Ethereum Explained For Dummies
Unless you’ve been living under a rock, we all know Ethereum is a cryptocurrency. So, what sets it apart from other decentralized platforms? That’s what you are going to find out.
Ethereum is often seen as the biggest rival to Bitcoin. Though Ethereum is the second most popular cryptocurrency after Bitcoin, they are not in direct competition. Their goals and features are completely different.
Both Bitcoin and Ethereum were created based on blockchain technology. Bitcoin was the first blockchain technology application. It introduced to the world the first digital currency – Bitcoin cryptocurrency. And Bitcoin’s main goal is to exchange cryptocurrency.
Soon developers started to see more opportunities for blockchain technology, beyond money exchange. And that’s why Ethereum was created, to make more use of blockchain technology.
In this guide, we’ll explore the Ethereum blockchain, understand how it works and how it can change our future.
Ethereum is a decentralized computer network built on blockchain technology. It’s powered by Ether token which makes it possible to make transactions, earn interest through staking, trade and store NFTs, trade cryptocurrencies, and many other things.
Ethereum is a decentralized application platform that expands the capabilities of blockchain technology. But what does a decentralized blockchain network mean?
Well, blockchain is a decentralized public ledger and all transactions on it are verified and recorded. Think of it as a long chain of blocks linked together where every member of the network can see the information about each block. Anyone can make changes to it, but it should be verified by other users. Everyone on the Ethereum network has an identical copy of the ledger and can see all the past transactions.
Decentralized means that there is no central entity that manages or controls the network. It’s all done by everyone who participates in the Ethereum network.
Many see Ethereum as the next step of the Internet. If a centralized platform like Apple Store is Web 2.0 then user-powered network Ethereum is Web 3.0. It supports decentralized applications – dApps, decentralized finance – DeFi, decentralized exchanges – DEXs and many other things.
How it Works
As I said, there is no central entity managing the blockchain system. But how does that work?
Blockchain uses cryptography to secure transactions and verify them. A network of computers from all over the world maintains Ethereum and requires the agreement of the majority to make changes and add new blocks.
It’s not so easy to add a new block to the chain. When too many conflicting blocks need to be verified the voting process slows down. Ethereum makes it hard to add new blocks to keep the number of conflicting blocks low.
When you want to add a block and succeed in it, you will be rewarded with cryptocurrency tokens – ether. There is also an easier way to get ether by buying it. Or you can go the harder way and mine it, which is the process of adding new blocks.
Let’s explore this process more.
Adding New Blocks
Imagine you’re trying to add a new block. To succeed, you need to be verified. To verify transactions, Ethereum uses a consensus protocol Proof of Work. The Proof of Work protocol requires that nodes, trying to add a new block, find a number that produces a hash value when combined with the block’s header data. That hash value needs to match the current target which is a value that keeps the production of new blocks at a steady rate.
It’s not easy to find that hash value. You need on average more than quadrillion values to try to find the hash value. The Proof of Work mechanism makes it hard to add new blocks and thus avoid conflicting blocks. The node that wins and finds the right value is rewarded with ether payment. This is the mining process and the winning node is the block’s miner.
An interesting fact about the mining process is that each block header contains a hash from the previous block. The hash value is used to detect unauthorized block changes.
Mining is becoming more and more competitive and users need high-performance computers to carry out the complex process. Basically, computers solve complex mathematical equations to find the right number and get verified.
The Switch to a New Protocol - Proof of Stake
Though this process makes it nearly impossible to make any unauthorized transactions, it takes quite a lot of time and energy. Ethereum has added a complexity value to make the mining even harder as miners get faster. Because of this complexity, the new block frequency is about one new block every 14 seconds. And the “gas” fees or energy fees to mine new blocks are huge.
That’s why Ethereum wants to switch to the Proof of Stake protocol. With the Proof of Work, miners compete to solve the mathematical puzzles to generate new blocks and earn crypto. With the Proof of Stake, the ability to mine is not tied with the ability to solve puzzles. Instead, it’s linked with the coins.
The owners stake their coins as collateral to validate the blocks. They are called “validators”. Unlike the Proof of Work which works based on competition, the Proof of Stake algorithm chooses the validators randomly to mine or validate the block.
To become a validator you need to stake a certain amount of coins. Ethereum requires validators to stake 32 ETH (ether) in order to become one. Blocks are validated by a specific number of validators, and when they verify the transaction, it’s finalized and closed.
The Proof of Work mechanism works quite well for Bitcoin and for crypto miners. But, as Ethereum’s goal is not limited to cryptocurrency transactions, they needed a new mechanism. Especially with DeFi, the blockchain system struggles to keep up. Ethereum started implementing the new version in 2020 and it is supposed to be finished in 2022.
The Proof os Stake mechanism requires much less energy to mine new blocks and makes the process easier. And don’t worry about attackers. It will be no less secure than the Proof of Work. It would cost attackers too much and they will lose more than they will gain from attacking.
The History of Ethereum
Ethereum wasn’t always the second most popular blockchain project. Vitalik Buterin a programmer and co-founder of Bitcoin Magazine described the project in a white paper in 2013. He saw more uses of blockchain technology, apart from money and wanted to create a more robust language for decentralized application development. DApp development already existed on blockchain technology, but the platforms were not interoperable.
Buterin wanted to create a platform that would unify the way dApps run and interact. In 2013 he proposed a new project with a more robust language, that would eventually become the Ethereum project. Creating a project like this isn’t cheap. Buterin and his co-founders held a token presale for the Ethereum development.
Ethereum has quite a long list of founders – Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie & Amir Chetrit (the initial 5), then Joseph Lubin, Gavin Wood, & Jeffrey Wilcke joined the project in 2014.
They founded the Ethereum Foundation in Switzerland to maintain and develop the network. Buterin announced that the project would run as a non-profit, which made some co-founders leave the project.
Officially, the Ethereum platform was launched in 2015. It has undergone several protocol upgrades since then. Over time, developers came to the project with their decentralized ideas. In 2016, the DAO – decentralized autonomous organization, backed by smart contracts was developed on the platform. It was founded to vote on changes and proposals on Ethereum.
But soon, the DAO was hacked and an unknown hacker stole US$50 million of DAO tokens. To reverse the theft they decided to “hard fork” Ethereum and upgrade it to a new protocol. It caused debates in the crypto community and eventually, the network split into 2 blockchains: Ethereum – the upgraded network, and the original version called Ethereum Classic.
Currently, the developers are working on Ethereum 2.0, which is expected to be released in 2023. The development consists of 3 phases and the second one is about the switch to the Proof of Stake protocol, which will be released this year.
Developers are constantly working on Ethereum and making it more useful for people. We just need to wait and see how it will change our future.
What Ethereum Does
Ethereum has a native cryptocurrency – ether or ETH which, similar to Bitcoin people can use to exchange currency. But besides the money transactions, Ethereum has many other use cases.
The biggest achievement of the Ethereum network is probably the DeFi – decentralized finance. It’s a financial technology that doesn’t rely on intermediaries like brokerages, exchanges or banks. People and businesses can lend, borrow and trade using software that records and verifies all the transactions. So you don’t need to wait for banks to approve your loans or keep your money in the bank. Though DeFi has many advantages it’s still hard to tell how it will change our financial system.
Another big achievement of Ethereum is dApps. They don’t really differ from usual apps, they still offer some useful services to the users. But unlike apps, they are not controlled by the central party like Apple’s App Store.
And of course, we can’t talk about Ethereum without mentioning NFTs. Thanks to NFTs, the price of ETHs and the popularity of Ethereum have risen enormously. NFTs are non-fungible tokens. They make it possible to buy and sell digital art, game assets and many other things.
It was impossible to trade digital art before as anyone could easily screenshot the work and it won’t be different from the original one. NFTs changed that by providing proof of ownership. No matter how many times the artwork was duplicated, the buyer is the only rightful owner of that work.
This is all about the Ethereum network. I tried to briefly explain the Ethereum blockchain and how it works to help you understand it and make it easier to choose a blockchain platform.
Ethereum did make some groundbreaking changes on blockchain technology and it has a big space to grow. Who knows, maybe in some years we won’t ever need to visit banks or use physical currencies to trade goods.
And it’s better to understand how these things work before they completely change our world and make the right decisions in the future.
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