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Investing in Ethereum (ETH) – Everything You Need to Know

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Ethereum is an open-source distributed blockchain network that simplifies smart contract scripting. Importantly, the platform allows developers to streamline build decentralized applications that function on blockchains. Consequently, the platform has introduced the world to host of new functionalities and applications.

It’s nearly impossible to venture into the crypto market without hearing about Ethereum. This unique token helped revolutionize the cryptospace. As such, ETH consistently ranks as the second most popular cryptocurrency based on market cap. Notably, a combination of factors has led to the popularity of ETH in the crypto space

Top Cryptocurrencies - CoinMarketCap

Top Cryptocurrencies – CoinMarketCap

Dapps are next-generation programs designed specifically to function within decentralized networks. These networks can include Tor, Distributed Ledgers, and blockchain. Dapps provide the world with a host of new opportunities. Consequently, Dapps continue to be one of the fastest-growing areas within the blockchain sector.

How Does Ethereum Work?

Ethereum borrows some key features from Bitcoin, albeit with slight changes such as the PoW consensus mechanism. Also, Ethereum utilizes some of the strategies employed by BitTorrent to create a truly decentralized operating system for Dapp programmers to build upon.

Ethereum is often referred to as a cryptocurrency. This reference is incorrect. Ethereum is the platform that the cryptocurrency Ether functions within. Within this ecosystem, Ether’s primary role is to compensate miners for performing EVM computations.

EVM – the Ethereum Virtual Machine

EVMs are virtual stacks embedded within each full Ethereum node. EVMs simplify the process of building decentralized applications. Consequently, these protocols are critical to Ethereum’s performance because they execute contract bytecode.

Crucially, every node in the Ethereum network runs an EVM instance. This strategy allows them to agree on executing the same instructions without human intervention. Additionally, it provides a means as to where anyone can execute code in a trustless ecosystem.

Importantly, EVM bytecode is a turing complete system. Turing refers to the capabilities of the protocols. Turing complete protocols such as JavaScript can perform a huge variety of critical computational functions.

Multiple Languages

One of the most unique and powerful aspects of EVM is its ability to utilize multiple coding languages. To date, EVMs have been successfully deployed using C++, Java, JavaScript, Python, Ruby, and more. Interestingly, Ethereum even introduced its own object-oriented, high-level language for implementing smart contracts called Solidity. Developers can program using any of the higher-level languages listed above and the code is then converted down into EVM Bytecode.

What is GAS?

You may have heard the term Gas thrown around when people discuss Ethereum. Gas is an internal pricing fee mechanism that allows Ethereum to ensure the quality of their network’s coding. Every Ethereum network transaction can be measured in terms of its Gas usage. Therefore,  each EVM has a particular Gas Limit and Gas Price associated with its execution.

Keenly, the introduction of Gas into the network ensures the quality of code on the network remains high. This strategy helps to protect the nodes from the introduction of nefarious coding. It also prevents the network from getting overrun with subpar coding.

Setting Gas Prices

The gas limit is the amount of total computational power the Ethereum network will use. The longer and more intricate your smart contracts are, the higher your total gas limit will become. The Gas price is the amount a user is willing to pay to execute the function in full. If you set your gas price too low, miners will just ignore your request. Also, in the event that your gas price doesn’t fully cover your EVM, miners will keep the difference.

The combination of both these factors gives you the cost of your Ethereum transaction. Importantly, the functionality and processing fees get measured in gas, but the fee is paid in Ether. This strategy is very interesting because it allows the network to determine the costs itself. In this way, Ethereum functions in a decentralized manner across its internal business processes.

History of Ethereum

Ethereum’s history begins in the early days of the crypto market. In 2013, an intuitive programmer and long time Bitcoiner, Vitalik Buterin published a whitepaper that describes the technical design and capabilities of the Ethereum concept. In the paper, Buterin describes a decentralized, global computer that could run on a blockchain similar to Bitcoin.

Ethereum Founder Vitalik Buterin

Ethereum Founder Vitalik Buterin

By 2014, Buterin had completed the very first version of Ethereum. Importantly, he had some help from the Swiss development firm GmbH. This early version of the software helped promote an ICO for the project. The ETH ICO was a huge success. The project raised $18 million from a variety of investors. Paramountly, it created the first network of ETH miners and shareholders.

Ethereum Launches Beta

In 2015, Buterin released the first beta version of Ethereum. The protocol received the name Frontier. The release helped push the value of Ethereum up to $0.420897 by Oct 21, 2015. In 2016, the protocol received another major upgrade dubbed – Homestead. It was at this time that the concept of decentralized autonomous organizations (DAOs) first became public knowledge as well.

DAOs Enter the Market

DAOs take the functionalities of corporations and convert all aspects into smart contracts. You can think of a DAO as an organization created by developers to automate decisions and facilitate cryptocurrency transactions. The goal of these next-generation protocols was to codify the rules and decision-making processes of an organization. In this way, you could eliminate the need for documents and people in governing.

Ethereum’s first DAO launched officially on April 30, 2016. The launch of the DAO helped Ethereum secure $150 million via a public ICO. At the time, the DAO was the largest blockchain-based crowdfunding event in history. Specifically, the event secured over $150 million. Perhaps even more impressive, the event saw participation from over 11,000 investors located all over the globe.

DOA Hack

Unfortunately, the hype was short-lived. Hackers quickly located and exploited a major programming error and attack vectors with the DAO. Sadly, developers were already working to fix the bugs but didn’t complete their work prior to the attack. Worst of all, 15% of all ETH was held in the DOA at that time.

The hackers utilized a duplicated DOA system to drain the funds. It only took hackers until June 18th to siphon out 3.6 million ETH from the ICO. News of the attack dropped the value of ETH from $20 to just under $13.

Developers noticed the funds draining, but lacked the time to obtain enough votes to revoke the heist. Additionally, since the DOA raised far more funds than ETH expected, they had mismanaged the level of security required. It was later revealed that the developers kept all the funding in a single wallet address.

Regaining Control

Eventually, ETH developers realized exactly what was happening and they began to work feverishly to stop the attack. As the ETH continued to drain, developers began to consider a more outlandish approach to stopping the hacker.

How Ethereum Was hacked

Importantly, the hacker utilized a duplicate DOA to fool the system. Since it was a duplicate, it included the main protocols initially programmed into the original. One of these protocols was a 28-day withdrawal stipulation. Basically, the hacker couldn’t gain access to their funds for almost a month. This window gave Ethereum some time to try and save the funds.

During the brainstorming sessions, many proposals were brought to the table. Eventually, developers decided that they needed to somehow nullify the Ether in the hacker’s DOA.  At first, a soft fork was suggested as a means to accomplish this task.

Soft Fork vs. Hard Fork

In the cryptocurrency realm, there are two types of major software updates blockchains can receive. A soft fork is a major upgrade that allows miners to continue mining the same blockchain. Reversely, a hard fork enforces new protocols that require miners to upgrade their software before they are able to mine a new chain of transactions. Critically, a hard fork creates a new cryptocurrency.

What Caused a Hard Fork?

Buterin’s team wanted to propose new software protocols that would make it impossible for the hacker to remove the stolen ETH from their DOA. In a public statement, Buterin stated that he wasn’t proposing to rewrite any blocks.

Instead, he said he wanted to introduce a feature in the basic coding of Ethereum to prevent the hacker from withdrawing the ETH. The switch would be a soft fork that could allow ETH developers to introduce a blacklist for certain addresses.

Hacker Responds

Here is where the incident gets even crazier. After seeing Buterin’s post, the hacker responded with a post to the company. He explained that he had done nothing wrong and that in a DOA, it’s up to the smart contract to validate transactions. He argued that nothing outside of the protocols should be able to alter their decision.

In one aspect, the hacker had a valid point. The entire premise of the DOA was that it needed no human intervention. Additionally, one of the core features of any blockchain is its supposed immutability and inalterability. The hacker even went on to offer miners who didn’t upgrade protocols huge rewards. Specifically, the attacker offered 1 Million ETH and 100 BTC to each node that refused the update.

Hard Fork Proposal

Foreseeing that the hacker had the upper hand in the scenario, ETH developers began to explore more aggressive options. Eventually, a group within the ETH community recommended a hard fork. The hard fork would roll back all ETH transactions to seconds before the attack occurred.

The ETH Community Splits

This proposal was met with staunch opposition. The entire point of a blockchain is to facilitate unalterable and immutable transactions. The fact that Ethereum’s developers wanted to roll back the blockchain transactions in order to avoid losses went directly in the face of the anti-censorship traits of a blockchain.

ETH Price Actions During DAO Hack

ETH Price Actions During DAO Hack

It was argued that ETH worked exactly as it was intended and that the update was not needed. Rather the DOA was programmed incorrectly and the losses were the result of that. The hard fork would introduce edits made by a centralized governing authority within the ETH ecosystem.

Decision is Made

In the end, a new version of the Ethereum mainnet entered the market on July 20, 2016. Ultimately, the hard fork instituted an irregular state change that erased the DAO theft. The hard fork split the Ethereum blockchain. The original chain of transactions would now go by the name Ethereum classic, whereas the new crypto would adopt the Ethereum title.

Long Term Effects

The decision to go through with the hard fork would have reverberations throughout the crypto market. Eventually, it would lead to ETH-based platforms being shunned within the security token space. The reason for these actions is simple, major financial institutions can’t risk having securities transactions reversed. Regardless, ETH still remains the top platform for Dapp development today.

Despite the drawbacks, ETH managed to regain market confidence following the attack. By 2017, the value of Ether grew over 15,000% to reach an all-time high of $1,432.8 in January 2018. Today, it’s still the second cryptocurrency in terms of market cap, even with more competition than ever.

ERC Protocols

Ethereum’s introduction to the cryptospace was pivotal. It introduced the world to a more simplified process for the creation of smart contracts. Now anyone could create a functioning and safe cryptocurrency on the ETH network using ERC protocols.

ERC protocols are token standards that adhere to Ethereum’s blockchain requirements. Originally, Ethereum planned to utilize the ERC-20 protocol to simplify internal token creation. However, it wasn’t long before they realized that there was a huge demand for a simplistic token creation method.

This strategy helped push the crypto sector to new heights. Specifically, the 2017 ICO breakout can be largely attributed to the growth of the Ethereum blockchain and ERC tokens. Today, ERC tokens are by far the most used in the space. One study found that as of April 16, 2019, there were more than 181,000 ERC-20-compatible tokens that lived on the Ethereum main network.

How to Invest in Ethereum

Investing in Ethereum is easy nowadays. Every major exchange trades ETH as one of its main coins. In fact, you can now find a huge variety of ETH trading pairs on most exchanges. To start your investment in Ethereum, you want to head over to a secure and reputable exchange such as Binance, KuCoin, Poloniex, or Bittrex.

Once you arrive at the exchange of your choice, fill out all of the necessary registration steps. Now that you have access to your account there are multiple ways to purchase ETH.

Firstly, you can buy ETH directly using fiat currency such as USD or EUR. This strategy can take longer and cost more than exchanging cryptocurrency for Ethereum. However, it is one of the best ways to enter the crypto market.

The second way to acquire ETH is by trading some other cryptocurrency for it. It would be difficult today to find an exchange that wouldn’t happily trade ETH for nearly any token on the market. This market penetration allows investors to freely choose between platforms based on their merits rather than if they offer the token you desire.

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Mining Ethereum

The Ethereum blockchain utilizes a PoW system to ensure the state of the network. Network participants, known as nodes or miners, continuously validate the network. Accordingly, every node attempts to solve a complex mathematical equation to prove they worked to secure the network.

Just like Bitcoin, the more miners on the network, the more difficult it becomes to participate. The node that adds the next block to the network receives a reward proportionate to the amount of computational power they contributed to the network.

Unlike Bitcoin, which validates new blocks of transactions every 10 minutes, Ethereum validates blocks every 15 seconds. Also, the miner who creates the latest block receives 3 ETH as a reward for their efforts. This is the only time that new Ethereum enters the crypto market.

Proof-of-Stake Ethereum

Interestingly, Ethereum plans to convert its network from a PoW consensus mechanism over to a Proof-of-Stake (PoS) mechanism before the end of 2020. Proof-of-Stake networks utilize much less electricity than PoW networks. These electrical savings is accomplished through the elimination of the PoW mathematical equation.

Instead, PoS systems rely on a staking strategy. When you “stake” your coins you are holding them in a network wallet. The more tokens you stake, the more likely it is that you will be the next node to approve the block of transactions. In a PoS system, a hacker would need to purchase a huge amount of tokens to gain control over the network.

Ultimately, the hacker would lose the most. In this way, PoS systems are able to keep their networks valid without requiring the additional computing power of a PoW system. Many analysts consider PoS systems as the natural evolution of the space.

Ethereum – A Pillar in the Market

As Ethereum decides what upgrades to make in the future, it’s important to recognize the concrete positioning of this platform within the sector. It’s hard to imagine a crypto market without Ethereum. Every month, Ethereum fulfills its goals as a safe Dapp launching platform. Nobody can say for sure which cryptocurrencies will stand the test of time, but, if you had to choose two, Bitcoin and Ethereum would surely win the prize.

 

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

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