Beginners Guide

Ethereum- A Complete Guide To The World’s Second Largest Cryptocurrency

Published by
Qadir AK

Bitcoin being the first and most widely recognized cryptocurrency, the Bitcoin blockchain was created only to support the bitcoin cryptocurrency. With time, people began to realize that Bitcoin can just be used as currency but not utilized for building more products. Thus Ethereum was introduced.

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.

Ethereum was intended as a platform to facilitate immutable, smart contracts and applications via its own currency. It was created by Vitalik Buterin, a Russian-Canadian programmer, is one of the most popular cryptocurrencies and stands to be the second-largest platform after Bitcoin in market capitalization. 

The Ethereum blockchain was originally introduced in 2015 with 72 million ETH were in circulation initially.

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 tells us!

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 the Ethereum blockchain, that manages digital currency and is accessible from anywhere in the world that allows you to send crypto to anyone for a nominal charge and also has its own native token for trading – ‘ETHER.’ It powers open-source programmes that no one can take down.

Both Bitcoin and Ethereum allow you to utilize digital money without a bank or a payment processor. Since Ethereum is programmable, it can be used to construct a wide range of digital assets. Moreover, it supports the development of smart contracts– something which isn’t possible on the Bitcoin network.

Smart contract ! Another Technical Term ! So What is smart contract ? Before Moving further Let’s understand the concept

So, Now when you know about smart contarcts, you can easily understand why ETH can be used for several purposes other than payments. It’s a financing service, gaming, and software store that won’t steal or manipulate your personal information.

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 determine Ethereum’s overall state 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 each new block and executing any machine code according to a set of specified rules.

The Ethereum Virtual Machine (EVM) specifies the 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 EVM then uses the operation codes to carry out specific tasks. As a result, the EVM functions as a big decentralized or master computer on the Blockchain, completing various tasks.

Working of Ethereum

ETH, like all other cryptocurrencies, is built on a Blockchain network, a decentralized public ledger used to validate and document all activities. 

Ethereum 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 refers to the completed transaction. 

A transaction is evaluated against a set of predetermined and standard criteria and is finally validated by ‘Miners.’

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 and 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 intermediary 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 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, many 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). In addition, ERC-20 Token functions similarly to ETH, which means that one Token is always equal to all other Tokens.

Ethereum Based Defi tokens

1) Work Token: These are the tokens in the DAPP that mark you as a shareholder. After this, you have a say in the path the DAPP takes. A suitable example would be the DAO tokens, which gave token holders the right to vote on whether or not a specific DAPP should get funding from the DAO.

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

ETH Price$3,407.31 ( At Time of writing)
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 circulated 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 of the project’s 2014 crowd sale, while 12 million went to the development fund.
  • The remaining funds were distributed to Ethereum network miners as block rewards.
  • The block reward was initially 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 Mining

The validation process 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.

Mining, in addition to earning Ether, is an essential aspect of the Ethereum network. In the actual world, the miners take on one of the fundamental functions of banks.

They keep track of blockchain transactions in the same way banks keep track of financial transactions and can avoid double-spending, fraud, and other problems.

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.

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. Therefore, more computations will require more gas.

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 its birth. Here are a few reasons behind Ethereum’s increasing value.  

  • 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 programmed for specific and recurrent usage are known as DApps. As of June 2021, Ethereum had over 3,000 DApps active, 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 put their ether stake on the line to certify that block.

  • Speed and Scalability

Ethereum block times are typically between 10-15 seconds, compared to 10 minutes for Bitcoin. Also, 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. This is because the Beacon chain, 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 improve Ethereum’s scalability and throughput rate significantly. 

  • Disinflationary Supply

EIP-1559 seeks to limit the Ethereum ecosystem’s inflation. Although the supply of Ethereum has become disinflationary due to 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 so.

Unlike Bitcoin’s limited supply of 21 Million, Ethereum’s total supply is unknown. This is because Ethereum allows for an endless quantity of Ether, even though the amount released yearly through mining is capped. This eliminates the perception of scarcity, contributing 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. This implies that the deflationary aspect may play a role in ways it hasn’t before.

Benefits of Ethereum

1) The Ethereum network serves as a security advantage factor for encrypting networks, thereby preventing hackers from breaking in without a central authoritative network. 

2) Ethereum’s other valuable benefit is its work in the initial coin offerings. Often named the ICOs or Token Sales, this funding mechanism enables users from 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 to preparing and strengthening insurance and tax financing or agreements.

History of Ethereum

Ethereum was 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 other 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. However, before the program 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 18 months. Finally, with the release of “Frontier” in July 2015, the Ethereum platform was formally launched, and Ethereum’s “genesis block” was created.

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

In 2016, the DAO, a collection of smart contracts created on the platform, raised a record US $150 million in a public sale to fund the initiative. However, 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, 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 to address Bitcoin’s flaws and is continuing to develop with important milestones regularly accomplished.

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

Introducing 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) enhances 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 primary goal of the upgrade is to boost network transactions 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 parallel blockchains (known as “sharding”) and halving them, so all share a typical 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 will take place in 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 responsible for creating blocks on the Ethereum 2.0 network. It also set the groundwork for all subsequent phases.
  • Phase 1: The primary 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 might be shared to decrease the network’s stress if different chains work simultaneously. 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 is a transitional period between phases 1 and 2. This phase’s primary purpose is to create a link between Ethereum 1.0 and Ethereum 2.0- a process termed ‘Docking.’ 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 due to 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 and cross-shard compatibility. The network will be able to handle smart contracts and transactions in Phase 2. This will turn every shard chain in the network into a fully functional mainnet.

How does Ethereum 2.0 differ from Ethereum?

Ethereum was only a proof-of-work Blockchain until recently. The network will now 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 vast amounts of data into small parts 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, before the 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 Ethereum 2.0’s Development?

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. However, 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.”

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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