Are you a newbie or a guru in the world of cryptocurrency? Looking to trade or invest in cryptocurrency, and you are wondering – What is Ethereum?
Do not worry because this article will show all you need to know about one of the world’s most fantastic and exciting cryptocurrencies – Ethereum!
This article will discuss everything from what Ethereum is to how it works, its pros and cons, its practical uses, storage, and many more.
What is Ethereum?
Ethereum is a type of cryptocurrency that suggests a way you can use the power of the internet. You don't need to trust apps like Facebook, Twitter, Google, or even online banking with your private information. It does that with decentralization making use of Blockchain technology.
Internet is known to collect and store the information of millions of users on servers. But note that it is not as secure as you imagine, as you can either lose your devices or the server get hacked. It means there is a possibility that you lose all your information stored on the internet/server.
Ethereum is a cryptocurrency that enables smart contracts and Distributed Applications (ĐApps) to be designed and operated without interruption, scam, control, or intrusion from a third party.
However, Ethereum's version of the internet is where servers and clouds get represented with a network of systems referred to as Nodes. These nodes work by storing and retaining a public database known as “Blockchain”.
There are several nodes in the network system, all working as storage for the whole Blockchain. So, the more nodes are available, the more secure the network system and its data become. Also, only you can control every single piece of information inputted into this record. Records are not stored on your computer devices or in a central server. Instead, they get stored across the whole network of nodes.
“Consensus” works by verifying information on the Blockchain. It indicates that over half of the nodes must agree that information is accurate before being allowed on the Blockchain.
Thinking of Hacking this kind of network system is almost impossible, as you would need to control over half of the network to force an agreement between nodes. Furthermore, even if it were possible to handle over half of the web, it would still cost a whole lot of money before you can complete the attack, and it wouldn’t be worth it.
Because Ethereum works by getting rid of the need to trust apps with private information. It does this with decentralization making use of blockchain technology. So now, let's explain what Ethereum Blockchain is.
Ethereum Blockchain Explained
Ethereum blockchain uses the same type of blockchain technology as Bitcoin. However, the Ethereum blockchain is more advanced and can get explained in two ways. They are Smart Contracts and Dapps(Decentralized Applications).
Smart contracts: are known as rules that decide which conditions need to get met before any transaction takes place on Blockchain. This is the reason they are called 'trustless’ transactions. So you don't need to trust individuals on the network. Once the conditions of the transaction are met, then the transaction will surely take place.
Dapps(Decentralized Applications): These applications don’t run on one server like the internet. Instead, it runs on a blockchain, using it to decentralize its server. Instead of a single computer, they run outside a single authority.
It’s a peer-to-peer (P2P) network that works like an operating system. DApps design an advanced open-source software system that is both safe and strong. It enables developers to create new and exciting online tools. It has vexed global business markets' interest and competing with centralized apps in social media, e-commerce, email, and online banking industries.
What is Ethereum Mining?
Mining is the process of creating a new currency, either bitcoin or Ether. Nodes on a Blockchain are expected to verify transactions before they can receive a new currency. For instance, an Ethereum node, a miner, will be rewarded with a new Ether after the mining process.
Creating a new currency is known as mining because it can be compared to gold or diamond mining. Still, the difference is that gold miners dig the ground to mine, while miners in Ethereum verify a transaction.
Mining Ethereum is also known as Proof of Work(PoW). This is because it verifies transactions to receive the Ether reward(new currency). However, PoW is more costly as it uses computing power and leads to more electricity consumption. Therefore, Ethereum users hope to soon migrate to using a different method known as Proof of Stake (PoW). This form of mining will get rewarded with fees instead of a new currency. As a result, it will use a lot less power and electricity.
What is Ethereum Storage?
To use Ethereum, you will need a wallet or address. This wallet does not contain Ether; instead, it includes the necessary code to access it. These codes are known as private keys. So, you have to avoid losing your keys because losing your keys means losing your wallet and your Ether. Any wallet connected to the internet is known as “hot storage”.
In contrast, the ones related offline are known as “Cold storage”. However, It is always advisable to combine hot and cold wallets for maximum security when storing your private keys. The main types of wallet include:
Hardware wallet: These are physical storage devices, like USB sticks. They can be likened to your set of keys at home; they can get lost, so you have to be extra careful where you keep them.
Web wallet: web wallets, as the name implies, mean an online wallet where you store your private keys. It is the least-safe wallet, so it's advisable not to keep what you cannot afford to lose on this wallet.
Desktop wallet: this is a computer wallet where you store your public and private keys directly onto your device, but it takes up a lot of space. This type of wallet uses a password that you must be careful not to lose.
Mobile wallet: This can be compared to a desktop wallet, but instead of storing your keys on the computer, you keep them on your smartphones. It takes a lesser space compared to a desktop wallet.
Paper wallet: These wallets are just pieces of paper with your access codes written on them.No one can hack them, but you need to remember where you put them.
How Does Ethereum Works? (Ethereum Vs. Ether)
Most people take Ether to be the same thing as Ethereum or confuse Ether as the short form of Ethereum. In its simplest form, Ethereum is the network system, while Ether is its currency. Before you can perform any transaction on Ethereum, you will need Ether, as it's the fuel to the Ethereum system. Because of that, Ether is referred to as “gas”.
On Ethereum, every transaction requires a definite amount of 'gas’ before a job can be done. So, the bigger the job, the more gas you need.
Just like people compare Ether with Ethereum, they do the same with Bitcoin and Ethereum. So, let's take a moment to describe some of the differences.
Ether Vs. Bitcoin
The answer to which one is better between Bitcoin vs Ethereum depends on what you want. Bitcoin is a digital currency, and its Blockchain allows manual peer-2-peer transfers of digital currencies. At the same time, Ethereum is a digital fuel and token. Therefore, it works well when you need to design and build Decentralized applications (DApps) and smart contracts. Let's consider more differences between these two below.
Bitcoin was invented in January 2009, while Ethereum was created in July 2015.
Bitcoin can be used to send/receive money or purchase goods. In comparison, developers use Ethereum to design and build applications on it.
The total supply for Bitcoin is set at 21 million, while Ethereum doesn't have a set cap for a complete collection.
Bitcoin was invented by Satoshi Nakamoto, while Ethereum was invented by Vitalik Buterin, Joesph Lubin, etc.
Bitcoin is a currency that was created to compete against the gold standard and fiat currencies. At the same time, Ethereum is a token that can facilitate smart contracts.
What is Ethereum 2.0, and why does it matter?
Ethereum 2.0 is the updated version of the existing Ethereum Blockchain, created to solve the issues of Ethereum via the implementation of some specific features like increasing the speed, efficiency, and scalability of the Ethereum network, allowing it to address the restricted access and increase the number of transactions.
There is an upgraded version of Ethereum to make the whole transaction safe and secured. Many Proofs of stake networks have a significantly lesser set of validators, leading to insufficient network security. This upgraded version of Ethereum involves a large group of validators, approximately 16,384. This makes it more decentralized, secure, and less prone to illegal operations.
The most significant advantage of Ethereum 2.0 is its “Scalability”. Ethereum 2.0, due to its scalability, will have shard chains because, for every second, 10,000 transactions can be conducted. Whereas, in the case of Ethereum, only 30 transactions can be completed per second. This results in many delays and network overcrowding which will not be the case in Ethereum 2.0. Furthermore, implementing shard chains increases the network's speed, making it scale more quickly as the transactions are controlled in parallel chains instead of sequential ones.
Ethereum vs Ethereum 2.0 (what is the difference?)
The significant difference between these two is that Ethereum uses the Proof of Work (PoW) mechanism. In contrast, Ethereum 2.0 uses the Proof of Stake (PoS) mechanism in the upgraded version.
The PoW mechanism is costly, and it's an energy-intensive process in that it involves the decoding of complex mathematical puzzles by miners using computer hardware processing power. In addition, it is used to verify new transactions. So, any miner who decodes the puzzle first adds a new transaction containing the previous transactional records(nodes), making up the Blockchain.
The Proof of stake is a less costly mechanism as crypto is used to verify transactions by transaction validators instead of miners. Validators are expected to suggest based on the time and amount of crypto they hold. Blocks can get added to the Blockchain once the majority of validators claim to see the block. After blocks are added to the Blockchain, validators get rewarded for conducting the block suggestion successfully.
The poS mechanism is more efficient in energy than PoW since it uses lesser computing power to keep a blockchain safe and secured.
Practical uses of Ethereum
Ethereum is used mainly for two purposes. First, to be traded as a digital currency exchange like other cryptocurrencies or used internally by Ethereum to run applications and even earn money for work. Below are more of its practical uses.
A smart contract can be used in the banking sector to increase banking transactions and simplify several financial procedures.
It can be used in the healthcare system to store and share patient information securely.
Smart contracts can be used to make direct transactions without any risk.
It can be used as a decentralized database storage facility.
It can be used to build decentralized apps (DAPPS).
Smart contracts enhance the token and ICOs sales process, making it more fair and transparent.
Pros and Cons of Ethereum
Ethereum has many benefits like every other cryptocurrency, including freedom of payment, transparent information, and the ability to bypass third parties. However, it also has its challenges, such as not being widely accepted and having high volatility. Below are more of its benefits and challenges,
Talking about advantages, Ethereum is more than just a cryptocurrency. The platform supports smart contracts, dApps (Decentralized Applications), and several Decentralized Finance (Defi) projects.
It is a decentralized structure that allows people to implement deals and transactions without central banks or third parties.
Another pro of investing in Ethereum is that Ethereum enables several Initial Coin offerings (ICOs).
Ethereum is not capped and has practical utility. For example, transactions come with self-executing contracts and fast transaction times.
Ethereum acts as a ledger, a platform for smart contracts resulting in viruses, failures, and hacks.
Ethereum’s language (Solidity) can be pretty complicated to learn. One of the main complications is that it's not easy to find beginner-friendly tutorials.
Unlike Bitcoin, often reflected as a crypto gold, most people claim that Ether is more like gas used to run smart contracts.
Investing in Ethereum can be risky. Cryptocurrencies are volatile, which can increase profits but also multiple losses.
The final decision is up to you. You are the most influential person who can decide whether to invest in Ethereum or not.
Interesting facts you should know about Ethereum
Ethereum has made impressive progress in the crypto world.
Security is the top priority of the CryptoLogic system. No one can hack into it.
When Vitalic Butterin got his first idea of the Ethereum platform, he called it a "white paper" Ethereum supported by some of the world's leading organizations.
Ethereum was developed after an argument by Vitalik that Bitcoin requires scripting language to develop an application.
Ethereum was funded through Group-funding.
Bottom Line(What is the Future like for Ethereum?)
Several transactions are being done in everyday life, including buying or selling goods and services online, rent an apartment, buy or sell a car. All of these involve entrusting your money and information to strangers. Each of these issues is what Ethereum solves, which means that it has lots of prospects for the future. So, now you know what Ethereum is and how it works and its practical uses.
Different technology is being connected to the internet every day. They are all required to run safely and with clear guidelines.
Think of a world where smart contracts and dApps are designed to guide those transactions and technologies. At the same time as an unbeatable record of it all is stored online, forever. Looks good.
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