ZuluTrade Blog

What Is Ethereum & How Does It Work? (& Ethereum 2.0)

Knowledge Crunch | Thursday, November 18, 2021 11:40 AM GMT

As the second largest cryptocurrency (through market cap) in the space right now, Ethereum (ETH) has always been a unique pick from any other crypto. The huge amounts of utility, functioning apps, dapps, smart contracts and a huge role within the NFT space. Eth has solidified itself as a solid crypto project.

So today, we are going to be exploring Ethereum's story, finding the real use cases of this digital currency and what makes this crypto so popular that some experts say that it could overtake the dominance of Bitcoin.




Table of Contents

 

What is Ethereum?

How Does Ethereum Work?

Is Ethereum Safe?

Ethereum vs Bitcoin

Ethereum Mining

Ethereum Wallet

Buying & Selling Ethereum

Introduction to Ethereum 2.0 (Eth2)








What is Ethereum?

Ethereum is one of literally thousands of cryptocurrencies that have sprung up over the last few years. As the brainchild of 8 co-founders as startups do on whitepaper and was officially invented by programmer Vitalik Buterin in 2015, on the heels of Bitcoin. The cryptocurrency or platform is called Ethereum, while the individual unit is called an ether.

Ethereum operates on a decentralized computer network, or distributed ledger called a blockchain, which manages and tracks the currency. It can be useful to think of a blockchain like a running receipt of every transaction that’s ever taken place in the cryptocurrency. Computers in the network verify the transactions and ensure the integrity of the data.

This decentralized network is part of the appeal of Ethereum and other cryptocurrencies. Users can exchange money through an ecosystem without the need for a central intermediary such as a bank, and the lack of financial services from a central bank means the currency is nearly autonomous. Ethereum also allows users to make transactions nearly anonymously, even if the transaction is publicly available on the blockchain.

While the whole field is referred to in terms of currency, it may be more useful to think of crypto as a token that can be spent for a specific purpose enabled by the Ethereum platform. For example, sending money or buying and selling goods are functions enabled by the coin. But Ethereum can do a lot more, and it can also form the basis for smart contracts and other apps.

There are two accounts available through Ethereum: externally owned accounts (controlled by private keys influenced by human users) and contract accounts. Ethereum allows developers to deploy all kinds of decentralised apps. 

 

Even though Bitcoin remains the most popular cryptocurrency, it’s Ethereum’s aggressive growth that has many speculating it will soon overtake Bitcoin in usage.




Source: Pixabay.com 





How Does Ethereum Work?

In programming language, Ethereum is a blockchain-based platform that aims to make it easier to create applications that aren’t managed or controlled by one entity. Instead, they are governed by code. Like all cryptocurrencies, Ethereum works on the basis of a blockchain network. A blockchain is a decentralized, open source, distributed public ledger where all transactions are verified and recorded.

It’s distributed in the sense that everyone participating in the Ethereum network holds an identical copy of this ledger, letting them see all past transactions. It’s decentralized in that the network isn’t operated or managed by any centralized entity, instead, it’s managed by all of the distributed ledger holders.

Blockchain transactions use cryptography to keep the network secure and verify transactions but exactly is a blockchain?

What is a blockchain?

Ethereum shares some similarities with Bitcoin in  blockchain technology because it relies on a blockchain to store and secure transactions.

Note that a blockchain is a chain of chronologically ordered blocks containing the data of confirmed transactions. Think of it as a ledger where all the activities executed in a network or platform are being recorded. Importantly, this ledger is publicly available, meaning network participants and even outsiders can easily track its content. 

Also, copies of this ledger are distributed across a global network of computers known as “nodes.” These nodes perform a variety of tasks on the network, including verifying and recording transaction and smart contract data.

The Ethereum network can also be used to store data and run decentralized applications. Rather than hosting software on a server owned and operated by Google or Amazon, where the one company controls the data, people can host applications on the Ethereum blockchain. 

This gives users control over their data and they have open use of the app as there’s no central authority managing everything.

















Is Ethereum Safe?

For any cryptocurrency to survive, it needs to have some type of real-world utility. Right now, Bitcoin is the most popular and most widely accepted cryptocurrency. However, the Ethereum blockchain is used for a variety of purposes, which gives it an advantage.

Ethereum is not only host to the Ether token, but it's also the foundation for other applications like non-fungible tokens (NFTs) and decentralized finance. NFTs could change the way digital items are bought and sold, and the decentralized finance movement aims to revolutionize the banking industry.

Also, Ethereum 2.0 plans to make the blockchain faster and more scalable so it can be used for even more applications such as peer to peer. That could give Ethereum even greater utility and more of an advantage.

Ethereum's widespread utility could benefit Ether as well. If Ether is required for applications on the Ethereum blockchain, Ethereum's success could give Ether a competitive advantage over Bitcoin and other cryptocurrencies.









Ethereum vs Bitcoin

Bitcoin's main purpose is to serve as digital money and a store of wealth. Ether may be used as virtual money and a store of value, but this is not a hard fork. The Ethereum network's decentralized nature allows users to develop and operate apps, dao, defi, smart contracts, and other transactions. These features are not available in Bitcoin. It is only used as a medium of exchange and a store of value.

To put it another way, Ethereum aspires to be more than just a cryptocurrency. It aspires to be a platform for all types of apps that can securely store data.

While there are many similarities between Ethereum and the Bitcoin network, there are also significant differences. Here are a few:

Utility - Bitcoin trades in cryptocurrency, while Ethereum offers several methods of exchange, including cryptocurrency (Ethereum’s is called Ether), smart contracts and the Ethereum Virtual Machine (EVM).

Security Protocols - They are based on different security protocols: After ETH 2.0 is out, Ethereum will use a “proof of stake” system as opposed to the “proof of work” system used by Bitcoin.

Transactions - Bitcoin allows only public (permissionless or censor-proof) transactions to take place; Ethereum allows both permissioned and permissionless transactions.

Block Confirmations - The average block time for Ethereum is significantly less than Bitcoin’s: 12 seconds versus 10 minutes. This translates into more block confirmations, which allows Ethereum’s miners to complete more blocks and receive more Ether.

Supply Cap - It is estimated that by 2021 only half of the Ether coins will be mined (a supply of more than 90 million tokens), but the majority of Bitcoins already have been mined (its supply is capped at 21 million).

How it’s mined - For Bitcoin, the computers (called miners) running the platform and verifying the transactions receive rewards. Basically, the first computer that solves each new block gets Bitcoins (or a fraction of one) as a reward. Ethereum does not offer block rewards and instead allows miners to take a transaction fee.















Ethereum Mining

Just as Bitcoin, Ethereum belongs to the bucket of public blockchains. It’s a decentralized ledger that is updated and verified by members of the Ethereum network. The only way to add a new block to the Ethereum blockchain is by mining it.

To mine Ethereum, computers spread around the world compete to solve cryptographic puzzles at the cost of processing power and therefore energy. Any miner that successfully solves the puzzle first is being rewarded with ether (ETH). These rewards pay miners for securing the network, verifying transactions and adding blocks to the blockchain.

The current mining reward is 2 ether per block plus all transaction and gas fees contained in the block. A new block is added to the blockchain on average every 15 seconds.

When mining ether, there are three different approaches miners can follow. In the following paragraph we take a quick look at each one.

Pool mining - Mining Ethereum in a pool is the simplest and quickest way to get started. Hereby you collaborate with other individuals. All of the miners in a single pool agree that if one of them can solve the cryptographic puzzles, rewards will be split among them according to the provided hashpower. The size of the pool, measured in hashpower, determines how many blocks the group finds on average and the expected rewards thereof. 

However, not all pools are created equal. When choosing a pool three key characteristics should be considered: pool size, minimum payout and pool fee. The pool fee specifies the share the pool administration gets for running the pool. If a pool has higher fees than 3% you may consider finding another pool. 

Solo Mining - Mining on your own seems like an attractive alternative to pool mining, as no pool fees have to be paid and rewards don’t have to be shared. But to have a realistic chance to solve one of the cryptographic puzzles in a reasonable amount of time, a miner needs dozens of GPUs. Therefore, solo mining is mostly for professional miners who run mining farms.

Cloud Mining - This is the process of paying someone else to mine for you. Instead of possessing and running your own mining hardware, you rent someone else’s computing power and let them do the work for you. In return for the rent, you get the mining rewards. But be aware: cloud mining requires trust in the counterparty, especially when done over an online service.

In the end, it’s easier to buy Ethereum on cryptocurrency exchanges than to mine it and requires less effort. There may be a profit potential in the mining of cryptocurrency, but you’ll have to see if the numbers work.











Ethereum Wallet

Ethereum wallets are applications that let you interact with your Ethereum account. Think of it like an internet banking app – without the bank. Your wallet lets you read your balance, send transactions and connect to applications. You will need a wallet to send funds and manage your ETH.

In the case of Ethereum wallets, the intangible features of the cryptocurrency are the reason why Ether is not stored in the wallet. Instead, the records of your Ethereum asset are stored on the Blockchain. 

Your wallet is only a tool for managing your Ethereum account. That means you can swap wallet providers at any time. Many wallets also let you manage several Ethereum accounts from one application. That's because wallets don't have custody of your funds, you do. They're just a tool for managing what's really yours.

Εvery Ether wallet has a unique address. Your wallet address consists of a random mix that includes letters and numbers. The wallet address is randomly generated as a security measure; the wallet address is also called a ‘public key.’ 

You need an Ethereum address to receive Ether from a client or friend. Basically, when you receive Ether in your wallet, the sender has transferred ownership of the cryptocurrency to you.

After sharing your ‘public key’ to receive Ether from anyone, you will need to enter your ‘private key,’ which is also your password, to complete the transactions and gain access to the coins you have received. To protect your Ether from hackers and thieves, it is important that you do not share your ‘private key’ with anyone.

For convenience, all owners of Ether wallets are given paired public and private keys, which is unique. For a transaction to be completed, you’re the characters that make up your public and private keys must be a match.

Buying & Selling Ethereum

Εvery Ether wallet has a unique address. Your wallet address consists of a random mix that includes letters and numbers. The wallet address is randomly generated as a security measure; the wallet address is also called a ‘public key.’ 

You need an Ethereum address to receive Ether from a client or friend. Basically, when you receive Ether in your wallet, the sender has transferred ownership of the cryptocurrency to you.

After sharing your ‘public key’ to receive Ether from anyone, you will need to enter your ‘private key,’ which is also your password, to complete the transactions and gain access to the coins you have received. To protect your Ether from hackers and thieves, it is important that you do not share your ‘private key’ with anyone.

For convenience, all owners of Ether wallets are given paired public and private keys, which are unique. For a transaction to be completed, you’re the characters that make up your public and private keys must be a match.

Should you buy Ethereum?

If you decide to invest in ether (and therefore, in Ethereum), you should first ask yourself why you are investing. Although the price of the coin has risen substantially over the past year, it can be extremely volatile. Thus, if you buy ether simply hoping the price will rise, you may end up frustrated.

Investing in Ethereum

You might consider investing in the Ethereum network to your portfolio for a few reasons, Firstly because, it has value and actual utility as a virtual currency; secondly, the Ethereum blockchain could become more attractive when it migrates to the new protocol; and thirdly as more people utilize Ethereum distributed apps, demand for ETH may increase.

 

Besides buying Ether directly, you could also try investing in companies that are building applications using the Ethereum network. 

Before making any significant investment in Ether or other cryptocurrencies, consider speaking with a financial advisor first about the potential risks. Given the high risk and volatility in this market, make sure it’s money you can afford to lose, even if you believe in Ethereum’s potential.

 

How to trade Ethereum

Ethereum doesn't trade on any major stock platform. You can't go to your online discount broker and buy Ethereum. You have to convert it into your wallet in order to trade it.  Trading Ethereum can be done on any crypto exchange (like coinbase) or cryptocurrency trading platform but there are other ways users trade. 

Once you own ETH, the selling of ethereum is just like the opposite of buying. You simply place a sell order on the exchange - like Coinase or Binance. It's important to note that you don't have to sell ethereum and receive cash for it. On many exchanges, you can sell ETH and receive different cryptocurrencies or USD. For example, you could sell ETH and receive USDC, USDT, or even BTC.

Another way is through Copy Trading. Every time a trader you follow opens a trade in ETH/USD pairs, you automatically replicate (copy) their trades in your brokerage account. All these great features are available on ZuluTrade. Etherum can experience volatility in some instances, but it is important to note that this is when it achieves it’s all time high (as with most altcoins).

 

Introduction to Ethereum 2.0 (Eth2)

Ethereum 2.0, also known as Eth2, is an upgrade to the Ethereum blockchain. The upgrade aims to enhance the speed, efficiency, and scalability of the Ethereum network so that it can process more transactions and ease bottlenecks.

The main purpose of this upgrade is to get Ethereum to use a proof-of-stake (PoS) mechanism model rather than the outdated proof-of-work (PoW) consensus mechanism that it currently has now.

Ethereum 2.0 is launching in several phases, with the first upgrade, called the Beacon Chain, having gone live on December 1, 2020. The Beacon Chain introduces native staking to the Ethereum blockchain, a key feature of the network’s shift to a PoS consensus mechanism. As the name suggests, it is a separate blockchain from the Ethereum mainnet.

The second phase, called The Merge, is expected in the first or second quarter of 2022 and will merge the Beacon Chain with the Ethereum mainnet.

The final phase is Shard Chains, and will play a key role in scaling the Ethereum network. Instead of settling all operations on one single blockchain, shard chains spread these operations across 64 new chains.

This also means that it is much easier from a hardware perspective to run an Ethereum node because there is far less data that needs to be stored on a machine. Shard Chains aren’t expected until 2022, but it is unclear exactly when.





Now Over to You

As we have discussed in this post, Ether is becoming  more widely available and is only second to Bitcoin. The future for Ethererum looks bright and there's a lot of noise in the news about it's rising value. Recently Apple CEO, Tim Cook revealed that he owns Eth too. But it's always important not to get sucked into the speculation too much. 

Always remember that all crypto investments do carry risks and we can’t stress enough that you should always carry out your own research before investing in any asset, digital or not.

We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade. 

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