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Table Of Contents
Ethereum stands out as a transformative force in the blockchain world, extending beyond just cryptocurrency. It's a versatile, open-source platform that revolutionized the creation and functionality of decentralized applications (DApps) through smart contract scripting. Ethereum's framework has opened up new horizons for blockchain functionality, leading it to become a cornerstone in the crypto market.
How Does Ethereum (ETH) Work?
While sharing some foundational principles with Bitcoin, Ethereum introduces unique features and a different approach, particularly in its consensus mechanism. Unlike Bitcoin's pure Proof of Work (PoW) system, Ethereum has transitioned towards a Proof of Stake (PoS) model with its Ethereum 2.0 update. This shift aimed to enhance network efficiency and scalability.
Furthermore, Ethereum incorporates elements from peer-to-peer networks to foster a genuinely decentralized environment, ideal for developing decentralized applications (DApps).
Ethereum: Platform vs. Cryptocurrency
A common misconception is to conflate Ethereum with a cryptocurrency. In reality, Ethereum is an extensive blockchain platform, and Ether (ETH) is its native cryptocurrency.
Ether plays a crucial role in the ecosystem, primarily used to remunerate validators for executing operations and securing the network, especially in the context of the Ethereum Virtual Machine (EVM) computations.
Ethereum Virtual Machine (EVM): The Core of Ethereum
At the core of Ethereum's functionality lies the Ethereum Virtual Machine (EVM). EVMs are embedded in every node of the Ethereum network and are instrumental in simplifying the development of decentralized applications. They serve as a robust and secure runtime environment for executing smart contracts.
Every node within the Ethereum network operates an instance of the EVM, enabling a decentralized consensus on the execution of code. This setup ensures that all nodes in the network can independently and reliably execute the same instructions, facilitating a trustless ecosystem where code can be run without centralized control.
Support for Multiple Programming Languages
Ethereum's innovative approach, especially with its evolving consensus mechanism and the versatility of the EVM, distinguishes it from other blockchain platforms. It's not just a cryptocurrency but a comprehensive platform enabling a decentralized digital economy and diverse applications.
For years, Ethereum had planned a transition from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism – an update known as Ethereum 2.0. This shift brought considerable improvements in terms of energy efficiency, as PoS systems require substantially less electricity than their PoW counterparts. The transition also aimed to address scalability and energy consumption concerns associated with the traditional mining model.
Staking in PoS: In PoS, network participants “stake” their ETH tokens in a network wallet, contributing to the network's security and transaction validation process. The likelihood of a participant being chosen to validate a block correlates with the amount of Ethereum they have staked. This method not only reduces the need for extensive computational power but also adds a layer of security; potential attackers would need to own and stake a significant amount of ETH, making any attack economically disadvantageous.
Security and Sustainability: The PoS model is viewed by many experts as a natural evolution in the blockchain space, offering a more sustainable alternative to the traditional PoW approach. By requiring participants to have skin in the game, PoS also encourages more responsible participation in the network's maintenance.
What is GAS?
Gas in the Ethereum network is a fundamental concept representing a unit for measuring the computational effort required to execute operations, such as transactions and smart contract executions. It functions as an internal pricing mechanism, crucial for maintaining the network's integrity and efficiency.
Gas: The Fuel for Ethereum's Engine
- Role of Gas: Gas serves as a metering unit for computational work on the Ethereum blockchain. It's used to allocate resources of the Ethereum Virtual Machine (EVM) so that every operation, from simple transactions to complex smart contract executions, is adequately compensated.
- Quality Control: By quantifying operations in terms of gas, Ethereum ensures the quality of code executed on its network. This system discourages inefficient or malicious code, as such code would require a prohibitive amount of gas, making it uneconomical to execute.
Setting Gas Prices and Limits
- Gas Limit: This refers to the maximum amount of gas a user is willing to spend on a transaction or smart contract execution. It acts as a safeguard against running into unexpected execution costs. More complex operations require a higher gas limit due to the increased computational work.
- Gas Price: Users specify the gas price in gwei (1 billionth of an Ether). It's the amount a user is willing to pay per unit of gas for their transaction to be processed. Miners prioritize transactions with higher gas prices, as it's more lucrative for them.
- Transaction Cost Calculation: The cost of an Ethereum transaction is determined by multiplying the gas used by the gas price. Although gas quantities are calculated internally, the actual transaction fees are paid in Ether.
Economic Incentives and Network Efficiency
The gas system in Ethereum creates a market-driven, self-regulating ecosystem. Users are incentivized to offer competitive gas prices to have their transactions processed promptly, while validators are incentivized to process transactions with higher gas prices for greater rewards. This mechanism ensures that resources are allocated efficiently within the network.
Balancing Network Load
By requiring gas for transactions and smart contract executions, Ethereum balances the network load. Transactions consuming excessive computational resources are naturally limited by higher gas costs, preventing network congestion and abuse. This balance is crucial for maintaining Ethereum's performance and scalability.
Overall, Gas in Ethereum is a critical component that ensures the smooth operation of the Ethereum network. It provides a flexible and efficient way to measure and compensate for computational efforts, aligns the interests of users and validators, and maintains the quality and security of the network. As Ethereum continues to evolve, the role of gas will remain pivotal in its ecosystem.
History of the Network
Ethereum began its journey in the early days of the crypto market. In 2013, programmer and Bitcoin enthusiast Vitalik Buterin introduced Ethereum through a whitepaper. This document detailed a novel concept: a decentralized, global computer operating on blockchain technology akin to Bitcoin. Buterin's idea was revolutionary at the time, proposing a platform that could run programmable smart contracts and applications beyond mere financial transactions.
The Inception and Evolution of Ethereum
- Early Development: Buterin, with assistance from the Swiss development firm GmbH, completed Ethereum's initial version by 2014. This development phase culminated in a highly successful Initial Coin Offering (ICO), raising $18 million and establishing a robust network of Ethereum miners and investors.
- Initial Launch – Frontier: 2015 marked the release of Ethereum's first beta version, known as “Frontier.” This release significantly influenced Ethereum's market value and laid the foundation for future upgrades.
- Homestead – The First Major Upgrade: In 2016, Ethereum underwent its first major upgrade, dubbed “Homestead.” This period also saw the emergence of Decentralized Autonomous Organizations (DAOs), innovative entities leveraging Ethereum's technology to automate decision-making and operations entirely via smart contracts.
The DAO: Ambition and Challenge
- Launch and Record-Breaking Crowdfunding: Ethereum's first DAO was launched on April 30, 2016, quickly becoming a landmark in blockchain crowdfunding by raising over $150 million, a record at the time, with participation from over 11,000 investors globally.
- The DAO Hack: The initial success was short-lived as a critical vulnerability was exploited by hackers in June 2016, leading to the theft of 3.6 million ETH. This event caused a significant drop in Ethereum's value and exposed the risks associated with smart contract-based systems.
Ethereum's Fork: A Controversial Decision
- Dealing with the Hack: Ethereum's community and developers debated solutions to reclaim the stolen funds in response to the DAO hack. A key proposal was to implement a ‘soft fork' that would blacklist the hacker's address. However, this idea was soon overshadowed by a more radical approach – a ‘hard fork'.
- Soft Fork vs. Hard Fork: In the crypto world, a soft fork is a backward-compatible upgrade, whereas a hard fork is a non-compatible upgrade that can result in a split blockchain. Ethereum's team proposed a hard fork to revert transactions to a state before the hack, an unprecedented move in blockchain history.
- Community Split and Ethereum Classic: The hard fork proposal was contentious, challenging the blockchain principle of immutability. Despite opposition, the hard fork was executed on July 20, 2016, effectively splitting Ethereum into two blockchains: the original (now Ethereum Classic) and the new version (Ethereum).
The Aftermath and Ethereum's Resilience
- Market Recovery: Despite the controversy and challenges post-fork, Ethereum managed to recover and strengthen its market position. By 2017, the value of Ether surged, reaching an all-time high in January 2018.
- ERC Protocols and Token Standards: Ethereum's introduction of ERC protocols, particularly ERC-20, was a game-changer, simplifying the process of creating new tokens and smart contracts on its platform. This development led to a surge in Initial Coin Offerings (ICOs) in 2017, substantially contributing to the cryptocurrency sector's growth.
Today's Ethereum Landscape
As it stands, Ethereum is a dominant force in the crypto market, known for its innovative approach to decentralized applications and smart contracts. The platform's adaptability, demonstrated through its evolving technology and response to challenges like the DAO hack, continues to keep it at the forefront of the blockchain space. Ethereum's influence is evident in the widespread use of its ERC token standards, underpinning a vast array of digital assets and decentralized applications.
How to Buy Ethereum (ETH)
Currently, Ethereum (ETH) is available for purchase on the following exchanges:
Uphold – This is one of the top exchanges for United States & UK residents that offers a wide range of cryptocurrencies. Uphold also offers Ethereum staking. Germany & Netherlands are prohibited.
Paybis – This truly global company offers services to residents from 180+ countries, including Canada, Europe, UK, & USA.
Kraken – Founded in 2011, Kraken is one of the most trusted names in the industry, with over 9,000,000 users and over $207 billion in quarterly trading volume. This exchange offers trading access to over 190 countries, including Australia, Canada, and Europe, and is our most recommended exchange for USA residents. (Excluding New York & Washington state)
How to Store Ethereum (ETH)
Securing Ethereum investments, especially for long-term holding or substantial amounts, necessitates a robust storage solution.
Hardware wallets, known for their enhanced security, are a top choice for safeguarding Ethereum holdings. These devices store cryptocurrency offline in “cold storage,” effectively insulating them from online vulnerabilities and hacking threats. A look at some of the best solutions can be found HERE.
For those unsure of hardware wallets, Ethereum is also widely supported by non-custodial software wallets. A look at some of the best software wallet solutions can be found HERE.
For Ethereum users, choosing the right storage option is crucial, with hardware and non-custodial software wallets providing a secure solution for substantial investments and long-term holding.
A Pillar in the Market
Ethereum's role in the cryptocurrency market is both prominent and foundational, making it hard to envision the sector without it. Known for being a secure and reliable platform for launching decentralized applications (DApps), Ethereum continually demonstrates its commitment to innovation, particularly with significant upgrades like the transition to Ethereum 2.0 and adopting a Proof of Stake (PoS) consensus mechanism.
While Bitcoin is often recognized as the pioneer digital currency, Ethereum stands out for its multifaceted utility, not just as a medium of exchange but as a platform enabling a decentralized, programmable financial ecosystem. Its contributions, such as catalyzing the rise of Initial Coin Offerings (ICOs), the proliferation of ERC-20 tokens, and the explosive growth of Decentralized Finance (DeFi), have solidified its position as a pillar of the crypto economy.
Looking forward, Ethereum's trajectory seems poised for continued influence and leadership, shaping the future of decentralized applications and smart contract technology in the ever-evolving landscape of blockchain technology.
Daniel is a big proponent of how blockchain will eventually disrupt big finance. He breathes technology and lives to try new gadgets.
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