Ethereum for beginners

Ethereum is an open-source, blockchain-based, decentralized software platform. It was the second blockchain software to be developed after Bitcoin.

 

To date, Ethereum is the second most popular blockchain network and its cryptocurrency, ether (ETH), which we shall look at later in this post, is also the second-largest by market capitalization. But unlike Bitcoin, the first blockchain and cryptocurrency, Ethereum is more than just a medium of storing value or a medium of exchange. It refers to itself as a “decentralized computing network built on blockchain technology”. Let us explain what that means.

 

Ethereum took Bitcoin’s blockchain concept of validating, storing, and replicating transaction data on several computers (referred to as nodes) in its network around the world to a higher level. Besides validating, storing, and replicating transaction data, Ethereum has a virtual machine called Ethereum Virtual Machine (EVM) that runs small computer programs on the various computers within its network. These small computer programs that run on the Ethereum blockchain network are referred to as smart contracts.

History of Ethereum

Ethereum was proposed by a Russian-Canadian programmer called Vitalik Buterin in 2013. The project was then funded in 2014 through an Initial Coin Offering (ICO) crowd fundraising at a time when its initial coin supply was 72 million ether (ETH) coins.


An ICO is a fundraising campaign where the company behind a certain blockchain project sells the crypto tokens to prospective investors and users at an initial price that it can in return raise money to fund the project.


Following a successful ICO, the blockchain went live in July 2015.


One year after Ethereum was launched, in May 2016, members of the Ethereum community announced a new concept called decentralized autonomous organization (‘The DAO’ or ‘Genesis DAO’) that was to be implemented through the Ethereum blockchain.


The DAO banked on the smart contracts technology that Ethereum had introduced into the blockchain world. It had an open-source framework.


In essence, a decentralized autonomous organization is an entity or organization that operates through the use of smart contracts. Its rules of operation and its financial transactions are programmed into various smart contracts which are deployed and executed through a blockchain. Therefore, the entity or organization is not controlled by a central entity nor does it depend on the human inputs and thus the terms autonomous and decentralized.


‘The DAO’ was designed to operate as a Venture Capital Fund that would help blockchain projects raise funds for their projects. A venture capital fund is a type of financing and a type of equity that investors give to startup companies or small businesses that show the potential of having long term growth. Traditionally, this financing comes from well off investors, or financial institutions inducing investment banks.


During the creation period of ‘The DAO’, interested parties were allowed to send ETH to a specific wallet address to get DAO tokens, a crypto token that had been created to be used within ‘The DAO’. During this period the project was able to raise a whopping 12.7ETH that was at the time worth about $150 million making it one of the most successful crowdfunding ever to be conducted.


Later, the same year (2016), ‘The DAO’ was hacked and hackers stole Ether worth $50 million, which was almost a third of what had been raised during the crowdfunding phase.


https://twitter.com/The_DAO_Project/status/810998905424986112


Following the DAO hack, the Ethereum community voted for the blockchain to hard fork to repay the stolen Ether. The Ethereum hard fork was completed on July 20, 2016, resulting in two blockchains namely the Ethereum Classic blockchain, whose crypto token is represented as ETC and the Ethereum blockchain, whose crypto token the Ether is represented as ETH.


https://twitter.com/The_DAO_Project/status/851406093674786816


The Ethereum Classic is the blockchain that continued as the old chain while the Ethereum blockchain was the new chain that was created to reverse the theft. Ethereum blockchain has since gone to become more popular than the Ethereum Classic blockchain.


In March 2017, several Fortune 500 corporations (a list of the 500 largest corporations in the US by total revenue that is compiled and published annually by the Fortune magazine), research groups, and blockchain startups created the Enterprise Ethereum Alliance (EEA). When it was started, the EEA had 30 members though that number has been rapid. Some of the companies that are part of the EEA include National Bank of Canada, Scotiabank, ConsenSys, Cisco Systems, Samsung SDS, Cornell University’s research group, Toyota Research Institute, CME Group, Microsoft, J. P. Morgan, DTCC, Cooley LLP, Intel, Merck KGaA, Deloitte, Banco Santander, ING, BNY Mellon, Accenture, MasterCard, and Sberbank.


Ethereum blockchain has made series of upgrades over the years and it is currently working on Ethereum 2.0 upgrade, which aims at moving the Ethereum Blockchain from the Proof-of-work (PoW) consensus mechanism, which is what is currently also used by Bitcoin, to Proof-of-Stake (PoS) consensus mechanism. We shall explain about the consensus mechanisms later in this article.

How the Ethereum blockchain works

We started by defining Ethereum as a blockchain network. Let us go a step further and dissect that word ‘blockchain’ to understand how Ethereum works as a blockchain network.

 

The term blockchain comprises two shorter terms; block and chain. The term block refers to the state in which information or data is stored within the blockchain network. Data is stored in sequential batches called ‘blocks’. On the other hand, the term chain refers to the way the blocks of data are intertwined within the network. The blocks of data form a chain of blocks and thus the term blockchain.

 

Every new block of data that is added onto a blockchain network like Ethereum is permanently added onto the network as an immutable block and it becomes an integral part of that specific network. This means that there is no way the block of data can be altered unless the entire blockchain network is brought down.

 

For a new block to be added to the chain, the computers (also referred to as nodes) on the network must come to a consensus or agreement that the block is fit to be added to the blockchain network to become part of the distributed ledger (data record) on the network.

Currently, Ethereum uses a consensus mechanism called Proof-of-Work (PoW), which dictates that a complex puzzle that requires a lot of computing power must first be solved for a new ‘block’ to be added onto the blockchain. The process of solving these complex puzzles is what is referred to as mining and in this case Ethereum mining.

 

https://youtu.be/zcX7OJ-L8XQ

 

However, after Ethereum finished the Ethereum 2.0 upgrade, the blockchain will move from the PoW to Proof-of-Stake (PoS) consensus mechanism. The PoS mechanism, which stipulates that a person can mine blocks depending on the amount of coins they have staked (crypto coins locked up in a different address that a user cannot trade). The more the stacked coins, the more the chances that a person or a group of people who have joined together in a staking pool have to be allowed to mine a block.

 

Currently, if person ‘A’ sends 2ETH to person ‘B’, a miner will be required to solve a complex puzzle to verify and validate the transaction after which the transaction is approved and added to a block and added to the blockchain.

 

Those who participate in Ethereum mining are rewarded in Ether (ETH) for having their nodes solve the complex puzzles to add new blocks on the Ethereum blockchain. We shall explain how you can participate in Ethereum mining and earn an extra income from mining later on in this article.

Besides being used as a medium of exchanging ETH, storing value (the value of ETH token keeps on fluctuating depending on its market prices) and storing the transaction data of the various ETH transactions that have occurred on the blockchain, Ethereum blockchain also adds another angle to blockchain technology, which is the smart contracts technology.

 

Smart contracts are computer programs that are written to execute certain tasks that form part of an agreement/contract between parties on the Ethereum blockchain. As mentioned at the beginning of this article, Ethereum has a virtual computing machine referred to as the Ethereum Virtual Machine whose sole purpose is to compute and process these smart contracts. And that is why Ethereum is also referred to as a ‘decentralized computing network’.

 

Blockchain developers take advantage of Ethereum smart contracts and use them to create decentralized applications (DApps), which comprise a group of smart contracts that are written to perform certain tasks to solve various problems in various sectors. Currently, there is a wide range of DApps that use Ethereum to disrupt business models and even invent new models.

 

DApps have found lots of applications in different industries including finance, gaming, gambling and technology.


In the finance sector, for example, there are lots of decentralized finance (DeFi) DApps ranging from Defi lending and borrowing protocols like Aave and Compound, decentralized Prediction Markets, decentralized crypto exchanges (DEXs) like PancakeSwap and Uniswap, to yield and mining pools.

 

In the gaming industry, several gaming DApps have been developed based on non-fungible tokens (NFTs) created on the Ethereum blockchain. Examples of such games include Cryptokitties, Axie Infinity, Sorare (an NFT-based football game), F1 Delta Time, and Evolution Land.

How to participate in Ethereum mining

There are two ways through which you can participate in mining Ethereum. One is by going it solo, meaning mining Ethereum on your own, and the other is by joining an Ethereum mining pool.


But first things first, regardless of the path you choose to take, you will need to have the necessary equipment (software and hardware) required for mining. To do this, simply:

  1. Get an Ethereum wallet where you shall be storing your ETH coins. Some of the most commonly used ETH wallets include MyEtherWallet, Exodus, Mist, MetaMask, Guarda wallet, Pillar wallet, HyperPay, Ledger Nano S hardware wallet, Ledger Nano X hardware wallet, Trezor One hardware wallet, Keepkey hardware wallet, and Trezor T hardware wallet.
  2. Install the Geth open-source software to enable your hardware to communicate with the Ethereum blockchain. It is available for almost every operating system.
    https://youtu.be/SVjG5QXtpqI
  3. Install Ethereum mining software like Ethminer, T-Rex, WinETH, TeamRedMiner, BFGMiner, CGMiner, EasyMiner, Lolminer, and PhoenixMiner. The mining software is responsible for overseeing the mining process.
  4. Purchase an Ethereum mining hardware device. Some of the most commonly used Ethereum miners include AMD Radeon R9 295X2, AMD Radeon R9 HD 7990, AMD R9 390, NVIDIA Geforce GTX 1070, and NVIDIA Geforce GTX 1660ti among others.

https://www.youtube.com/watch?v=tPzJbDI1yxo

An Ethereum mining pool is simply a group of miners working together to mine Ethereum. And although mining pools provide smaller payouts compared to the lump sum rewards that solo miners get once a block is mined, the rewards from mining pools are frequent and less volatile. However, solo miners are less likely to be awarded blocks to mine compared to the group of miners (mining pools).

To join an Ethereum mining pool, you simply look for a good Ethereum mining pool like Ethpool/Ethermine or Nanopool, join and start mining.

https://www.youtube.com/watch?v=WwDVIpnjfOA

Benefits of using the Ethereum blockchain

  • Ethereum blockchain has a cryptocurrency called Ether, which is denoted as ETH and it is currently the second-largest cryptocurrency by market capitalization. If you hold ETH, you can use it on a variety of Dapps, or even trade it on a majority of cryptocurrency exchanges.
  • Ethereum blockchain has a range of other use cases that have been enabled by its smart contracts functionality. There are very many applications out there developed on Ethereum ranging from DeFi applications to games that you can leverage.
  • Ethereum has the largest blockchain ecosystems and a very committed global community owing to its wide variety of use cases. This makes it interesting since there are always new ideas and products coming from this large community and ecosystem respectively.
  • Ethereum is one of the most preferred blockchains by DApps developers who are always developing new applications that keep enlarging blockchain use cases. If you are a DApps developer, you can leverage Ethereum functionality in creating your decentralized application.
  • Through the use of smart contracts, the DApps developed on the Ethereum blockchain have succeeded in eliminating intermediaries/third parties in various financial transactions. For example, the DeFi lending protocols have made it possible for crypto users to borrow from other crypto users without having to include a bank.

Ethereum Limitations

  • Rising gas (transaction fees) – Currently, the average Ethereum transaction fee is $13.07, a figure that has rapidly risen considering that on January 1, 2021, the transaction fee was $3.363. You can use a tool like the ETH GAS STATION to find out the different gas prices on various DApp platforms. Additionally, contrary to the Bitcoin blockchain where the blockchain network rewards the miners, in the Ethereum blockchain those transacting are the ones who cover the transaction fees.
  • Risk of inflation – Contrary to other cryptocurrencies like bitcoin that have a limit of the total amount BTC coins that will be mined at the end, Ethereum has no limit on the amount of Ether (ETH) coins that will be mined in the lifetime it only has a limit of 18 million ETH coins in per year. This means that the mining of new coins will continue indefinitely and it could eventually result in inflation due to an oversupply of the ETH in the market.

How to buy Ether

To purchase and own Ethereum cryptocurrency, Ether (ETH):

  1. Choose a cryptocurrency exchange with fiat on/off-ramp. Fiat on/off ramps enables such exchanges to convert fiat to crypto. Some of the most commonly used crypto exchanges with fiat on/off ramps include Binance, Coinbase, Kraken, Bitstamp, Luno and Coinjar.
  2. Register for an account with the exchange, link a payment method like bank transfer, credit card, debit card, PayPal, etc., send some fiat currency to the account you created on the exchange.
  3. Then, use that money to purchase ETH.
  4. Look for a personal Ethereum wallet like to move your ETH from the exchange’s wallet, which is not very same. Hardware wallets or paper wallets are the safest crypto wallets. Examples of hardware wallets that support ETH include Ledger Nano S hardware wallet, Ledger Nano X hardware wallet, Trezor One hardware wallet, Keepkey hardware wallet, and Trezor T hardware wallet. You could also choose to use other hot wallets (wallets that store the private keys on the computer and are actively online whenever you connect to the internet) like MyEtherWallet or Exodus among others.