What Is Ethereum? Absolutely Everything You Need to Know (A Beginner’s Guide)
Okay, before we get into this guide, you need to do one thing:
Stop thinking of Ethereum as a cryptocurrency.
Honestly! Although Ethereum does use a form of digital currency, it’s much bigger than money.
Ethereum doesn’t aim to be a global cash system like bitcoin. Ethereum is more like… the internet .
It’s often referred to as the “world computer,” but in simple terms, Ethereum is a platform for anyone to build something with blockchain technology.
Ethereum is a playground. It’s like lego. Or Minecraft.
In this guide, we’ll answer the burning questions: W hat is ethereum? How does it work? Who created it, and where can you buy ethereum? We’ll try to answer them all in plain language. However, you may want to read our explainer on Bitcoin first to get your head around the basics of blockchain.
CONTENTS
PART 1: What is Ethereum? (A Simple Guide for Beginners) PART 2: What Is Ether, the Currency? PART 3: Who Founded Ethereum? a Brief History PART 5: How to Buy and Store Ethereum PART 6: What’s Next and Who Are Ethereum’s Competitors? PART 1: What Is Ethereum? (A Simple Guide for Beginners)
Infographic courtesy of @angelomilan Ethereum Basics
Ethereum is a gateway for building just about anything on the blockchain – apps, games, contracts, even new cryptocurrencies.
But why would someone create an app on Ethereum rather than, say, the Apple app store or a normal website?
To understand why, let’s take a look at the Apple App Store and its problems.
Firstly, Apple is acting a gatekeeper. Every app must be vetted and approved by Apple. In fact, Apple rejects tons of apps or forces them to change how they operate.
Secondly, all the apps are hosted on Apple’s servers and accessible only to those with an Apple ID
This is the definition of centralization . One company controls many thousands of apps.
Then there are the apps themselves. A banking app, for example, saves your personal details, account numbers, and balance on its servers. Another example of centralization. What’s Wrong with Centralization?
First, there’s the philosophical argument.
Should one company, like Apple, really be the gatekeeper to the world’s apps?
Second, there’s the practical argument. If all the apps are stored in the same place (Apple’s servers), it’s much easier to hack. There’s one point of failure .
The same goes for the apps themselves. If all your private information and data is stored on the app’s servers, it’s more vulnerable to thieves.
Even websites are centralized. They’re built on cloud servers owned by hosting companies.
One gatekeeper. One point of failure.
But what if websites weren’t hosted on one central server? What if apps didn’t have to be approved by Apple and stored on their cloud?
Enter Ethereum… How Does Ethereum Work?
Ethereum is like the app store, except it isn’t owned or controlled by any one person or company.
Everything built on Ethereum is supported and verified by thousands of computers, all at once, all over the world.
It uses blockchain technology to make sure there is no central authority.
It takes what Bitcoin did for money and applies it to any industry on the planet. Prefer to Read This Guide as an eBook?
If you’d like a hard-copy of this guide (or just want to come back to it later), download the free pdf version here , no email signup required. How Is Ethereum Different to Bitcoin?
Let’s back up and talk about Bitcoin for a moment. Bitcoin uses the blockchain to record financial transactions with complete transparency and security.
In other words, bitcoin is all about money.
But blockchain doesn’t only have to track money. Blockchain can record just about anything: electoral votes, goods, stocks, oil, contracts, data, home ownership, cartoon cats! ( yes, really .
)
Ethereum takes Bitcoin’s underlying technology and expands it for everything. More importantly, it allows creative developers to build things on it.
“Bitcoin is great as a form of digital money, but its scripting language is too weak for any kind of serious advanced applications to be built on top.” – Vitalik Buterin, Ethereum founder.
Having said that, Ethereum and Bitcoin do share the same core values that make it so strong:
No censorship – Anyone can build anything they want, without a large company or government limiting their vision. Like Bitcoin, there’s no middleman.
Secured with cryptography – Like everything on the blockchain, building on Ethereum is secure. Transactions are encrypted and there is no single point of failure, so it’s very difficult to hack.
Immutable – Transactions on the blockchain cannot be reversed or altered.
Transparent – All transactions are preserved in the blockchain forever.
Still confused? Watch Ethereum’s founder Vitalik Buterin explain the whole concept:
Okay, so we know that Ethereum is a gateway to building on the blockchain. But what exactly can you do with it? Ethereum Dapps (Decentralized Applications)
Most developers use Ethereum to build Dapps (decentralized applications). Dapps are just like an app on your phone, or a website, but hosted on the blockchain.
A Dapp is essentially any blockchain project that does something useful.
Bitcoin could be considered a Dapp. It’s a Dapp for transferring money without a bank.
Many thousands of others exist. For example, you might have heard of Cryptokitties. It’s a Dapp for buying and trading collectible cartoon cats. It’s like Pokemon cards but on the blockchain. It might sound ridiculous, but it’s actually quite revolutionary. Every collectible crypto kitty is 100% unique and cannot be duplicated because it’s on the blockchain. The rarity lead one buyer to pay over $100,000 for one crypto kitty.
More practical Dapps include Ethlance, a completely transparent freelance jobs portal.
There are no fees and every contract between freelancer and client is executed on the blockchain. No more chasing payments for freelancers. Ethereum: A Launchpad for New Cryptocurrencies
Many of the Dapps built on Ethereum have also launched their own cryptocurrencies.
In fact, some of the biggest cryptocurrencies on the planet started on Ethereum.
EOS , TRON , Vechain , and ICON all started life as projects on the Ethereum network. They have since branched off and created their own blockchain (or mainnet).
A further handful of top 20 coins are still ‘hosted’ on Ethereum, including OmiseGo , 0x and Binance Coin .
Not only can you use Ethereum to build a new project, you can use it to create new cryptocurrencies.
Ethereum Smart Contracts
Ethereum was also created to execute smart contracts.
The easiest way to understand smart contracts is the much-used vending machine analogy.
A vending machine is a simple contract.
It will automatically release a can of coke when the correct amount of money is inserted.
Smart contracts are the same. The contract will automatically execute only when certain conditions are met.
In a more practical example, let’s say you’re buying a house. Normally, a lawyer is responsible for executing the contract.
They check whether the money has been transferred and whether the seller has met all the criteria.
On the Ethereum network, there is no human making that final call.
The conditions of sale are written into the smart contract in advance. When those conditions are met (such as money transfer and land survey completion), the smart contract will automatically execute.
The transfer is recorded in the blockchain forever.
It is irreversible and completely transparent. What’s the Point of Smart Contracts?
Smart contracts eliminate the likelihood of fraud.
In the case above, no lawyer can manipulate the contract or hide conditions, because the smart contract simply won’t execute.
It’s secure. Like Bitcoin, the Ethereum blockchain exists on thousands of computers all at once. There is no single point of failure.
Smart contracts also remove the need for trust in one particular party (like an estate agent or lawyer). The contract is verified by many hundreds of people on the blockchain.
Lastly, the fees are lower. With fewer middle-men, there are fewer costs to pay. The Countless Use Cases for Ethereum
The potential for Ethereum is phenomenal.
It can be used to decentralize everything.
Imagine an electoral voting system on the Ethereum blockchain. Every vote is recorded transparently. No third-party can manipulate the results.
No more human error in counting. No more electoral hacks.
Imagine an insurance system built on Ethereum. If your house is flooded, and the damage meets all the agreed criteria, an Ethereum smart contract automatically executes to pay out the settlement.
Ethereum could improve almost every industry on the planet, from healthcare to finance to academia to logistics.
– Hi. Enjoying what you’re reading? Join the Block Explorer newsletter to stay one step ahead in the world of crypto. – Part 2: What Is Ether? the Cryptocurrency That Powers the Blockchain
When people talk about ethereum as a cryptocurrency, they’re actually talking about ether (ETH).
Ether has enjoyed incredible growth ( 10,000% in 2017 alone ). But if ether isn’t a global cash system like bitcoin, what is it?
Ether is often referred to as the “fuel” or “gas” that keeps the Ethereum network running.
It’s a form of currency for developers who build apps and smart contracts on the system.
Let’s say you’re building an app on Ethereum.
You pay a transaction fee to build on the Ethereum network, in the same way you’d pay a “hosting fee” for building a traditional website.
If you want to make changes to that app at any point, you pay a further transaction fee. These fees are proportionate to the amount of computer power needed.
That ether fee pays “miners” that maintain the Ethereum blockchain and verify the transactions.
“Bitcoin and Ethereum are doing different things. Bitcoin is a digital currency, and the protocol is written to sustain this cryptocurrency. Clearly, Ethereum platform has ETH, it is also a digital currency, but it exists to sustain the protocol.” – Vitalik Buterin, Ethereum founder.
In other words, the Bitcoin blockchain exists solely to power the cryptocurrency. With Ethereum, it’s the other way round. Ethereum’s cryptocurrency (ether, or ETH) exists solely to power the vastly more powerful blockchain. What Affects the Price of Ethereum?
In theory, the price of ether should be linked to the growth of the Ethereum blockchain. The more developers build on Ethereum, the higher the demand for ether to pay for transaction fees.
Right now, however, the price is primarily driven by speculation.
Like bitcoin, ether is bought, sold and traded on exchanges around the world. Most people hold ether because they hope it will increase in value, not to actively build on the network.
Ether is also heavily tied to the price of bitcoin. Despite wildly different use cases, ethereum and bitcoin have a correlation as the cryptocurrency market moves, by-and-large, as one. Unlike Bitcoin, Ether Supply Isn’t Capped
While bitcoin has a hard cap (only 21 million bitcoins will ever exist), ether does not.
Founder Vitalik Buterin has suggested a 120 million cap on ether supply , but it’s worth pointing out that his suggestion was posted on April Fool’s Day. However, he later confirmed that a hard-cap was worth considering.
As for current supply, 60 million ether was distributed during the first crowdfunding round in 2014. A further 12 million was gifted to a team of developers working to improve the system, known as the Ethereum Foundation .
Until recently, ether miners generated 18 million ether annually (about five ETH for every block, roughly 12 seconds).
Under a new agreement, the community decided to cut the reward down to two ETH per block. Ethereum Mining
Mining ether operates in much the same way as bitcoin.
Miners are responsible for maintaining and verifying transactions across the blockchain. In return, they are rewarded with ether.
Transactions are verified and logged in the blockchain by solving complex puzzles (through computer processing). The first miner to solve a particular puzzle mines the block and is rewarded with ether.
Ethereum mining is significantly faster than Bitcoin. While bitcoin blocks are produced every ten minutes, Ethereum blocks are mined every 12 seconds.
Another key difference is who mines Ethereum.
The Ethereum community has always stressed the importance of mining by individuals, not giant corporations and mining pools. In that sense, Ethereum aims to be more democratic and less centralized. (We should point out that large mining pools do still dominate the majority of Ethereum mining).
PART 3: Who Founded Ethereum? (A Brief History)
Vitalik Buterin founded Ethereum in 2013 when he was just 20 years old.
Buterin was a huge fan of bitcoin.
In fact, he also founded Bitcoin Magazine – one of the leading authorities in the crypto space.
In 2013, he published a white paper outlining his vision for Ethereum. Buterin sent the white paper to some close friends for critical feedback. Instead of criticism, however, he got a handful of co-founders!
More than 30 people wanted to work on the project with him.
Ethereum was born.
Vitalik Buterin officially launched Ethereum in 2014 and unveiled the project at a Bitcoin conference.
Shortly after, they launched a crowdfunding campaign to sell the ether token. A Moment That Changed Ethereum Forever
Ethereum has suffered some huge setbacks on its road to becoming the world’s second-biggest cryptocurrency.
The Ethereum “hard fork” was perhaps the most notable.
Here’s what happened. In 2016, hackers stole $55 million worth of ether . (Like Bitcoin hacks, we should point out that the hack did not breach the Ethereum blockchain itself, but software built upon it).
The Ethereum community faced a game-changing decision.
They could reverse the hack (by “resetting” the blockchain) and return the stolen money.
Or they could do nothing, accept the breach and move on.
Both options were problematic.
If they did nothing at this early stage of Ethereum’s development, it would damage the project’s credibility (who’s going to trust their money to a system with such a high-profile hack?)
But if they reversed the hack, it would fundamentally go against the values of Ethereum. The blockchain is supposed to immutable and irreversible.
Ultimately, the community voted to “reset” the blockchain, reversing the hack and returning the stolen money.
However, many Ethereum purists were furious. They believed the blockchain must never be reset. The decision spawned a new cryptocurrency: Ethereum Classic . Ethereum vs Ethereum Classic
Resetting the Ethereum blockchain created a hard fork.
You can think of a hard fork like a train track splitting in two. The currencies share one single track until a certain point when they split and go off in different directions.
The so-called purists took one track with the $55 million hack still coded into the blockchain.
This is now the Ethereum Classic blockchain.
The other track is Ethereum as we know it today: the “reset” blockchain, without the $50 million hack. PART 3: How to Buy and Store Ethereum How to Buy Ethereum
Ethereum is usually bought and sold on an exchange, much like bitcoin.
The most popular exchange in the US is Coinbase , but there are many others around the world.
You’ll be asked to register an account on the exchange, which often means uploading a picture of your photo ID and proof of address. This is to satisfy KCY (Know Your Customer) and AML (Anti-money-laundering) rules (p.
s. want to buy ethereum without ID? Keep reading below).
You can then buy ethereum using USD or your local currency of choice, depending on the exchange. Can I Buy Ethereum Anonymously?
Yes. There are some exchanges that do not require photo ID or proof of address. However, you may have to buy ether using another cryptocurrency to do this.
For example, you can purchase bitcoin anonymously using the Bitmex exchange.
You can then use bitcoin to purchase ether anonymously on another exchange such as shapeshift.io . How to Buy Ethereum with Cash
If you really want to go off-grid, you can buy ether with cash.
Localethereum.com connects you anonymously with local ethereum sellers. Sellers are verified and rated by buyers, so there is an element of confidence here.
You can arrange a face-to-face meeting to exchange crypto or make a private transfer arrangement.
Even your messages on localethereum are encrypted, so it’s private from the start. How to Store Ethereum
Once you’ve bought ethereum from an exchange, you need to move it to a safe wallet.
You can leave your ethereum in your account on Coinbase or whichever exchange you’re using. However, this storage method is more vulnerable to hacks.
(Hackers are more likely to target a large exchange than one smaller wallet). Choosing an Ethereum Wallet
The right ethereum wallet depends on how you plan to use the ether currency.
If you are investing in ethereum for the long-term, consider a cold storage option. This keeps your ethereum offline so it cannot be accessed by hackers.
Read more : What is Cold Storage for Cryptocurrencies?
However, if you’re using ether to make regular transactions or trades, you might want a “hot wallet” connected to the internet.
Ethereum recommended wallet – A simple choice is Ethereum’s recommended wallet, called Mist. It allows you to store ethereum and any other cryptocurrency built on the Ethereum network. You can also use this wallet to write and execute smart contracts and build Dapps (more on this later).
The wallet is downloadable at ethereum.org .
Hardware wallet – While the Ethereum wallet is handy for regular usage, consider a hardware wallet for cold storage. This is a like an external hard drive for cryptocurrencies. While it’s the safest option, there is a downside: if you lose the hardware wallet, your ethereum is gone forever. Popular options include Trezor and Ledger (pictured below).
Paper wallet – A paper wallet is another form of cold storage. It’s a simple piece of paper with your ethereum public and private key written down.
Paper wallets are incredibly safe because no-one can hack a piece of paper. But if the paper is lost or damaged, so is your ether.
Browser wallet – MetaMask is a browser extension for Google Chrome. It allows you to access Ethereum Dapps and store ether. Be aware, however, that your private key is stored by the browser and can be hacked.
Other ethereum wallets – Another popular option for storing ethereum is MyEtherWallet .
It’s a unique web wallet that stores your private key safely on your computer. You can also use it to create smart contracts. Exodus is a desktop wallet with functionality for seven different cryptocurrencies. PART 4: Can I Build on the Ethereum Network and Access Dapps?
Yes!
The whole point of Ethereum is to encourage developers to build on its ecosystem.
Anyone can build Dapps, write a smart contract or create a new cryptocurrency.
It all revolves around the Ethereum Virtual Machine (EVM): the nerve center (or brain) of Ethereum.
The EVM means developers can build on Ethereum with relative ease (without starting from scratch with complex code). To be clear, this is still advanced territory for the average user.
While the EVM aims to simplify the process of building Dapps and smart contracts, it still requires advanced technical knowledge.
(Interesting fact: the EVM is ‘Turing Complete’ which means it has the potential to solve any algorithm thrown at it by developers. As a comparison, the Bitcoin network is not Turing Complete as it only handles monetary transfer).
Here’s where to start when building or accessing Dapps and smart contracts: State of the Dapps
State of the Dapps is a list of all existing dapps on the Ethereum network. It’s the easiest way to see what’s out there right now.
All the dapps are categorized into genres, most-used, and top-rated lists. If you’ve already built a dapp, you can submit it to the site, too. Ethereum Mist Browser
The Mist browser is Ethereum’s official wallet. It’s also a gateway to the world of Dapps and smart contracts.
When you launch Mist, you are now connected to the Ethereum blockchain.
Create an account, and you can use this browser to send and receive ether.
You can also hit the “Contracts” tab to create your first smart contract.
Lastly, there’s a search button which allows you to use the many thousands of Dapps on the network. MetaMask
MetaMask is a browser extension for Chrome that gives you access to Ethereum Dapps and smart contracts.
The bonus of using MetaMask is that you don’t have to download any software (or the blockchain itself).
It works in much the same way as Mist. You can send and receive ether, create smart contracts, and browse the world of Dapps. Five of the Most Impressive Ethereum Dapps
Golem – Golem is a revolutionary project that allows you to “lend” your idle computer power to others. Imagine you’re a video maker who temporarily needs more processing power to finish a project. Or a corporation that needs extra data storage space quickly.
With Golem, you simply borrow it from others around the world by connecting to the blockchain. Users are paid in the Golem cryptocurrency (GNT) to rent out their computer power.
uPort – uPort is a Dapp built to protect and manage your identity. Using the uPort software, you enter your personal details into a smart contract. Your identity is only shared when certain conditions (which you set) are met. In other words, it gives you complete control over your identity and whom you share data with.
Augur – Augur lets you predict, and bet on the outcome of, just about anything. From the presidential election to the weather to the success of Apple’s next iPhone.
You make the prediction and you then ‘trade’ the outcome alongside thousands of others. Augur launched its own cryptocurrency, REP, which is used to reward those that confirm or “report” the outcomes.
Cryptokitties – We mentioned crypto kitties before, but it’s worth repeating. At its core, cryptokitties allows you to buy and trade cartoon cats. Trading rare cats might not be the most powerful use case for Ethereum, but it has become a gateway for mainstream blockchain use. It’s the first truly viral phenomenon in blockchain, hinting at the enormous potential of the technology.
It introduces people to Ethereum in a fun, engaging way.
Idex – Idex is building a decentralized exchange for trading Ethereum-based cryptocurrencies.
Because it’s based on the blockchain (and not on a traditional server like, say, Coinbase) it’s reportedly more secure from hackers. It uses smart contracts to execute trades.
There are more than 1,800 dapps currently out there with more added every day. PART 5: What’s Next for Ethereum and Who Are Its Competitors?
After the explosive growth in value in 2017, ethereum spent most of 2018 cooling off.
However, that’s not to say the platform itself isn’t growing… Fortune 500 Companies Are Using Ethereum (JP Morgan, Microsoft, Intel, Cisco, Mastercard)
If you think Ethereum is just for cryptocurrency insiders, think again.
Some of the biggest companies on the planet are experimenting with the technology.
Microsoft, Intel, MasterCard, Cisco, and JP Morgan are all part of the Enterprise Ethereum Alliance , an organization built to advance Ethereum.
It’s still early days but blockchain technology has the power to change entire industries. Most smart businesses are dabbling in this new world, and they’re using Ethereum as a testing ground. Competition from New Projects
Being the first doesn’t always guarantee success.
The platform now faces huge competition from so-called “Ethereum-killers.”
EOS is perhaps the most notable. The project, which was built on Ethereum before launching its own mainnet, is built for Dapps. It is arguably faster, cheaper and more efficient than Ethereum.
Other competitors include Zilliqa , which aims to scale faster than Ethereum, and NEO which facilitates smart contracts without Ethereum’s complexity. Ethereum’s Scaling Problems
One of the big question marks over Ethereum’s future is its ability to scale. How can it get faster and more efficient?
Developers are currently working on a long series of upgrades to the system. Under the codename “Casper,” Ethereum is slowly shifting from a “proof-of-work” system to a “proof-of-stake” system.
Without getting too technical, this should reduce the computer power required to mine ether and keep the system running.
Ultimately, it will lead to faster transaction times and lower fees.
Watch Vitalik Buterin talk about his plans for scaling Ethereum below:
For now, Ethereum remains the go-to platform for building new technology. It is the gateway to the blockchain, and we are only just scratching the surface of its potential.
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