Beginners Guide to Ethereum the Cryptocurrency
In recent years, the cryptocurrency industry has gone through severe changes. Along with Bitcoin, you may have heard another term ‘Ethereum’. Many think that Ethereum is just another cryptocurrency like Bitcoin that they can use to buy products, invest in, or send them to friends and family.
But Ethereum is far more complex than Bitcoin. It was created for an entirely different reason as well. If your head is spinning already, don’t worry because, in this Ethereum beginners guide, we are going to visit every little corner this decentralized network has.
And for purposes of this article, decentralized means it’s not owned by one central power like the government. The power is spread out so it can’t be controlled by government.
What is Ethereum?
If you have been thinking that Ethereum is just another cryptocurrency people are going crazy over for no reason, you won’t be alone. Believe it or not, a vast majority of the tech-savvy generation also thinks the same.
But in reality, Ethereum is a decentralized platform rather than a currency. On the other hand, Bitcoin was created to hold monetary value and replace centralized currencies. For example, if you wanted to send money to someone before the Bitcoin era, you had to opt for an intermediary i.e. a bank. But with Bitcoin, you can directly send it using Blockchain technology.
Ethereum was developed by using Blockchain technology as well. But that’s where the similarity between Ethereum and Bitcoin ends. The purpose of Ethereum is to basically decentralize the internet, while Bitcoin can only decentralize a currency.
For example, if you are looking for a new car, either brand-new or used, you must go through a third-party platform to find your pick. It’s either the dealership or an online marketplace. These are centralized authorities that control how your data flows.
Ethereum plans to eliminate the need for a third party for good. It means that when you need a used car, you don’t have to go through any marketplace.
Rather, you can connect to a car owner over an Ethereum Dapp. Also, the transaction will go through automatically when the predetermined conditions are met.
You may think that it’s the same thing all over again. Ethereum is working as the third party here, right? Wrong! Ethereum is a decentralized platform. It means that all of the nodes connected to the network are responsible for your new ride, not any single entity.
Ethereum is a specialized platform for developers to release their programs but in a decentralized manner. These programs are known as Decentralized Applications or Dapps for short.
But how do developers deploy their codes on Ethereum? By paying for the execution in gas. And gas is bought with Ether.
When people refer to the constant price fluctuation of Ethereum, they are actually referring to Ether. Ether is the virtual currency used in the Ethereum network to incentivize transactions.
If things seem a little blurry to you now, don’t worry. It will all clear out when we go in much deeper on how Ethereum works and how you can start to make money from it. Yes! You can use this Blockchain technology to earn for yourself.
But before we get into that, let’s take a look at Ethereum’s history.
The History of Ethereum
It all started when Vitalik Buetrin published the official Ethereum whitepaper in 2013. A year later in 2014, it was announced publicly that the development for the Ethereum platform has started. The first team to ever work on it consisted of Vitalik himself, Mihai Alisie, Charles Hoskinson, and Anthony Di Iorio.
The same year marked the release of Ethereum ICO. If you’re not familiar with ICO, it stands for Initial Coin Offering. Just like a public company introduces itself in the stock market through IPO (Initial Public Offering), ICO is the way to go for cryptocurrency-based platforms.
In May 2015, Ethereum was released in a beta form known as the Ethereum testnet ‘Olympic’. In August of the same year, the first phase of Ethereum development known as ‘Frontier’ was released to the public. After a year of testing, it went live in 2016.
Since its release, the Ethereum protocol has been updated quite a few times. The first one was in October 2016 when the classic protocol got updated. One year later in October 2017, the ‘Metropolis Byzantium Hardfork’ update was released. And in February 2019, the ‘Metropolis Constantinople Hardfork’ update was rolled out.
Ethereum 2.0
2021 saw the release of the biggest update of the Ethereum platform. It’s known as Ethereum 2.0 or ETH2 for short. The entire platform has been reworked to provide more scalability, sustainability, and security.
One of the biggest changes in the latest update is energy efficiency. The previous platform consumed too much computing power to execute the operations. The nodes responsible for maintaining the blockchain were leaving too much carbon footprint on the world. The new update solved it.
In terms of security, there has been a major scandal regarding the DAO (Decentralized Autonomous Organization). DAO was kind of a public hedge fund for investors, only autonomous. One of the users managed to crack the security and drain the entire fund for their own benefit. Ethereum 2.0 envisions to seal all sorts of security leaks like the DAO attack.
And lastly, the scalability of the platform has been improved. The new protocol can handle thousands of transactions every second!
How Does Ethereum Work?
To fully understand how Ethereum works, we need to get a little technical. You already know that it’s a decentralized platform for developers to deploy Dapps. It’s time to dive deeper into how all of this works.
The first thing we are going to cover is Blockchain technology. If you’re familiar with this already, the concept is more or less the same.
Instead of going through a centralized authority, all of the operations happen over the internet using full nodes, devices that hold the entire copy of the Blockchain. It eliminates any single point of failure.
For example, if the Facebook server is hacked, you lose all of your valuable and sometimes sensitive information. Because all the information was stored on Facebook’s servers. It is the centralized authority that handles all of your data and transactions.
That’s where decentralization comes into play. The network is not dependent on one computer or one server. The Blockchain connects millions of computers (nodes) from around the world to work together as a supercomputer. Even if the majority of the nodes failed, it won’t hurt the developer’s privacy or integrity of the platform.
The next thing we need to shed light on is the smart contracts. Unlike bitcoin, Ethereum is not strictly a cryptocurrency network. It’s aimed at the developers. And it can tackle more complex conditions while executing the instructions.
A smart contract is a code that a developer writes and uploads on the Ethereum network for execution. The smart code contains certain parameters that determine whether any transaction will take place or not.
To create smart contracts, you need to learn Ethereum’s own programming language. It’s known as ‘Solidity’. Solidity is used to write contract codes that can facilitate the exchange of value. It can be money, it can be a house, it can be public shares, a car, or anything you want it to be.
For example, if you’re looking into a used car, you can set certain conditions on your smart contract like you need X amount of mileages, Y model year, etc. And the seller can do the same with his or her listing.
When the smart contract is executed, the blockchain validates whether the conditions have been met or not. If yet, the transaction goes through and the seller of the car gets paid automatically. And you receive your product. No intermediary is needed.
But how does this transaction happen? Ethereum is not a currency, right? Well, it happens using Ether. Ether is a token that contains the monetary value. If you want to compare something with Bitcoin, that would be Ether.
Ether is used to buy Gas. Gas is the unit required to fuel each smart contract. A developer needs to pay in Gas units to execute his or her smart contract. Gas is bought with Ether from any of the reputed Ethereum exchange websites. We’ll get into that later. Keep on reading.
Now, you may wonder why to go through the trouble of introducing another variable when the Ethereum network is already so complex. Well, it’s done to keep the network stable. The price of Ether changes constantly. So, if you were to fund your smart contract with Ether, you may have to pay a different amount at different times.
But when you use Gas, you pay the same number of Gas units for your contract, regardless of time and place. It ensures that the users have maximum control over how much they want to spend. If you manage to buy Gas at a lower Ether price, you can use the same number of gas units when the price of Ether is high.
To fund a smart contract, you need to calculate how much Gas is needed for the entire execution, line by line. If you miscalculate and assign less gas than what is needed to execute the block of code, your contract won’t go through. It will stop working in the middle and you’ll not get any refund.
This is done to ensure that the developers put enough time and effort to optimize their Dapps. Inefficient code is not good for the network and leaves more carbon footprint. With the introduction of upfront funding, the network eliminates the unnecessary usage of valuable resources. In this case, that would be computing power.
When you provide extra gas for your smart contract, the miners give your code priority over lower-paying clients. The miners are the ones who dedicate computing power to execute smart contracts. And they get paid in Ether for their services. If your contract is executed and you have leftover Gas, you will get a refund.
The last scenario regarding Gas and smart contracts is where you put too little Gas for your code. In that case, your contract will likely be discarded by the network entirely for low fuel.
How is Ethereum Created?
Ethereum is already created. And a dedicated team of developers has been working relentlessly on the platform to make it better. As a user, you can only dedicate computing power to execute smart codes and receive Ether in return.
The process works very similarly to bitcoin mining and it’s known as mining as well. You would be sharing your resources in an existing Ethereum mining pool to solve a block and add it to the Blockchain. The block contains the codes written on the particular smart contract.
Another thing to keep in mind when using Ethereum is that the contracts are one-time. It means once it’s deployed and in execution, no one can change it in any way, not even the creator of the code. It’s because once it’s fueled to run, millions of nodes are working to execute it. There is no way to stop them all or update them all by any single node.
The mining algorithm that is used in the mining process is known as Ethash. It’s very similar to the hashing algorithm bitcoin uses, hashcash. But they are not the same. And unfortunately, you cannot use the ASICs (Application Specific Integrated Circuit) to mine Ether. At the time of writing, Ethereum can only be mined with a graphics processing unit on your computer.
On average, an Ethereum block takes about 15 seconds to solve. For each successful block, miners get a reward of 2 Ether and all of the Gas assigned to that block. One interesting fact is that although the number of Ethereum miners is increasing every day, the average time to solve a problem remains the same. But Why is that?
It’s due to the difficulty of the problem block. The hash algorithm is designed to calculate the number of users working on the block and increase or decrease difficulty as needed to keep the mining rate constant.
You simply open an account with your preferred Ethereum wallet and join a mining pool to start mining. And that’s how the number of miners is increasing every day, giving Bitcoin a run for its value.
The Concept of Ethereum Wallet
Just like with Bitcoin, you need to own wallets to use the Ethereum platform. There are both software and hardware wallets, as you would expect from a decentralized network. However, the accounts on the Ethereum platform are divided into two sections. The first one is an Externally Owned Account or EOA and the second one is a contract account.
An EOA works very similarly to Bitcoin wallets. It comes with a private key for you to access your Ether and a public Ethereum address that other users can use to send you Ether. An EOA also comes with the feature to initiate and trigger smart contracts. A user, as in you, can open as many EOAs as you want.
An EOA can interact with other EOAs through messages. It’s needed because unlike bitcoin, Ethereum is not used to define value only. So, two-way communication is needed. Messages are sent by using Gas which means you cannot send unnecessary messages to other EOAs.
Apart from using it to send Ether between different wallets, transactions are used to create or trigger contracts. In this case, you need to send your smart contract code as a message using Gas. And that’s how contracts are uploaded into the Ethereum network.
To activate or create a contract, you need to send the message to a contract account, which we will cover now.
A contract account is created for each smart contract and they have the code associated with them. A contract account can open additional accounts based on the triggers hardcoded in the contract. They have an Ethereum Address, but no private keys.
Software Wallets
Software wallets are applications that you download on your computer and connect to the Ethereum network. Certain wallets only allow you to send or receive Ether from one EOA to another. The other ones allow you to create or trigger a smart contract as well.
Wallets are often called nodes. It’s understandable why because a wallet is the only point of contact between you and the whole Ethereum network. You can either decide to become a full node or a light node.
Full nodes are similar to master nodes in the Bitcoin Blockchain. They do the heavy lifting for the network by validating and updating information in real-time. And it takes a lot of power and memory to operate a full node.
Geth, Mist, and Parity are three of the most popular software to interact with the network. Geth was developed by the Ethereum foundation and is targeted toward the developers. You can realize it when you see that that you can only use it by writing commands in Solidity. It’s very similar to how the command prompt on Windows or Terminal in MAC works.
Mist, on the other hand, is technically Geth but with a user interface. It’s designed for non-technical consumers who don’t know the Solidity programming language.
Lastly, Parity is a private company that develops software to run full nodes. It enables businesses and individuals to use the decentralized technology to their benefit.
Keep in mind that all three of them are designed to run full nodes. For your light node needs, there are many wallets that we’ll talk about near the end of this post.
Hardware Wallets
Hardware wallets are basically EOAs stored on the hardware. The hardware in use is very strictly encrypted to protect your private key and your transaction needs. One drawback of a hardware wallet would be that it costs money. But it’s only fair to pay a premium for higher security.
How Do You Make Money from Ethereum?
Just like with everything that has value, you can make money from Ethereum as well. There are quite a few ways to milk the Ethereum network to make money. But before we go into any of that, we need to validate whether Ethereum is a sustainable source of income or not. And if it is, should you invest in it.
To answer the first question, Ethereum is not going anywhere any time soon. The user base is increasing by the day. Especially due to the crypto boom in 2020 and 2021, there are more users in the Ethereum network than there ever was. So, yes, it’s a very sustainable platform to invest your time and money.
Coming to the second question, why should you invest in Ethereum? There are a few things we can quickly put together to understand why so many people are dedicating their resources to it.
- Liquidity: Being the 2nd largest crypto network in the world after Bitcoin, Ethereum is one of the most effective assets in terms of liquidity. There are hundreds of exchange platforms and brokers where you can change your Ether for money, gold, or anything else on offer.
- Easy Monitoring: monitoring and predicting the future of the Ethereum network is much easier than it is with centralized currency. As money is regulated by governments, you do not have access to information that allows you to predict the future of the value. It makes you prone to sudden inflation or deflation risks.
Ethereum, on the other hand, keeps all the information as a public record. You have full access to the blockchain to see current nodes, value, and everything. It makes investment easier and more secure than most stock exchanges in the world.
Now that you have an idea why investing in Ethereum is good, we can proceed to ways that make money.
Mining
Just like with Bitcoin, the most straightforward way of making money from Ethereum is mining. But unlike Bitcoin, you don’t need massive computing power or hundreds of GPUs to start Ethereum mining. The blockchain is very efficient when compared to the Bitcoin Blockchain.
To get started, you need to open an account at your preferred wallet and join a pool of miners. By doing so, you become part of the supercomputer Ethereum is. It’s a relatively long-term plan because there are millions are other people competing with your hardware to mine the block as fast as they can.
To increase your likelihood of profit and faster return, you can invest in powerful hardware, mostly graphics cards. The hashing algorithm of Ethereum is optimized to use computational power from graphics cards more than any other processor.
Holding
It’s another very popular way of making profits from Ethereum. The concept is fairly simple. You buy Ether for less money and sell it for higher. And to do that, you need to constantly monitor the network for the price fluctuations of Ether and wait for the right opportunity.
You can do it either long-term or short-term. If you want quick profits, you need to get active on the online brokerages to find opportunities. It will take a lot of effort and the profit will be smaller.
The smart way to go would be for long-term investments. You can buy a bunch of Ether at once and sell them all together when the price goes higher. Just like what many people did at the last crypto boom in 2021.
Ethereum Staking
You can earn a percentage of the Gas money assigned to fuel a smart contract when you dedicate your resources to validate a transaction. On the Ethereum Blockchain, a transaction is only recorded after it’s validated. The process is known as Skating.
In simple terms, you use some of your Ether as collateral to validate a transaction. Once it’s successfully done, you get your ether back along with your percentage of the Gas. However, the validation may go wrong and you could potentially lose your Ether.
Ethereum Faucets
Similar to Bitcoin faucets, there are Ethereum faucets. The process is very similar as well. If you don’t know what they are, they are platforms that allow you to perform small tasks like solving CAPTCHA problems or completing surveys. Upon successful completion, the faucets reward in fractions of Ether. If done smartly, it won’t be long before your funds start to show up.
How Do You Get Started?
As you may already know, you need to own a wallet to connect with the Ethereum network. At the time of writing, there are hundreds of software and hardware wallets that you can use for Ethereum mining, trading, or holding.
But not all of them are equally good. In this section, we will look at some of the finest wallets you can get for all your Ethereum needs.
Atomic
Atomic is hugely popular among both desktop and mobile users. It’s a software wallet that you can use for Ethereum and ERC20 tokens. ERC20 tokens are used to create and issue smart contracts. It means that Atomic is effectively an EOA for you.
You can store, buy, or exchange Ether with Atomic. Even with a registered bank card. If you’re into trading or holding crypto, Atomic is one of the best places to start.
Along with Ether, Atomic supports over 300 other cryptocurrencies. So, you can use it as your all-in-one solution for decentralized business.
Guarda
Guarda is another very popular wallet but is only designed for light nodes. It means you can use it to store your Ether with a secure private key. We like the interface a lot comparing to other wallets. It has a very intuitive design along with desktop and mobile compatibility for absolute convenience.
Argent
If you want to emphasize on mobile usage of Ethereum and don’t plan to dedicate any resources for mining, Argent is the way to go. Unlike other wallets, it doesn’t have a private key. You need to access it using your email address and mobile number to carry out your transactions.
Ledger
Coming out from the reign of software wallets, we have Ledger. It’s a hardware wallet for users who want a more secure way to store their private key and Ether. You can choose between the Nano X and the Nano S version, Nano X being the more expensive one.
Nano S lets you conveniently store your Ether away from the internet. And that’s about it for the S variant. However, when you move up to the X variant, you get superior security and access to more cryptocurrency.
Trezor
You might be familiar with Trezor if you keep an eye out for crypto-related news. Trezor is one of the best hardware wallets money can buy. You can securely put away your private key offline which will keep it away from any hackers or scammers’ hands.
Trezor comes as a USB dongle that you connect to your computer only when you need to. You are allowed to create your own password for the interface so that no one except you can access your Ethers.
Risks Associated with Ethereum
From what you’ve read so far, you may think that Ethereum was the only thing missing from your life. And now, you can millions of dollars by mining or trading Ether! Well, as good as it may be, the Ethereum network has its fair share of risks.
The most notable security breach was with DAO. Decentralized Autonomous organizations or DAOs are created with many investors. A DAO in 2016 pooled over $150 million in Ether before it was drained by another anonymous entity. Rather than the scammer, it was Ethereum’s loophole that caused the breach.
The issue might have been mitigated, but you now know that Ethereum is not some invincible network that can do anything. It has its limitations. The good news is, Ethereum is constantly evolving. And with the introduction of Ethereum 2.0, we can hope to see a more secure and sustainable platform for both the developers and end-users.
Other common risks associated with Ethereum would be high volatility, unregulated market, lack of proper opportunities to liquidate your Ether, and so on.
Final Words
If you’ve read the entire post, it’s safe to say that you are ready to start your own journey with Ethereum. Whether you want to make money or apply the decentralized nature of the platform to join the revolution, Ethereum may be the future of the crypto network. And with Bitcoin reaching its market cap faster than ever, it’s the perfect time to invest in Ethereum and make a sustainable living.