Ethereum

What is Ethereum? How does Ethereum Work?

October 5, 2019

By Team Basil Zaff

If you have ever heard of Ethereum, you may be interested to know what all of the buzz is about.

Welcome to a post where you can finally learn all about Ethereum and how it works. This will be a resource that you can use as an early Ethereum investor. It’s okay to feel a little bit in the dark about Ethereum and how it works. Ethereum is widely considered to be one of the most promising and exciting cryptocurrencies that is available today. If you’ve never heard of Ethereum, here are some top features of this cryptocurrency to keep you informed.

The History of Ethereum.

Ethereum first got started in the year 2015 but the vision for the cryptocurrency was born far earlier than this. In the year 2012 at the age of 17 a Bitcoin enthusiast named Vitalik Buterin began writing for Bitcoin Magazine and started considering a series of improvements that could be made to the Bitcoin platform for the future.

The early articles that he produced were an open invitation for developers on the Bitcoin platform to make these improvements.

After several years when these changes were not made, Buterin set out to create his very own idea instead. Ethereum started out in the year 2015 being worth just a few fraction of a cent. Today the value of Ethereum has risen considerably to a market cap of $18.5bn for the total value of Ethereum. But what makes the currency so valuable from such humble beginnings?

Ether is considered to be the currency for Ethereum and the value of the platform itself comes from the total value of Ether out in the world. Ethereum as a platform features its own blockchain tech that’s changing the world in the way that we look at finance. This type of technology is what makes the cryptocurrency so special and why so many people are trying to get their hands on Ether to invest in this technology.

Ethereum tech and its block chain are spawning a number of new applications that are maximizing the value of cryptocurrency and the security that’s associated with this system. Even if you aren’t a programmer or developer, as an investor, Ethereum is a special opportunity. Why should you consider investing?

Ethereum at its core.

Ethereum is something that’s not easily defined but the best way to look at it is a platform for progress. A great example of how Ethereum can represent progress in development comes with the level of control that it can provide in security.

Say a developer is interested in creating a collaboration suite for its company to share documents. Using a program like google drive could make it quite easy for the documents to fall into the wrong hands, get lost or even hacked. Rather than a company switching to exclusively paper documents that can be locked up and only shared on location, adding new levels of control can be the answer.

Ethereum can offer the chance to use powerful collaboration tools that already exist but with a brand-new level of security. Rather than having an app that you need to trust with your private information it possible to decentralize information and keep it heavily encrypted. This could produce a collaboration suite that’s just as quick as any free tool on the market but with an advanced level of security that comes only in Blockchain tools.

The basics of blockchain.

Ethereum has a brand-new version of the Internet and Internet applications. The base idea is that every system within this network is controlled on nodes. The nodes throughout the network are responsible for maintaining and storing the database of information which is called the blockchain. Because thousands of nodes make up the network storing the full blockchain is easy and incredibly secure. The information entered into this ledger can only be controlled by a person that has access to the correct password information. None of the data will be stored on your computer or on one central server for easy hacking, instead has to be validated by multiple nodes and stored on multiple nodes throughout the network.

The information throughout the blockchain is then verified by a consensus-based process. The majority of the nodes within the system need to verify the data that a person needs to access before they are allowed to actually compile that data across the blockchain. Hacking into this system would be next to impossible as a person would have to control more than half the nodes in the network in order to be successful with ascertaining the data.

This type of attack would simply be too expensive to pay off and it would take a massive amount of technical experience with a huge team as well.

This blockchain technology has been in place for years thanks to Bitcoin, but Ethereum massively improved on the system allowing for a series of changes for developers creating on this blockchain.

Be sure to read the Guide to Blockchain for more information on this tech.

Ethereum and the new Blockchain: What can it do?

The Ethereum Blockchain is often regarded as the 2.0 version of Blockchain technology. Even though it’s built on technology that’s very similar to Bitcoin, it can be considered more advanced. It has more features than the Bitcoin blockchain as highlighted by these two important facets within the Ethereum Blockchain:

Smart Contract Technology.

The Blockchain with Ethereum is designed to make sure the transactions will only take place when a variety of conditions can be met within the system. The rules surrounding some of these conditions are known as a smart contract. This can be a particularly essential aspect of managing Ethereum.

When looking at a vending machine for example, it’s very important to consider that if a person wanted to pay with a card, that they also had access to the funds to pay for what they needed out of that vending machine.

A smart contract for a vending transaction may be something as simple as swiping a card, choosing an item worth a dollar in the machine, the machine validating that the funds are available for transfer, transferring the funds from the account and then dispersing the item from the machine.

When a transaction like this takes place it can’t be undone. These types of transactions are widely considered to be trustless transactions because they don’t require any type of network or a large group of individuals to monitor or maintain. If the conditions of the particular contract are not met head on then the disbursement doesn’t take place and the contract itself cannot be granted.

With smart contracts in block chain, the network never goes off-line and the entire system is forged on these trustless contracts. When one of these transactions is completely written, if the conditions of the contract are not met it won’t happen and if the conditions are present for the contract to happen, it will occur. The best news about this type of contract is that a transaction can never officially go off-line.

If you would like to learn more about smart contracts, check out more in our smart contract guide.

DApps.

DApps or decentralized applications are designed not to run on a central server. These are applications that instead run on the blockchain and do not decentralize a server directly. DApps are one of the core features of Ethereum. Most of these applications are built within their own coding language which is called Solidity. Salinity is used directly to build a series of dApps. Because the system is built within Javascript, it can encourage almost any developer to create their own brand new dApps. These types of applications will soon be competing directly with the older security on centralized applications. The overall possibilities of dApps on Ethereum’s blockchain can be considered almost endless when we look at the chances to develop on Ethereum Blockchain.

Recap.

When we look to revisit the question, what is Ethereum? It is very important to consider what we’ve learned so far. Ethereum stands as a blockchain system that can make for the easy build of smart contracts and dApps. The system also has insane potential for changing the scope of Internet applications in the future.

Understanding how Ethereum works can show you just how important it is for future investment.

The details of Ether and Ethereum.

Ether is the currency that is placed in Ethereum, the two are often heavily confused and many people request the purchase of Ethereum without knowing what Ether is directly. If you’re interested in getting anything done within the system of Ethereum, you need to consider gas. Gas is the basic value of what a transaction will take to get done within the Ethereum Blockchain. This can be somewhat different from the concept of Bitcoin and its own blockchain. Understanding some of the main differences can help to better explain Ethereum.

Bitcoin and its blockchain.

Bitcoin is widely considered digital money. It’s possible to easily perform peer-to-peer transfers of this digital money for goods and services. Steve can pay Thomas five Bitcoins through a transfer for graphic design services. Steve will simply send the funds from his digital wallet to Thomas’s with the network verifying the transaction.

Bitcoin really just had this singular function and there’s a cap on the number of bitcoins that can exist. It could become quite reliable to store Bitcoin as an investment like diamonds or gold because there’s a cap on the total number that can ever exist.

Most of the confirmed transactions within the Bitcoin Blockchain take approximately 10 min.. Some can take a bit longer depending on the number of trades occurring throughout the network.

Ether.

Ethereum is the Blockchain that is built for Ether. In a way, Ether works like the digital fuel for smart contracts within the Ethereum network. If Steve wanted to pay Thomas for his services within this network, he would have to pay using a smart contract. The transaction would include the details of “If Thomas provides 10 hours of graphic design work, Steve will send 10 ETH to him” Until the job is done, the funds do not transfer. The contract does not occur within the Bitcoin network and without this smart contract there isn’t the same level of security to guide transactions. The same system on the Ethereum network will continue to guide transactions of almost every type. It can be used for payrolls, instant mortgages, email offers and more.

Ether doesn’t have a cap like bitcoin it’s very likely that the overall market Will not reach over 100 million anytime soon. These numbers will continue to climb as the Blockchain expands however.

Ethereum has extremely quick transaction times. The smart transactions often take just seconds compared to a system on bitcoin that can take up to 10 min. at a time or longer.

Can you mine on the Ethereum network?

Bitcoin and Ethereum both offer the option to mine. This process of mining involves activating a node along the Blockchain to verify transactions. Nodes are directly rewarded with currency. An Ethereum Node or miner is regularly rewarded with new Ether in the process of mining. The nodes that are activated across the network will be director spot over verifying transactions in the Block chain.

Ether Mining is regularly called a proof of worked my. Each node within the network is responsible for showcasing that it’s done the work of verifying transactions and this is how an Ether reward is disbursed. This type of mining often takes an extreme amount of computing power and this can often lead to higher electricity values. This can make Ether mining quite expensive and not so environmentally friendly.

Ethereum developers are hoping to create a brand-new form of mining called proof of stake. This form of mining will use far less electricity and divide up the various transactions throughout the network for a random verification of transactions. This will drastically speed up the process of verifying transactions and use substantially less electricity in the process of mining Ether.

Users that are currently selected for proof of stake are not called miners, the current name for Ethereum stake verifiers is Stakeholders.

How do you store Ether?

Ether will never directly leave the Ethereum Blockchain. The currency is never physically stored anywhere. If you wanted to use Ethereum, you’ll need to access a wallet that’s compatible with the network. This wallet will never contain any of the Ether but it will contain the necessary codes to access Ether across the network. The codes that are included for this access are called private keys and if you are to lose your private keys you’ll also lose the Ether value associated with it. Making sure that you have a great wallet for the Ethereum network is essential to protecting your investment. Some of the main types of wallets can include:

Mobile wallets: These are similar to traditional desktop wallets. These wallet commonly use far less space and they are some of the best wallets for making quick transactions in public with your smart phone. One of the most popular wallets on the mobile platform for Ethereum is Jaxx. It can currently store 16 different cryptocurrencies.

Hardware wallet. A hardware wallet resembles the look of a USB flash drive. The most popular one in the Ethereum network is the Ledger Nano S. this is one of the safest off-line key storage tools but it’s also one of the most expensive. Keeping track of your hardware wallet and making sure that it is kept in a safe place remains essential to keeping your investment safe.

Desktop. For storing your private keys in public keys you can use your desktop as well. Downloading an application like Exodus for a desktop wallet can be a great way to keep all of your keys secure under one password. The biggest problem with this wallet is that it can commonly take up a lot of space on your device and it can be subject to malicious attack.

Web based. A web-based wallet is not something that we highly recommend for Ether. Applications like Coinbase online can store your private keys but they are also highly targeted by hackers because they can be easy to steal on online platforms. This wallet is best used as a transfer tool only.

Paper wallets. A paper-based wallet is one of the original forms of cryptocurrency storage. These are often just pieces of paper that had the access codes that you need written on them. Although it’s a low-tech solution, this is an off-line storage method for your Ether. Until you enter the code into an online wallet, you can keep it safe and away from hackers.

Now that you have seen some of the best options for Ethereum storage, you can discover which wallet to choose for your needs.

Where should you buy Ether?

Getting invested in the Ethereum network involves finding an area where you can purchase Ether with some security. Some of the top three sources for buying Ether include:

A trading platform: Trading platforms such as Bitfinex are a common place for buyers and individuals working on an exchange to meet using a middleman service. Bitfinex to make sure that traders can turn one cryptocurrency into another and purchase a variety of coin values like Ether with Bitcoin or Litecoin.

Peer to peer: Buying peer-to-peer from a message board like Local Ethereum can often help you find some great deals and easily negotiate prices as a buyer or seller. This is one of the riskiest options for trading Ether but it also has some lowest fees. There’s no middleman and you can pay using a currency of your choice.

Brokerages: a brokerage like Coinmama can be an excellent choice in buying Ether with a credit card for a small fee. Although these systems are an easy way to you can get into the network and purchase Ether with your native currency, the transaction fees can often be some of the highest for trades. For some of your first trades, this is a great way to get into Ether with just your debit card or credit card.

If you would like more information on how you can buy Ether, consider looking into out How to buy Ethereum guide.

What is Ethereum up to now?

dApps today that are being created on Ethereum’s blockchain are receiving an extensive amount of fund raising. The fund-raising that’s occurring across this network is really giving it new value. Fundraising for decentralized applications is taking place with initial coin offerings otherwise known as ICOs. An initial coin offering will allow a developer to seller idea for product to also fund the creation itself. dApps and Ethereum are basically working together to create a Blockchain based kickstarter.

Some of the top dApps that are being developed across Ethereum with the help of ICOs include:

Ethertweet: This communications platform is similar to the idea of Twitter but it features no central authority built on the Block chain. This application could be a completely uncensored and open version of twitter for the future.

Ether roll: this is a casino that built on a series of fair dice games and decentralized technology. With smart contracts, this new technology could change the way that people gamble around the world.

Golem: This application allows for the rental of idle processes with computers all over the world. By renting out some of your extra processing space you could make use of the extra power that your computer has an earn money from home.

One of the biggest criticisms with Ethereum is that the concept in many of the applications are considered to be too complicated for many users. Although the complexity may mean that experienced developers could offer up the chances to scam newcomers, Ethereum has had many people step up in an attempt to simplify the process with a new user interface.

Ethereum is widely compared to the idea of MS-DOS. Until Microsoft Windows came around it was difficult for the system to be user-friendly. As more developers come along and get a clear idea of what Ethereum is capable of we may soon see a community that joins together and creates a better style of operating system for the blockchain.

A modern fork is beginning to emerge within this network in which many would like to see it modernized while others would prefer to see it and network capitalized by blockchain developers.

What will Ethereum do in the future?

Ethereum represents hope for the financial industry that is extremely powerful. With the number of transactions that occur every day, we could see an extensive amount of improvements in the gambling industry, rental industry, sales and retail and more. Smart contracts have the potential to solve problems worldwide and introduced new technology into the Internet of everyday things.

By making sure that smart technology can be properly secured, we can make sure that new transactions within technology can be revolutionized. Ethereum can work to secure the future smart home, improve device security and even introduce a network that could improve safety and humanity as a whole.

With the sheer number of development along the blockchain and new efficiency improvements occurring almost every day, Ethereum could be an unbreakable investment for the future of technological advancement.

Ethereum truly represent anything that you want it to be. Getting started and investing in Ethereum through technology, through ether or even through your own development, you can work at supporting a bright new future for us all.

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