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Ethereum is the second-biggest player in the cryptocurrency world today. Founded only 4 years ago by Vitalik Buterin, the Ethereum platform has seen remarkable growth in its short lifetime. If any coin is able to usurp Bitcoin’s position as the most valuable cryptocurrency in the world, Ethereum may just be the one.

In this guide we’ll explain what makes Ethereum so promising and tell you everything you need to know to start investing. Topics to be covered in this article include:

Let’s jump in!

While Bitcoin is first and foremost a blockchain currency, Ethereum is a blockchain platform. Ethereum allows developers to utilize blockchain technology for a wide range of purposes, with virtual currencies being just one of an infinite number of possible applications.

The Ethereum cryptocurrency is called ether. Ether is often referred to as the “fuel” of the Ethereum network. Anyone looking to make use of the Ethereum platform pays a transaction fee in the form of ether. These transaction fees cover computing costs and keep the network running smoothly.

The ether token can also be used for a number of other purposes, not least of which is buying alternative cryptocurrencies. Whenever you hear someone talking about the value of Ethereum, they’re more than likely talking about the value of ether. Though technically not the same, the terms are often used interchangeably.

This section will be pretty familiar to those of you who have already read our Ultimate Guide to Bitcoin, but here’s a refresher for those who haven’t.

The blockchain is a powerful technology pioneered by Bitcoin founder Satoshi Nakamoto that allows for secure, unalterable record-keeping without a trusted central authority. In Bitcoin, this takes the form of a public ledger which records every single Bitcoin transaction. A peer-to-peer network of nodes processes each new transaction and bundles them with other transactions in “blocks”. These blocks are then attached to the previous end of the blockchain using advanced encryption methods. Once a block is added, every single node in the network is notified and updates their copy of the blockchain.

This is an oversimplification of the process, but the point is that the public record of transactions is distributed across the whole network, rather than being stored in one central location. Blocks are essentially unchangeable once they are attached to the chain, which makes for a system that is both extremely secure and surprisingly transparent.

Ethereum has taken the blockchain and broadened its use beyond currency, instead focusing on decentralized applications.

The Ethereum network is maintained by volunteers known as Ethereum miners. Ethereum mining is very similar to Bitcoin mining. In short, miners carry out the computations required to process and validate new blocks.

Currently, Ethereum uses a proof-of-work system similar to Bitcoin’s to determine which miner gets to add each new block to the blockchain. Proof-of-work essentially requires miners to use computers to guess the answer to a difficult puzzle until one of them finds the answer. Mining requires extremely powerful computers in order to be competitive and is consequently very costly. Miners are rewarded for the valuable service they provide to the network with 5 ether for every new block they add to the blockchain. This incentivizes the miners and keeps the network running smoothly.

Ethereum will soon be transitioning away from proof-of-work toward a new system called proof-of-stake. This new system would randomly award blocks to users based on token ownership rather than their ability to compute the answer to a puzzle. This should be a less-costly option and result in a more distributed network of miners, rather than a handful of large mining operations.

While the idea of the blockchain was largely borrowed from Bitcoin, the Ethereum Virtual Machine (EVM) is something entirely new. Every node in the Ethereum network runs a copy of the EVM, creating a sort of world computer that allows any individual computer to run any application, if given enough time and memory.

In contrast to most other blockchains, which can generally be used for a very limited range of operations, this technology makes Ethereum extremely flexible. The most prominent examples of uses are smart contracts, decentralized autonomous organizations, and decentralized applications.

A smart contract is essentially a computer program that automatically executes a set transaction when certain conditions are met. Two individuals can anonymously “sign” a smart contract and the contract will be preserved on the public blockchain. When the conditions of the contract are met, it executes itself and this new state is updated on the next block in the blockchain.

Smart contracts aren’t limited to only monetary transactions either. Content, property, and anything else you can think of can be used as a reward for meeting the contract’s conditions. Smart contracts are appealing because they are anonymous, secure, flexible, and they don’t require any third-parties to be carried out.

Decentralized Autonomous Organizations (DAOs) are essentially smart contracts taken to the scale of an entire organization. Organizational processes could be written into code and run automatically rather than relying on an actual hierarchy of individuals to carry them out.

DAOs are an incredibly ambitious application of the Ethereum network. The upshot of this kind of an organization would theoretically be extreme efficiency and lack of corruption. The downside though is that implementing this kind of a system would require incredible foresight. Smart contracts are very difficult if not impossible to alter once they’re live, so any oversights or coding errors would be a major liability. This is exemplified by the most famous DAO in Ethereum’s history, simply called The DAO, which was exploited by hackers to steal about $60 million of investors’ funds. The money was eventually returned, but The DAO Event serves as a stark warning for what can happen if coding is flawed.

Probably the most exciting use of the Ethereum network is decentralized applications, better-known as dapps. A dapp is exactly what it sounds like: an application that utilizes the decentralizing power of the blockchain.

Dapps have several advantages over traditional applications. Perhaps the biggest is that dapps have no central point of failure. It’s common today to hear about thousands or millions of people’s data being compromised or stolen as a result of hacks or server malfunctions — the Equifax scandal in 2017 comes to mind. Dapps don’t suffer from these types of problems because of the security and decentralization of the blockchain.

Beyond security, another advantage of dapps over traditional applications is that dapps are not susceptible to server outages. Dapps are maintained by a network of thousands of nodes which act as mini-servers. A dapp could only be “down” if the entire network were down.

Best of all, dapps don’t require any change in the front-end user interface, meaning that dapps can reap all the benefits of decentralization while remaining indistinguishable to most users from the traditional applications they are used to.

The most convenient way to buy Ethereum is on an online exchange. Exchanges allow users to buy, sell, or trade Ethereum for fiat currency or alternative cryptocurrencies. There are many exchanges to choose from and they each have their pros and cons.

Here’s a quick look at some of our favorites exchanges:

These are just three of the numerous exchanges on which users can buy Ethereum. For a more in-depth look at these and other exchanges, check out our guide to the Best Bitcoin, Ethereum, and Altcoin Exchanges of 2018.

Before purchasing any Ethereum though you’ll first want to make sure that you’ve set yourself up with an Ethereum wallet. Wallets serve the important function of protecting your Ethereum when it’s not in use.

Your wallet doesn’t actually store your ether. Instead, wallets store the alphanumeric keys and addresses that allow you to send or receive ether.

A private key is a long string of alphanumeric characters that is used to “sign” transactions to verify that you are the one sending your ether. As the name suggests, it is critical that you keep your private key secret. Anyone with knowledge of your private key would be able to steal your ether. Protecting your private key is your wallet’s primary purpose.

Ethereum wallets also store your Ethereum addresses. An Ethereum address is another long string of alphanumeric characters, but an address is used for receiving ether instead of sending it. It is not necessary to keep your Ethereum address secret in the same way you keep your private key secret. Your Ethereum address is cryptographically derived from your private key, but there is no way to determine your private key simply by looking at the address. Giving someone your address allows them to send ether to your wallet.

Ethereum wallets fall into 5 main categories:

Hardware Wallets Trezor, Ledger, KeepKey

Once you’ve selected wallet type and purchased some Ethereum from an exchange, you’re ready to start making transactions using Ethereum.

Ethereum transactions work in much the same way as Bitcoin transactions. Paying someone in Ethereum is as simple as entering in their address along with the amount you’d like to send.

Receiving ether is equally simple. Just give the other party your address and they can send you the ether.

Calling Ethereum a cryptocurrency feels insufficient, because it is so much more than that. Ethereum is a platform that allows developers from all around the world to utilize the power of blockchain technology for any application they want to create. Smart contracts and dapps have the potential to revolutionize a wide range of industries, and given that Ethereum has only been live for about 2 years, that potential has only just begun to be explored.

This expansive network puts Ethereum in a truly unique position in the cryptocurrency world. Owners of ether have more than just a piece of digital currency; they have a stake in something special.  

The post What is Ethereum? The Ultimate Beginner’s Guide appeared first on UNHASHED.

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