What is Ethereum(ETH)- A Step by Step Beginners Guide - CoinGyan

Ethereum is the 2nd largest cryptocurrency in the world after Bitcoin. But I think so you already know this. Unless you are playing video games all day long and are completely oblivious to this fundamental fact regarding cryptocurrency. So without wasting your time, I’m going to share with you in this post: Ethereum for a beginner.

What is Ethereum

In the words of Stephan Tual, CCO of Ethereum, ” Ethereum is an open-source platform to build, distribute next-generation decentralized applications.”

He further elaborates on this point by saying that these applications built on the blockchain of Ethereum are supposed to be free from the middleman business, i.e., the users can interact with social systems, financial systems, gaming interfaces, etc. in a peer to peer fashion.

You can transfer Ether from one account to another and use it to compensate the participants’ mining nodes for the computations that happen on the blockchain.

Ethereum employs a decentralized Turing-complete virtual machine known as the Ethereum Virtual Machine (EVM). Now the specialty of this feature is that it can execute scripts through an international network of public nodes. An internal transaction pricing mechanism that goes by the name of “Gas” is used for reducing spam and distributing resources on the network.

Vitalik Buterin, a cryptocurrency researcher and programmer in late 2013 decided to introduce Ethereum into the cryptocurrency market. Its development was funded through an online crowd sale that happened between July and August 2014. It finally went live on 30 July 2015, with a total of 11.9 million coins being premined for the crowd sale. 13 percent of the total circulating supply seems to be originating from this premining of Ether.

During the year 2016,  Ethereum bifurcated into two different blockchains as a consequence of the collapse of The DAO project. The new version was named Ethereum (ETH), and the original plan carried on as Ethereum Classic (ETC). As a result, the value of the Ethereum currency shot up to over 13,000 percent in 2017.

I think that should be a great bird’s eye view for you guys about What is Ethereum:

An open-source platform to build and distribute decentralized applications where users can interact with their creations in a peer to peer fashion without the need for a middleman.


Who needs Ethereum

For all developers who desire to build apps by leveraging the power of the Ethereum blockchain, users interested in accessing and interacting with smart contracts on the ethereum blockchain are the ones who need it. But wait there’s more. All the hodlers and anyone else interested in making a profit from this cryptocurrency and diversifying it into other types of cryptocurrencies are also hungry for ethereum.

Dapps and community:

Decentralized applications or dapps for short were first built on ethereum, and then Lisk modified this approach through its innovative blockchain. However, this is just my two cents regarding things here, and you guys are free to agree or disagree with it. A dapp is only an application serving a specific purpose like voting for someone or something or buying tickets just with the exception of no middleman fee or anything. This means you can get quality service without all the extra costs that banks, etc. charge. Awesome right?

Now if you’re wondering about how to build a dapp, then I would write an entire post for that so let’s just keep it for the next time. However, just some basics about dapp building many people maybe knowing that you use the programming language Solidity to build dapps on ethereum. And you use ethereum tech to create new tokens on the ethereum platform.

So I believe that it is enough regarding knowledge about dapps on the ethereum platform. We’ll have an in-depth look at them in another dedicated post.

Now let’s transition our discussion about the ethereum community.

Regarding the community aspect of ethereum, you already know something about it if you read the introduction or if you’re a crypto enthusiast. However, if you don’t know much about it then let me reiterate what I have discussed in the introduction section of this post. Ethereum is an open-source platform where you can build, distribute next-generation decentralized applications without any middleman intervention. So if you want to become a part of this community, you need to either create dapps and monetize them, or you could just buy ethereum at any cryptocurrency exchange. Then you will be a proud member of the ethereum community where people try to solve real-world problems using revolutionary blockchain technology. Welcome onboard is what Vitalik ( the founder of Ethereum ) would say if he would be personally greeting you.

If any of you would enjoy being a part of a forum for some discussion regarding a host of topics about ethereum like mining, pool discussion, education, etc. then here’s one forum I think you guys will enjoy.

ETH Consensus System

So ethereum is currently operating on a hybrid of proof of work basis but will soon move to proof of stake basis under the Ethereum 2.0 initiative. According to Wikipedia “Proof-of-stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In PoS-based cryptocurrencies, the forger of the next block gets selected via various combinations of random selection and wealth or age (i.e., the stake). In contrast, the algorithm of proof-of-work (PoW) based cryptocurrencies (such as bitcoin) uses computationally intensive puzzles to validate transactions and create new blocks (i.e., mining)”. So this should give us a brief idea of how the mechanism of POW and POS algorithms work. And for further understanding of the consensus system and algorithm of ethereum, this is where you need to go.

Smart Contracts

As Vitalik Buterin, the 22-year-old prodigy or rather the mastermind behind Ethereum, explained it at a recent DC Blockchain Summit, within a smart contract approach, an asset or a currency is transferred into a program, “and then the program runs a certain code and at some point, it automatically approves of a condition and then accordingly determines whether the asset should be going to one person or back to another person, or whether it should be refunded asap to the person who sent it in the first place or some combination thereof.” In the meantime, the decentralized ledger also stores and replicates the document which gives it certain security and immutability.

Now this, in a nutshell, means that smart contracts run on an if this then that basis, i.e., If X event happens then only, Y should happen. Otherwise, nothing should get triggered just like if you don’t touch the first piece of the domino then the other parts would also stand still and vice-versa.

For example:- This one is cliche, and you may have already seen a lot of youtube videos and read a lot of articles about this, but this is the simplest way, in my opinion, to learn about this concept of smart contracts with you guys. Moving on to the example that we are going to discuss. Have you guys seen a vending machine? Hopefully yes. And you might also be familiar to a great extent as to how it works. You put money into the vending machine then press a specific button to get your soda or chips, etc., and wait for your beverage or chips to fall and take away for consumption.

Now, did this analogy clarify some if not a lot of doubts regarding smart contracts?

If it did then awesome. Otherwise, if you guys are still confused about anything related to smart contracts, then please do bother me in the comments section below. I would love to talk to you.

Difference Between Bitcoin and Ethereum

Bitcoin and Ehtereum operate on the principle of distributed ledgers and cryptography but both of them are different from each other. Transactions done on the ETH network may contain an executable code, but the data that are assigned to the Bitcoin network contain transactions for keeping notes. Another major difference includes block time. The Ether transactions are faster and can be completed within seconds whereas the bitcoin transactions sometimes take minutes to complete. The algorithms on which these two cryptocurrencies run are also different. Ethereum uses ethash while Bitcoin uses SHA-256.

Even the objectives of these two coins are different. The objective of Bitcoin is to work as an alternative to the national currencies and become a medium of exchange. On the other side, the objective of Ethereum is to work as a platform for promoting immutable, programmatic contracts, as well as applications through its own native currency. It is true that both BTC and ETH are crypto coins, after all, but ETH was never intended to replace the monetary system. The ETH network is working on the initiative to monetize the operation of the Ethereum smart contract and Dapp platform.

The Bottom Line

All in all, Ethereum is an innovative approach to the blockchain technology that is leveraging the principle of blockchain that supports Bitcoin, however, the intention is almost entirely different from Bitcoin. Nevertheless, the popularity and rising market capitalization Ether has received since it was inception in 2015, makes it a fierce competitor against all other cryptocurrencies, especially from a trading perspective. As of now, the market cap of Ether (ETH) is higher than Ripple and Litecoin, although it’s got a lot of distance to cover regarding overtaking Bitcoins’ position on the coinmarketcap. In conclusion, Bitcoin and Ethereum are two separate versions capitalizing on the blockchain technology and are driven by different motives set to establish themselves in the cryptocurrency world.

What is The Supply System of ETH

As per the terms consented by all parties involved in the 2014 presale, the issuance of ether is capped at 18 million ether per year (this number equals 25% of the initial supply). Now what this means is that while the total issuance is fixed, the relative inflation is decreased every year. In theory, if this issuance was kept indefinitely then at some point the rate of new tokens created every year would reach the average amount lost yearly (by misuse, accidental key loss, the death of holders, etc.) and therefore would reach an equilibrium.

But the rate is not expected to be kept. Another case in point is that Ethereum is under the plan to be switching from its current POW, i.e., Proof of Work algorithm to a new consensus algorithm of POS, (as already discussed) which is under development and is called Casper. This is expected to be more efficient and requires less mining subsidy. The exact method of issuance and it’s functionality is currently an area of active research.

Although as of now, you can be assured of these two things.

(1) The current maximum is considered a ceiling and the new issuance under Casper shall not exceed it (and is expected to be even less).

(2) Whatever method gets selected ultimately for issuing will be based on a decentralized smart contract that will not give any biased treatment towards any particular group of people, and its purpose will be to benefit the overall health and security of the network.

For more information check out the whitepaper here.

What Problems Does Ethereum Solve

From my experience Ethereum is trying to solve real-world problems like problems in scalability in specific sectors, the problem of middleman, problem of trust in higher organizations regarding people’s funds, etc. through its dapps and its cryptocurrency.

For example:- A gateway to decentralized services such as Infura, co-ownership of real assets, e.g., the Swarm Fund, decentralized financial services like WeTrust.

You can check out more over here.

So this my short and sweet explanation of what I understood as in how can modern-day developers use ethereum and solve modern-day problems.

Personalities Behind Ethereum

Founder: Vitalik Buterin.

Co-Founders: Dr. Gavin Wood, Joseph Lubin.

You can learn more about the people behind Ethereum here.

Ethereum 2.0: What’s New?

Ethereum 2.o emerged to fulfill the need for improved performance and a more environment-friendly approach. The coin will switch from the existing mechanism of POW (Proof-of-Work) to POS (Proof-of-Stake).

It is very complex and hard to get the right answers in the POW model, but too easy in the POS model. In POW, the users are rewarded for getting the right answer whereas, in the POS, the users are punished for getting the wrong answer. The problem with the POW mechanism is that it consumes a lot of energy and power, hence it is not a good option as far as the environment goes. For example, take a look at the Bitcoin energy consumption index chart which can be directly compared to New Zealand.

Bitcoin Energy Consumption Chart- CoinGyan

Switching to POS will not only save the power consumption but it will also make the Ethereum network more secure by solving at least 51% of the potential attack problems. You can also refer to the Github Gist to have a look at a more detailed answer.

What is Proof-of-Work?

POW happens when a miner tries to solve a difficult arithmetical/mathematical problem. Navigating the solution to such problems is more or less like a guessing game but it is not a tough job to assess if a particular solution is correct because there could be only a single solution. It is not possible for the miners to cheat their way into the system as real-world resources are needed to address these solutions. Although one of the biggest problems with POW is that it is highly prone to attacks. The hackers can invalidate a true transaction leading to double-spending of funds. Bitcoin gained popularity because of its ability to tackle the problem of double-spending. Now it’s the turn for Ethereum.

What is Proof-of- State?

POS takes place when a miner locks up a specific amount of his or her coins for verifying a block of transactions. It is much simpler for computers to solve cryptographic calculations in POS. The miner only has to prove his or her certain percentage of all the cryptocurrency coins in a given currency. For example, if Ethan owns 2% of all the ETH, then he would be able to mine 1% of all the transactions all across the ETH.

Switch from POW to POS

Ethereum intends to switch to the POS mechanism from the existing POW using the Casper protocol. Ethereum Casper Protocol shall be implemented in stages for diluting down the security risks on the ETH network. Casper FFG (The Friendly Finality Gadget) shall be the first stage and it is kind of a combination of both POW and POS. POW shall be the core algorithm in this case for creating security boundaries around the network but every fifteenth block in the network shall be validated via POS.


Casper FFG- CoinGyan


Ethereum 2.0 Design Goals

Some of the broad design goals of the Ethereum 2.0 have been highlighted below:

  • To minimize all the complexities involved even if it costs loss of efficiency.
  • To stay live all the time with the help of partitions of major networks.
  • To select all the components for making sure that they can be easily exchanged for quantum secure counterparts when available.
  • To allow massive participation of validators in total unit time and per unit time.

EIP: Ethereum Improvement Proposals

Ethereum Improvement Proposals (EIPs) elaborates on the standards for the Ethereum platform. Not only this, but EIP also includes core protocol specifications, contract standards, and client APIs. These are proposed and suggested by any Ethereum community individual and then brainstormed internally.

EIPs are made of technical specifications for the suggested changes and work like a “source of truth” for the ETH community. Network upgrades, as well as application standards for Ethereum, all are discussed and developed via the EIP process. Anyone who is part of the Ethereum community has the power to create an EIP. You can check out the guidelines for writing EIPs on the official website of Ethereum.

Why EIP Matters?

EIPs play an important role in deciding how the changes would be implemented and documented on the ETH network. EIP is nothing less than a gateway for members to suggest, debate, and implement the changes. There are different types of EIPs that include-

  • Standard Track
  • Core
  • Networking
  • Interface
  • ERC
  • Meta
  • Informational

All EIPs serve different purposes. For example, Core EIPs are made for low-level protocol alterations.

EIP Process

The EIP process can be understood with the help of the following diagram-

EIP Process- CoinGyan

The terms used in the aforesaid diagram might appear complicated but I have made it easy for you by explaining these terms so that you understand the process properly-

  • Draft: An EIP which is open for discussion and is undergoing quick changes and modifications.
  • Last Call: An EIP on which initial changes and iterations have been done and is now waiting for a review by an extensive audience.
  • Accepted: A core EIP lying in the Last Call tunnel for at least 14 days and the technical changes, if any on the same were requested and is waiting by the author to be addressed.
  • Final (non-core): An EIP that the core developers have decided to adopt and deploy in a future hard fork.
  • Deferred: If an EIP is not under the consideration for immediate adoption and might be considered again in the future for a subsequent hard fork, then it a deferred EIP.

Now, you can check the diagram again and it will help you to understand the EIP process better.

Where to Store ETH Safely

Although the Ethereum team recommends using official clients like mist, I won’t touch them if I were a newbie to this cryptocurrency arena. It’s a little on the techy side of things, and you wouldn’t want to attempt it right out of the bat because you might get overwhelmed by the complexity of things and run away from cryptocurrencies for good. Not what I would want for you. So what I would recommend is Ledger Nano S or Trezor wallet. They’re a much more safe and convenient way to save your private info when it comes to cryptocurrencies.

So that’s it for this post on Ethereum. I hope you guys enjoyed my company as much as I did enjoy your company here. And more importantly, I wish to have either refreshed or educated you about this beautiful cryptocurrency called Ethereum. Once again thank you so so much for your presence here, and I shall be meeting you in my next post. Until then, please follow us on Facebook, Twitter & Instagram.

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About Author

I am a tech enthusiast & Digital nomad from Dhenkanal, India I've been dealing with Bitcoin since 2014.I started CoinGyan to help users around the globe to learn about popular Cryptocurrencies. Here at CoinGyan, I write about Bitcoin Wallet, Cryptocurrency wallets, & making money from Crypto.

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