What is Ethereum? — The basics
Ethereum is an open-source, decentralized, blockchain-based software platform that enables smart contracts and distributed applications (DApps). Both of these reduce downtime, fraud, or third-party interference.
Smart contracts are self-executing contracts, meaning that the buyer and seller’s agreement is written into lines of code. Smart contracts allow people to exchange money, stock, or property without the need to make use of a lawyer, notary, or third-party intermediary. This is one of the most popular features of ETH, leading many people to believe in this platform’s longevity.
Decentralized applications (DApps) are digital applications that run on a blockchain or P2P network instead of a single, self-serving computer. There is no single authority that controls the network due to decentralization.
The difference between Ether and Ethereum
Ether is the native cryptocurrency of the Ethereum blockchain. Ether is often referred to as “Ethereum” as the two names have become interchangeable. Ether is vital to the blockchain in two ways: as a reward for validating a blockchain transaction and as a fee for using the Ethereum network.
Why Ethereum has value
ETH is often referred to as a world computer, meaning it’s known for its DApps and smart contracts. Although BTC has smart contracts as well, ETH’s self-executing contracts are baked into the system, which makes it really easy to use.
Ethereum has value because it represents a wide range of uses outside of transactions and the exchange of money. An example of this would be the non-fungible token (NFT) markets, which mostly run on top of the ETH blockchain.
Use cases for Ethereum
The various technologies that resulted from Ethereum’s introduction of the smart contract model would lead users to find creative ways to integrate this into their projects. dApps, for example, have seen positive feedback thanks to the combination of decentralized systems with modern applications.
The most recent example of Ethereum’s use case, though, would have to be NFTs. Stemming from the simple idea of creating digital art, developers could find interesting ways of using smart contracts to develop virtual game items that would hold real-world value.
Admittedly, the run we saw NFT games pull off would be a relatively short one, but it seems that that was simply a proof of concept. Now, people have an actual idea of the potential that NFTs have in the real world.
Layer 2 solutions
Another thing to consider with Ethereum is its Layer 2 functionality and scalability. Generally speaking, Layer 2 is a supplemental layer built on top of the base layer of the blockchain. In this case, the main Ethereum blockchain would be Layer 1, with succeeding dApps and layers considered Layer 2.
Layer 2 aims to improve the scalability of the main blockchain while also being a platform for other services to operate from. It’s an expansion of everything Layer 1 promised (in this case, Ethereum) by pushing its reach to distances normally restricted by infrastructure limitations.
Take Loopring as an example. Loopring’s zkRollup is a Layer 2 solution that aims to provide similar security to Ethereum’s Mainnet, albeit with the promise of a larger scale—a 1000x increase in efficiency and costs that can go as little to 0.1% of Layer 1.
Another example is zkSync, a development from Matter Labs that also aims to provide scaling solutions for Ethereum’s network. They currently provide payment support, token swaps, and even NFT minting.
On the Ethereum blockchain, there’s a cost for making transactions, and it’s called Ethereum gas. However, these transaction fees aren’t fixed. The amount of gas required for each transaction may differ depending on the complexity of the exchange.
The minimum requirement for a simple transaction is set at 21,000 gas. However, the more complicated it becomes, the more expensive it can get — up to 1,000,000 gas.
This gas system exists so the network could differentiate the computational costs from other expenses. By establishing a separate unit for making transactions, people would be able to tell the difference between the computational costs of the Ethereum Virtual Machine and ETH’s actual valuation.
If you want to save money on your transactions, it would be a good idea to check what time Ethereum gas prices are at their lowest.
Ethereum soft and hard forks
Ethereum’s blockchain is also known for its forks or permanent splits off of the blockchain. Each fork or split will introduce various planned functionality and security updates while preventing new transactions from being integrated into the old chain.
Let’s take a look at some of the forks we’ve seen so far:
This is the first phase following the Olympic testing phase of Ethereum. Barebones but operational, its intended users were technically oriented (i.e., developers).
This fork removed the previous 5,000 gas limit per block. This meant that transactions (which normally require 21,000 gas) were now operational on the blockchain.
This fork introduced several protocols and networking changes that would make it easier for Ethereum to do further upgrades in the future.
In 2016, an insecure DAO contract was used to drain 3.6 million ETH in a massive attack. The course of action approved by the ETH community would be to move the funds from the flawed contract to a new one that only had one function—withdrawals.
That same year, a flurry of DoS (denial of service) attacks on the network would prompt developers to respond with an update that would address network health issues revolving around underpriced operation codes.
As a follow-up to the original remedy to the DoS attacks, Ethereum’s developers would further improve security by tuning opcode pricing, enabling “debloat” of the blockchain’s state, and adding replay attack protection. This would effectively prevent further urgent security concerns.
Byzantium’s release would come with a reduction in block mining rewards from 5 ETH to 3. This update would also delay the difficulty bomb (a planned exponential increase in the difficulty of proof-of-work (PoW). This difficulty bomb is meant to motivate users toward a proof-of-stake model, which should reduce the chances of needing a fork further down the line.
The update would also allow users to make non-state-changing calls to other contracts and add cryptographic methods that allow for layer 2 scalability.
Developers would further progress towards proof-of-stake (PoS) by implementing updates that prevented any freezes in the system before PoS implementation. Gas prices for certain Ethereum Virtual Machines (EVM) and EVM-related actions were also optimized, and developers added the option to interact with addresses that haven’t been created yet.
With Istanbul, user contracts would be given more flexibility for creative functions. EVM gas prices would further be improved in this next update. Ethereum developers would also improve DoS security, provide Layer 2 scaling solutions (which were based on SNARK and STARK’s performance), and enable Ethereum and Zcash interoperability.
The difficulty bomb would further be delayed in this update due to concerns of degradation of the usability of Ethereum through the increase in the difficulty of proof-of-work.
EVM gas prices would further be optimized with the Berlin update, alongside additional support for multiple transaction types.
This update would bring us EIP-1559, an Ethereum Improvement Proposal meant to reform the transaction fee market. They would also make changes in how gas refunds are managed while also altering the schedule of the Ice Age, a hard fork (permanent change) that would increase difficulty exponentially to promote the transition to PoS.
Arrow Glacier would push the difficulty bomb further back by a couple of months. This is similar to the Muir Glacier update in that this would be the only change this update would come with.
Similarly, Gray Glacier would push back the difficulty bomb by three months.
In what is known as The Merge, Ethereum’s existing execution layer (current Mainnet) was merged with the new proof-of-stake consensus layer called the Beacon Chain on September 2022. The Beacon Chain is a network created on December 1, 2020, which exists separately from Ethereum’s Mainnet, running only in parallel.
Why did the merge happen?
The switch to PoS consensus is meant to reduce the overall energy cost of mining Ethereum. Instead, network security is assured through staked ETH. This diverting of security means that the Ethereum blockchain can claim to be “greener” operationally (99% more environmentally friendly) while also improving security as well as sustainability in one move.
Implications of the merge
The main implication of this would be an increase in the use case of Ethereum, making it easier for developers and users to build on, operate, and invest in the blockchain and all its developments. An increase in usability also means that Ethereum would look better as an investment opportunity, especially when we consider its improved security and sustainability.
How will the merge affect ETH gas?
As for Ethereum gas fees, we see little to no change. Concerns have been raised surrounding Ethereum mining, though, as this merge would mean that the work that miners were doing would be rendered obsolete. Ethereum mining pools look set to survive the merge, though, due to how they function. Inherently, they do not make use of computing power but instead rely on a group coordinated effort, an effort that could translate well with PoS.
Through countless tests, bug hunts, and diagnostics, Ethereum’s developers have ensured that the event proceeded smoothly as the network entered a new phase in its history.
Because Ethereum has finally proceeded with its plans of moving to Proof of Stake (PoS) along with the Ethereum 2.0 (ETH2) update, Ethereum mining is now considered a dead practice since PoS does not require powerful computers to validate transactions, instead relying on staked Ethereum.
Before you start staking Ethereum, there are a few things you can take into account:
Can I afford it?
To begin staking Ethereum, you will need 32 ETH to activate the validator software. You will also need to make sure that your computer has access to the Internet 24/7, so electrical fees will be taken into consideration.
Do I have access to it?
As mentioned, you will need a personal computer that can be dedicated to the practice. You will also need a reliable internet connection in order to maintain efficiency.
Do I have the time?
While active participation is not required 24/7, it is highly recommended that those staking ETH devote time to learning more about the network and the staking community as a whole.
Is this legal?
The rules and regulations of cryptocurrency vary per country, so make sure that you’re mining in a place that allows it.
Like mining, there are a couple of different ways to go about staking ETH. You can start getting a better idea of what might be in store for you based on your answers to the questions above. Let’s take a look at some of your options:
Solo home staking
By far the most common way to stake ETH, solo home staking involves individuals depositing 32 ETH and managing the software themselves.
This method is ideal for those who have the 32 ETH but are unwilling to validate transactions themselves. The 32 ETH will instead be diverted through a provider that will stake ETH on your behalf.
This method caters to those who are unable or unwilling to part with 32 ETH. Instead, the 32 ETH is provided by a pool of users that hold tokens representing the amount of ETH they staked in the pool.
If you’re a little unsure of how to start, centralized exchanges provide an easy way of entering the community. Both staking and holding the ETH rewards can be done on your chosen platform.
Ethereum vs. Bitcoin
Like Bitcoin, Ethereum runs on blockchain technology which functions on a distributed ledger model. This means that everyone on the blockchain has a copy of all the validated works and can view all transaction records throughout the blockchain’s history—but that’s where their similarities end. Ethereum differs from Bitcoin in key aspects like:
- Bitcoin primarily trades in cryptocurrency.
- Bitcoin uses the PoW security protocol, a system that requires all its miners to verify a block by using high-end computers.
- The average block time for Bitcoin is around 10 minutes.
- BTC miners only receive their rewards when they successfully verify blocks.
- The majority of BTC’s limited supply cap (21 million) has already been mined.
- Bitcoin only allows public—censor-proof or permissionless—transactions.
- Ethereum offers many methods of exchange, including cryptocurrency and smart contracts.
- Ethereum used the PoW system in its earlier years but is moving to PoS as soon as the ETH 2.0 updates are finished.
- The average block time for Ethereum is 12 seconds.
- There is no limit to Ethereum’s supply. Instead of having a hard cap, the supply of ETH increases every year.
- Ethereum allows both permissioned and permissionless transactions.
Ethereum’s main advantage over its older sibling, Bitcoin, is its earlier introduction of smart contracts. This lead time helped Ethereum and its developers pioneer DAOs (decentralized autonomous organizations), NFTs (non-fungible tokens), and dApps (decentralized applications).
Nowadays, other blockchains have gotten their hands on their own form of smart contracts. That said, Ethereum’s flexibility as a cryptocurrency for dApps remains unchallenged, if only for its long experience in the practice.
While Ethereum’s flexibility lends it an interesting utility, it would also lead to the network’s biggest weakness—Ethereum gas prices. To facilitate transactions, Ethereum users are charged a gas fee, a fee that scales to the size of the transaction. This has been the main criticism of users as it could lead to large differences in the expected transaction costs. More on this later.
How to buy and sell ETH
Like Bitcoin, Ethereum is listed on centralized exchanges and P2P marketplaces that allow you to buy and sell ETH. One should look for a platform that has:
- Robust security features – Look for a marketplace or exchange that implements products and services to protect both buyers and sellers.
- Reasonable transaction charges – Each platform will differ in the way that they charge its users, so be on the lookout for the ones that have lower fees.
- Authenticity and reputation – Make sure that you find a platform that is verified within the crypto community. This minimizes the chances of being a victim of fraud.
How to store and send Ethereum
Ethereum, like Bitcoin, also uses cryptocurrency wallets as storage. There are many different types of wallets out there, so make sure to do your research so you can find the one that best suits your needs. Mainly, wallets will be separated into two categories: Hot wallets and cold wallets.
Hot wallets are storage systems that are accessible through an Internet connection. Examples of these would be web wallets and mobile wallets.
Cold wallets, on the other hand, remain mostly offline. It should be noted, though, that some cold wallets can access the internet. These wallets trade in a little bit of accessibility for more security. Examples of these would be hardware wallets, desktop wallets, and paper wallets.
The future of ETH
It’s evident in the way the platform is built that the developers are not in it just to make a quick buck. Instead, many people seem to be in it for the long haul, only allowing more leeway for growth opportunities in the future.
At this point, no one knows where it’s going to go or if another Ethereum hard fork is going to happen, but one thing’s for sure: we’re here for the ride. Right now, Ethereum’s price is sitting at the 1,691 USD mark—but who knows? ETH just might be the most dominant blockchain in the future.