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New To Ethereum? – Beginner Friendly Guide

Ethereum, which debuted in 2015, is the second-largest cryptocurrency by market capitalisation, trailing only Bitcoin. However, unlike Bitcoin, it was not designed to be a digital currency. Instead, its founders set out to create a new type of global, decentralised computing platform that takes the security and openness of blockchains and applies them to a wide range of applications.

Ethereum

The Ethereum blockchain is already powering everything from financial tools and games to complex databases. And its future potential is only limited by the imaginations of developers. According to the Ethereum Foundation, “Ethereum can be used to codify, decentralise, secure, and trade almost anything.”

  • The most recent prices can be found on Coinbase’s Ethereum asset page.
  • It has grown in popularity as an investment vehicle and a means of storing wealth (and can be used, like Bitcoin, to send or receive value without an intermediary).
  • The Ethereum blockchain enables developers to create and run a wide range of applications, from games and advanced databases to complex decentralised financial instruments — all without the need for a bank or other intermediary.
  • “Smart contracts” are used to build Ethereum-based apps. Smart contracts, like traditional paper contracts, define the terms of an agreement between two parties. However, unlike conventional contracts, smart contracts automatically execute when the terms are met, without the need for either party to know who the other party is — and without any kind of intermediary.
  • Ethereum, like Bitcoin, is a decentralised open-source project that is not owned or operated by a single person. Anyone with access to the internet can run an Ethereum node and interact with the network.
  • Similarly to how Bitcoin’s decentralised blockchain enables any two strangers anywhere in the world to send or receive money without the need for a bank in the middle, intelligent contracts running on it’s decentralised blockchain enable developers to build complex applications that should run exactly as programmed without downtime, censorship, fraud, or third-party interference.

Stablecoins (like DAI, which has its value pegged to the dollar by smart contract), decentralised finance apps (collectively known as DeFi), and other decentralised apps are popular Ethereum-based innovations (or Dapps).

Is Ethereum Secure To Invest?

Ethereum

The Ethereum blockchain currently secures ETH in the same way that Bitcoin’s blockchain ensures Bitcoin. A massive amount of computing power – contributed by all the computers on the network – verifies and secures every transaction, making it nearly impossible for any third party to interfere.

The fundamental concepts underlying cryptocurrencies contribute to their security: the systems are permissionless, and the core software is open-source, allowing countless computer scientists and cryptographers to examine all aspects of the networks and their security.

On the other hand, apps running on the Ethereum blockchain are only as secure as their developers make them. For example, code may contain bugs that result in a loss of funds. While their source code is also visible to all, the user bases of each app are much smaller than Ethereum’s overall, so there are fewer eyes on them. It is critical to research any decentralised app you intend to use.

The Ethereum protocol is currently being updated in order to make it faster and more secure. For more information, see the Ethereum 2.0 section below.

How Does Ethereum Work?

Ethereum

You’ve probably heard that the Bitcoin blockchain is similar to a bank’s ledger or even a chequebook. It’s a running tally of every transaction made on the network since its inception, and all computers on the network contribute computing power to the task of ensuring the tally is accurate and secure.

The Ethereum blockchain, on the other hand, is more like a computer: while it also documents and secures transactions, it is far more flexible than the Bitcoin blockchain. Developers can use the Ethereum blockchain to create a wide range of tools, including logistics management software, games, and the entire universe of Defi applications (which span lending, borrowing, trading, and more).

  • To accomplish all of this, Ethereum employs a ‘virtual machine,’ which is similar to a massive global computer made up of many individual computers running the Ethereum software. Participants must invest in both hardware and electricity to keep all of those computers running. The network employs its Bitcoin-like cryptocurrency known as Ether (or, more commonly, ETH) to cover these expenses.
  • ETH keeps everything running. You interact with the Ethereum network by paying the network in ETH to execute smart contracts. As a result, fees paid in ETH are referred to as “gas.”

The cost of gas varies according to how busy the network is. In December 2020, Ethereum 2.0, a new version of the Ethereum blockchain that aims to increase efficiency, began rolling out. (The transition to the new blockchain is expected to take two years.)

What is Ethereum 2.0?

Ethereum

Ethereum 2.0 (also known as ETH2) is a significant upgrade to its network. It is intended to allow this network to expand while improving security, speed, and efficiency.

Ethereum 2.0 and Ethereum 1.0 coexist as early as 2021, but the original blockchain will eventually merge with the ETH2 blockchain. (If you own ETH, you won’t have to do anything because your holdings on the ETH 1.0 blockchain will be automatically transferred to the ETH2 blockchain.) The switch to ETH2 began in December 2020 and is expected to take two years.

What is The Need of Ethereum 2.0?

Moving a popular crypto asset to a new platform is difficult, but it is necessary for this crypto to scale and evolve. This is due to the fact that the “Proof of Work” method used by the ETH 1.0 blockchain to verify transactions causes bottlenecks, raises fees, and consumes significant resources (particularly electricity).

What is Proof of Work?

Ethereum

Without a central authority like Visa or Paypal in the middle, how do cryptocurrency networks ensure that no money is spent twice? They make use of a consensus mechanism. When ETH 1.0 was released, it used the Proof of Work consensus mechanism pioneered by Bitcoin.

  • Proof of Work necessitates a massive amount of processing power provided by virtual “miners” all over the world competing to be the first to solve a time-consuming math puzzle.
  • The winner receives a predetermined amount of ETH as well as the opportunity to update the blockchain with the most recent verified transactions.
  • This process occurs every 30 seconds (as opposed to Bitcoin’s roughly 10-minute cadence). As network traffic has increased, the limitations of Proof of Work have resulted in bottlenecks during which fees fluctuate unpredictably.

What Is Staking?

Ethereum

Ethereum’s creators were well aware of the limitations of Proof of Work. As a result, a very different solution was devised for Ethereum 2.0, one that will eventually allow the network to process thousands of Ethereum transactions per second.

Ethereum 2.0 employs a Proof of Stake consensus mechanism, which is faster, less resource-intensive, and (at least theoretically) more secure. The result is similar to that of Proof of Work in that a network participant is chosen to verify the most recent transactions, update the blockchain, and earn some ETH.

  • Rather than a network of miners racing to solve a puzzle, Proof of Stake necessitates an extensive network of participants invested in the enterprise’s success.
  • These stakeholders are referred to as validators. Validators contribute ETH to a “staking pool” rather than processing power, as miners do.
  • Staking is the act of contributing ETH to the pool. If you choose to stake some of your ETH, you will receive rewards proportional to your stake amount. For the majority of users, staking will function similarly to an interest-bearing savings account.
  • The network chooses a winner based on how much ETH each validator has in the pool and how long they’ve had it there — literally rewarding the most invested participants.
  • Once the winner has validated the most recent block of transactions, the block’s accuracy can be attested to by other validators. The network updates the blockchain once a certain number of these attestations have been made.
  • All validators who participate receive a reward in ETH, distributed by the network in proportion to their stake.

How Can You Buy Ethereum?

Ethereum

You’ll need to understand a few basic concepts regardless of how you get your ETH. Every address on the Ethereum network is given a public and private key, and you’ll need a wallet to keep track of your cryptocurrency holdings. 

  • Public key: Consider this the crypto equivalent of an email address. People can send you ETH and Ethereum-based tokens like USDC and Dai using your Ethereum public key. You can safely distribute this to others.
  • Private key: Consider this to be your password. In general, you should avoid giving this to people. A private key is made up of a long string of letters and numbers. (It can also take the form of a string of words known as a seed phrase.) Keeping track of your private keys is critical. If you misplace them, you will lose your Ether for good.
  • Wallet: A wallet is required to store and secure your Ether. If you’re just getting started, the simplest option is to create an account through the Coinbase app or coinbase.com, where you’ll interact with a “custodial wallet” that stores and secures your private keys for you. As you progress, you may want to look into other wallets designed to interact with decentralised finance (or DeFi) protocols, such as Compound (a lending and savings app) or Uniswap (a decentralised exchange that allows you to trade cryptocurrencies).

How Does Ethereum Have Value?

Ethereum

There are several approaches to answering this question. On one level, the value of this cryptocurrency is determined by markets, just like the value of any other asset. It is available 24 hours a day, seven days a week, using Bitcoin, dollars, euros, yen, and other currencies. The price can change from day to day depending on demand. (Because this cryptocurrency is still a developing technology, its value is volatile compared to currencies such as the US dollar or equities such as Fortune 500 stocks.)

However, why the market prices it as it does is a much more complicated question. To many investors, its value stems from its adaptability as a platform for issuing stablecoins and running Defi applications, which has resulted in an increasing user base and transaction fees.

What’s Next For Ethereum?

As of early 2021, Ethereum hosts the vast majority of blockchain applications and has a market cap of just under $200 billion, with over $55 billion locked up in blockchain tokens. Because of its network effects, popular stablecoins such as USDC and USDT are mostly based today.

However, a slew of new smart contract blockchains is entering the fray. So, while it is the dominant market leader today, there is increasing pressure on it to execute the Ethereum 2.0 transition successfully.

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