A Beginners Guide to the Ethereum Network 0/0
A Beginners Guide to the Ethereum Network
What is Ethereum?
Basically, Ethereum is an open-source, public, blockchain-based platform on which decentralized applications can be built.
The ethereum project enables developers to build and execute smart contracts and decentralized applications without any possibility of censorship, downtime or counterparty risk.
The network owns a native cryptocurrency known as the “Ether”. Ether is a peer-to-peer digital asset that can be used to process online payments. However, it doesn’t only operate as a digital currency; ether fuels the entire ethereum network and is used by developers to execute these decentralized applications and contracts.
History of Ethereum: The Emergence of a more Versatile Blockchain
The first ever blockchain project ‘bitcoin’ was built for a sole purpose; as a peer-to-peer electronic cash payment system. The Bitcoin blockchain only stores and handles every transaction within the network. However, as time went by, many people believed blockchain can be used to achieve more than just the storage of bitcoin transactions.
The idea was first mentioned in 2013 by Vitalik Buterin, a Russian developer and bitcoin enthusiast. Buterin believed that bitcoin should be more versatile than originally intended to be. However, his idea was never taken up for the bitcoin network; thus, Buterin opted for a new network, the ethereum blockchain.
The project was officially announced in January 2014, with the core team consisting of Vitalik Buterin (CEO), Gavin Wood (CTO), Mihai Alisie, Anthony Di Iorio, Charles Hoskinson and Jeffery Wilcke. The team pioneered the new fundraising system known as the initial coin offering (ICO), distributing about 60 million ether tokens to initial investors whose funds were used to develop the project.
Since its inception, the ethereum network has gained widespread adoption and increased substantially.
How does Ethereum work?
Like bitcoin, ether functions as a cryptocurrency that can be traded or used as a store of value. It’s entirely decentralized, with no banks providing the confirmations needed to validate transactions. This task is performed by miners who contribute their computing power to solve a complex mathematical problem in order to confirm a block of actions within the network. Upon the successful completion of each task, a predefined number of ether is produced and distributed among the miners as a reward for their work.
However, it is not the Ethereum that will get produced or mined; it is Ether. Ethereum is the network based on the blockchain technology and Ether is the cryptocurrency which fuels the network.
Unlike Bitcoin which is solely designed to function as a payment network or a store of value, the ethereum network enable users to perform more technical tasks. Ethereum allow developers to create and run decentralized applications and smart contracts on the network.
Instead of creating various blockchain for every project, ethereum makes it very easy for users to develop and execute their projects by utilizing its existing blockchain network, which provides the security and efficiency of these applications and contracts. These applications are finally executed with a defined amount of ether known as Gas.
A Gas is the unit measure of the amount of fees to be paid for the execution of a certain operation on the ethereum network. Every single operation that takes part in Ethereum, be it a simple transaction, or a smart contract, or even an ICO takes some amount of gas. These fees are payments made to the miners who carry out the operations on the network.
Operators must specify the total amount of Gas which they would spend on a particular project; this is called the Gas limit. Only when the Gas limit has been specified would the miners begin the execution of the operation.
Smart contracts are self-executing contracts with the terms of the agreement between the involved parties being directly written into lines of code existing across a distributed, decentralized blockchain network.
Smart contracts enables individuals to carry out any form of transaction or agreement in a transparent, conflict-free way while avoiding the services of a middleman.
As an example, say you want to rent an office from a service that uses ethereum. A smart contract is generated, stipulating that if you send the required amount of funds, then the service will send you a digital code to unlock the office. This process is performed on the blockchain, so when you send the ether tokens, the network automatically send you the unlocking code.
As the contract exists on a decentralized blockchain network, it is tamper-proof, thus, it can never be altered and can only execute the task once the stipulated terms have been met.
The Ethereum network aims to bring decentralization to our daily routine. With the implementation of smart contracts, ethereum can incorporate its core principles – trust, transparency, security and efficiency – into any service, business or an industry.
Decentralized Applications (dApps)
Decentralized applications or dApps are software applications that run on a distributed, peer-to-peer network. These softwares exist on the internet as decentralized applications that are not operated by a single entity.
Today, several dApps exist on the ethereum blockchain and have gained varying degrees of success.
Merits of the Ethereum Network
Security: The decentralized nature and cryptographic security make the Ethereum network well protected against possible hacking attacks and fraudulent activities.
Transparency: the system is not controlled by a central authority. The whole platform is decentralized, which means there is no possible single point of failure.
Tamper-Proof: the network is formed around a principle of consensus, meaning that all the nodes within the system must agree on every change made within it. This eliminates possibilities of fraud, corruption and makes the network tamper-proof.
Demerits of the Ethereum Network
The ethereum network employs the smart contract system to make it secure and fault-proof. However, these contracts can only be as good as the programmers of the code. Any single error that exists in the code could possibly be exploited.
Of course, as blockchain implies, every command is irreversible. Thus, there are no direct means to counter a cyber-attack or the exploitation of a coding error. The only possible means would be to rewrite an underlying code to retrieve whatever is lost, though; this could mean altering the nature of blockchain which is supposed to be an unchangeable and immutable ledger.
A scandal involving “The DAO” serves as a case study in how smart contracts can go wrong. ‘The DAO,’ which is a name of a particular Decentralized Autonomous Organization launched on April 30, 2016 after a crowdfunding which brought the network over $150 million.
Immediately after its launch, the DAO got hacked. The hacker exploited a vulnerability in the code, automatically draining out DAO tokens worth US$60 million which was transferred into a different decentralized autonomous organization.
Ethereum vs. Ethereum Classic: The Hard Fork
Ethereum Classic emerged as a result of disagreement with the Ethereum Foundation regarding The DAO Hard Fork.
The hardfork was implemented to refund the loss of DAO token holders. The Hard Fork made the hacked transaction invalid, and a new version of the blockchain was formed.
The Aftermath of the DAO hack brought about a division to the ethereum community as decision was made to retrieve the stolen DAO tokens. Retrieving the stolen funds would mean making some alterations to the underlying blockchain which would make the hack transaction invalid.
One group within the ethereum community was in support that the changes be made while another group was not citing that blockchain are immutable and should never be altered regardless of the outcome. A consensus was taken and the alteration was made invalidating the hack transaction, and a new blockchain was formed.
When the hard-fork was implemented, users that did not agree with it decided not to upgrade their software and to continue mining on the old version of the blockchain. Thus, diverging into their own blockchain known as the ethereum classic.
Ethereum Classic shares similar features as Ethereum, such as the creation and deployment of smart contract and Decentralized applications, but, they have different blockchain and are independent of each other. Both blockchain are identical until Block 192000, where the hard fork was applied.
Like every other blockchain network, ethereum is dependent on its miners. Miners processes and validate every transaction within the network thereby keeping the platform up and running.
Mining Ethereum uses proof-of-work (PoW), which means that miners contribute their computing power to solve a complex mathematical problem in order to confirm a block of actions within the network. Miners who manage to successfully complete this task create new ether which they receive as a reward for every block mined.
The Ether supply is limited to 18 million per year. Every 12-14 seconds, a new Ethereum block is mined, and a reward of 5 Ether is shared among the miners.
The ethereum network is moving towards adopting the proof-of-stake (PoS) mining, which consumes less energy than the PoW system and also environmentally-friendly.
How to get Ether
There are two major ways to get your hands on the ethereum cryptocurrency; by mining or buying it.
As stated earlier, individuals involved in ethereum mining get rewarded with a predefined amount of ether (5 ETH) upon the completion of each task. This is one way to receive some ether tokens. However, this task can be gruesome, and beginners are recommended to join mining pools. This is a group of miners who combine their computing powers to perform tasks and the rewards are shared among each participant on successful completion of a task. There are various mining pools available around the globe, you can check them out online and can join whichever you like.
Another way and perhaps the most convenient way to get the ethereum token is purchasing it on cryptocurrency exchanges. Ether can be exchanges for fiat currencies or can be exchanged with other cryptocurrencies on a trading platform. You can simply register in an exchange with ether support and begin trading. Ether can be found on exchanges with the cryptocurrency symbol ETH.
After you’ve successfully purchased the ether token, you can access them from a digital wallet. A digital wallet can be in the form of software, hardware or paper. It provides protection for your assets and can only be accessed by you. There are various wallets which can be used to store ether, including hardware wallets like the Ledger Nano S, paper wallets like MyEtherWallet or the Classic Ether Wallet and also software wallets like the Ethereum Wallet which is an application provided by the ethereum network that allows you to hold and secure ether and other crypto-assets built on Ethereum, as well as write, deploy and use smart contracts.
Where to Buy/Sell Ether
Below are some of the major exchanges to buy/sell ether
The future of Ethereum
Since its inception in 2015, ethereum has enjoyed a fairly widespread adoption. The network has risen substantially in value and has a total market capitalization of over $400 billion.
Many in the industrial space believe ethereum has the potential to revolutionize services and industries that have been existing for many years. Several developers have adopted the network for the creation of dApps and DAOs which is changing the way internet looks.
With a solid team behind, the ethereum network looks to disrupt the internet and bring decentralization to the global financial sector. Smart contracts could free individuals from the constraints of the legal system and big business.
Although ethereum is a very promising and exciting technology, its native currency Ether is highly volatile like many other cryptocurrencies and as such is susceptible to crash. Since ether fuels the entire project, it is left to be seen if ethereum will stand the test of time.
In my personal view, Ethereum presents an exciting technology which has the potential to change the regular order of doing things by bringing decentralization to the world.
While the future looks promising for ethereum, there is always a chance of failure. It is always important to understand the risk associated with such project before you go all in.
I believe this course has cleared your curiosity on the ethereum network. Give us a feedback and let us have your say on the topic.