how ethereum works

A Beginners Guide | How Ethereum Will Revolutionize The Internet As We Know It.

When Ethereum Started:

In the age of Cryptocurrencies, Ethereum is considered a dinosaur.  Modeled after the Bitcoin Network, Ethereum set out to improve upon the ‘perceived deficiencies’ that Bitcoin had.  Introduced by a young Russian Entrepreneur Vitalik Buterin, who wrote a white paper on the subject which generated the interest of nearly 30 programmers and thought leaders.  Many of these associates agreed with Vitalik’s vision and subsequently joined the project, as ‘co-founders’.

Buterin was an evangelist for Bitcoin and in particular, Blockchain Technology.  In 2014 while writing for different blogs dedicated to bitcoin, he decided University was getting in the way of his immense appetite for learning about blockchain technology, so he dropped out.

Only then, did he fully embrace this revolutionary technology and begin to make it his ‘life’s work’ of finding ways of improving it.  Part of his journey included co-founding Bitcoin Magazine with Mihai Alisie who would go on to become one of the co-founders of Ethereum.

Buterin believed so much in Blockchain Technology, but thought it could be much more than a currency, a peer to peer lending network or a store of value.  His vision was an open source, blockchain technology which would allow for anyone to build decentralized applications on top of it.

Inspired by Medieval Scientific Theory Buterin decided to call this new technology, Ethereum.  Some see the correlation that Ethereum has to Bitcoin as being similar to what the ‘Road’ has meant to the ‘Car’.

How Ethereum Works

As previously discussed, Blockchain Technology is the foundation of the Ethereum Network.  Though, anyone with the ability to ‘Code’ in the programming language known as Solidity or Vyper, can build an application on top of the Ethereum Blockchain.

The applications are merely computer code which execute a task on a blockchain.  The blockchain is decentralized, permissionless, immutable, and no, ‘one central authority’ has any control over the application, not even the creator.  Once the application is deployed, computer code executes it in a looping manner considered to be Turing Complete.

Here are 10 Applications that are really making a splash in the Ethereum Ecosystem.

  • Got a Hard Drive you’d like to rent out?  At Storj you can rent it out and get paid in Ethereum.
  • Axie Infinity– Get paid in Ethereum to play online games.
  • Decentraland– A virtual reality world where you can build your own kingdom, and rent it out for Ethereum.
  • Akasha– A censor resistant Social Network.
  • Ever thought of being a horse breeder, but don’t have the know-how.  Become one on the Zed network.
  • Bet on the Super Bowl, the Lastest MMA Fight, or The World Series on Augur.
  • Join a peer to peer trading platform on Loopring.
  • Need a loan or want to give one?  Use the Aave platform. Currently there is over 17 Billion in Liquidity.
  • Are you a musician who isn’t signed to a major record label?  Build your following and get paid on Audius.
  • Join the largest NFT Trading site and get paid for your art on Opensea.

 

How did ethereum get started

Do smart, permissionless, decentralized, contracts that are built on a blockchain, make the old way of executing contracts, dumb? Ethereum will confirm this in due time! Click To Tweet

How Ethereum was created

Known for his Mensa level of intelligence and his resolute work ethic (not to mention his flamboyant taste in clothes) How did Ethereum StartVitalik was determined to see Ethereum be a game-changer.  He and the other co-founders set up a crowd sourcing campaign to fund the building of Ethereum by selling ‘Ether Tokens’.  These Ether Tokens were all purchased with Bitcoin.

The crowd sourcing campaign was a major success and amounted to over $18 Million at a time when each Bitcoin was trading for $320.  The first live release of Ethereum took place in 2015 and was aptly named ‘Frontier’.

What is Ethereum Gas and how does it work

The term ‘Gas’ in the Ethereum Ecosystem is what enables transactions to be accomplished.  Gas, is considered a unit of measurement for the computational power, needed to execute the transaction.

Depending on the complexity of the transaction will determine the specific amount of Gas required.  If you wanted the network to do a simple mathematic equation say (X+Y), the Gas fee would be as low as 3 Gas.

Want to buy an NFT, or lend Ethereum on the Aave Protocol this is going to be a more complex transaction, and would cost a minimum of 21,000 Gas.

Gas prices are denominated in a unit known as Gwei, which is a term used to refer to a very small Ethereum unit.  1 Ether is equal to 1 Billion Gwei.  Similar to Bitcoin, where 1 Bitcoin equals 100,000,000 Satoshi’s, Gwei is simply a denomination of Ethereum.

What are some of the problems with Ethereum

Ethereum is the second largest Crypto Token in Market Capitalization, behind the King-of-Them-All, Bitcoin.  Currently, sitting at $309,187,533,317 in Market Cap, dwarfing its next largest competitor, USDT by a substantial 34%.  The Ecosystem Ethereum has built is unrivaled, so being in the ‘game’ early has its advantages.

 

what are the problems with Ethereum

But, being the first horse out of the gate also has its disadvantages; horses get knee problems, they twist an ankle every now and then.

Competitors such as Solana and Cardano are hoping Ethereum will “Spit the Bit” so they can take market share from them, and do so in big chunks!  Ethereum is slow, less scalable, and expensive to use when compared to these other two Layer-one Solutions.

Ethereum is currently moving from Proof of Work to Proof of Stake, where the others are both proof of stake.  This is adding to its current vulnerability.

What is Proof of Stake in Ethereum

Proof of Stake in Ethereum is a consensus mechanism used by blockchain networks to achieve distributed consensus.

Ethereum.org

Currently, Ethereum is a Proof of Work consensus based blockchain, just like Bitcoin.  This means transactions are verified by miners (computers which verify the validity of transactions and place them on a blockchain).

Proof of Work requires nodes on a network to provide evidence that they have expended computational power (i.e. work) in order to achieve consensus in a decentralized manner and to prevent bad actors from overtaking the network.  For this ‘work’, the nodes receive a payout in the form of the coin it is validating.

This method of consensus requires more computational energy than that of Proof of Stake, which is one of the reasons Ethereum is moving to a Proof of Stake Blockchain.

Proof of Stake is generally considered to be more environmentally friendly.  It uses Nodes as validators which are randomly selected.  These Nodes do not compete with one another, as a result they are not wasting un-necessary energy in the process.  They do not ‘Mine’ Blocks, they just create new blocks when they are chosen at random.

Where is Ethereum going in the future

Ethereum is widely considered to be the ‘proxy’ in the Decentralized Finance world.  It’s solely responsible for the introduction of the NFT market, and Vitalik is widely considered the “EF Hutton” of the Crypto world.  When he speaks, people listen!

Ethereum is in the process of moving to a Proof of Stake consensus network, which is taking longer than anticipated, known as ETH2.0.  Once it becomes Proof of Stake, in theory it will become faster, cheaper, and more decentralized.  But, it is not there yet.

As the transition to ETH2.0 continues, so does the ‘burning’ of the supply of circulating tokens.  To date 1,965,034 Ether tokens have been burned, and are no longer available to be traded.

As supply shrinks, but demand increases or stays the same, the theoretical outcome becomes-Increased Price!  So, In a time of 7+% inflation, Ethereum becomes more deflationary everyday.

Is Ethereum a good investment?

As always, this is not investment advice…..Do your own research, and consult with your Financial Sensei before making any Ethereum purchases.  

As the network grows and becomes widely adopted and smart contracts are proven to have a positive effect on everyday life, inevitably, the price will climb.  Couple that with a shrinking supply, and mathematically, what you have is a supply shock, which will act as a rocket ship for the price.

But, it wont be tomorrow, or next Tuesday.  It will take time, especially as the transition to Proof of Stake (Eth2.0) continues.  The concern is and the Million Dollar question is,  does Ethereum lose too much market share to Solana and Cardano before Eth2.0 is finally live?  

Is Ethereum worth it

 

Ethereum may lose some market share to those other, Layer-one Solutions, however it is becoming more secure and decentralized with the Eth2.0 upgrade.  In the current global environment where censorship is rampant, and financial freedom is eroding, decentralization becomes immensely important.  Don’t believe me?   Ask a Ukrainian Citizen or a trucker from the Canadian Freedom Convoy how important decentralization is.

What are your thoughts on the Ethereum Network, and it’s long term potential adoption?

 

 

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