What is Ethereum?
Ethereum is the most well-known cryptocurrency network for the development of decentralized financial applications.
What does Ethereum mean?
"Ethereum”, the name of this blockchain, evokes the concept of ether and ether, a mysterious invisible medium that slips into our universe and allows light to travel.
Due to its multiple uses and creation capacity, Ethereum can be described under various terms. For example, it is considered a global platform, because it is a system or "Internet place” that is available for any country or territory. Likewise, Ethereum is an open computational code, built on the basis of instructions and a programming language that is of public permission, so any programmer can consult freely.
What is ether (ETH)?
Let's start by clarifying that ether (ETH) is not the same as Ethereum. Ethereum is the platform as a whole, while ETH is the cryptocurrency and the ”fuel" of Ethereum. We can think of it like this: Ethereum is the country (like the United States) and ETH is its currency (like the dollar).
In this way, ether has several use cases. Mainly, being a cryptocurrency, it is a method of monetary exchange and also an investment asset. On the other hand, it is an indispensable element for the use of the network, so if you want to enjoy the services of any internal Ethereum application you must have ethers. That is, that ‘fuel’ known as ”gas" that makes it possible to transmit transactions.
What is gas?
To use the Ethereum network, as with other cryptocurrency networks, a fee must be paid. This tariff is known as gas. It's not that it's another currency, but rather it's a measure of what you have to pay for what you're doing: a transfer, a smart contract, a DAO, a game, a token, or basically anything that's built on this blockchain.
It should be mentioned that each ETH is divisible by up to 18 decimal places (0.00000000000000001 ETH), and just as there is a cent in fiat currencies, ether has also named its smaller fractions. From youngest to oldest there are: wei, Kwei (babbage), Mwei (lovelace), Gwei (shannon), microether (szabo), milliether (finney) and ether.
The most common measure of ether:
The Gwei is the unit that users use the most to denominate small amounts of ETH, as is the satoshi in Bitcoin. Usually, when you pay commissions to make a transaction on Ethereum, it is accounted for in Gwei.
How does Ethereum work?
To fully understand the operation of Ethereum, we must first divide it into two levels. On the one hand, we have the how the network works at the level of verification, validation and registration of transactions/information. On the other hand, we must also recognize that since Ethereum is a programmable network, there are other mechanisms that make it possible for developers to create their applications on it, so the process of operation in this area is different, even if they are interconnected.
At the level of data transfer: staking:
Let's talk first about Proof of Participation (PoS) and staking. These two concepts are interconnected with what are known as consensus algorithms, a set of rules of a network protocol that makes it possible for the community to make decisions and communicate without centralized governance.
If you want to know more about this concept we have a chapter of the Cryptopedia dedicated to it, but, in general, what you should know is that in Ethereum the Proof of Participation is used to validate transactions on the network. In this model, there are nodes (which protect and transmit the network information) and validators (which are responsible for organizing, verifying and registering new information to the network). Both figures are key to ensuring consistency in the data supplied to the network, as well as avoiding double expenses and processing transactions 24/7.
In the case of validators, they need to deposit money on the network (32 ETH or more) to have the power to validate transactions. This act is known as staking, and it has become popular in the market as a form of passive investment. They also need special computers and constant internet service to be able to carry out their work. For the work they contribute to the network, the validators receive a reward in ethers, as well as the commissions that users pay to have their operation transmitted.
For each set of blocks of transactions organized, verified and validated, an epoch (or level of the blockchain) is formed in the Ethereum network, where all the operations performed by the users of the same are stored historically. Just like a public ledger, users can see in real time the history of their transactions and other network addresses.
At the programming level: EVM:
At the level of application programming, there is another element that plays a fundamental role for the proper functioning of the network: the Ethereum virtual machine (EVM).
We can say that the EVM (Ethereum Virtual Machine) is something like the Ethereum CPU. And it's just as it sounds: a digital machine that, in theory, is capable of solving almost any mathematical problem and, therefore, running almost any instruction or program. Ethereum is also known as a ”universal computer".
All kinds of computer programs, better known as smart contracts, are built on the EVM. These are codes and data that exist in a specific address of the Ethereum blockchain and which are executed with the aim of offering certain services or fulfilling certain tasks. That is, they are the piece that makes it possible for decentralized exchanges, unique digital images (NFTs) and even predictive markets to be programmed in this network.
The EVM has its own computer language:
The 'EVM bytecode’ is the language of the Ethereum Virtual machine. Once the contracts are written in Solidity, Vyper or another, they are “translated” into Bytecode so that the EVM can read and execute them properly.
What is Ethereum used for?
Ethereum has different use cases, because as we can see it is a platform with several layers of functions. Mainly, we can see it as a person-to-person (P2P) exchange network, where users can move money or make agreements with another individual directly, without the need for an intermediary.
In this way, you can trade with ether or other tokens that make life on this blockchain. You can also send remittances or international payments. There is also, in Ethereum, the possibility of carrying out loans, bets and other types of value exchange in applications developed by third parties.
As it is a programmable network, unlike Bitcoin, it serves to develop online applications in a decentralized way. In turn, since most of these dapp's are open source and Ethereum is also, other developers and programmers can create programs that interconnect with each other.
In this sense, users have the possibility to enjoy a more complete financial system, by getting all kinds of services, such as stablecoins, video games, liquidity pools, trading platforms and financing.
What is Ethereum used for?
Ethereum has different use cases, because as we can see it is a platform with several layers of functions. Mainly, we can see it as a person-to-person (P2P) exchange network, where users can move money or make agreements with another individual directly, without the need for an intermediary.
In this way, you can trade with ether or other tokens that make life on this blockchain. You can also send remittances or international payments. There is also, in Ethereum, the possibility of carrying out loans, bets and other types of value exchange in applications developed by third parties.
As it is a programmable network, unlike Bitcoin, it serves to develop online applications in a decentralized way. In turn, since most of these dapp's are open source and Ethereum is also, other developers and programmers can create programs that interconnect with each other.
In this sense, users have the possibility to enjoy a more complete financial system, by getting all kinds of services, such as stablecoins, video games, liquidity pools, trading platforms and financing.
How is ETH purchased?
There are several ways to buy ethers for the first time. Everything will depend on how much capital you have, the level of knowledge you have and how you want to carry out this operation.
Exchanges:
The most common way to acquire any cryptocurrency, including ETH, is through an exchange. These are platforms specialized in the purchase and sale of crypto assets, as well as other financial products such as derivatives or even loan services.
In this market, there are two widely used types of exchange. First, there are the centralized or traditional exchanges (CEX), which are managed by a company or board. These exchanges are usually the favorites of novice users, since the operations are centralized and can be reversed in case any inconvenience /scam occurs. However, due to its operation, it is essential that the user links their bank accounts in order to make a first purchase on the exchange and even has to provide private information by KYC and AML measures.
On the other hand, there are decentralized exchanges (DEX) that usually make life on networks such as Ethereum and work through smart contracts. Without the need for an intermediary, users can make person-to-person (P2P) purchases automatically and without the need to provide personal information. Its disadvantages? They do not usually work with bank accounts or cash (only cryptocurrencies), as well as users are more vulnerable to scams or theft because there is little legal protection in this sector.
ATMs:
If cash is your thing, then cryptocurrency ATMs may be the ideal option for you to buy your first ETH. It is a machine, just like the ones we are used to in banks, that allows us to exchange physical coins for electronic money.
Not all ATMs have the possibility to buy ETH, since a large majority is focused on the bitcoin market. However, it is an alternative with many advantages: you can directly change money from your national currency to cryptocurrencies, if you make low purchases you do not have to provide personal information and you can get acquainted faster with electronic money since it is a very simple process.
A disadvantage? Not every country has cryptocurrency ATMs, much less every city in the world. Also, these machines usually charge high fees for their service.
Person to person:
Do you have an acquaintance who is selling ETH? Or any family member who is familiar with the cryptocurrency market? Well, one of the easiest ways to acquire a cryptocurrency is by buying it from a close person. Because Ethereum is a person-to-person (P2P) network, two individuals can make a trading agreement outside the network and even an exchange platform.
You will have to talk to the person about the terms of that trading operation: the price at which the cryptocurrency will be traded, the amount to be purchased and the address at which the money will be received. When all the details are agreed, both parties will transfer the capital without having to report it to a third party. Of course, be careful, as this is an informal agreement there will be no easy way to verify the transaction. Therefore, one of the biggest disadvantages of this type of purchase is that it is the most vulnerable to theft and scams.
Institutional signatures:
If you want to invest in ETH or do trading, but you are worried about the legal incidents of doing it on an exchange, then you have the investment funds or derivatives products on the stock exchange as a more institutional option. These financial products allow you to gain exposure in crypto assets without having to directly acquire the cryptocurrency in case you so desire. Likewise, some of these firms create investment strategies or diversify their clients' portfolios in order to maximize profits.
Some of these products are, for example, the futures contracts of The Chicago Mercantile Exchange (CME). Likewise, the digital asset firm Grayscale offers shares of its fund in ethers, the Grayscale Ethereum Trust, for those investors interested in holding the cryptocurrency.
Disadvantages? Mainly that this type of products are not as common and freely accessible as cryptocurrency exchanges. These are services focused on citizens of a country, such as the United States, Canada or the European Union area. In the same way, these are companies that ask their clients to meet certain requirements to become part of their community, such as buying a certain minimum amount of shares to be able to trade with them.
Alejandro O. Asharabed Trucido
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