What is Ethereum? A Beginner's Guide by ChangeHero

Ethereum started the second generation of blockchains, expanding on the capabilities of the technology greatly and introducing tons of new concepts into the industry. Today it’s hard to imagine the market without Ethereum and other currencies that exist because of it, though it has been around for only five years. In this article, ChangeHero team is going to answer all your questions about the most popular alternative cryptocurrency.

What is Ethereum?

In simple terms, Ethereum is a blockchain which has the functionality of smart contracts. They are compiled in Ethereum Virtual Machine (EVM) and executed on the blockchain. As for their function, smart contracts are the scripts or programs that run only if all the conditions stated in its code are met. Smart contracts let a robust variety of features such as tokens, dApps and prediction markets exist on the Ethereum platform.

The nodes that perform the computations are rewarded with a block reward of 2 ETH and the gas – essentially, a system of network fees in Ethereum, only in this case any record in the chain is rewarded. Since the Ethereum network is used not only for transacting with ETH but also for executing smart contracts, every computer doing the work is incentivized.

How was Ethereum created?

The idea of Ethereum was first presented in January 2014 in the whitepaper by Vitalik Buterin. Before that, he was looking into the solutions for creating applications on the Bitcoin blockchain, but, ultimately, came to the conclusion that fundamentally it is limited in its features, like backwards scanning or compatibility with more complicated scripts. The new platform would need to be built with a scripting language from the ground up.

Although Vitalik Buterin is often considered to be the face and voice of the project, he is not the only founder. Ethereum wouldn’t have happened without Gavin Wood, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin. In early 2014 they finished figuring out the basics, laid out by Buterin, and decided to crowdsale the launch. The 31 thousand Bitcoin raised would be put to set the Ethereum Foundation, responsible for further development of the chain.

What has Ethereum made possible?

Stablecoins

Stablecoins are the tokens that are pegged to the value of another asset, for example, collateral in another currency or a fiat currency. This is achieved by both decentralized smart contract functionality and partial centralization: regulated issuance and custody of the backing funds.

Technically, stablecoin technology and principles do not require them to be built exclusively on Ethereum. Nevertheless, the fact that the most popular stablecoins like Tether and DAI are a part of Ethereum network greatly underscores the reliability of the platform.

Blockchain Gaming

Gaming on blockchain adheres to the same principles as other applications on blockchain: it is decentralized, censorship resistant and has consistent uptime. The last two are especially important in gaming, since in most cases with traditional centralized providers, like massive multiplayer online game publishers and game stores, your purchases generally do not belong to you and are “rented”, and there are often server downtimes for maintenance.

In addition, blockchain games allow for tokenization of collectibles and trading on in-game marketplaces, which are filled with other players like yourself, creating a unique small economy within the game.

Ethereum is one of the most popular platforms to build on, purely for its security and proven functionality. The games built on Ethereum include Decentraland, Gods Unchained and, of course, CryptoKitties. It is not dominating by a wide margin, since the transaction throughput is still being worked on. With the implementation of scaling solutions like sharding or Plasma, it might become an even more solid platform for game developers.

Decentralized Finance

Arguably the most important and potentially impactful application of Ethereum platform and smart contracts is for decentralized finance, or DeFi. In comparison to traditional banking, it is uncensorable, accessible, open and self-sovereign.

DeFi applications include asset management and issuance apps, alternative savings (like Dharma or Linen.app), decentralized exchanges like Uniswap, oracles, prediction markets, DAO, insurance and lending, among other things.

Some of DeFi applications on Ethereum have projects with networks of their own. The oracle network ChainLink can be used to transfer any data on-chain, making it secure and reliable. Prediction market Augur puts the future price betting on the blockchain, making it fair by incentivizing honest behavior. Plasma-powered decentralized exchange solution OMG Network’s mission is to provide accessible and fast financial services to anyone with Internet access. These tokens power their own ecosystems but at the same time work thanks to Ethereum.

What dApps on Ethereum are popular?

  • MakerDAO – this DAO includes OasisDEX, investment products and DAI stablecoin;
  • Brave Frontier Heroes is a crossover between Brave Frontier and My Crypto Heroes. Think of it as BF, but on blockchain — an acclaimed mobile RPG with the elements of virtual economy;
  • FunFair — the blockchain casino with the most active users, according to State of the dApps;
  • OpenSea — P2P marketplace for collectibles and NFTs;
  • Nexo — crypto loan platform;
  • Livepeer — uncensorable video broadcasting service;
  • Golem — decentralized computation network.

How are Bitcoin and Ethereum different?

Like we already said, Ethereum is a second-generation blockchain to the first one represented by Bitcoin. Its versatility, in comparison to the first cryptocurrency, is vastly superior. However, how does Ethereum do its job of transacting currency?

In Bitcoin, each new block is produced every 10 minutes (target block time), meaning a transaction will be recorded within approximately this time. The transaction throughput is artificially limited at 7 transactions per second, to decrease the chances of double-spending. Bitcoin is slow but once the record is done on the chain, the transaction is soundly confirmed. Ethereum is much faster in comparison, with a block target time of only 15 seconds. This increases the throughput of the network to 15 transactions per second, which also accounts for smart contract execution in addition to money transfers.

Bitcoin’s blocks are capped at 1 MB, and Ethereum’s have a block gas cap. Since gas is calculated by the lines of code a node has to execute, a maximum limit of processing for one block is 10 million Gwei.

screen shot 2020 06 17 at 5.14.40 pm 1024x228 - What is Ethereum (ETH)? A Beginner’s Guide
Source: bitinfocharts.com

Since a “transaction” in Ethereum is not limited to value transfer, the number of it on average is larger than in Bitcoin. Ethereum “transactions” are hitting almost 1 million a day, while in Bitcoin this figure is closer to 300 thousand.

screen shot 2020 06 17 at 5.17.34 pm 720 - What is Ethereum (ETH)? A Beginner’s Guide
Source: bitinfocharts.com

Nevertheless, the number of active addresses, another important metric for chain activity analysis, shows that there are more unique active addresses transacting Bitcoin than Ethereum.

How much is ETH worth?

The native currency in the Ethereum network is called Ether (ETH), though it is most often referred to as Ethereum, like the platform. Ether is issued via mining and its main value comes from enabling transactions and smart contract execution on the network with the gas system.

Gas is very similar to transaction fees in other currencies, but it is needed not only for transactions but for all computations performed by nodes. It is fully customizable, but usually there is no need to set it for more than a few cents. Gas is the reason ETH was so popular in 2017 and 2018, when the ICOs were the fad, and it certainly contributes to the popularity of Ethereum today, since the most used stablecoins are ERC-20 tokens.

 

screen shot 2020 06 17 at 2.27.21 pm - What is Ethereum (ETH)? A Beginner’s Guide
Source: CoinMarketCap

Despite the fact that the market is undoubtedly dominated by Bitcoin, Ethereum also takes a considerable chunk of the total market capitalization. It took less than a year for ETH to reach 10% in market dominance in March, 2016. Since then and until 2018, Ethereum had almost the same market capitalization as the rest of the altcoins combined. A noteworthy exception was observed around mid-2017 when Ethereum and Bitcoin were on almost equal footing (31.17% in Ethereum vs. 37.84% in Bitcoin). This and early 2018, the time when the prices were soaring on the whole market, were as close as we could get to a true altcoin season. However, this trend changed and the major part of capitalization was in Bitcoin once again. Today, Ethereum holds about 9% of the whole market cap.

ethereum charts  1  720 - What is Ethereum (ETH)? A Beginner’s Guide
Source: CoinMarketCap

The parallels with the previous chart are obvious: the higher the price, the larger is the market cap, though this is not a 100% correlation. In 2017, the first smart contracts for enterprise use were finalized, and the Ethereum price skyrocketed from $10 to $380 over a couple of months. Decentralized exchanges, blockchain games and stablecoins all contributed to that. On January 13, 2018, Ether price hit an ATH of $1,432.88.

Since then, the price has been corrected and did not see such crazy spikes. At the moment of writing, a single ETH is worth $231.84 according to CoinMarketCap. For more detailed price history, you can check out our Ethereum Price Prediction.

How to put ETH to use?

 

39663125045 18c85320ec c - What is Ethereum (ETH)? A Beginner’s Guide
Source: Quote Catalog

Buy Ethereum

Being a second only to Bitcoin cryptocurrency, Ether is listed on almost every crypto and hybrid exchange. To buy ETH on an exchange, a user would have to make an account and have it approved first, then make a purchase, then withdraw. To circumvent this somewhat complicated process, on ChangeHero, you can buy Ether after a quick verification, and the whole process will not take more than 15 minutes. Oh, and did we mention it works both ways, so you can sell it as well? If you already own other cryptocurrencies, you can use them to purchase ETH even faster and with no registration at all with instant swaps provided by ChangeHero.

Ethereum Wallets

Unique to Ethereum are smart contract wallets. In these apps you can do things that are not normally possible on other blockchains: recover funds, set fraud alerts and limit withdrawals. Wallets like this include Gnosis Safe, Argent and Authereum. The obvious drawback is that these wallets work with Ethereum only, so you can only store ETH and ERC-standard tokens there.

Most multi-currency wallets support Ethereum. For hot storage we recommend Exodus and for cold storage, you can pick Trezor or CoolWallet S, because in these you can exchange cryptocurrencies with ChangeHero as easily as on the website but without leaving the app.

Spend Ethereum

In addition to utilizing ETH in the Ethereum ecosystem’s apps, you can purchase goods and services in any shop or with any merchant that accepts ETH or has a payment gateway installed. It doesn’t have to be an online shop or platform, since there are lots of real-life shops and hotels that also accept such payments. Roughly half of all merchants that accept cryptocurrencies support Ether payments. The full list can be found here.

What is Ethereum 2.0?

As far as the future updates are concerned, all eyes are on Ethereum 2.0 now. Simply put, it is a completely new iteration of the original network, introducing new features to the technology: sharding and proof-of-stake. PoS will be introduced in the Phase 0 of the beacon chain of Eth2.

PoS will make the Ethereum network more secure and sustainable. The increased security comes from increased responsibility for running a validator node. To claim one, 32 ETH (~$7,418) would need to be locked into the system, and in case any malicious activity is performed by the node, the rewards get slashed in part or entirely. However, running a validator node and sustaining it is a dependable source of passive income in the form of validation rewards, so this model will attract even more investors.

Sharding is supposed to be the solution to Ethereum’s scalability problem. Shard chains are supposed to multiply the amount of transactions processed simultaneously. Since the number of them is planned to be 64, in theory, the speed of transaction processing should increase accordingly. Sharding is supposed to roll out in Phase 1, and there is no set launch date for it yet.

In total, the new network will not replace current Ethereum entirely but will coexist with it, at least until Phase 2. This new network will be even better fit both as a means of value transfer and money transacting, and a platform for smart contract-enabled applications and assets.

Is there anything wrong with Ethereum?

Of course, Ethereum is far from being a perfect technology. There are adaptability concerns, already mentioned scalability problems, some critique addresses even security issues.

Decentralization and community governance, as well as rigidness of the blockchain structure makes adaptability a huge issue for Ethereum. In the 2016 DAO hack, when a hacker exploited a smart contract vulnerability to drain millions of ETH from the account that was supposed to become a venture fund for development on Ethereum, the damage could have been prevented by a hotfix. Of course, singlehanded issuance of changes to the network was not possible in this case. In addition, an attempt to write this case out of the history of Ethereum to return the stolen funds caused a schism in the community.

Then there is scalability. The gas limit which has already been increased in September 2019, is being put to test again under the pressure from stablecoins and dApps running on Ethereum. The definitive solutions like sharding are not expected to happen even in the first phase of Ethereum 2.0, so the community has to settle on gas limit increase.

The best practices to avoid known attacks are described in a guide by the Ethereum Foundation developers, but there is a lot more potential for exploitation with the new kinds of code being developed for Ethereum every day. And, like we already said, there would be no quick way to fix a smart contract due to it being executed on the blockchain.

What does Twitter say about Ethereum?

Ethereum is not a niche crypto project by any means. It might not be such a common household name as Bitcoin, but it is definitely not limited to Crypto Twitter and its own community.

screen shot 2020 06 17 at 2.21.40 pm - What is Ethereum (ETH)? A Beginner’s Guide
Source: Twitter

On the weekend before this Tweet, J.K.Rowling asked her followers to explain Bitcoin to her. Little did she know that by doing so, she summoned the entire crypto Twitter to her mentions for the rest of the weekend. Some outlets interpreted that as genuine interest, to which Rowling retorted wittily.

screen shot 2020 06 16 at 5.31.01 pm - What is Ethereum (ETH)? A Beginner’s Guide
Source: Twitter

Elon Musk attempted to express his thoughts on Ethereum in a cryptic and concise way. (Which, of course, left a bit too much room for interpretation and not a bit of nuance). This sparked a brief back-and-forth between him and Vitalik Buterin, which proved that the eccentric billionaire was genuinely interested in how the technology can be applied in real use cases.

screen shot 2020 06 16 at 5.47.17 pm 720 - What is Ethereum (ETH)? A Beginner’s Guide
Source: Twitter

In some recent news, a suspicious transaction on Ethereum caught the attention of the community. The reason? A 10,688 ETH gas fee to transfer 0.55 ETH. But what made the mystery even more captivating was that this happened not once but twice. The situation is still unresolved, as far as everyone is aware.

screen shot 2020 06 16 at 5.51.07 pm - What is Ethereum (ETH)? A Beginner’s Guide
Source: Twitter

Obviously, Ethereum is a traders’ altcoin darling, and @TheCryptoDog promised that this summer is going to be pretty interesting for ETH holders. Again, are we sure what he meant by that? Not really, but that is how Twitter is. One thing is certain, Crypto Dog knows what he’s talking about.

Conclusion

So, in short, Ethereum is the blockchain/cryptocurrency of the second generation, which sparked a lot of innovation in the sector: ICOs and tokens, stablecoins, DEX and dApps. Like Bitcoin, it inspired a lot of alternative chains that promise to improve on some parts of its premise, but Ethereum remains a standard for the blockchain-powered platforms.

The development of Ethereum looks very promising, and it is a sound asset even now. So if you would like to get some Ether, you can do it on ChangeHero, both with other cryptos or fiat currencies. Check our service out to see for yourself — it’s easy, hassle-free, safe and lightning fast!

Subscribe to ChangeHero on social media to always be in the know about our new content: we’re on Twitter, Facebook, Reddit and Telegram.

Title
ethereum guide banner 720 - What is Ethereum (ETH)? A Beginner’s Guide
Article Name
What is Ethereum (ETH)? A Beginner’s Guide
Description
Ethereum is the blockchain of the second generation, which sparked a lot of innovation in the sector: ICOs and tokens, stablecoins, DEX and dApps.
Author
Publisher
ChangeHero
Logo
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments