What is Ethereum? Guide for Beginners

Ethereum is known to be a digital currency and functional decentralized environment at the same time. Anyway, its creation started a real revolution in the IT sphere.

The information was not so popular, but the digital currency boom in 2016-2017 began thanks to Ethereum development and popularization. Innovative environment made the maximization of the blockages potential in technic and financial spheres possible and became an idea for innovative startups and projects creation.

As a result, Ethereum became the second on the list of the most popular crypto currencies and first in one related to the revolutionary virtual money platforms.

History of Ethereum development

Next-gen crypto platform vision was presented in 2013 for the first time. Vitaliy Buterin was the author of that idea. It seems to be magic, but young man not only develop a block chain system, which was used for Bitcoins, but also convinced other people to join him to create a specific platform named Ethereum.

The main feature of the Ethereum system consisted not so much in currency, but in using of smart contracts. These are programs fulfilling when certain events occur. Example from real life is very simple. Two social network users stake on the outcome of a football match. When the game is over, a smart contract is executed, and prizes are distributed automatically according to the existing algorithm.

The campaign with aim to collect funds for project development started in 2014. Authors were able to collect investments for 31550 Bitcoins purchasing. Then Vitaliy and his team started the process of elaboration. First results were shown on 30th of July in 2015. It was a moment when blockchain, distributed digital base of the Ethereum, was realized. The first protocol was named Frontier.

Creation team started to popularize their cryptocurrency. Thanks to that they were able to establish partnership with large firms and companies, including Microsoft.

Protocol was changed on 14th of March in 2016. It second version was named Homestead. Interesting, that prices for Ethereum increased more than 10 times during first quarter of the year. The current version was positioned to be stable. The total network capitalization reached 1 billion dollars to that moment. New phenome was discussed everywhere. Unfortunately, that didn’t save the project from hard times.

Decentralized autonomous organization, also known as the DAO, realized by cooperation with Ethereum investments collecting net, had a mistake. That was a problem which allowed intruders to steal the third part of money on 16th of June in 2016. They transferred 50 million of dollars to their management. Two days later the currency rate fell by one third.

Ethereum fond, headed by Vitaliy Buterin, suggested to fulfill the net Hard fork for digital actives returning. There were users in community who disagreed to accept that point of view. They were Shure that the main law of digital currency included unchangeable blockchain.

Despite this Hard fork was fulfilled one month later. The base was corrected, and stolen money was returned. Anyway, some developers and users refused to agree with changes. So that was the reason of Ethereum Classic creation. The project was built independently. Authors assure, it is free from censorship, fraud and interference.

Unfortunately, the situation brought nothing new. Ethereum prices begun to decrease. In December 2017 users were able to buy the currency paying less than $7. That was the worse time ever. Some months later investors returned to Ethereum.

In 2016 Bitcoin prices started to increase. That was the reason of remaining digital currencies value strengthening. Culmination happened on February 23. The number of unconfirmed network bitcoin transactions reached 100,000. Investors started to look for alternative currencies for their actives. In 2017 Ethereum price reached $50 on 25th of March.

Hacker attacks on Bitcoin machine continued. The transfer of coins took too long period of time, up to several days, and the commission reached several dollars

Ethereum prices didn’t stop to increase. In May they reached $100 for 1 ETH. Later Ethereum had price of $200. Users think that price will increase this year too.

What Does Ethereal Mean?

Name of the cryptocurrency has no translation analogs. Ethereum has the same pronunciation in other languages. It was named after English word Ethereal.

According to the dictionary word has some common meanings, including:

  • Unearthly, heavenly, divine;
  • Incorporeal, intangible, nonmaterial;
  • Light, airy, delicate, refined.

As Ethereum is known to be a digital currency, there is nothing strange it has a name using the word inside. Maybe, creators wanted to show, that users can’t touch money, but still can use them.

But Ethereum is currency, and a special platform for the creation and realization of decentralized applications using blockchain and smart contracts at the same time.

The platform is invisible too. So, word ‘Ethereal’, chosen for the currency name, is perfectly suitable.

How Ethereum works?

Ethereum Virtual Machine uses special scheme, which is called ethash. Also, it is functional thanks to code, nonce. Nonce is used by ethash algorithm for hashing of network blocks metadata. It contains zeros and ones – two main symbols of binary code and forms a certain number which is used for the function meaning finding. Every chains block has its own hash value, given by the system. After joining the process of mining, user guesses the nonce value and find out the needed function meaning.

Algorithm of hashing is based on the cryptography sphere. That is why random guessing is useless. User must change nonce value using cycles, moving between minimal and maximal possible meanings. The process stops, when the needed one is founded.

Last blockchain piece decrypts if the value is guessed. User gets his or her 5 ETH as a reward. Then new block is added and the process stars from the very beginning. Meaning of nonce changes every twelve seconds.

What is Ethereum Classic?

There are people, who are assured that Classic currency is an original vision of Ethereum platform before the First Hard fork for the stolen DAO money returning.

Original vision is known to be a secure decentralized platform for building and supporting the implementation of decentralized applications, also named dApps. That was the fundamental principle of the basic Ethereum before it was changed by Hard fork fulfilling and protocol changing. Classic Ether platform is much smaller, then basic one. Although that is even better for some developers, who are going to choose the application base.

Ethereum Classic has strong support from the Mining Communities, which helps to keep it decentralized and look after BTH prices level.

Ethereum Classic is in top-10 cryptocurrency list according to the market capitalization.

There are two teams who develop the currency and create projects using its platform: ETCdevteam and Grothendieck. The development is quite perspective, they assure.

Marketing strategy is well-organized too. Creators regularly develop their currency in this sphere. Moreover, reaching top-10 in such a small period of time is a great decision. Users can know all about platform development thanks to its Twitter and Reddit accounts. What is also important – team of creators is quite active on Github.

Talking about investments, there are also some perspective ways of development. As they are supported by mining communities, Classic Ethereum creators may use basic currency problems with Parity virtual wallets and get some benefit from this situation.

The cryptocurrency is used for short-term and for long-term investments, as client prefers.

Analytics predict Classic Ethereum increase in popularity and price.

Ethereum vs. Bitcoin

Bitcoin and Ethereum have common features. Both of them are blockchain platforms. Anyway, Bitcoin has smaller sphere of using and functional. The main goal the project was created for is conducting pseudonymous transactions. At the same time Ethereum is an environment for the implementation of decentralized applications using smart contracts, not only transaction system.

The features of inner platform currency are different too. Bitcoin`s currency has the same name – Bitcoin. Its main function is electronic payment method. Bitcoin is a kind of crypto money anyway. Ethereum uses ether. It has a token conception and is used for smart contracts fulfilling.

There are some statements describing Bitcoin:

  • Global digital currency, which can be stored and used for goods and services purchasing;
  • Decentralized financial sphere without any mediators, but with minimal commissions;
  • ‘Digital gold’ with anonymous transactions and money security functions for saving peoples budget in unstable economies.

Bitcoin is tool that allows wide functionality in the financial sphere with elements of anonymity and decentralization. Ethereum is the platform for decentralized programs and applications for the blockbuster creating. Ethereum is based on universal smart contracts. Bitcoins’ contract guarantees only payment transactions execution Ethereum allows to use them in other spheres too.

Both network use Proof-of-Work protocol. According to that, there are special rules for mining. For example, computing power of PCs are used to guarantee protection from double consumption and hacker attacks. Bitcoin has maximal emission value (21 000 000), while Ethereum has no limits. That is the reason for the platform developers to consider variants of transition to the Proof-of-Stake algorithm and possible ‘burning’ of mined coins.

Moreover, Ethereum is more flexible than Bitcoin. It is easier to change, update and upgrade the platform.

To see all the difference there is a special table with their main characteristics:

Bitcoin

Ethereum

Date of start

January, 2009

July, 2015

Creators

Satoshi Nakamoto

Vitaliy Buterin, Gavin Wood, Joseph Lubin

Algorithms

Proof-of-Work, SHA-256

ВProof-of-Work, EThash. Using of Proof-of-Stake is possible

Maximal emission

21 000 000 BTC

No limit

Time, needed for block generation

10 minutes

12-15 seconds

How much does user get for every found block?

12,5 BTC

5 ETH

Main sphere of using

Digital currency / platform for money calculation and storage

Platform for Dapps creating based on smart contracts.

In general, Bitcoin better copes with the functions of the payment facility. If you need cryptocurrency for purchasing and money saving, BTC may be an excellent choice. User is able to buy goods for it on bigger number of sites and status of crypto gold sounds quite prestige. Ethereum is not only the kind of virtual money, but a universal platform for decentralized programs creation. So, it is used is wider range of spheres.
Ethereum mining 2018

Ethereum Smart Contract

Before talking about smart contracts, there is a necessary to know more about their basic components.

To begin with, there are some theoretical notions describing principles of contract functionality.

Blockchain is a special format for data saving. It is built from organized blocks which are sequentially connected. That makes data substitution being impossible. But blockchain is something reminding not database only, but data warehouse too. Ethereum network developers took care of the way of applications storage and functioning. To describe it in the easiest way, blockchain is a place where programs are saved and the information about their work is written.

Ethereum working blockchain contains full data and programs collection. Information is also downloaded into every existing copy, used by the network.

Decentralized application is a kind of program which works in the form of many copies of the Internet network. Local one is also used, but not by Ethereum platform. Program is based on principles of blockchain, which saves all changes during its working process. All results of application functionality are synchronized between copies of blockchain. That allows to individualize data of every program copy, but also makes information actual.

Node or EVM is a copy of Ethereum program complex. It is used to launch blockchain and provide access to it. Also, node makes contracts functionality and calling possible. That is useful for blockchain state modifying and synchronizing block with its other copies.

Smart contract is one of basic Ethereum functionality components. It is a computer algorithm that ensures contracts execution inside the blockchain. Smarts are built in a way, allowing needed action after fulfilling some certain conditions only.

Contracts are part of Ethereum network. They are written on solidity. Their saving state is inactive. Contracts activate after call from outside. Smart contracts are saved in blockchain. They can change it and add new data transactions into. Every contract has its own data field and can’t reach information used by others. Interaction is provided through the special functional interface.

To explain it more understandably, let’s make an example with apartment rent. The required condition of living there is paying for territory. If the tenant pays, then he can safely use the flat. If no, owner can program flat’s smart contract and block all the door locks, for example. So another person wouldn’t be able to get into apartment until he or she paid for it. This example is quite simple, but it illustrates the main purpose and principle of smart contracts. The decentralization is guaranteed, as client and owner cooperate directly, without checks, bills and banks.

In general, main objects of Ethereum smart contracts include:

  • Interacting parties. Also called signatories.
  • Subject of the contract. That may be rent, service or money transaction.
  • Execution conditions. Mathematical or programming description is required.

Smart contracts are used as base for all ICO. They guarantee automatic tokens transaction to investors after they transfer ETH to the indicated web wallets.

Miners also use principles of Ethereum Blockchain including Proof-of-work algorithm. It requires clients computing power to make the process of network functionality safety. Miners are paid if they find out nonce of current block. And that won’t be possible without smart contracts.

Where to Buy and Sell Ether?

Ethereum cryptocurrency greatly increased in price in 2017. It also took second place among other currencies according to its capitalization level. That was enough to let ETH appear on all major exchanges and online services.

There are some ways to get Ethereum:

  • Choose cryptocurrency exchange and buy it there. LiveCoin, WEX, Bitfinex are available.
  • Use online exchange service for buying ETH.
  • Get it from cryptomat.
  • Start own mining process.

First two variants are the easiest ones. Users can use special Currency Rating and check current Ethereum rate. Purchasing is easy itself.

Cryptomats are not so popular nowadays and not all of them offer Ether.

Mining is not possible without seed money, no matter if user wants to build his or her own farm or use service of Cloud Mining. Ethereum is one of main pool miners option. It is mined on farms equipped with powerful Radeon and GeForce video cards. First ASIC for ETH mining was presented in 2017. Developers are thinking about using new PoS protocol instead of old one. Unfortunately, after this change Ethereum mining won’t be profitable.

Exchange

Short information Functions and advantages

Where is used

Coinbase

Service is known all over the world, has millions of users and brief investors. Data security, available prices, convenient service for newbies, insurance Available in thirty-two countries

Gemini

Helps to fulfill licensed exchanging of ETH and BTS. Safety, understandable options, available analytics. USA and UK, Canada, Asian countries

Cex.io

Suggests many functions for different kinds of virtual money. Allows trading not only cryptocurrency, but real money too. Nice customers’ feedback, available mobile application, ability to use credit cards, convenient interface, works in every part of world. All over the world.

Bittrex

Exchange which supports lots of crypto currencies. Based on USA systems. Has good data security, convenient and understandable for beginners, user can exchange more than 150 virtual currencies. All over the world.

Coinmama

Is known to be one of the first exchange services. Supports purchasing by card, through MoneyGram or the Western Union using real money. Good customers’ feedback, understandable functionality, a wide range of functions, great speed. All over the world.

Kraken

Cooperates with the first bank of virtual currency. Famous for having the biggest exchanges in Euros. Great customers’ feedback, pleasant rates, available prices, low deposits, data and money secure.

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All over the world

GDAX

Coinbase follower. Proposes easy and safety exchanges. Uses nine pairs system for cryptocurrency trading. Actives safety, available fees, convenient functionality, nine pairs system for cryptocurrency trading. Almost all over the world: in USA, UK, Australia and Canada, European countries, Singapore.

ShapeShift

One of leaders among digital currency exchangers. Allows trading diverse kinds of virtual money. Nice customers’ feedback, understandable interface, supports exchanges of many currencies, great speed, users can ween a prize. All over the world.

Poloniex

One of leaders among digital currency exchangers. User can buy and sell different kinds of digital money. Functionality includes variety pairing systems, analysis of data, other useful tools. Easy way of registration, understandable interface, available prices, API. All over the world.

Bitstamp

Offers system of loyal client base. Good customers feedback, safety, available prices, ability to exchange big sums. All over the world.

Pros and Cos of Ethereum

First of all, lets discuss ETH token. It has no serious disadvantages in comparison with Bitcoin and other popular virtual coins. Moreover, network can process transactions quickly and that increases the payment potential of Ethereum.

There are no problems during exchange process. Owners can buy Ethereum or sell it while purchasing other crypto currencies. Unfortunately, token has some disadvantages in the sphere of Economics. That is not only its course, but also mechanisms that affect it. Bitcoin prices are formed according to the current market standards. Ethereum price depends on success of the platform. So, if someone creates better version or finds defects in current one, prices for tokens will immediately decrease.

The second disadvantage is that emission ceiling is missing. That depreciates the currency, so transition to Proof-of-Stake algorithm or development of a special tokens burning mechanism are needed.

Pros and cos of Ethereum platform are shown in the table:

Advantages

Disadvantages

Universalism – supports different programming languages and algorithms. Smart contracts are used in different spheres.

Flexibility – platform may be improved, upgraded and updated.

Publicity – Ethereum has leader, Vitaliy Buterin. Details of upgrades and updates are previously announced.

Availability – the platform is open for decentralized Ethereum-based applications development. Almost everyone can become a developer.

Centralization. Though Ethereum is known to be a decentralized autonomic organization, there are some occasions like Hard fork in 2016, proofing that platform has elements of centralization too.

Vulnerability – famous incident with The DAO shows, that platform may pass over some scams or imperfect projects.

Documentation – developers complain about the lack of clear documentation. That makes interaction with the platform more difficult.