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What is Ethereum? A beginner’s guide to ETH
Learn all about the Ethereum network, including where to buy its ETH token and how to use it.
There is no way you’ve missed seeing Ethereum mentioned if you’ve been involved in any way with cryptocurrencies.
Ethereum began out of a need to see bitcoin’s underlying technology – the blockchain – used for something different than simply sending currency from one user to another. Vitalik Buterin, the creator of Ethereum, built the system to be a “world computer” incorporating a virtual machine (EVM), a Turing-complete language (Solidity, Viper), a token (ETH), and fuel (gas).
In this guide, we’ll look at all these aspects and how they relate to each other.
What is Ethereum?
|Icon||Symbol||Initial release date||Algorithm type||Max. supply|
|ETH||30 July 2015||Ethash||No hard limit|
When most people talk about Ethereum, they are really talking about Ether (ETH), the underlying token currency of the Ethereum platform.
Why people confuse Ethereum with Ether
This confusion stems from the fact that bitcoin and its underlying technology, the blockchain, were never really defined separately when bitcoin launched. The idea was that the blockchain would be little more than the system that allows the transfer of BTC between users, and Satoshi, the creator of bitcoin, intentionally limited the blockchains capabilities for security purposes. But the coin and the blockchain are two very different things, capable of acting and being used independently.
Ether, traded under the code ETH, can be purchased at exchanges and used to pay for products and services at most merchants that accept cryptocurrencies. At the time of writing (September 2017), it was the second biggest cryptocurrency by market cap.
Ether is also used to pay for transaction fees and for computational services when using the Ethereum network.
Ether is mined similarly to bitcoin. You set your computer to attempt to solve the question present on a particular block in the blockchain. Once you find the answer, you get paid in ETH.
However, the goal of Ethereum is to be something more than a coin. Not happy with how the blockchain technology was being underutilised by bitcoin, the creators of Ethereum set out to take the blockchain to the next level. They envisage a method to decentralise the Internet itself.
Why a decentralised system?
To understand what a decentralised system is, you need to understand how our current networking systems work, which are centralised systems. Let’s say you have an online account where you store photos. Let’s call it “CloudPhoto”. You can upload photos to CloudPhoto, and you can access those photos from anywhere. Now let’s say something goes wrong, and CloudPhoto’s servers burn down. Unfortunately, you can’t access your photos, and all of them are lost.
This is a centralised system. Usually, we mitigate this scenario by creating backups of our data, making copies of the same data and storing them elsewhere or by keeping different groups of data on different servers. This decentralises the system.
Decentralisation is also beneficial in cases where you need to maintain the integrity of data. For example, keeping all student grades at a school on one computer is a problem because if someone hacks into that computer and changes those grades, then there would be no way to catch the change. If ten different computers held onto the student scores, it would be easy to recognise that one of the computers holding the data is wrong and consequently fix that data set.
So a decentralised system is one where there is no single point of failure. This has many obvious advantages, and you need to keep that in mind when considering Ethereum.
Ethereum virtual machine and DApps
Decentralised Applications, or DApps, is the driving force behind Ethereum’s development, and they run on the Ethereum virtual machine, also known as the World Computer. This virtual machine is Ethereum’s defining development and it allows applications to run on the blockchain.
As discussed in the “Why a decentralised system?” section, centralised systems suffer from single points of failures. If something were to happen to eBay, and they didn’t have any backups, you would lose all evidence of your hard-earned success. Decentralised Apps run on the blockchain and make use of it to maintain data scattered across all users of Ethereum. The data sets are, of course, encrypted so as to not be accessible by everyone, but everyone would be able to verify and validate the data if the need arises.
There are already many DApps, from online gambling to prediction markets and social media platforms, and most likely there are many more to come.
The DAO Hack
Smart contracts are the basis of the Ethereum ecosystem and platform: someone creates a contract with rules and triggers, and the smart contract executes when the trigger event occurs, as long as all the rules can be enforced.
The Decentralised Autonomous Organisation, or DAO, was to be the crown jewel of the Ethereum smart contract and virtual machine ecosystem: a smart contract that was going to build a decentralised venture capital fund with the aim of providing funding for all future DApp development. People would invest into the DAO, and they would be allowed to vote on which DApps got funding, and which did not.
The DAO launched on 30 April 2016 and within 28 days, it had accumulated more than US$150 million worth of ETH. The attack happened on 17 June 2016 and it worked by exploiting a loophole in the way traders left the DAO. If you wanted to leave the DAO (as a trader), you were allowed to take all the ETH you had purchased after you returned the DAO tokens you had been given when trading (a sort of stakeholder system).
The problem was that the contract had two steps:
- Take DAO tokens from user and give back ETH from DAO to user.
- Register the transaction in the blockchain and update the DAO token count.
The hack was simple in hindsight: inject a step between step 1 and step 2 above where, before the transaction gets registered, the DAO would give the same user more ETH for the same tokens.
This hack cost the DAO US$50 million worth of ETH and caused the value of ETH to plummet from US$20.17 to US$11.52 in 48 hours.
This is also when Ethereum Classic was born.
Ethereum Classic (ETC) is a fork of Ethereum (ETH) that came about as a result of the way the developers and community behind Ethereum decide to handle the DAO attack.
When developing a project, open source or closed, software developers often keep their code in one central location to avoid confusion and mismatched files. Other developers can modify and change these files, creating branches, then the changes are merged into what’s called the main branch, the original trunk.
They can also create what are known as forks. A fork is similar to a branch, but it’s often done with no plans to merge the code back with the original. This usually happens as a result of a philosophical disagreement over the direction of the product.
While this is not an open-source-specific concept, open source projects allow developers to fork and take a product in a completely different direction than intended, without violating copyright law.
After the DAO attack, the Ethereum community agreed that the best course of action was to hold the money taken by the hacker and to return everything to the people who bought into the DAO, practically rewinding the hacker’s attack. Many Ethereum users did not agree with this as, in their opinion, it went against the core philosophy of cryptocurrencies: the blockchain is immutable and should not be affected by the whims of its users.
Reverting the attack and forking the code to reset the blockchain went against the core philosophy that the code is law, and so many people stayed with the original blockchain, Ethereum Classic.
Today’s Ethereum price
Where can I use ETH?
ETH has been on the rise since its inception and has been enjoying widespread acceptance by traders, exchanges and merchants. At the time of writing, in September 2017, websites using cart software like WooCommerce and OpenCart can be set up to accept ETH payments and even more merchants may soon be popping up online that accept ETH.
But currently, in September 2017, the biggest use for ETH is as a stake in Ethereum.
How to transfer money with Ethereum
Transferring ETH works just as it would work with any other cryptocurrency:
- Have some ETH in your wallet. The official Ethereum wallet can be download either from GitHub or from the official website.
- Scan or enter the recipient’s address. Whether they provide you with the hashed wallet address or a QR code, just follow the simple instructions on your wallet of choice and you’ll be done in no time.
- Enter the amount and send. The transaction should be verified in a few seconds and you’re done.
- Get paid in ETH. Adopting ETH as tender for your products or services is the simplest and most effective way of making money with a cryptocurrency like Ethereum. If you’re a writer, designer, artist or developer, you can ask to be paid in ETH. If you’re selling clothes, vape products, posters or DVDs, you can ask to be paid in ETH. Every sale affected with ETH helps Ethereum grow and as it grows so does the value of that same ETH sitting in your wallet.
How to buy Ethereum
What to watch out for
Ethereum is trying to be bigger and better than simple currencies like bitcoin, but this might also be its downfall.
- Not just a coin. Ethereum wants to be something more than a cryptocurrency and this might cause problems. A platform is harder to maintain, harder to develop and harder to see adoption. A cryptocurrency is simple: buy and sell things using that currency. Bitcoin, for example, is nothing more than a currency and people, especially businesses and merchants, like simple things that just work.
- Big things in the future. With a roadmap as ambitious as Ethereum’s, the road is bound to be a little rocky. After all, platforms have failed for introducing far smaller, and far simpler new features that had unforeseen, fatal side-effects. This is obviously not a certainty, but it’s good to be mindful of big changes coming in the future of Ethereum.
What’s next for Ethereum?
Ethereum’s roadmap is sprawling and ambitious. Apart from a strong drive to have ETH accepted by more merchants there are some promising things in Ethereum’s future.
- More DApps. Ethereum is a platform for building decentralised apps. From smart contracts to crowdfunding projects to autonomous organisations, just as a computer is only as effective as the software written for it, Ethereum is only as successful as the DApps running on it. This is definitely an exciting time for everyone from simple users of Ethereum to investors, developers and the cryptocurrency community as a whole.
- Proof of Stake. Similar to the proof-of-importance system used on NEM, Ethereum is working on shifting from a proof-of-work (POW) mining method to a proof-of-stake (POS) generation of ETH instead.
POW is a system in which your computer works hard at some puzzle that helps maintain the integrity of the Ethereum platform, and your wallet is rewarded with some amount of ETH for your efforts.
POS works by having a user lock up a percentage of their ETH assets in order to verify a segment of transactions on the Ethereum network, from which the user would receive ETH (possibly as part of the transaction fees paid in every transaction). This is considered a fairer system than POW as it relies on the user having a stake in the platform instead of being able to purchase a strong computer that runs more computations than someone else’s.
Frequently asked questions
Image sources: Shutterstock, CoinMarketCap
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