What is Ethereum: The Ultimate Beginners Guide

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While Bitcoin is deemed as digital gold, Ethereum is considered digital money. But Ethereum is much more than just a store of value—it’s a giant platform for decentralized applications using smart contracts. In this guide, you’ll find everything you need to know about Ethereum and its native cryptocurrency, ETH.

The two leading cryptocurrencies have different goals, functions, and even technology. At its core, Ethereum is a decentralized, open-source blockchain system. While Bitcoin was designed as a currency and store of value, Ethereum is a decentralized network for the execution of smart contracts – code that is executed in a peer-to-peer network and verified in Ethereum’s blockchain.

The idea behind the network is to create applications that are secure, transparent, and censorship-resistant, as they do not rely on centralized platforms. Ethereum is used as the underlying software layer for everything from decentralized financial applications (DeFi) to play-to-earn games using non-fungible tokens (NFTs). Many believe that Ethereum could support the transformation of the Internet into a new phase, called Web3, in which people will take control of the Internet from big companies (like Google and Meta).

Fun fact: The name “Ethereum” was inspired by the term “ether,” which refers to an invisible medium that allows light to travel. Vitalik Buterin, the co-founder of Ethereum, saw it as a fitting name for a project that aimed to be a medium for decentralized applications.


What Is Ethereum and How Does It Work?

The Ethereum network, like Bitcoin, exists on thousands of computers worldwide, with users working together as nodes rather than as a centralized server. This makes the network decentralized and highly resilient to attack. If one computer fails, it doesn’t really matter because thousands of others maintain the network. Ethereum is essentially a single decentralized system powered by a computer called the Ethereum Virtual Machine (EVM). Each node has a copy of this computer, meaning every interaction needs to be verified so that each can update its copy. So-called smart contracts lie at the core of the Ethereum ecosystem.


What Is a Smart Contract?

Imagine a world where contracts execute themselves without the need for intermediaries. That’s the magic of smart contracts. These self-executing contracts with the terms of the agreement directly written into code lines are Ethereum’s pièce de résistance. They ensure trust, transparency, and tamper-proof operations, making Ethereum a developer favorite. They are programs that run exactly as they are set up to run by their creators.


How Is Ethereum Using Smart Contracts?

  • Decentralized Execution: Unlike traditional contracts, the Ethereum network executes smart contracts on Ethereum, making them decentralized. This means that once a smart contract is deployed, it cannot be altered, and its execution does not rely on a single party or central authority.
  • Ethereum Virtual Machine (EVM): Smart contracts are executed in a runtime environment called the Ethereum Virtual Machine. Every node in the Ethereum network runs an EVM, ensuring that smart contracts are executed consistently across all nodes.
  • Solidity and other programming languages: Smart contracts on Ethereum are primarily written in Solidity, though there are other languages like Vyper. These languages are designed to be compiled into bytecodes that the EVM can understand and execute.
  • Gas and execution: Every operation in a smart contract requires a certain amount of computational power. This is measured in “gas”. When users or other contracts interact with a smart contract, they pay gas to compensate for the computational energy required to execute the contract’s functions.
  • Interactivity: Smart contracts can call functions on other smart contracts, send Ether (Ethereum’s native cryptocurrency), and even create new smart contracts. This allows for the creation of complex decentralized applications (DApps) built on interconnected smart contracts.
  • Immutable and transparent: Once a smart contract is deployed on the Ethereum blockchain, its code is visible to everyone and cannot be changed. This transparency ensures trustworthiness, as everyone can verify the contract’s behavior.
  • Events and logging: Smart contracts can emit events, which are a way of logging specific actions or changes. These events can be monitored by DApps or external systems to react to contract activities.

What is an Ethereum Virtual Machine?

Ethereum Virtual Machine (EVM) is another crucial tool developers use to create decentralized apps (DApps). Imagine Ethereum as a vast, global supercomputer. The EVM is its central processing unit. But unlike your typical CPU, which resides in a single computer, the EVM exists in thousands of computers worldwide, all working in tandem. This decentralized nature ensures that Ethereum remains censorship-resistant and free from a single point of failure. Developers do not code directly for the EVM; instead, they use languages like Solidity or Vyper to compile into bytecode, a language the EVM understands. So, this bytecode is a series of opcodes that the EVM executes.

Think of it as the Esperanto of Ethereum, a universal language every node understands. This is essential because it allows Ethereum nodes to recognize other EVM-compatible chains, such as Cosmos and Polygon. Consequently, this improves interoperability between EVM-compatible networks by enabling developers to move their DApps and tokens from EVM-compatible networks to Ethereum and vice versa.

One of the marvels of the EVM is its deterministic nature. Given the same set of inputs, the EVM will always produce the same output. This predictability is crucial. With millions of dollars in value often on the line, the last thing you’d want is unpredictability.

Fun fact: Ethereum’s scripting language, Solidity, is Turing complete, meaning it can theoretically compute anything given enough resources. This flexibility allows developers to create a wide range of applications on the platform.


History

The brainchild of a young, brilliant programmer named Vitalik Buterin, Ethereum’s inception was rooted in a simple yet profound dissatisfaction. Buterin, an avid supporter of Bitcoin, recognized the limitations of Bitcoin’s scripting language. He envisioned a more versatile platform that could go beyond mere transactions to facilitate programmable contracts and applications. This vision was articulated in Ethereum’s white paper, a groundbreaking document that proposed a blockchain capable of executing smart contracts.

While Vitalik’s white paper laid the conceptual groundwork, Dr. Gavin Wood’s Ethereum Yellow Paper in 2014 provided the technical specifications. This document detailed the workings of the Ethereum Virtual Machine (EVM), the engine powering the Ethereum network. With the stage set, Ethereum’s initial coin offering (ICO) took place, raising over $18 million, making it one of the most successful crowdfunding projects of its time.

With the foundation laid and funds secured, Ethereum introduced the world to its native cryptocurrency: Ether (ETH). 2015 saw Ethereum come to life with the “Frontier” release, marking its first live implementation. Developers bravely ventured into this new territory, and by 2016, Ethereum transitioned to “Homestead,” its first stable release, signaling its readiness for mass adoption.

Fun fact: Before co-founding Ethereum, Vitalik Buterin was a co-founder and lead writer for Bitcoin Magazine, one of the first publications dedicated to Bitcoin and the broader cryptocurrency world. The Bitcoin he earned from writing allowed him to travel and attend various cryptocurrency conferences and events worldwide.


Historical Milestones:

  • November 2013 – Vitalik Buterin writes a white paper explaining the concept of Ethereum.
  • January 2014 – Ethereum goes public.
  • July 2014 – Ethereum conducts an ICO using bitcoins to buy Ether.
  • June 2016 – $50 million worth of Ether was stolen from the crowd sale, and Ethereum developers agreed to reverse the decision by creating a “hard fork.”
  • March 2017 – A group of companies, including Toyota, Samsung, Microsoft, Intel, and J.P. Morgan, forms the Enterprise Ethereum Alliance, a non-profit organization dedicated to making Ethereum fit for big business.
  • December 2020 – The Beacon Chain goes live, the first phase of a major upgrade known as Ethereum 2.0, which will eventually move the network to a consensus mechanism for proving stakes.
  • March 2021 – Visa starts using the Ethereum blockchain to settle stablecoin transactions.
  • April 2021 – Berlin’s stablecoin fork goes live, reducing gas fees on the network.
  • August 2021 – London hard fork introduces basic fees for each transaction and launches transaction fees instead of allocating them to miners.
  • September 2022 – The Merge completes, Ethereum moves fully to proof-of-stake mechanism.
  • 2023: Ethereum completes the Eth2 upgrade, which makes the network more scalable and secure.

ETH – The Native Cryptocurrency

At first glance, one might be tempted to label Ether as just another cryptocurrency in the vast crypto ocean. However, that would be like calling the Mona Lisa just another painting. Ether or ETH, the native cryptocurrency of the Ethereum platform, is a multifaceted asset with functionalities that extend far beyond mere transactions.

Imagine a bustling city with roads, buildings, and infrastructure. Now, think of Ether as the electricity that powers this city. Ethereum, as a platform, facilitates the creation and execution of decentralized applications (DApps) and smart contracts. And Ether? It’s the fuel that powers this intricate machinery. Every action, from executing a smart contract to making a transaction, requires a certain amount of computational effort. Ether compensates for this effort, ensuring that the Ethereum network remains vibrant and functional.

While Bitcoin often grabs headlines as ‘digital gold,’ ETH has carved its niche as a store of value with added functionalities. Beyond its role as fuel for the Ethereum network, ETH is also traded on various cryptocurrency exchanges, often serving as a benchmark for other tokens and projects built on the Ethereum platform. As ETH is a utility token rather than a value token, its supply is infinite.


Ethereum Gas Fees

While Ethereum’s decentralized ethos is commendable, critics argue that its gas fee structure is becoming a barrier to entry. In a world where Ethereum champions financial inclusivity, the irony isn’t lost on many when a simple token transfer can cost upwards of 100 USD during peak times. For many in developing regions where Ethereum’s solutions might be most needed, such fees are simply untenable. While Ethereum gas fees have been reduced after moving to a proof-of-stake mechanism, they still remain relatively high, especially in comparison with Ethereum’s competitors, such as Solana (SOL) or Cosmos (ATOM).

Because of that, a new type of solution evolved: Layer-2 solutions. Layer 2 solutions are designed to address the scalability issues of Ethereum. They do this by moving some of the computation and data off of Layer 1 and onto a separate blockchain or sidechain. This allows for more transactions to be processed per second, which can lead to lower gas fees and faster transaction speeds. Examples of Ethereum are Polygon (MATIC), Arbitrum (ARB), Optimism (OP).


How Can I Buy ETH?

As the second largest cryptocurrency, ETH is available on virtually all major crypto exchanges, including Binance, Coinbase, Bitstamp, KuCoin. Currently, Binance is by far the most popular exchange for ETH and offers many trading pairs, so we will use this cryptocurrency exchange as an example:

  • Step 1: Create your Binance account and top up your balance with USDT
  • Step 2: Go to the ETH/USDT spot market and go to the order panel at the bottom of the page
  • Step 3: Select the “market” tab and enter the amount of USDT you wish to spend on ETH. Click on the “Buy ETH” button to complete your order.
  • Step 4: Congratulations, now you own ETH. Your token will be processed at the best available price and will then be available in your Binance account.

How to stake ETH?

Ethereum staking is a great way to earn passive income on your ETH holdings. Here is a quick step-by-step guide on how to stake ETH and put your crypto to work:

  1. ETH wallet: First, ensure you have an Ethereum 2.0-compatible wallet. While many wallets support ETH, not all are suitable for staking in the Beacon Chain. Popular choices include Ledger, Trezor, and Metamask.
  1. The magic number—32 ETH: To become a full validator, you’ll need 32 ETH. But fear not—if you’re not swimming in crypto, many staking pools and platforms allow you to stake with less.
  2. Solo staking: If you’re an Ethereum maverick with 32 ETH and technical know-how, solo staking might be your game. This is the most involved way to stake ETH, but it also offers the highest rewards. To run your own node, you will need to purchase a dedicated hardware wallet, such as a Ledger Nano S or Trezor.
  1. Staking pools: A staking pool is a group of people who pool their ETH together to stake. This allows you to stake even if you don’t have enough ETH to run your own node. Participants get their rewards based on the stake.
  1. Staking on a centralized crypto exchange: This is the easiest way to stake ETH. Deposit your ETH into a supported exchange, such as Binance or Kraken, and you will start earning rewards immediately. The rewards are typically paid out weekly or monthly.
  1. Safety First: Staking is exciting, but it’s not without risks. Ensure your private keys are, well, private. Hardware wallets are a godsend, providing an extra layer of security.

    What Applications Can Be Created on Ethereum?

    Decentralized Finance (DeFi) is probably the greatest achievement of the Ethereum network. Decentralised DApps, which can perform multiple functions in the ecosystem, have emerged in 2019-2020 and are growing in popularity by the day. The more DApps applications are used, the more the Ethereum network will be used as a result. As Ethereum’s DeFi scene is the largest in the industry, and successful DApps applications have brought more awareness to the platform over the years.

    App use cases on the Ethereum network:

    • Social networks – Decentralized social networks will pay users for their posts.
    • File storage – Decentralised file storage at low prices.
    • Cross-border transactions – Dramatically reduce the cost of sending cash abroad.
    • Payment cards – Contactless debit cards for payments in ETH and other cryptocurrencies.
    • Online advertising – Eliminating intermediaries in online advertising. Users directly receive payment for viewing online ads.
    • Exchanges – Decentralised exchanges (DEX) such as Uniswap allow users to trade cryptocurrencies peer-to-peer without intermediaries.
    • Loans – Blockchain-backed loans without credit checks.

    Ethereum vs. Bitcoin: What’s the difference?

    While Bitcoin is the first cryptocurrency, the Ethereum community wants to expand the whole crypto project. The first one dedicates itself to digital money and fulfills this purpose quite well. However, Bitcoin has its limitations. It is a PoW network, which is difficult to spread, leading some to believe that it is more about storing value, similar to gold. Bitcoin also has a hard supply cap of 21 million coins, which further supports this argument.

    Ethereum aims to outpace our current internet infrastructure. It plans to automate many processes that still require intermediaries, such as using an app store or interacting with fund managers. In the network, people primarily use ETH for interacting rather than transferring money, although it is also capable of performing the latter function. Developers can create a unique and Ethereum-compatible token for each DApp based on Ethereum called an ERC-20 token. Although the process is not perfect, all tokens are technically interoperable. However, the Bitcoin network solely focuses on Bitcoin.


    Ethereum: Pros

    1. Decentralization and resistance to censorship

    Ethereum’s decentralized design efficiently distributes knowledge and trust among network members, eliminating the need for a central authority to manage the system and mediate transactions.

    1. Smart Contracts

    Ethereum’s pièce de résistance, smart contracts, are self-executing contracts with the terms directly written into code. This groundbreaking feature has paved the way for trustless, transparent, and tamper-proof agreements, revolutionizing everything from business deals to property transfers.

    1. Interoperability and Integration

    Ethereum’s architecture play’s well with others. Be it integrating with other blockchains or facilitating cross-chain swaps, Ethereum stands as a linchpin in the broader blockchain ecosystem, fostering collaboration and interconnectedness.

    1. Decentralized Applications (DApps)

    Ethereum boasts a robust ecosystem of DApps. From decentralized exchanges to lending platforms, Ethereum is the playground for blockchain innovation.

    1. Ethereum 2.0 and PoS

    With the transition to Ethereum 2.0, the shift from proof-of-work (PoW) to proof-of-stake (PoS) promises scalability, faster transactions, and a greener blockchain.

    1. Vibrant Developer Community

    Ethereum’s developer community is a bustling hub of innovation. With continuous upgrades and a focus on user experience, Ethereum remains at the cutting edge of blockchain technology.


    Ethereum: Cons

    1. Network congestion

    As we can see with Bitcoin and Ethereum, decentralized protocols tend to be slow. Bitcoin has an average speed of 7 TPS (transactions per second) and Ethereum 30 TPS. This is twice the speed of Bitcoin, but it is far from enough. In 2021, the explosive popularity of DeFi and, in particular, Yield Farming, has made the Ethereum network incredibly congested. For short periods, transaction fees increased to 100x normal levels or more, resulting in outrageous costs.

    1. Complex programming language

    Ethereum uses the same programming language as Python, Java, and C++. Unfortunately, the language Ethereum is using can be complicated for beginners to understand, and this is one of the most pressing challenges.

    In practice, this means that developers have to code smart contracts in a new language that they may not be familiar with. As a result, developers relatively often write smart contracts with vulnerabilities. Some of these vulnerabilities are difficult to identify, and there are even cases where a third party audits a smart contract (checks the code to ensure its security), and even after the audit, a hacker can find a hole in the system.

    1. Emerging Competitors

    The crypto realm is dynamic, with new players entering the fray regularly. Platforms like Binance Smart Chain, Polkadot, and Cardano offer similar functionalities, often with faster transaction speeds and lower fees. Challengers are questioning Ethereum’s first-mover advantage, and the platform must continuously innovate to remain ahead.

    1. Locked-in ETH and Liquidity Concerns

    Validators lock away a significant amount of ETH with the advent of staking in Ethereum 2.0. While this is part and parcel of proof-of-stake systems, it does raise concerns about liquidity and the potential impact on ETH’s price volatility.


    What is Ethereum 2.0?

    Ethereum 2.0 is a new version of the Ethereum blockchain that uses a proof-of-stake mechanism to verify staking transactions. This mechanism is claimed to use 99% less energy. Ethereum 2.0 wasn’t just an upgrade; it was a complete transformation of the Ethereum network. Here are the main pillars of Ethereum 2.0:

    • Proof-of-Stake (PoS): Gone are the days of energy-guzzling mining rigs. Ethereum 2.0 introduces a shift from the proof-of-work (PoW) consensus mechanism to proof-of-stake. In this new paradigm, validators replace miners, staking their ETH as collateral to secure the network and validate transactions. The result? A greener, more energy-efficient blockchain.
    • The Beacon Chain: Launched in December 2020, the Beacon Chain is the heartbeat of Ethereum 2.0. It’s the PoS blockchain running in parallel with the original Ethereum PoW chain, ensuring that the transition to PoS is smooth and seamless.
    • Shard Chains: Scalability is the name of the game. To boost the network’s capacity, Ethereum 2.0 introduces shard chains, smaller chains that process transactions and smart contracts. With 64 shard chains proposed, Ethereum’s transaction throughput is set to skyrocket.
    • The eWASM: Replacing Ethereum’s current virtual machine, eWASM allows developers to execute code more quickly, broadening the potential for larger and more complex applications on the network.

    With Ethereum 2.0, the user experience is poised for a significant uplift. Faster transaction speeds, reduced gas fees, and enhanced security protocols mean that whether you’re a dApp developer, a trader, or a casual user, Ethereum 2.0 promises a smoother, more efficient journey.


    Conclusion

    As the second biggest cryptocurrency, Ethereum stands out not merely as another digital coin but as a revolutionary platform that has redefined the boundaries of blockchain technology. Its introduction of smart contracts and decentralized applications has paved the way for a new era of digital innovation, transforming not just how we transact, but how we envision the future of decentralized systems. And when it comes to its native cryptocurrency ETH, we believe it has a bright future as it plays a crucial role in Ethereum ecosystem for years to come.


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