Beginners Guide

Ethereum-Complete Guide on World’s Second Crypto

Written by: Qadir AK

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Qadir AK

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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Mar 31, 2022

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If you’re a crypto enthusiast who keeps up with the markets, you’ve almost certainly heard of Ethereum. It is a technological platform that aims to change the digital world for the better and aspires to completely change the way the internet works.

The Ethereum blockchain was originally introduced in the summer of 2015. Around 72 million ETH were in circulation at the time. There were 113.5 million tokens in circulation by January 2021, and there are presently around 120 million. 

Ethereum is one of the most popular and stands to be the second-largest platform after Bitcoin in market capitalization. And was created by Vitalik Buterin, a Russian-Canadian programmer. 

Although Bitcoin and Ethereum are both well-known cryptocurrencies, the primary goal of ether is to make the Ethereum smart contract and decentralized application (dapp) platform easier to use and commercialize. 

Let’s dive into what the definition of Ethereum says!

What is Ethereum?

Ethereum is the first programmable blockchain in the world. It is a decentralized application platform that runs on a worldwide, open-source platform.

You can develop code on ETH that manages digital currency, performs exactly as it should, and is accessible from anywhere in the world.

It is a cryptocurrency that allows you to send crypto to anyone for a nominal charge and its own native token for trading ‘ETHER’ . It also powers open-source programmes that no one can take down.

It is a fork of Bitcoin with a few key features. Both allow you to utilize digital money without having to go via a bank or a payment processor. Because Ethereum is programmable, it can be used to construct a wide range of digital assets

As a result, ETH can be used for purposes other than payments. It’s a financing service, gaming, and software store that won’t steal or manipulate your personal information. 

History of Ethereum

Ethereum was first introduced in a white paper by Vitalik Buterin, a programmer and co-founder of Bitcoin Magazine, in late 2013 as a mechanism to create decentralized apps. 

Buterin collaborated on the Colored Coins project with eToro CEO Yoni Assia in 2013 and drafted the project’s white paper, which outlined further blockchain use cases. 

In January 2014, Ethereum was unveiled during the North American Bitcoin Conference in Miami. 

Ethereum Switzerland GmbH, a Swiss firm, began formal development of the software that underpins Ethereum in early 2014. Before the programme could be deployed, the idea of putting executable smart contracts on the blockchain had to be specified.

In 2015, as part of their proof-of-concept series, the Ethereum Foundation built multiple codenamed versions of Ethereum over the period of 18 months. With the release of “Frontier” in July 2015, the Ethereum platform was formally launched, and Ethereum’s “genesis block” was created.

Ethereum has undergone a number of planned protocol updates since its conception, which have resulted in major changes to the platform’s fundamental functioning and incentive structures. To introduce protocol enhancements, a hard fork is used.

In 2016, the DAO, which is a collection of smart contracts created on the platform raised a record US$150 million in a public sale to fund the initiative. In June 2016, the DAO was hacked, with an unknown hacker stealing $50 million in DAO tokens. The occurrence sparked a debate among cryptocurrency fans over whether Ethereum should retrieve the funds through a difficult “hard split.” 

As a result of this, the network was split into two blockchains: Ethereum, which had the theft reversed, and Ethereum Classic, which remained on the original chain. The hard fork generated competition between the two networks. Ethereum forked twice more in the fourth quarter of 2016 to handle additional attacks after the hard split.

Vitalik Buterin co-founded the Ethereum project in order to address Bitcoin’s flaws, is continuing to develop and the milestones are constantly being accomplished. 

Ethereum Virtual Machine 

The Ethereum Virtual Machine is a software framework that allows developers to create Ethereum-based decentralized applications (DApps). This virtual computer holds all Ethereum accounts and smart contracts. The EVM’s job is to figure out what Ethereum’s overall state will be for each block in the blockchain. 

The second layer is referred to as a “distributed state machine.” At its most basic level, Ethereum’s state consists of a massive database including all ETH accounts and balances.

At the same time, Ethereum’s state is a machine state, capable of altering with each new block and executing any type of machine code according to a set of specified rules. The Ethereum Virtual Machine (EVM) specifies the specific rules that govern how the machine changes state with each new block.

The EVM’s purpose is to add a few extra features to the Blockchain so that users have fewer problems with it. The operation codes are then used by the EVM to carry out certain tasks. As a result, the EVM functions as a big decentralized or master computer on the blockchain, completing various tasks.

What are Smart Contracts?

The Smart Contracts are predefined, pre-embedded, and self-executing programs that contain terms and conditions of an agreement between peers. 

Smart contracts enable the build of Decentralized Applications(Dapps).

The applications are like any other digital application which runs on a peer-to-peer network of Ethereum blockchain. 

One of the most notable advantages of smart contracts over traditional contracts is that when the contract criteria are met, the outcome is automatically performed. There is no need to wait for the result to be executed by a human. To put it another way, smart contracts eliminate the requirement for trust. 

On the other hand, execute precisely according to the conditions contained in the contract’s code. This precision means that the smart contract will generate the same output under identical conditions. 

Working of Ethereum 

Ethereum, like all other cryptocurrencies, is built on a blockchain network. A blockchain, which is a decentralized public ledger, is used to validate and document all activities. 

ETH is a decentralized system that runs on a computer called the Ethereum Virtual Machine (EVM). 

Validation is the process by which nodes check the validity of new transactions by solving complex math. A new block is added to the blockchain after validation which also refers to the transaction being completed. 

And those who validate transactions are known as miners. A transaction is evaluated against a set of predetermined and standard criteria.

Ethereum’s current consensus mechanism is proof-of-work. Anyone who wishes to add additional blocks to the chain must first solve a complex challenge that takes a lot of processing resources. Solving the riddle “proves” that you used computing resources to do the “job.” Mining is the process of doing so. Mining is usually done by trial and error, but adding a block earns you ETH.

A 64-digit code is assigned to each block. Miners use their computing resources to identify and prove the code’s uniqueness. Miners are awarded in ETH, and their computing power acts as “proof” of their job.

EVM is the protocol in charge of executing smart contracts; the scripts are executed through a decentralized network of public nodes, guaranteeing that no middleman is involved in the transaction.

The Ethereum blockchain could be used as a state-based transactional system. A basic explanation of how it works is as follows:

Step 1: Each Ethereum state has millions of transactions.

Step 2: These transactions are grouped into blocks and are interconnected.

Step 3: Before the transaction is recorded in the ledger, it must be verified through a process known as mining.

Step 4: To construct a block, a large number of miners compete with one another.

Step 5: Once a miner has created a block, Ether tokens are created and distributed among the miners.

Tokenomics 

ERC-20 Token

On the Ethereum blockchain, an ERC20 token is a standard for creating and issuing smart contracts. People can then invest in tokenized assets created using smart contracts.

The ERC-20 offers a standard for Fungible Tokens, which means that each Token has an attribute that makes it identical to another Token (in type and value). ERC-20 Token functions similarly to ETH, which means that one Token is always equal to all other Tokens. 

Ethereum Based Defi tokens

These are mainly of two types which can be described as follows:

1) Work Token: These are the tokens in the DAPP that mark you as a kind of shareholder. You have a say in the path that the DAPP takes because of that. The DAO tokens offer a great example of this. You had the right to vote on whether or not a specific DAPP should get funding from the DAO if you were a DAO token holder.

2) Usage Tokens: These are the tokens in their respective DAPPS that function like native currency. A fairly good example of this is Golem. If you want to use Golem facilities, you will need to pay for them with the Golem Network Token (GNT). Although these tokens have a monetary value within the network itself, they will not grant you any unique rights or privileges.

ETH Price$3,407.31
Market Cap$409,513,496,969
Trading Volume$14,434,018,767
Total Supply120,182,551.37 
Max Supplyunknown
Crowd Sale 60 Million
Development Fund12 Million 
  • Around 117.5 million ETH tokens were in circulation in September 2021, 72 million of which were issued in the genesis block, the first block on the Ethereum blockchain. 
  • 60 million of the 72 million were paid to the original participants to the project’s 2014 crowd sale, while 12 million went to the development fund. 
  • The remaining funds were distributed to Ethereum network miners in the form of block rewards. 
  • The block reward was originally set at 5 ETH per block in 2015, however, it was reduced to 3 ETH in late 2017 and then to 2 ETH in early 2019. A block of Ethereum takes about 13-15 seconds to mine on average.

Ethereum Based Defi tokens

These are mainly of two types which can be described as follows:

1) Work Token: These are the tokens in the DAPP that mark you as a kind of shareholder. You have a say in the path that the DAPP takes because of that. The DAO tokens offer a great example of this. You had the right to vote on whether or not a specific DAPP should get funding from the DAO if you were a DAO token holder.

2) Usage Tokens: These are the tokens in their respective DAPPS that function like native currency. A fairly good example of this is Golem. If you want to use Golem facilities, you will need to pay for them with the Golem Network Token (GNT). Although these tokens have a monetary value within the network itself, they will not grant you any unique rights or privileges.

How does Ethereum Have value?

Ethereum has established itself as the most widely utilized blockchain network in the crypto market just a few years after it was born.  Here are a few reasons noted for the value Ethereum has been gaining.  

  • Smart Contract Capability 

Ethereum is a platform for running smart contracts and apps programmatically using its native currency, ether. 

The Ethereum blockchain can run smart contracts that enable decentralized apps (DApps) such as decentralized finance (DeFi) and nonfungible coins (NFTs).

Smart contracts that have been programmed for a specific and recurrent usage are known as DApps. As of June 2021, Ethereum had over 3,000 DApps active. This is higher than any other general purpose blockchain platform’s total number of DApps combined.

  • Proof-of-Stake Model

Ethereum is actively working on a proof-of-stake mechanism, often known as Ethereum 2.0, which will significantly change the rewards structure. 

Transaction validators will take the place of miners in the proof-of-stake mechanism. There will be no cryptographic difficulties to solve in the future. Validators must own ether, and in order to verify a block, they must put their ether stake on the line in order to certify that block. 

  • Speed and Scalability

Ethereum block times are typically between 10-15 seconds, compared to 10 minutes for bitcoin, an ether transaction will appear in approximately five minutes, whereas bitcoin transactions take roughly 40 minutes to complete. 

Faster transactions will be possible with the impending Ethereum 2.0 upgrade. The Beacon chain, which is part of that update, uses shard chains, which are smaller groupings of nodes that process their own sections of transactions in parallel without requiring network-wide consensus.

This is intended to greatly improve Ethereum’s scalability and throughput rate. 

  • Disinflationary Supply

EIP-1559 seeks to limit the Ethereum ecosystem’s inflation. The supply of Ethereum has become disinflationary as a result of its steady decline,  the supply is still expanding, but at a slower rate than before. EIP-1559 intends to make the disinflationary system even more disinflationary, if not deflationary. 

Unlike bitcoin’s limited supply of 21 Million, Ethereum’s total supply is unknown as of now. Ethereum allows for an endless quantity of ether, but the amount released each year through mining is capped. This eliminates the perception of scarcity, which may have contributed to bitcoin’s greater price.  

Furthermore, proof of stake eliminates mining costs such as electricity and hardware, implying that fewer ethers will be sold by miners and potentially staked, implying that the deflationary aspect may play a role in ways it hasn’t before.

Benefits of Ethereum 

Some of the major benefits of Ethereum can be described in detail as follows:

1) The Ethereum network serves as a security advantage factor for encrypting networks, thereby preventing hackers from breaking in with the absence of a central authoritative network. 

2) Ethereum’s other valuable benefit is its work in the initial coin offerings. Often named as the ICOs or Token Sales, this is a funding mechanism that enables users from the early-stage start-ups to build “tokens” and exchange them for Ether. These tokens have an interest in the applications of start-up development and profit-trading.

3) Another application is related to third-party fees and privacy rights. The lack of a centralized network and the encryption of data codes allow for the strength of privacy and safe payment transactions through the decentralized system. 

4) Smart contracts may be used for different scenarios, from centralized financial activities in the preparation and strengthening of insurance and tax financing or agreements.

Ethereum Mining

The process of validation is known as mining and the validators are regarded as miners. Mining is one of the most fundamental aspects of any Blockchain.

Miners are rewarded with ETH for this consensus mechanism called proof-of-work, here ETH serves as ‘proof’ for working on really complicated math problems. 

Ethereum presently employs a proof-of-work blockchain, but with Ethereum 2.0, it will switch to a proof-of-stake (PoS) blockchain for scalability and a more eco-friendly approach. 

Gas Fee

To make an operation on Ethereum, the user is charged an execution fee. This execution fee is known as ‘Gas’  which will be rewarded to the miners.

Gas costs are expressed in gwei, which are tiny fractions of ether. Gas prices have ranged from as low as 92 gwei to as high as 130 gwei. The cost of gas is determined by the amount of time it takes to execute the transactions.

1 gwei = 0.000000001 ether

Gas calculates how much fee it takes for any event to occur. More computations will require more gas.

Mining, in addition to earning Ether, is an important aspect of the Ethereum network. In the actual world, the miners, so to speak, take on one of the fundamental functions of banks.  Miners keep track of blockchain transactions in the same way that banks keep track of financial transactions. They can avoid double-spending, fraud, and other problems by doing so.

How is Ethereum Mining Different from Bitcoin Mining? 

Bitcoin mining refers to the protocol that works by adding blocks to a chain of transactions known as a blockchain using a mathematical equation. To timestamp the freshly added block, each block utilizes a hash code from the previous one.

Miners compete against each other to solve a mathematical equation (SHA-256) whose answer must begin with four zeroes every ten minutes, adding blocks to the blockchain. The procedure necessitates a significant amount of computer processing power, which translates to electricity consumption. 

Ethereum’s mining process uses the same basic features as Bitcoin’s. To solve a mathematical equation, nodes compete against one another. A payment of about 3.5 ETH is given to the node that adds the next block to the blockchain. Every 14-16 seconds, a new block is added to the Ethereum network.

The ethash mining algorithm is used by Ethereum instead of the SHA-256 method used by Bitcoin. Proof-of-work technologies are used in both mining operations. As a result, both cryptos use a lot of electricity when they’re mined.

In many ways, Ethereum is different from Bitcoin. Ethereum is a centralized software platform, for starters. Unlike Bitcoin, Ethereum has a central office and is led by Vitalik Buterin, a well-known developer. Ethereum has a dual account structure that includes both private key, controlled, and contract-code accounts, the latter of which is referred to as smart contracts.

When crypto is sent to the contract’s address, smart contracts perform specific tasks. Ethereum makes use of the Solidity programming language, which makes smart contract integration much easier. 

Smart contracts on Ethereum make it easier to create tokens using the ERC-20 and ERC-721 protocols.

ERC-20 has surpassed ERC-721 as the most widely used token generation protocol in the crypto industry, owing to a growth in the tokenization of both digital and physical assets. ERC-20 tokens are fungible, which is the fundamental distinction between the two.

So, does this imply that Ethereum is nearing the conclusion of its journey? No, not at all.

Here Comes Ethereum 2.0..

What is Ethereum 2.0? Why was it developed? 

Ethereum 2.0, often known as Eth2 or “Serenity,” is the next version of the Ethereum blockchain. 

Ethereum 2.0 was released in many ‘Phases,’ the first of which began in 2020. Each phase will improve the functionality and efficiency of Ethereum in different ways. Ethereum 2.0 will be released in at least three phases: phase 0, phase 1, and phase 2.

Proof of Stake (PoS) is an enhancement to Ethereum 1.0’s existing Proof of Work consensus paradigm, allowing for increased security and scalability. PoS (Proof of Stake) is a method for extending blocks on the blockchain using validators and staked ETH. 

Ethereum 2.0 is a massive upgrade to the network, consisting of a series of phases that will conclude in the switch from proof-of-work to proof-of-stake consensus, making the network more scalable, safe, and long-term. 

The major goal of the upgrade is to boost network transaction throughput from the current rate of roughly 15 transactions per second to tens of thousands of transactions per second. 

This will be accomplished by dividing the workload into many parallel blockchains (known as “sharding”) and having them all share a common consensus proof-of-stake blockchain so that tampering with any single chain would require tampering with the common consensus. 

Phases of Ethereum 2.0

The transition to Ethereum 2.0 takes place in phases. It will be rolled out into 3 main phases. 

  • Phase 0: This phase launched the beacon chain in the network on 1 December 2020. The main goal of this phase was to keep track of the validators that were responsible for creating blocks on the Ethereum 2.0 network. It also set the groundwork for all subsequent phases.
  • Phase 1: The phase 1 update’s major goal was to create shard chains and roll-ups. Within the Ethereum network, shard chains allow transaction data to be split across 64 blockchains. The network’s throughput is significantly increased when transaction data is distributed. The data output may be shared around to decrease the network’s stress if different chains worked together at the same time. The first phase is set to be released in early 2022.

It’s worth noting that the features of phases 0 and 1 won’t work until phases 1.5 and phase 2 are released.

  • Phase 1.5: Phase 1.5 serves as a transitional period between phases 1 and 2. This phase’s major purpose is to create a link between Ethereum 1.0 and Ethereum 2.0. ‘Docking’ is the term used to describe the joining of two ecosystems. The Ethereum 1.0 mainnet will be docked with the beacon chain, and the Ethereum 1.0 blockchain will become one of the 64 shard networks established in phase 1 as a result of the merger.
  • Phase 2: Phase 2 will begin following the launch of Ethereum 2.0. It will enable native decentralized application (dApp) development on the network as well as cross-shard compatibility. The network will be able to handle smart contracts and transactions in Phase 2. This will turn each and every shard chain in the network into a fully functional mainnet.

How does Ethereum 2.0 differ from Ethereum?

Ethereum was a proof-of-work blockchain until recently. The network will be updated to a proof-of-stake blockchain, and a beacon chain and shard chains will be included in Ethereum 2. This upgrade will save energy, improve transaction speed and volume, and maintain the network secure and decentralized.

Ethereum 2 uses validators to safeguard the network through a proof-of-stake block validation method.

On Ethereum 2, a validator is a computer program that confirms transactions on the shards, adds them to the chain’s next block, and communicates with the beacon chain.

Shard Chains are introduced in Eth2 to improve the Ethereum blockchain’s throughput and bandwidth. Sharding is the technique of dividing huge amounts of data into little parts that are distributed across several servers. As a result, in Eth2, shard chains are constructed by “splitting” the Ethereum blockchain and distributing data processing among multiple nodes.

All transactions and data verifications by miners in Eth1 are currently done in a single 14 TPS chain.

What is the current state of Ethereum 2.0?

On the testnet, Ethereum 2.0 is operational, and approximately 8 million ETH has already been staked.

Ethereum had another update on August 5, 2021, prior to this 2.0 upgrade, in the London hard fork. This update activated EIP-1559, which altered Ethereum’s transaction fee scheme and initiated the ETH burning process.

In a later interview with Planet Crypto, “We’re going to witness a full transition to proof-of-stake by mid-Q2 2022,” said Ethereum Oracle. 

What’s next in the development of Ethereum 2.0?

The mainnet will be merged with Ethereum 2.0’s Beacon Chain, enabling full staking. After that, in 2023, Ethereum shard chains will be launched, doubling the blockchain’s capacity.

According to the current ETH plans from the EIP-4345 Difficulty Bomb Delay, the Merge is planned to happen in Q2 2022, which puts it between April and June 2022. Tim Beiko and James Hancock, creators of EIP-4345, propose delaying the difficulty bomb until June 2022. They state the following motivations in this proposal:

The Merge is expected to happen before June 2022. The bomb could be delayed much more if it is not ready by then.

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Qadir AK

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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