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23.08.2019

Ethereum: Complete Guide

What is Ethereum? This question of interest to investors, who only delve into the cryptocurrency market and plan to invest money in a reliable asset. Such activity is easy to explain. Appearing only in 2015, the ETH virtual coin quickly gained popularity. On September 5, 2018, ranked 2nd in terms of capitalization after Bitcoin, with a figure of 20+ billion dollars. Not surprisingly, more and more people are interested in Ethereum, and its technology is in demand in many life sectors. What are the features of a virtual coin? What is Ethereum currency, and how does it work? Let’s talk about this in more detail.

History of Ethereum

The Ethereum project was founded and presented by a 19-year-old programmer, Vitalik Buterin, the author of Bitcoin Magazine. He created a unique idea, the gist of which is to use advanced blockchain technology. It was also implemented with the help of Gavin Wood, and from the very beginning, Ethereum was called the “second Bitcoin”. 

The main difference from other cryptocurrencies was that the emphasis here was not so much on the coins as on the system of “smart contracts”. These are special programs that started to work during certain situations. In some ways, they look like a sweepstake. For example, several people bet on a situation, and if it happens, there is an activated smart contract and all participants receive their rewards.

In 2014, Ethereum ICO has begun and raised 32.000 Bitcoins that year. At the same time, the founder was engaged not only in programming but also in active advertising of the project. Ethereum found a huge number of partners, even cooperating with Microsoft.

In a year after the project started, it has reached 1 bill. by capitalization amount placed on the second position. But in the beginning of 2016, the project faced the problems. There is a DAO (Decentralized Autonomous Organization) in Ethereum, which was based on a smart contracts. That year it was found an error in the code of DAO, due to which, the fraudsters were able to hack the system and transfer more than $ 50 million from customer accounts. These funds had to be compensated by the company. A day after the publication, the Ethereum rate fell by a third.

The founder and some heads of departments proposed a radical solution to the problem — to perform hard fork (complete re-planning of the project, changing the core code to reverse the stolen coins back). 

However, many programmers and investors were against such a decision, because in this case the Ethereum features and the main rule of cryptocurrency would be an immutable blockchain.

Despite the controversy in July 2016, the leadership still had to make a hard fork. The system was updated, and all stolen funds were returned. But many wallet owners refused to accept the changes, so the new Ethereum Classic platform was created. It was developing autonomously from the main Ethereum even if it was based on the original code. Ethereum Classic shouldn’t be confused with Ethereum itself — they are two different cryptocurrencies.

In one year, Ethereum became the second most popular cryptocurrency, then fell in price to $ 7 per coin due to scandals around and began growing again. By the end of 2016, it has occupied the leading position after Bitcoin.

What is Ethereum

Ethereum is a platform created for developing blockchain-based software solutions. They are called decentralized applications or, more abbreviated, Dapps. 

The platform’s currency is the ETH token that guarantees the execution of smart contracts and is used as a “fuel” to support the network.

ETH is able to play the role of:

  • asset storage forms
  • payment instrument
  • investment asset

When exploring the platform, it’s important to consider two details — what Ethereum is and how it works. To the first part of the question is given attention above, and now we will analyze the principle of coin operation. To begin with, we note that the Ethereum virtual coin is based on blockchain technology. This is a chain of blocks that includes information about transactions carried out on the network.

The algorithm of action is as follows:

  1. The network member decides to transfer a certain amount of coins.
  2. Other users who are engaged in mining confirm the operation.
  3. The operation is approved by the participants, and the resulting item is added to the public chain. As soon as this happened, the transfer is done. Thanks to this feature, such operations are faster than in the case of Bitcoin as the block creation time is only 1 minute. (10 minutes in BTC blockchain).

To make transaction accepted, all participants pay a commission (calculated in “gas”). This amount is sent to miners for performing the transaction processing work. Before the operation, a person sets gas amount to pay miners maximally. On September 5, 2018, the average commission was only $ 0.224. For comparison, Bitcoin has three times higher fees — $ 0.761. If the user is greedy and set a low commission, the transaction may return and the operation will have to be carried out again.

Smart contracts are the second side of Ethereum. These are special algorithms that guarantee the implementation of certain operations within the blockchain. Smart contracts work in such a way that the execution of a specific action is relevant only when following the requirements set by the developer. 

This is the simplest example, but it illustrates the principle of operation and the algorithm that is individual for each specific case. The platform main plus is that it’s decentralized. This means that there are no intermediaries between the participants (the recipient of the service and the owner of the cryptocurrency).

Today, smart contracts are the basis of all ICOs that guarantees the transference of coins to depositors after moving Ethereum to the specified wallets.

Ethereum Features

Smart contracts

Smart contract, as described above, is an algorithm that implements a particular task under specific conditions at the level of program code.

So take a look at another simple example: you have agreed with a stranger to sell goods over the Internet. To avoid scam, you set the terms of your transaction in a smart contract: the buyer transfers a certain amount to the contract account at ETH; the seller, seeing this, sends him goods.

When the goods come to the buyer, he reports this to the smart contract, for example, tells him the code that is written on the box with the goods and which the seller has entered the contract in advance. And only after receiving confirmation of a smart contract he transfers ETH to the wallet of the seller.

ICO and Tokens

Smart contracts are capable of many other functions, for example, they help to create new crypto-tokens and conduct ICO by various start-ups.

The advantage of creating tokens on Ethereum lies in the fact that all token transactions are processed by other miners, who receive a payment for this in ETH. It’s unnecessary to develop your own blockchain (reinvent the wheel) and take care of its safety, scalability and so on.

Smart contracts may also have nothing to do with finances. They simply engage in transfer and information processing. Their potential is especially strongly dispelled in combination with IoT devices and artificial intelligence. For example, you can create a completely autonomous business in which all orders will be processed by AI, logistics will be monitored by sensors of the “Internet of Things”, and payments will be made in crypto-tokens.

DApps

DApps (decentralization apps) are programs that perform various functions, have complex code and often even a user interface, but at the same time, instead of a centralized server, they use Ethereum blockchain as a virtual machine and server.

The advantages of such systems are their resistance to attacks and hacks (hacking a blockchain is a thousand times more difficult than a normal server), as well as their openness: blockchain has a special source code that can be checked by an expert at any time who will ensure that there are no backdoors and hidden vulnerabilities. This greatly increases user confidence.

Moreover, in order to use DApps, you don’t need to have any specific knowledge about the blockchain and programming. They’re just like common applications on the Web, on a PC or smartphone.

EVM (Ethereum Virtual Machine)

Ethereum Virtual Machine (EVM) is a global computer that anyone can use for a small commission paid in Ether.

EVM (Ethereum Virtual Machine) is a single global 256-bit “computer” where all transactions are stored locally on each node of the network and executed with the comparative synchronization. It’s a globally accessible virtual machine consisting of many individual computers.

This giant computer that can be accessed by any person with a wallet node or application, makes it easy to move arbitrarily large quantities of value (money) almost instantly. While anyone can use this global virtual machine, no one can create fake money there or transfer funds without permission.

GAS

Gas is a work unit used to measure how computationally expensive operation in Ethereum will be. Gas costs are paid in small amounts of Ether.

Gas has a dual purpose. Firstly, it guarantees a prepaid reward for miners, who execute the code and protect the network, even if the performance for any reason fails. Secondly, it allows you to bypass the problem of stopping  and ensures that the execution of the code cannot last longer than the prepaid time for it.

Gas is not a sub-currency, and you cannot store or accumulate it. It simply measures how much effort you need to make to perform each step of the transaction computationally.

To be able to pay the cost of gas, you just require to add Ether to your account. You don’t need to buy it separately; there is no token for gas. A certain gas flow rate is associated with any operation that is possible to perform in EVM.

Gas costs ensure that computation time on the network will be appropriately estimated. This works differently with Bitcoin, where the commission is based on the size of the transaction in kilobytes. Since the Solidity code has been arbitrarily complex, a short piece of instructions can generate a lot of computational work, while a long piece can produce less work. That’s why commissions in EVM are based on the amount of work done, not on the size of the transaction.

Difference Between Ethereum and Bitcoin

It’s important to mention another side of Ethereum — its differences from the cryptocurrency leader (Bitcoin). At first glance, these virtual coins are similar, because each of them has blockchain at the core. But there are a number of individual features in functionality. If Bitcoin is used only for transferring and investing, Ethereum (besides its highlighted purposes) can be used to develop projects on a decentralized basis with the help of smart contracts (this has already been mentioned above).

In other words, Bitcoin is a financial instrument (digital currency) that allows carrying out transactions without intermediaries with a small commission payment and preserving users anonymity. In turn, Ethereum is both a platform with a decentralized character and a cryptocurrency that is an internal payment instrument. This means that Bitcoin can only be used in the financial sector, and Ethereum, due to the presence of “smart” contracts, in many areas of life.

Both virtual coins work with the PoW protocol. But the Ethereum development team plans to replace it with PoS that will allow to “burn” a part of the coins received during the mining process. Another Ethereum differences include the Ethash algorithm, the lack of a limit for issuing a virtual coin and the size of the block reward (3 ETH).

For clarity, we summarize the difference between cryptocurrencies in the table.

ParameterBTCETH
Start2009th 2015th
DeveloperSatoshi Nakamoto V. Buterin, G. Wood, J. Lyubin
ProtocolPoW, SHA-256. PoW, Ethash. On September 1, 2018, announced that Ethereum developers decided to postpone the transition to PoS for 1 year
The number of coins21 million. Unlimited (it’s planned to introduce a limit)
The speed of block generationAbout ten minutes About 15 seconds
Block award (for 2018)12.5 Bitcoin3 Ethereum
PurposeDigital money, an investment object.Virtual coin, a decentralized platform for developing applications based on smart contracts.

Ethereum pros and cons

In examining the virtual coin, it’s important to pay attention to many components, for example, how Ethereum works, what is it, what pros and cons it has. If we dealt with the first two questions, we should dwell on the last point in more detail.

Ethereum main advantages:

  • immutability that doesn’t allow third parties to substitute data for a specific user
  • impossibility of censoring due to the fact that all Dapps function in blockchain and operate on the principle of coordination
  • cryptographic encryption, providing users with protection from various kinds of hackers and fraudsters
  • continuous improvement of technology occurring through the introduction of new software solutions from talented developers around the world

It’s important to argue from two positions here — cryptocurrency (means of payment) and “smart” contracts. The second component of the platform has practically no weak points and is only gaining momentum. As for the ETH virtual coin, its positive and negative qualities are summarized in the table below:

ProsCons
Availability. It’s not difficult to buy or sell cryptocurrency. Ethereum is available at major exchanges and exchange offices. 
Versatility. The platform works with different programming languages ​​and protocols (regardless of the level of complexity).
There is no limit on emissions. This is a minus, which in the future could lead to ETH devaluation. Not surprisingly, the developers are working on the transition to PoS and also they try to limit the total number of coins.
Availability of smart contracts. Thanks to this technology, many large banks and corporations are interested in Ethereum.
Publicity. Ethereum has an ideological inspirer (V. Buterin), who has an open profile and often speaks to community members. All innovations are discussed and announced in advance, which provides a greater level of confidence in the virtual coin.
Elements of centralization. The situation with The DAO in 2016 showed that the platform has problems. This resulted in the appearance of Ethereum Classic.
Flexibility. Developers continue to refine the platform, and it easily accepts changes and upgrades. Open source. If desired, each user can create a decentralized application based on the platform.
Vulnerability. Again, the above-described case pops up in memory, when attackers stole about 40% of the coins accumulated in the ICO process.

Experts agree that the appearance of the full version of Homestead was one of the key factors in the development of cryptocurrency. From this point on, using the platform, with the help of smart contracts you can create applications and projects that are decentralized in nature. As a result, new avenues of investment opened up.

Ethereum platform allows you to use blockchain to solve many problems, and not just to record transaction history. The next jump can occur with the transition to PoS that has so far been postponed for a year. Investors are looking forward to the emergence of futures on Ethereum that will spur the exchange rate and open access to an interesting asset.

Ethereum flexibility, as well as the presence of “smart” contracts make cryptocurrency a fascinating tool for investments. Today the platform is used by many giants, such as Intel, Microsoft and other companies. Practice shows that if such large “players” are interested in the product, this means that it’s well studied and is worth investors’ attention.

How to Buy Ethereum?

In order to buy Ether, like any other cryptocurrency, you must have a wallet. Each currency has an official wallet, but there are also general ones. Ethereum has two official wallets, Geth and Mist; although, the problem with both is that they are not running in the full version yet.

Use Atomic Wallet to Buy Ether in a convenient way. Fees are fixed at 2% percent, purchase time is 30 minutes. Registration is needed only once and it is free.

Finale

Ethereum’s environment is growing with seven league steps, and some decentralized applications are beginning to crowd out their centralized counterparts. Blockchain technologies have penetrated into all areas of our daily life and every day they hasten an automated future, where there is a place for holographic devices, droids and other innovations that science fiction writers wrote about. The revolution is happening right before our eyes and it will be a mistake to pass by it without becoming a part of the future.

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