What is Ethereum?

What is Ethereum?

Ethereum is more than just a cryptocurrency. It's a kind of computing platform where thousands of machines around the world work together. It's like a laptop or PC, but on a global scale. Along with being used for money transfers like other cryptocurrencies, Ethereum opens doors to broader possibilities. Here, you can create your own code and interact with other applications created by users worldwide. Ethereum's flexibility allows for running applications of varying complexity, making it an incredibly versatile tool.

Here's a simple explanation: developers can create and run code not on a single centralized server, but on a distributed network. This means that such applications cannot be easily stopped or censored. And here's an interesting fact: the units of exchange used in Ethereum are not called Ethereums, but rather ether or ETH. Clear now? Ethereum is a protocol, and ether is its currency.

And this is why Ethereum is so valuable: because of it, any user anywhere in the world can launch an application that cannot simply be shut down. And since ether has its value, applications can set conditions for cryptocurrency transfers. Programs for creating such applications are called smart contracts, and they can operate without human involvement.

It's no wonder that many users, developers, and companies worldwide are excited about the idea of "programmable money." After all, it opens up vast prospects for investments, crypto trading, and online earning. And the foundation of all this is blockchain. It's like a database that stores information about all transactions. If you're already familiar with Bitcoin, you understand how blockchain works. It's like a book where each page is a block with information about transactions. New pages are added sequentially, not randomly, to ensure the integrity and security of the system.

During the process of hashing information from a page, a unique identifier called a hash is created. The probability that different parts of data will form the same hash is extremely low. Moreover, this is a one-way process: creating a hash based on information is straightforward, but extracting the original data from an existing hash is nearly impossible. This ensures the reliability and security of the system.

Based on the aforementioned components, a mechanism is formed to link pages in the correct order. Trying to change this order or delete a page will disrupt the entire structure, as it will affect each of the preceding pages.

Now let's understand the differences between Ethereum and Bitcoin. Bitcoin uses blockchain technology and financial incentives to create a global payment system, allowing users to operate in a decentralized environment without the risk of being cheated. Bitcoin is often called the first-generation blockchain due to its limited flexibility and simplicity, which provide greater security in security matters. However, its smart contract language is limited and not well suited for applications unrelated to transactions.

The second generation of blockchains, represented by Ethereum, has greater flexibility and functionality. It allows for the creation of decentralized applications (DApps) and provides developers with more opportunities to experiment with code. Ethereum pioneered the second generation of blockchains and remains a leading representative of this segment.

How Does Ethereum Work?

It operates as state machines that can take a snapshot of the file system at any given time and reflect information about all balances in accounts and smart contracts. Smart contracts in Ethereum are initiated by transactions and executed on the Ethereum Virtual Machine (EVM). Network state updates are accomplished through the mining mechanism, which uses the Proof of Work algorithm.

What is a smart contract?

A smart contract is code that executes under specific conditions and ensures the execution of agreements between parties. This is not just an abstract concept—smart contracts are already being used in the digital environment to automate various processes and transactions. They can be as simple as a vending machine or as complex as mechanisms governing entire networks of contracts.

Who is behind Ethereum?

In 2008, an unknown developer (or group of developers) under the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper. This event radically changed the perception of digital currencies. Several years later, a young programmer named Vitalik Buterin developed this idea and devised a way to apply it to any type of application. This became the starting point for the creation of Ethereum.

How was ether distributed?

Ethereum was launched in 2015 with an initial capital of 72 million ethers. Over 50 million of these units were distributed through a public token sale called an Initial Coin Offering (ICO), where anyone could buy ether tokens in exchange for bitcoins or fiat currency.

What is DAO, and how did Ethereum Classic emerge?

With the advent of Ethereum, entirely new ways of open collaboration over the internet emerged. One such example is DAOs (Decentralized Autonomous Organizations), which are governed by code similar to a computer program.

The DAO was one of the first and most ambitious attempts to create such a system. However, shortly after its launch, attackers exploited a vulnerability and stole funds. After discussions, the chain underwent a split (hard fork) into two chains. In the new chain, malicious transactions were effectively reversed, and funds were returned to owners. Today, this chain is known as the Ethereum blockchain. The original chain, where transaction irreversibility was maintained, is now called Ethereum Classic.

How are new ethers generated?

We have already briefly mentioned mining. If you are familiar with Bitcoin, you know that mining is an integral part of updating and securing the blockchain. The same holds true for Ethereum: to reward users engaging in mining (which requires significant expenses), the system rewards them with ether.

How many ethers are there in total?

As of now, the total circulating supply of ethers is around 110 million.

Unlike Bitcoin, the token issuance schedule for Ethereum was not defined at the platform's launch. Bitcoin aimed to preserve its value by limiting the total number of coins issued and gradually reducing this amount. Meanwhile, Ethereum aims to provide a foundation for decentralized applications (DApps). Since it's unclear what token issuance schedule best suits this purpose, the question remains open.

How does mining work in the Ethereum network?

Mining plays a crucial role in ensuring the security of the Ethereum network and updating its blockchain. This process guarantees the correct updating of the blockchain and ensures the autonomous operation of the network. During mining, numerous nodes, called miners, allocate computational resources to solve cryptographic tasks.

These nodes hash groups of pending transactions along with other data. For a block to be recognized as valid, the hash must be below a certain numerical value set by the protocol. If nodes fail to find a solution to the computational task, they can adjust some parameters and attempt to solve it again.

To be competitive, miners must hash information as quickly as possible; their power is measured in hash rate. The higher the hash rate in the network, the more difficult it becomes to solve the task. Only miners have the right to find a block solution. Once a solution is found, other network participants can easily verify its validity.

Clearly, continuous hashing at high speeds requires significant expenses. To incentivize miners to ensure the network's security, they are offered rewards, including all transaction fees in the block.

What is gas in the Ethereum network?

You probably remember the "Hello, World!" contract example? It was a simple program with low computational costs. But what happens when many people run complex contracts? If someone sets up a contract for infinite repetition, every node in the network will have to run it. This creates a huge load and can lead to system failure.

To mitigate such risks, the Ethereum network introduced the concept of gas. Just as a car cannot move without fuel, contracts cannot execute without gas. Users must pay a certain amount of gas for a contract to execute successfully. If there is insufficient gas, the contract will not execute.

Gas essentially serves as a mechanism for additional fees, similar to regular transactions. Miners, who decide which transactions to include in a block, may ignore transactions with low fees. Note: ether and gas are different things. You pay for gas in ethers to perform a transaction.

While the price of gas may vary, a fixed minimum amount of gas is required for each operation, thus, gas serves as a measure of computational power, ensuring fair payment for the use of Ethereum resources.

Gas and Gas Limit When Anna executes a transaction on a contract, she can calculate how much gas she's willing to spend using, for example, ETH Gas Station. She can set a higher price to incentivize miners to process her transaction faster. However, she also needs to set a gas limit to ensure protection. If something goes wrong with the contract, it may lead to higher gas consumption than Anna anticipated. The gas limit ensures that transaction execution will stop once a certain amount of gas is consumed. Thus, the contract won't execute, but Anna won't have to pay more than she planned.

At first, understanding these concepts may seem daunting, but there's no need to worry. You can always set gas price and limit manually, although most wallets will assist you with this. In simpler terms, gas price determines the speed at which miners process your transaction, while gas limit specifies the maximum amount you're willing to pay.

Mining Block Speed ​​in the Ethereum Network Typically, it takes between 12 to 19 seconds to add a new block to the Ethereum chain. However, this time can be reduced when the network transitions to the Proof of Stake method, the goal of which is to speed up block creation. If you're interested in more information, you can learn about Ethereum Casper.

What Are Ethereum Tokens?

One of the attractive aspects of Ethereum is the ability to add user assets to the chain, store, and transfer them in the form of ether. These assets are governed by smart contracts, allowing developers to set specific parameters for their tokens. The smart contract determines how many tokens will be created, how to issue them, whether they are divisible, exchangeable, and much more.

ERC-20 Tokens on Ethereum The most common technical standard for creating tokens on Ethereum is ERC-20. These tokens are often referred to as ERC-20 tokens. The functional potential of such tokens provides developers with a vast experimental platform for creating modern applications that combine finance and technology. They can be used to create a single currency in applications or issue unique tokens backed by physical assets. The Ethereum platform demonstrates a wide range of possibilities and high flexibility in token development, and the best practices of this process are likely yet to be discovered.

Using Ether (ETH) Unlike Bitcoin, Ethereum is not just a cryptocurrency but also a platform for creating decentralized applications. Ether, as the exchange token, serves as the fuel for this ecosystem. The main value of ether lies in its multifunctionality in the Ethereum network. You can use ether to pay for goods and services just like any other currency.

Purposes of Using Ether Ether can be used as digital money or collateral. Many also use it for long-term investments. The Ethereum blockchain is more programmable compared to Bitcoin, which opens up more opportunities to work with it. Ether can be used to create decentralized financial applications, markets, games, and much more.

Loss of Ether Since banks do not participate in the use of ether, users are responsible for safely storing their funds. If you store ether in your wallet, it's important to keep your seed phrase safe, as it's the only way to regain access to your funds in case of loss.

Transaction Reversal Once a transaction is added to the Ethereum blockchain, it cannot be changed or reversed. Therefore, it's important to carefully check the data before sending a transaction, especially the recipient's address. Caution is necessary, especially when sending large sums.

Transaction Privacy All transactions on the Ethereum blockchain are public. Even if your real name is not listed in the Ethereum address, third-party observers can identify you through various methods.

Earning Opportunities on Ethereum Can you make money on Ethereum? Yes, but it's important to remember that ether, like other cryptocurrencies, is volatile, which creates financial risks both for earning and losing funds. Some people choose a strategy of long-term holding of ether in hopes of the network's future development. Others prefer to exchange ether for other cryptocurrencies. There are also opportunities to use ether in decentralized financial applications (DeFi), borrowing, collateral for loans, creating synthetic assets, and staking (when available).

Storage of Ethereum (ETH) When it comes to storing Ethereum, it is important to choose the right method. There are two main types of wallets: custodial and non-custodial.

Custodial wallets: These are wallets where you trust a third party with your coins, such as an exchange. While convenient, there is a risk associated with the security of the platform.

Non-custodial wallets: These are wallets where you control your coins by using your own cryptographic keys. This category includes hot (internet-connected) and cold (offline) wallets. Hot wallets are convenient for daily use, while cold wallets provide a higher level of security.

Ethereum Logo and Symbol The Ethereum logo consists of a rhomboid surrounded by four triangles. This design is based on an emblem representing two rotated sums Σ (sigma from the Greek alphabet). The Ethereum symbol in Unicode is Ξ, which is used to denote this cryptocurrency.

Scalability in the Context of Ethereum What is scalability?

Scalability is the ability of a system to increase its performance or data processing as the workload grows. In the context of computer systems or networks, this means they can efficiently handle more operations or requests as the number of users or data volume increases.

Why does Ethereum need scalability?

Ethereum aims to become the foundation for the next generation of the internet, known as Web 3.0. This implies creating decentralized applications and ecosystems where there is no need for intermediaries, data privacy is emphasized, and true ownership of personal data is ensured. To achieve this goal, Ethereum must be able to process a large number of transactions without compromising decentralization and security.

How does Ethereum achieve scalability?

Currently, Ethereum limits the number of transactions that can be included in a block through gas limits. This means that only a certain number of operations can be included in a block, depending on their complexity and the amount of gas they consume. This approach allows balancing the network's performance and decentralization but can also lead to network congestion issues during periods of peak activity, as seen with CryptoKitties.

The Blockchain Scalability Trilemma

Vitalik Buterin proposed the concept of the "blockchain scalability trilemma," which indicates that it is impossible to simultaneously achieve high levels of decentralization, security, and scalability in a blockchain system. Increasing the number of transactions by raising the gas limit per block may enhance performance but could also increase the risk of centralization and decrease network security.

How many transactions can be processed in the Ethereum network?

In recent years, Ethereum has rarely exceeded ten transactions per second (TPS), which may be insufficient for a platform aimed at global scalability. Increasing scalability remains one of Ethereum's primary goals to ensure efficient operation of applications and meet the needs of a growing number of users.

Ethereum 2.0: Revolutionary Upgrade for Scalability

What is Ethereum 2.0?

Ethereum 2.0, also known as ETH 2.0, is a major upgrade to the Ethereum blockchain platform aimed at improving scalability, security, and network efficiency. This comprehensive upgrade includes a series of changes and innovations that will significantly enhance the performance of the entire system.

Issues Addressed by Ethereum 2.0

One of the key issues addressed by Ethereum 2.0 is the insufficient scalability of the current platform version. Ethereum, like many other cryptocurrencies, faces limitations in the number of transactions it can process per second. This leads to delays and high transaction fees during periods of network congestion.

Solutions in Ethereum 2.0

Sharding: Introducing sharding is one of the main changes in Ethereum 2.0. Sharding divides the network into smaller subnetworks called shards, each of which processes its own set of transactions. This increases the network's throughput since each shard can operate independently of others.

Plasma: Another innovative solution proposed in Ethereum 2.0 is Plasma. Ethereum Plasma is a layer-two solution that allows transactions to occur off the main Ethereum blockchain, thereby increasing its throughput and efficiency.

Benefits of Ethereum 2.0

Improved Scalability: The introduction of sharding and Plasma will significantly increase the network throughput of Ethereum, allowing it to process significantly more transactions per second.

Greater Efficiency: Ethereum 2.0 will make the network operation more efficient and economically viable by reducing delays and lowering transaction fees.

Enhanced Security: Updates introduced in Ethereum 2.0, such as sharding, will also enhance the security of the network, making it less vulnerable to attacks and failures.

-Conclusion

Ethereum 2.0 represents a significant upgrade to the Ethereum blockchain platform aimed at addressing key issues with the current version and enhancing its performance, security, and efficiency. These changes will make Ethereum even more attractive to developers and users, opening up new possibilities for creating decentralized applications and services.

-Rollups in Ethereum

Rollups are a scalability method for Ethereum that allows transactions to be moved from the main blockchain to secondary chains. This approach is similar to Plasma but has its own characteristics.

-Rollup Structure

In rollups, one contract on the main chain holds all the funds and cryptographic proof of the current state of the secondary chain. Operators of the secondary chain monitor changes and ensure that only valid data is recorded in the contract. Since the state is stored off-chain, there is no need to store information on the blockchain. However, unlike Plasma, in rollups, all transactions are eventually transmitted back to the main chain.

There are two types of rollups:

-ZK-Rollup: This approach uses cryptographic verification called zero-knowledge proofs (zk-SNARKs). It allows different parties to prove to each other the existence of certain information without revealing it. In ZK-Rollup, this method is used to demonstrate state transitions from the secondary chain to the main one. The advantage is fast and secure data transmission.

-Optimistic Rollup: This approach is less prone to sacrificing scalability for flexibility. It utilizes an "Optimistic Virtual Machine" (OVM) to execute smart contracts on secondary chains. However, there are no cryptographic proofs confirming the correctness of state transitions, so there is a small delay allowing for the challenge of invalid blocks.

Proof of Stake (PoS) in Ethereum

Proof of Stake (PoS) is an alternative to the Proof of Work (PoW) method for block validation. In PoS, blocks are not mined; instead, a process called "staking" or "minting" is used. Nodes (validators) are periodically selected at random to validate blocks. PoS eliminates mining, reducing energy consumption and making the network more environmentally friendly.

Staking in Ethereum

In PoS staking, validators must stake their tokens to have the right to validate blocks. If a validator attempts to cheat the system, their funds can be confiscated or gradually deducted. Staking contributes to network security and incentivizes validator participation.

How much ETH constitutes one stake in the Ethereum network?

The minimum stake for participating in Ethereum staking is 32 ETH per validator. This threshold was set sufficiently high to deter 51% attack attempts by requiring a significant amount of funds.

What income can be earned by participating in Ethereum staking?

The actual income from participating in Ethereum staking depends on your stake, the total amount of ETH staked in the network, and the inflation rate. Rough estimates suggest the current income is approximately 6% annually, but this is a preliminary estimation, and the final amount may change in the future.

How long will ETH be locked in staking?

To withdraw ETH from staking, you need to wait for your transaction to be queued. If there is no queue, the minimum withdrawal time is 18 hours. However, this time may vary depending on the number of validators wishing to withdraw their funds.

What are the risks associated with ETH staking?

Participating in Ethereum staking carries risks. If your validator node is offline for an extended period, you may lose a significant portion of your deposit. Additionally, if your deposit falls below 16 ETH, you will lose the right to validate blocks. It is also essential to consider systemic risks associated with the fact that Proof of Stake has not been implemented on such a scale before, which may lead to software bugs and vulnerabilities in the network.

What are Decentralized Finance (DeFi)?

Decentralized Finance, or simply DeFi, is a movement aimed at creating financial applications without central control. DeFi is based on open-source blockchains accessible to anyone with internet access. This transition is bringing billions of people into this new global financial system.

What can DeFi be used for?

One of the key advantages of Bitcoin is its ability to function without central control. The idea behind DeFi is to use this concept to create programmable financial applications. This means no central control or intermediaries, making the system more transparent and reliable. The accessibility of DeFi opens doors for billions of people without access to traditional financial services.

Will Decentralized Finance (DeFi) ever go mainstream?

While DeFi promises to revolutionize financial services, most associated applications are currently challenging to use and experimental. Developing such an ecosystem faces many problems and obstacles, and while DeFi has the potential to go mainstream, it requires overcoming many technical and conceptual challenges.

What DeFi applications exist?

One of the most popular uses of decentralized finance (DeFi) is stablecoins. Essentially, these are tokens on the blockchain whose value is tied to a real-world asset, such as fiat currency. For example, BUSD is pegged to the value of the US dollar. The convenience of these tokens lies in their ease of storage and transfer since they exist on the blockchain.

Another popular type of application is lending platforms. There are many P2P services that allow lending out funds and receiving interest payments in return. One of the most interesting aspects of DeFi is the various applications that are challenging to classify. These include all kinds of decentralized P2P marketplaces where users can exchange unique crypto collectibles and other digital items.

They may also include the creation of synthetic assets, where anyone can open markets for any valuable items. Additionally, prediction markets, derivatives, and much more can operate on DeFi. Decentralized Exchanges (DEX) on Ethereum A decentralized exchange (DEX) is a platform where users can trade directly between wallets. When you trade on a centralized exchange like Binance, you send your funds to it and trade through its internal systems.

Decentralized exchanges are structured differently. Thanks to the amazing capabilities of smart contracts, they allow trading directly from your crypto wallet, eliminating the risk of exchange hacks and other risks. DEXs are the most commonly used applications running on the Ethereum blockchain. Although compared to centralized exchanges, the trading volume is still small. Nevertheless, if DEX developers and designers make interaction with users more attractive, in the future, DEXs could compete with many centralized exchanges.

What is an Ethereum node?

An Ethereum node is a program that interacts with the Ethereum network. It can vary from a simple mobile wallet to a computer storing a complete copy of the Ethereum blockchain. Nodes serve as communication endpoints in the Ethereum network, and there are several types of such endpoints.

How does an Ethereum node work?

Unlike Bitcoin, Ethereum does not have a single standard program. Instead, there are several independent programs compatible with the Ethereum protocol. The most popular ones are Geth and Parity. A full Ethereum node downloads all blocks from other nodes and verifies their correctness. It also allows for the execution of smart contracts and ensures data consistency among all network participants.

Full Ethereum Node

To interact with the Ethereum network and independently verify data in the blockchain, it is necessary to run a full node using special software. Such a node downloads all blocks to the user's device and verifies their correctness. Full nodes play a key role in ensuring network resilience to censorship and decentralization.

Simplified Ethereum Nodes

Simplified nodes require fewer resources and disk space, allowing them to run on devices with lower technical specifications. However, they do not fully synchronize with the blockchain and rely on full nodes to obtain information. Simplified nodes are widely used for making payments and accessing services on the Ethereum network.

Ethereum Mining Nodes

A mining node can be either full or simplified. Miners use additional hardware, such as graphics cards, to create blocks in the Ethereum network. They can operate independently or join a mining pool to increase their chances of finding a block and receiving a reward.

Launching a Node in the Ethereum Network

One of the main advantages of blockchains is open access, allowing anyone to participate in strengthening the network. This is achieved by running a node that verifies transactions and blocks in the Ethereum network.

Plug-n-Play Solutions

Similar to Bitcoin, there are companies offering plug-n-play Ethereum nodes. This is convenient for those who want to have a working node, but additional fees may apply for this convenience.

Node Software

To run your own Ethereum node, you can use software such as Geth and Parity. The process of installing the chosen program may require some time and instructions.

Technical Requirements

Running a regular Ethereum node on a consumer laptop should be sufficient in terms of computational power. However, it is recommended not to use a computer needed for everyday work to avoid slowing down processes.

Online Mode

It is best to run a node on devices that remain online constantly. If a node temporarily goes offline, it may slow down its synchronization with the network when the connection is restored. Therefore, it is preferable to use devices that are inexpensive to maintain and easy to support.

Ethereum Mining

Considering the network's plans to transition to Proof of Stake, Ethereum mining becomes a less long-term and secure option. However, if you still decide to engage in Ethereum mining, you will need specialized equipment such as graphics cards or ASICs. Setting up a mining farm requires significant investment and time, so careful consideration of your capabilities and resources is recommended before making a decision.

ProgPow Ethereum

ProgPoW (Programmatic Proof of Work) is an extension of the Ethash algorithm designed to make graphics processors more competitive compared to ASICs. This helps maintain network decentralization and reduce ASIC dominance in Ethereum mining.

Development of Ethereum Software

Ethereum software is developed open-source, allowing anyone to participate in protocol and application development based on it. Ethereum has the largest blockchain developer community in the world, ensuring a high level of innovation and a variety of solutions.

Scalability of Ethereum

Scalability is the ability of a blockchain to handle a large number of transactions and smart contracts. Ethereum uses the Solidity programming language for smart contract development, allowing developers to create code understandable to the Ethereum Virtual Machine (EVM). Additionally, there is an alternative programming language called Vyper, which provides developers with a different syntax for creating smart contracts.