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What Is Ethereum?

Everything You Need To Know About To Get Started

The Digital world runs on code. Ethereum is a blockchain that has code which enables it to do much more than what Bitcoin can do. If you are new to cryptocurrencies start with a basic understanding of how Bitcoin and blockchain technology works.

What are Cryptocurrencies?

Best Ether Wallets

What Is Ethereum?

Ethereum is a blockchain-based open distributed computing platform proposed by Vitalik Buterin in 2013. It features a decentralized public blockchain. Hence, it can support a decentralized platform on which applications can be programmed.

While Ethereum is the network based on the blockchain technology, Ether is a currency of the Ethereum blockchain and helps in running the platform/ network.

Ether is the incentive that encourages miners and developers to maintain the platform. Mining is simply the process that helps in building up the blockchain as per the coded protocols. Miners exchanges their computing resources for Ether. Ether is listed as ETH on cryptocurrency exchanges.

Ethereum platform intends to prevent any chance of fraud, censorship, or third-party interference through the effective use of the blockchain technology and smart contracts. This makes Ethereum an attractive platform to launch decentralized applications (aka DApps).

Solidity is the inbuilt programing language used to write autonomous smart contracts and also create decentralized applications. Developers can hence build and launch their own decentralized applications using smart contracts. This is why Ethereum is also referred as programmable money.

What Are Smart Contracts?

A smart contract is a piece of code that lives in a blockchain. When a preprogrammed condition is triggered, the smart contract executes the corresponding contractual clause.The transaction is then executed and subsequently recorded in the blockchain. A transaction of value in terms of Ether takes place.

As Smart contracts live on a blockchain and not on a server, no third-party trust is required. Smart contracts can facilitate the exchange of money, content, property, shares, or anything of value. As smart contacts are inbuilt into the blockchain it acts like a self-operating computer program that automatically executes code when specific conditions are met. The secured feature of the blockchain also enables security of a smart contract and hence it is tamper-proofed.

Decentralized Applications (DApps) 

The Ethereum white paper splits dApps into three types:

  • that manage money (Type I),
  • where money and a service is involved (Type II), and
  • which includes voting and governance systems (Type III).

DApps are a ‘blockchain enabled’ applications. It is an open-source software platform implemented on decentralized blockchains and is fueled using tokens. Tokens are generated using a Smart Contracts. Just as ETH is the ‘crypto fuel’ for running smart contracts on the Ethereum platform, the tokens issued by the DApps ‘fuel’ that particular application. The value of the tokens is based on how much people value that application.

Decentralized Autonomous Organizations (DAO) are type III. A DAO is fully autonomous, decentralized organization with no single leader. DAO’s are run by programming code, on a collection of smart contracts written on the Ethereum blockchain. The code is designed to replace the rules and structure of a traditional organization, eliminating the need for people and centralized control. A DAO is owned by everyone who purchases tokens and gives people voting rights.

Ethereum Milestones

Since the initial launch, Ethereum has undergone several planned protocol upgrades called milestones.

VersionCode nameSalient FeatuersRelease date
0OlympicOlder version May, 2015
1FrontierOlder version 30 July 2015
2HomesteadImprovements to transaction processing, gas pricing, and security  14 March 2016
3 Metropolis (vByzantium)Reduce the complexity of the EVM, more flexibility for smart contract developers and support for zkSnarks 16 October 2017
3.5 Metropolis (vConstantinople)Introduce the proof-of-stake and proof-of-work hybrid chainTBA
4 SerenityChange from proof-of-work to proof-of-stake, Improvements to scalability, specifically shardingTBA

How Ether (ETH) works?

Ethereum is a network—the blockchain. Ether (ETH) is the fuel for that network. 72 Million Ether were premined and currently, there is no hard limit on the supply of Ether. Currently, the block reward is 5 Ether and the block time is 14.6 seconds. The block reward is expected to decrease after the transition to proof of Stake protocol.

Mining Ether

Ether (ETH) will be issued at a constant annual linear rate via the block mining process. This rate is 0.3 times the total annual amount of ETH created in the pre-sale.

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 given to the computer who mined it. Ether can be mined through CPU and GPU Mining via mining blocks on the Ethereum blockchain.

The specific proof-of-work algorithm that Ethereum uses is called ‘ethash’, designed to require more memory to make it harder to mine using expensive ASICs.

Gas Limit And Gas Price

Computational power is exchanged for Ether to run the blockchain. So, when you send tokens, ETH, or do anything else on the blockchain, you must pay for that computation. The transaction fees is calculated in Gas and gas is paid in ETH.

You are paying for the computation, regardless of whether your transaction succeeds or fails. Even if it fails, the miners must validate and execute your transaction (compute) and therefore you must pay for that computation just like you would pay for a successful transaction.

The transaction fee is paid to miners for mining the transactions, putting them into blocks, and securing the blockchain.

The total cost of a transaction (the “TX fee”) is the Gas Limit * Gas Price.

Think of the gas limit like the amount of liter of gas required by a car to travel some distance. And the gas price as the cost of that liter of gas.

  • With a car, it’s $2 (price) per liter (unit).
  • With Ethereum, it’s 20 GWEI (price) per gas (unit).

To fill up your “tank”, it takes…

  • 10 liters at $2 = $20
  • 21000 units of gas at 20 GWEI = 0.00042 ETH.

Therefore, the total TX fee will be 0.00042 Ether.

You can use this tool to calculate GWEI <-> WEI <-> USD here, which can be helpful when you want to know your TX fee in ETH, rather than GWEI.

Gas Limit

The gas limit is called the limit because it’s the maximum amount of units of gas you are willing to spend on a transaction.

However, the units of gas necessary for a transaction are already defined by how much computation a code requires to get executed on the blockchain. You must include enough gas to cover the computational resources you use or your transaction will fail due to an Out of Gas Error. All unused gas is refunded to you at the end of a transaction.

Gas Price

If you want to spend less on a transaction, you can do so by lowering the amount you pay per unit of gas. The price you pay for each unit increases or decreases how quickly your transaction will be mined.

During normal times:

  • 40 GWEI Gas Price will almost always get you into the next block.
  • 20 GWEI will usually get you within the next few blocks.
  • 2 GWEI will usually get you within the next few minutes.

During Token Creation Periods, these costs go crazy due to supply/demand:

  • 50 GWEI is the max gas price most new Token Creation Period contracts will accept. Anything above that and your TX will fail. Most is the keyword here—check with the Token Creation Period you wish to invest in before said Token Creation Period begins.
  • 50 GWEI would be the amount you should send in that case.
  • If you are trying to send during an Token Creation Period (but not to the Token Creation) you have 2 choices: wait a bit until the Token Creation Period is over, or increase the gas price over 50 GWEI.

Gas Limit for Token Sales

You should put whatever the token sale holders tell you to put. If you do not know, then ask, before the token sale. This ensures that your transaction won’t fail due to an “Out of Gas” error. Typically, a 200000 gas limit will be enough, but some require more

Note: The gas will NOT be returned to you if you send with a too-low gas limit, too early, or too late in the Token Creation Period.

First, see if the token sale has a max gas price. If they do, use that as the gas price. Take the gas limit (e.g. 200000), multiply by the gas price (e.g. 50 GWEI) and that is how much you will pay for your attempt to get in and participate in an ICO.

Popular Ethereum Wallets

  • Hardware Wallets: Trezor, Ledger Nano S
  • Mobile Wallets: Jaxx (iOS, Android), Coinbase (iOS, Android), Ethereum Wallet (iOS)
  • Desktop Wallets: Jaxx (Windows, Mac OS, Linux), Coinbase
  • Web wallets: MyEtherWallet
  • Paper Wallets: EthAddress

Bitcoin vs. Ethereum

While the Bitcoin blockchain is used to track ownership of digital currency (bitcoins), the Ethereum blockchain focuses on running the computation required for any decentralized application.

Future Of Ethereum

Despite the fallout from The DAO hack, Ethereum is moving forward and looking to a bright future. By providing a user-friendly platform that enables people to harness the power of blockchain technology, Ethereum is speeding up the decentralization. Ethereum is (as of 2017) the leading blockchain platform for initial coin offering projects, with over 50% market share.

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