Find out why Ethereum is one of the biggest cryptocurrencies in the world and why it's built such an incredible ecosystem around it.
Ethereum is one of the largest cryptocurrency projects. It has grown a massive community of both users and projects around itself, becoming a fascinating thing to explore. Let's delve into the basics of this established cryptocurrency and find out why so many people are choosing to build on ethereum.
What is Ethereum?
Ethereum launched in July of 2015, intending to become a programmable blockchain rather than a cryptocurrency focused on payments. While you can look at some cryptocurrencies as focused on the currency aspect, ethereum takes that in a slightly different direction. While you can transact using ethereum as a means to exchange value, there's a lot more focus on creating applications that can take advantage of the network; these are called decentralized applications.
Ethereum launched as a proof-of-work blockchain; this means that miners are used to help secure the network. However, with the intended transition to ethereum 2.0, this will no longer be the case. The goal is to move to a proof-of-stake solution that operates without the need for miners but instead allows people to stake their ether to validate transactions on the network.
At its core, ethereum is a blockchain network that utilizes a decentralized public ledger to verify and record transactions, but thanks to some key differences in how ethereum works, a lot more is possible.
Smart Contacts & Solidity
Smart contracts form the programmable part of ethereum and have had a strong influence on the types of projects attracted to ethereum. Projects like Uniswap have leveraged smart contracts to create forms of decentralized finance (DeFi) and dapps that are becoming incredibly popular.
Dapps (decentralized applications) are a large part of the ethereum ecosystem and are only increasing with new projects launching all the time. While in the earlier days of the project, ethereum was arguably best known for being a blockchain that allowed for the easy creation of tokens that could be utilized using the existing network. Even with that still being common, far more attention is shifting towards the developments of dapps.
Dapps, as the name suggests, are decentralized. This decentralization is made possible by them running on the ethereum network which is distributed thanks to the vast range of participants across the world. Using smart contracts, ethereum accounts that can be interacted with in various ways and using various logic can be created, around this fully dapps can be built. While smart contracts can be incredibly complex, you can break them down to a key point; with the right inputs, a certain output can be guaranteed. Using smart contracts it's even possible to have one deploy another. With the public nature of the ethereum blockchain, you could attempt to engage with any smart contract you find deployed on the network; however, you are not guaranteed any particular outcome other than what is coded into the contract itself.
Smart contracts allow for trustless exchange, conditional payments, and so much more. However, they do have their limits. They cannot access data about events outside of the blockchain, which has led to the challenge of creating blockchain oracles to solve this problem. While this limitation can be a problem for some uses, it ensures smart contracts are by default protected from relying on third-party data sources off-chain that can't be trusted in the same way as on-chain activity. However, this is somewhat outside of the scope of this article, nonetheless a topic worth exploring if you are interested.
What is an Ethereum Wallet?
If you've never used a cryptocurrency before, the concept of a wallet may seem odd at first, but it's something that you'll quickly get the hang of with experience. Like a wallet in the real world, your ethereum wallet helps you track and store value, but it has some key differences.
When simplified, an ethereum wallet, in practice, involves both a public key and a private key for your ethereum account. Using the public key, you can receive funds; there’s no harm outside of the privacy concerns of you publicly sharing this address. No one can take your ethereum from you with only access to your public key, hence the name. On the other hand, your private key is very much the opposite. Your private key allows you to sign transactions. Your private key gives you the power to prove ownership of ether or tokens on the ethereum blockchain and perform transactions with them freely. If you lose your private key or access to it, you will no longer be able to access the funds stored in your wallet and should consider it lost.
Not all types of wallets are equal when it comes to cryptocurrency, which is important to understand. Some wallets (such as those on centralized exchanges) are managed wallets, and they take custody of your ethereum when you deposit (send ether to them). These specifics are important because if you don't have access to the private key, you don't control your ether. If the platform you are using went offline, blocked your account, or anything else that removed access from you to that wallet, it would be unrecoverable as you don't have true access to those funds. While this may not concern you for smaller transactions, it is something essential in understanding.
Suppose you use LocalCoinSwap to store your ethereum. In that case, you can export your private key, giving you complete control of your ether, as your private key is generated using your password, which we don't have access to, only you have access to your funds; this is called a non-custodial wallet.
Typically when referring to a wallet, it will be referencing websites or other applications (such as a mobile wallet on your phone) that allow you to manage your ethereum account. If you can generate an ethereum account using a piece of software, you would generally call this a wallet. Your ethereum account does not technically require a wallet; it just makes using your ethereum a lot more practical. Some popular examples of ethereum wallets include MetaMask, MyEtherWallet, MyCrypto, just to name a few of the most popular options.
Understanding Gas on Ethereum
One of the most common points of confusion for new ethereum users is gas, but it's not as complicated as it may seem at first glance, even though it has an unusual name. Gas is required to conduct transactions on the ethereum network. It doesn't matter if you are sending ethereum, tokens, interacting with a smart contract; all of these actions require gas. Priced in a smaller unit of ethereum called gwei, gas is, in essence, just a way of paying for transactions using ethereum.
Whether you are trying to perform a transaction with some tokens or with ether itself, you'll still require ethereum in your account to be able to get your transaction confirmed. The amount of gas you'll be required to pay is primarily based on supply and demand. The more congested or active the network is, likely the higher you'll need to pay for fast or successful confirmation. Different types of actions will require different amounts of gas to perform. For example, sending ether may cost a certain amount of gwei, while interacting with a smart contract will cost more; this is due to the resources required to process your transaction depending on what you are trying to do.
You can find reasonable estimates of current transaction costs by checking out the Etherscan Gas Tracker. They include a few examples of common transaction types and the current rate you can expect to pay. When sending important transactions to be careful when using the lowest gas estimates; you can find that your transaction may fail to confirm or take a long time if the network activity increases if you set your gas price too low. ETH Gas Station is another excellent resource for gas estimates.
The Best Way to Learn About Ethereum
When it comes to cryptocurrencies, reading is a great way to gain a foundational understanding of the fundamentals. However, if you really want to explore ethereum, the best way can be to explore using it. Buying a small amount of ethereum and experimenting can help you not just understand how things work but allow you to experience it for yourself.
If you found this interesting, be sure to check out some of our other articles to learn more about ethereum or other aspects of cryptocurrency.