# A Comprehensive Guide to Understanding Ethereum for Beginners
Written on
Chapter 1: Introduction to Ethereum
Ethereum represents much more than just a digital currency; it's a robust platform leveraging blockchain technology for a variety of applications.
In 2008, an individual or group operating under the name "Satoshi Nakamoto" introduced blockchain technology to the world through Bitcoin. This event sparked significant interest in cryptocurrencies and, more recently, NFTs. By 2011, a young Vitalik Buterin, aged 17, was eager to earn Bitcoin and began writing for Bitcoin Weekly, which compensated contributors with 5 Bitcoins per article. After that publication ceased operations due to financial issues, Mihai Alisie collaborated with Buterin to launch Bitcoin Magazine, which became one of the first serious platforms focusing on cryptocurrency.
By 2013, Buterin authored a white paper advocating for Bitcoin to adopt a scripting language for application development. When this idea did not gain momentum, he proposed creating a new platform altogether. This led to the co-founding of Ethereum alongside Gavin Wood, Joseph Lubin, and Charles Hoskinson.
Ethereum: More Than Just a Currency
Ethereum operates as a decentralized computer network powered by its cryptocurrency, Ether. While Ether can be exchanged for cash similar to Bitcoin, its primary role extends beyond mere trading. The core objective of Ethereum is to establish a decentralized framework for building and executing applications. Ether's main function is to fuel this network.
Furthermore, Ethereum supports NFTs through the ERC-721 Token Standard, allowing digital assets to be permanently associated with the token. This structure can be likened to an operating system such as iOS, which provides the environment for app development and interaction. Just as Apple Pay facilitates transactions, Ether allows for exchanges within the Ethereum ecosystem.
The Three Layers of Ethereum
Ethereum is structured in three layers: the Ethereum Virtual Machine (EVM), Ether, and Gas.
#### Ethereum Virtual Machine (EVM)
The EVM can be visualized as a vast cloud or an ocean wave, representing a single entity maintained by thousands of computers operating an Ethereum client. This virtual machine acts as a decentralized computer, forming the backbone of Ethereum's operational framework. The Ethereum protocol ensures continuous, uninterrupted, and immutable functionality. The EVM enhances the blockchain by deploying additional features, minimizing user issues on the distributed ledger.
Moreover, the EVM fosters an environment for creating, deploying, and managing Smart Contracts, which are crucial for developing Decentralized Applications (dApps). Essentially, the EVM serves as the user interface for blockchain technology, making it more accessible to end users.
#### Ether
However, running the EVM incurs costs. Ether is the currency used to pay for operations within the Ethereum network. Every action, program, or service within this ecosystem requires computational resources, and Ether serves as the payment medium for these operations.
If you're familiar with blockchain, you'll know that miners complete complex mathematical tasks to validate blocks. Upon solving these equations, they receive Bitcoin as a reward; similarly, Ether fulfills this role within the Ethereum network. Each transaction and interaction with dApps requires Ether, with users free to set their transaction fees—higher fees typically result in faster processing times. Crypto wallets like Metamask help users gauge transaction times and suggest appropriate fees.
#### Gas
Just as vehicles require fuel, Gas powers the Ethereum network. It quantifies the computational effort needed to execute tasks on the network. Each Ethereum transaction incurs a fee to compensate for the required resources, with Gas indicating the necessary fee for successful completion. Users purchase Gas with Ether, and the unit for Gas is Gwei (Giga Wei), which equals 0.000000001 ETH. Following the London Upgrade in September 2021, a base fee for each block was established, allowing users to add a tip to reward miners.
For instance, if John wishes to transfer 1 Ether to Edith, and the transaction has a gas limit of 10,000 with a base price of 100 Gwei and a 10 Gwei tip, the total fee would be calculated as follows:
Total transaction fee = Gas Limit * (Base Price + Tip) = 10,000 * (100 + 10) = 1,100,000 Gwei, equating to 0.0011 ETH. Thus, John would pay 1.0011 ETH, with Edith receiving 1 ETH and the miner receiving 0.0011 ETH.
Applications of Ethereum and Ether
Building on the foundation established by Bitcoin, Ethereum offers a global decentralized computer network that connects a diverse marketplace of decentralized applications (dApps). This network and its capabilities provide unmatched security and efficiency. Using straightforward yet powerful Smart Contracts, Ethereum finds applications across various sectors, including:
- Games like Cryptokitties and Acebusters
- Cloud-based operating systems
- Identity verification
- Currency exchange
- E-commerce solutions
- Document notarization
- Social networking
- Messaging platforms
- Decentralized news verification
While many cryptocurrencies primarily function as payment methods, Ether's versatility allows it to serve multiple roles, such as facilitating cryptocurrency and NFT trades, exchanging with fiat currencies, operating dApps, and purchasing Gas for transactions. This multifaceted utility may contribute to a more stable price for Ether compared to other cryptocurrencies.
Ether vs. Bitcoin
When comparing Ether and Bitcoin, several distinctions arise:
- Faster Block Time: Ethereum achieves block additions in about 10–20 seconds, while Bitcoin takes approximately 10 minutes.
- Bitcoin's Limited Supply: Bitcoin has a hard cap of 21 million coins, with over 18 million currently in circulation. This restriction makes obtaining rewards through Bitcoin mining increasingly difficult. Conversely, Ethereum has an annual cap of 18 million, ensuring consistent rewards for miners, with around 120 million Ethers currently available.
- Partial Rewards: In Bitcoin, if two miners solve an equation simultaneously, only one receives the reward. Ethereum, however, partially rewards both miners, promoting competitiveness among smaller-scale participants.
Challenges Facing Ethereum
Despite being a leading force in making blockchain technology accessible, Ethereum is not without its challenges. The need to pay for each transaction may deter users from experimenting with new applications. While developers can use test networks to access dummy ETH for experimentation, a similar model should be considered for end-users to minimize costs during their learning phase.
Although transaction speeds on Ethereum are quicker than Bitcoin, they still lag behind optimized centralized networks. Transitioning from the "Proof of Work" to the "Proof of Stake" model may enhance transaction speeds in the future.
Conclusion
Blockchain technology has revolutionized the tech landscape in just a decade, creating valuable financial opportunities. This guide serves as an introduction to Ethereum, but staying updated with its rapid developments is crucial in this ever-evolving sector.
Since becoming a Medium Paid Member in September 2020, I have gained extensive insights into marketing strategies and data-driven approaches, leading to improved performance in my professional endeavors. Articles focused on personal growth have also contributed to my development. If you haven't joined yet, consider becoming a member for just $5 a month to access exceptional content that also supports authors and contributors.
Source: Vitalik Buterin
Schedule a DDIChat Session in Blockchain and Cryptocurrency:
Apply to be a DDIChat Expert here.
Subscribe to DDIntel here.