world.
There are several other uses of Ethereum such as Non-Fungible Tokens (NFTs), but the real promise of growth lies in the ones that we have covered.
Ethereum 2.0 and What the Future Holds for the Platform
Although Ethereum holds a lot of potential, there are some obstacles in its way. To overcome these hurdles, Eth2 was developed. Some of the issues that Ethereum faced were scalability and slow transaction speeds that congest the Ethereum network. But these issues are being steadily rectified, further improvements will also take place in the future as more people adopt the whole ecosystem.
The future for Ethereum looks bright and there is a promise to revolutionise the financial ecosystem. Millions of people are still unbanked, they will get an opportunity to participate in the global economy. Not just finance but the internet as a whole may be transformed with the help of decentralised applications and we will not have to worry about our data getting in the wrong hands.
The key difference between both the technologies is the scope of usage. While Bitcoin was invented to revolutionise the banking sector and transactions, Ethereum has a broader use case. One point that everyone should note is that Ehtereum was made to complement Bitcoin and not to compete with it. Ehtereum is the platform where real evolution is taking place, even Microsoft has put it into use for its azure platform.
You can buy Ether just like any other cryptocurrency via a crypto exchange on the internet. You just need to make an account on any crypto exchange of your choice and then get a digital wallet, then transfer funds in exchange for Ethereum, it’s as simple as that. Please click here to read Finvesting’s article about buying cryptocurrencies.