The Simpler Guide to Ethereum

2018-01-12 | Sam Shames

What is Ethereum?

Ethereum is an open source Blockchain network that allows developers to build decentralized applications on the platform.

Ethereum has similarities to Bitcoin in that they are both decentralized crypto-currencies and digital assets.

Ethereum differs from Bitcoin in its end-use goal. Bitcoin aims to be the world’s currency and to facilitate transactions between individuals without the need for a third-party to confirm the transactions. Ethereum aims to be the world’s largest computer network that allows developers to build decentralized applications that are all powered and confirmed by the underlying Blockchain or network, without the need for a traditional third-party such as a bank.

If the goal of Bitcoin was to become the world’s currency, then the goal of Ethereum is to become the world’s most interconnected, yet decentralized, computer.

A simplified description of how Ethereum works is to compare it to the operating system that powers the iPhone, iOS. We all have one of these devices in our pockets and know that there are many types of apps that can be installed on an iPhone. The developers for these apps can create a wide variety of uses from Maps to Music to Shopping, all separate apps, that all work together by integrating in to the iOS on the iPhone.

Ethereum intends to work in the same way as this iOS “backbone.” To provide a network where developers can create decentralized applications that can speak to each other without the need for a third party to establish trust or a centralized system of control over individuals.

What is the Blockchain?

The Blockchain is the technology that Ethereum and most other cryptocurrencies are built on. The Blockchain works as the “backbone” of Ethereum network and allows users from all over the world to share a common ledger on which to record transactions. When you buy, sell, or transfer Ethereum a ledger entry is made that is confirmed by all other users on the network.

All Ethereum that have been mined or transacted have an entry in the common ledger.

Who created Ethereum?

Vitalik Buterin proposed the idea for Ethereum in 2013 with the goal of building a decentralized platform for applications.

What is Ether?

Unlike Bitcoin, which was created as a currency and store of value by limiting supply, the goal of the Ethereum network is to host decentralized applications.

The name of the entire network is Ethereum. However, the name given to the primary token or coin used to transact and power the Ethereum network is “Ether.”

Ethereum can be thought of as the entire network, Ether would be the currency that allows transactions or promotes contributions to the network.

Where do new Ether come from?

New Ether are created by “mining.” A new block is mined about every twelve seconds. As new blocks are mined the miners receive an award in Ether and new Ether are created.

Unlike Bitcoin where the maximum number of coins is capped at 21 million total, as of right now, the number of total Ether is not yet capped. About 97 million Ether have been mined and are in circulation as of 2018.

What is Ethereum “mining”?

Mining works as a mathematical “race” between miners. Every twelve seconds miners will have the opportunity to “mine” a new block. They accomplish this by solving very complex math problems as quickly as possible.

Whoever can provide the correct answer first wins the right to mine the block and receives Ether as a reward.

Most computers can solve math problems faster than you or I could blink. Ethereum works around this by reversing the process.

In a simplified example, a computer could very easily solve 2 + 2 = 4. However, if we provide four as the input and ask the computer how can we get to four, the task becomes much more time intensive and difficult. We could get to four by 5-1, or by 3+1, or by 1+1+1+1, etc.… the possibilities are vast and it takes the entire processing power of the Ethereum network to mine new blocks.

Can more Ethereum be created?

Yes, unlike the original concept for Bitcoin which limits the total supply that can ever be mined at 21 million, Ethereum does not yet have a cap on the number of Ether that can be created by mining.

Can I mine my own Ethereum/Ether?

It is no longer profitable for most people to mine their own Ether. The math problems that are solved in order to mine have increased exponentially in difficulty as more and more Ether are mined. As the difficulty of mining has gone up, so have the costs to entry.

How do I get Ethereum/Ether?

You can receive Ethereum directly from another party or it can be bought on an exchange.

What is Ethereum/Blockchain backed by?

Ether is backed by the Ethereum network itself, the Blockchain. It seems redundant to say, however, the very thing that gives Ethereum its value is the entirety of the network or Blockchain underlying it.

Each block on the Blockchain, by its design, has been confirmed by every Ethereum ledger in the world. Each transaction is public and can be mathematically tested (if you’re inclined to test it yourself) to ensure that no one is gaming the system.

The Blockchain creates trust between millions of participants by providing transparent proof of work for all transactions.

Who controls Ethereum?

No one person or group controls Ethereum. Ethereum is controlled by all participants in the network. The common ledger of all Ethereum transactions is public and all new transactions are written there.

Because it is decentralized, Ethereum transactions are confirmed by miners and then written to everyone else’s copy of the ledger. In order for a group to “control” Ethereum they would need 51%, or a majority vote, of the mining power on the network. As of right now, this is impossible to reach for one group.

What gives it value?

Ethereum gets its value from the same natural forces that act on stocks and all other financial instruments—supply and demand. Slow increase in supply and increased demand for crypto-currencies have resulted in staggering price increases for Ethereum.

Is it safe?

The Ethereum Blockchain has never seen a successful, direct attack. The network is designed so that 51% of the computing power of the network must agree on the next transaction, this works as a safeguard against fraudulent spending or theft.

What are Ethereum wallets?

A wallet is a place to store your Ethereum. There are software wallets which store your Ethereum online and only you have the keys to unlock.

There are also hardware wallets which store your Ethereum or Bitcoin offline so only you have access.

A wallet for crypto essentially works like a safety deposit box that only you have they keys to.

Hot and cold wallets?

There are two types of Ethereum wallets, hot and cold. A hot wallet is connected to the internet and is typically accessed via software programs such as Exodus or Jaxx. As the owner, you retain the private keys to your account. You can receive or send Ethereum to your public address using these wallets.

A cold wallet is not connected to the internet and is most often a hardware device, such as a Trezor or Ledger Nano wallet, that you have moved your private keys to.

A cold wallet is much more secure as it is offline, however transferring funds from cold wallets to other wallets takes additional steps.

What is the difference between exchanges and wallets?

An exchange will store your Ethereum for you in a wallet designed for you. This is similar to depositing money in a bank and having a checking account that gives you access to funds.

What is an Alt-Coin?

An alt-coin is any crypto-currency that is not Bitcoin. Examples include: Ethereum, Litecoin, Ripple, and many more.

What is a “fork”?

A fork is when a crypto-currency splits and two assets are created. A fork can occur if enough people using a crypto-currency disagree on its future direction or on the technology that underpins it. The result of a fork is the miners that believe the “new” coin is the better technology/asset will move their resources to that Blockchain and build out from there. The miners that preferred the previous modality will stay on the current Blockchain and continue to provide their resources there.

A fork in the Ethereum network happened when Ethereum as it trades now “forked” from the original Ethereum Blockchain. This left us with Ethereum (ETH) in its current status and Ethereum Classic (ETC) which continued on the original Blockchain.

How big could the Ethereum market be?

This is the most important question to us as traders. Valuing the market for Ethereum and all other crypto-currencies is similar to asking what’s the total value of the internet.

Ethereum has similar properties to the early-stage internet, even more so than Bitcoin, in that it is a way ‘in’ to the network that will host hundreds or thousands of applications. All the applications and alt-coins that will be layered on top of the Ethereum network will require Ether as the means of payment within the system.

We believe the crypto-currency market will continue to grow as individuals move away from chaotic centralized bank and government controls and adopt the new asset class based on decentralized control and common trust built on the Blockchain.