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What is Ethereum – A Complete Beginner-Friendly Guide

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Marketing Specialist

Last updated April 18, 2022

If you think Ethereum is so valuable because it has the second biggest market cap and a relatively high value per unit, then you really missed the point. And just by trading and hodling the cryptocurrency, you are actually kicking yourself out of a much greater opportunity.

It’s true that the cryptocurrency market is a little bit of a wild west these days, and many people are just looking to get some profits. However, understanding Ethereum will give you a glimpse of Vitalik Buterin’s bigger picture and why his project is so great.

But let’s not forget that there have been some changes when it comes to Ethereum. The so-called 2.0 version and the Staking process have started, yet it’s still to be seen how Ethereum is ultimately going to work.

Ethereum explained

Ethereum explained

First of all, Ethereum is a platform founded by Vitalik Buterin in the pursuit of making the internet decentralized, where the code is the law. Its coin is the most well-known altcoin, more than a regular cryptocurrency, the Ether.  

Ethereum is a do-it-yourself platform for decentralized applications (DAPP). It allows you to build an application that no single person controls and is backed by blockchain technology. Therefore, it removes the need for a third party, as everything is managed through smart contracts.  

The dapps are built through Solidity and Vyper, and you are virtually able to give them virtually any capabilities.

More experienced developers also might want to use YUL, an intermediate language for the Ethereum Virtual Machine, or Yul+, an extension to Yul.  

SIDENOTE. Solidity is an object-oriented programming language for writing smart contracts on the Ethereum Platform. Solidity looks a lot like a simplified version of JavaScript. Vyper is a pythonic programming language with fewer features than Solidity that aims to make contracts more secure and easier to audit. Yul and Yul+ are used by experienced developers that support EVM and Ewasm, which can help to optimize the gas usage of your contracts.  

The platform is rather complex and continuously evolving, so we won’t get into coding specifics. But to understand Ethereum, it’s enough to know that it has a main aspect:  

Ethereum virtual machine – which calculates elements that dictates the way smart contracts work.  

As for how big the Ethereum blockchain is, it reached a size of 646.28 GB in April 2022.  

Getting started with Ethereum

To get started with Ethereum, you first have to understand that the Ethereum Blockchain works like a big, decentralized supercomputer. It gains its computing power from around the world, and that computing power requires gas which is paid in Ether.  

The gas price is approximative, in April 2022, 36 Gwei (0.000000001 Eth).  

So first, you are going to need a wallet where to store Ethereum. There is a multitude of Ethereum wallets – some are better, some worse. That’s why you should read our Cryptocurrency wallet guide before picking one.  

Then you can go forward with writing smart contracts and building dapps.

What is ether used for

There is no data for the max supply of ETH, but at the time of writing, there are 120.42M ETH on the market.  

The main use of Ether is to power and incentivize the Ethereum network. But at this point, you may want to know what Ether is used for aside other than for buying gas.  

And there are actually several use cases for it outside the platform. People use Ether to send money abroad, with very small fees through peer-to-peer transfers. Also, you can use Ether to buy products or services from all the providers that accept it. Or you can just trade it on exchanges.  

But keep in mind that every operation with Ether uses gas, including transfers.  

SIDENOTE. To facilitate the connection of your internet browser with the dapps, you can make use of the Metamask, especially if you want to make small transactions here and there.  

Ethereum Smart Contracts

Ethereum Smart Contracts

The big innovation Ethereum brought was the smart contract.  

Smart contracts are little programs that are established before launching a token, then stored on the blockchain. After you write the function’s characteristics, they will run autonomously, without anyone being able to modify them.  

Basically, a smart contract defines the condition upon which all parties agree by using it. Also, smart contracts can contain various information, from the number of tokens to even a type of insurance.  

In the beginning, creating a new smart contract and a token was a lot like reinventing the wheel. Almost every new token would necessitate special customization for an exchange, a wallet, or an app to communicate with it.  

There was a lot of room for errors, and changing your dapp after launching it on the main net would require a hard fork. So, the need for a token standard appeared.  

Ethereum Request Comment (ERC)  

ERC20 appeared in 2015 and gave the Ethereum users a guideline for creating a fungible token. It’s the most spread token and, by far, the easiest to create.  

You don’t even have to write a smart contract yourself. You can go on a token generator to automatically create your own cryptocurrency. You just have to put in basic info like:  

  • the name of the token;   
  • the symbol;  
  • max supply;  
  • price;  
  • gas limit.  

Some of these platforms even allow you to generate an ICO.  

Over time, people noticed a lot of issues with ERC20, and one of the most known issues is that of sending a token to a smart contract that is not made to support it. Millions of dollars have been lost due to blocked transactions.  

ERC223 comes to solve this problem by adding a token fallback function. It is an improved version of the ERC20 that rejects unsupported transactions and uses two times less gas.  

ERC721 is the token standard that proposes a non-fungible token. If ERC20 comes with a token that is valued the same as the next one, ERC721 introduces tokens that are indivisible and unique. The most popular use of ERC721 is in CryptoKitties.  

ERC1155 is a rather unique approach that proposes a standard where a single contract acts as an interface for multiple types of tokens such as fungible, non-fungible, or other configurations. 

Ethereum 2.0 and the merge

Ethereum 2.0 brings improvements designed to innovate the Ethereum network by planning to decentralize the network’s scaling and transition to proof-of-stake. Around 2018 all the researchers’ work was combined into a single roadmap under the “Ethereum 2.0 “umbrella.

The existing proof-of-work chain Eth1 would eventually be deprecated via the met difficulties. This way, users and applications would migrate to a new proof-of-stake Ethereum chain, known as Eth2.

It started with Phase 0 back in December 2020 with the official launch of the Beacon Chain. Where in this phase, the Beacon Chain manages the registry of validators and implements the Proof of Stake (PoS) consensus mechanism for Ethereum 2.0.

The Beacon Chain adds a native staking feature to the Ethereum blockchain as a primary feature of the network’s shift to the PoS consensus mechanism.

The second phase, named “the Merge,” will combine the Beacon Chain with the Ethereum mainnet at some point in 2022. The final upgrade for the Eth2 will see the implementation of Shard chains.
Introducing sharding to Ethereum 2.0 should allow for heightened scaling of Ethereum as transactions can be split across 64 new chains.

This means that running an Ethereum node will become considerably easier from a hardware standpoint since significantly less data has to be stored on a system.

The full upgrade is expected to take place by 2023.

SIDENOTE. Keep in mind that the Ethereum organization is phasing out the Ethereum 2.0 and Eth2 terminology. However, the roadmap and the developments remain the same.

Can you mine Ethereum?

Can you mine Ethereum

Yes, you can still mine Ethereum and gain Ether. As Ethereum mining hardware, you can only use GPU (Graphical Process Unit). As for ASIC (application-specific integrated circuit), it is excluded for the sake of decentralization.

Through Ethereum mining, the network is kept alive and developed. The nodes help add new blocks and confirm transactions by solving complex mathematical operations.

For now, Proof of Work is the main functional consensus mechanism used by Ethereum, but it’s expected to transfer to Proof of Stake exclusively by the end of 2022.

How hard is it to mine Ethereum in 2022?

In the beginning, it was relatively easy to mine Ethereum in order to distribute Ether around the world and to set up an extensive network. In 2016 you could still set up a mining rig investing about $2,000 and get around $20,000.

4 GPUs RX 580 8GB that would generate 115 MegaHash/s would get you 1 Ether a day. But in 2022, the Ethereum hash rate difficulty increased considerably to almost 80 GH/s for 1 Ether a day.
And besides the initial investment, you would have to consider power consumption.

Is mining ETH profitable in 2022?

The short answer is “it depends.” Thanks to the Eth price being so high, nowadays, you can run a profitable mining operation if you acquire powerful hardware.

If you check an Ethereum mining calculator, you’ll see that an NVIDIA GeForce RTX 3060 Ti (60MH/s, 200W TDP, 8GB GDDR6 VRAM) — can keep your proffit on the green side. Also, the cheaper the energy cost, the better.

However, keep in mind that the plan for Ethereum is to move to proof-of-stake.

Ethereum Proof-of-Stake

In the current status quo, Ethereum can support 15 transactions per second. To scale, the Merge of Ethereum comes with several updates centered around the idea of staking, phasing out proof of work mining.  

By switching to staking, Ethereum means to support thousands of transactions per second in the future.  

Also, the increase in transactions per second does not come at the expense of current nodes. The proof of stake consensus mechanisms relies on an economic incentive to keep the validators honest. 

The validators can open up staking nodes by locking 32 ETH in a staking contract. And as they secure the network, they will receive a certain APR that can vary from 4.3% to 5.4% APR to upwards of 9%-12% APR.  

SIDENOTE. The current APR can be checked on launchpad.ethereum.org.  

The proof of stake system will open up a node that will require significantly less hardware power than the previous consensus method as the node needs to handle less information at a time. A node operator has to run one shard on his node, which will be possible even with an office laptop.  

The Ethereum proof of stake is currently being tested on the Beacon Chain. And there has been staked 9,500,000 ETH ($37 billion in current value). The plan is to merge Beacon Chain with the main Ethereum chain in the next months. 

More important in the staking process is randomness. Nodes are assigned randomly to shards and transactions so they cannot collude and take over a shard.  

Staking Ethereum is made to be more accessible in order to encourage decentralization. You only need a dedicated computer and 32 ETH. If you want to lock up more ETH, you have to open up a separate node with another 32 ETH stake.  

But do not forget that the technical knowledge to set up a node correctly is a must. If you mess up the node setup or get hacked, or attempt to damage the network (even by mistake), your stake can get slashed and even kicked out.  

And of course, there are some packages for everybody to find the best and most suitable option for them and the network. The options are:  

Solo home staking – known as the gold standard for staking, provides full participation rewards, improves the decentralized network, and does not require trusting anyone else with your funds.  

Staking as a service – this package is made for people that do not feel comfortable dealing with hardware but still want to stake. This one will allow you to delegate the hard part while you earn native block rewards. Doing this will allow you to walk through creating a set of validator credentials, uploading your signing keys to them, and depositing your 32 ETH.  

Pooled staking – several pool solutions will assist the users who do not want to stake 32 ETH. Includes what is known as “liquid staking,” which involves an ERC-20 liquidity token that represents your staked ETH. This solution enables easy and anytime exiting and makes staking as simple as a token swap. It also allows users to hold custody of their assets in their own Ethereum wallet.  

Centralized exchanges – many centralized exchanges provide staking services if you do not want to hold ETH in your own wallet. This way can be a fallback to allow you to earn some yield on your ETH holdings with minimal oversight or effort.  

The Ethereum Shard chains

Sharding is a concept that splits the entire Ethereum network into multiple portions called “shards” that will reduce network congestion and increase transactions per second. Each shard would contain its own independent state, meaning a unique set of account balances and smart contracts. Besides that, sharding will provide extra, cheap storage layers for applications and rollups to store data.

This concept also enables layer two solutions that offer low transaction fees while leveraging the security of Ethereum.

Sharding can be considered the most complex of Ethereum scaling solutions. It is also expected to be released sometime in 2023, giving the developers the necessary time to fully scope it out and test it in production environments.

Before going any further, it is important to know what is the roles that the nodes play in the Ethereum network. These nodes are created to verify the miners’ work and follow consensus rules. The best way is to keep a full copy of the Ethereum ledger and begin the easiest way, but it is kind of hard as the Ethereum blockchain is approaching 1 TB of storage, which makes it impractical for a regular person to run a node.

What does sharding solve? Well, nodes might become too expensive to run on Ethereum, making the network more susceptible to centralization. At the same time, each transaction processed by every node will make it, so Ethereum never scales.

The sharding does not intend to move transactions off the blockchain but improve the network without sacrificing decentralization, scalability, and security.

Future of Ethereum

Future of ethereum

The merge between Beacon Chain and the Ethereum mainnet is expected to occur at some point in 2022. That’s why the change to proof of stake is the hottest topic in 2022 for Ethereum.  

The Beacon Chain introduces native staking to the Ethereum blockchain, a primary function of the network shift. That is meant to separate the blockchain from the Ethereum mainnet.  

As for the consensus mechanism, Vitalik Buterin revealed the new Ethereum proof of stake will be lighter, faster, and much more efficient.  

You will be able to mine Ethereum by staking 32 Ether and using an average laptop. 

However, the network participants will be required to be online only for 2/3 of the time a day.  

The merge comes with a transaction speed in the order of tens of thousands per second. Also, the costs and fees will be cut down.  

The interface will be more user-friendly as well, so people can develop even more projects on Ethereum.

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