Ethereum is a blockchain-based platform that allows for the creation of decentralized applications, known as "DApps". Investors can add funds to these DApps and earn interest or other rewards in various ways.
These applications can run without any censorship or third-party interference, making them a powerful tool for creating unstoppable applications.
This guide will explore what Ethereum is, how it works, and why it's so revolutionary. LFG!
Table of contents
What Is a Blockchain?
A blockchain is a public digital ledger that documents all cryptocurrency transactions. It grows by "completed" blocks being added to it, with new records recorded in each block.
The previous block's hash includes a timestamp and transaction data in each block.
In ELI5 terms...
it's an inescapable public ledger. The wallet address records every single thing that happens. However, these wallets are usually anonymous.
Blockchain Features
Blockchains do some pretty cool stuff. While it can be somewhat technical, here are some attributes we can all understand and get behind as investors and people who want to experience a different type of finance.
Decentralization
The most important feature of a blockchain is that it is decentralized. There is no central authority that controls the network.
This means that no one can censor or interfere with the applications running on the Ethereum blockchain.
Transparency
All transactions on the Ethereum network are public and transparent. Anyone can see the transactions that are taking place.
It is a powerful tool for combating fraud and corruption, as it makes it very difficult to hide nefarious activities.
Security
Blockchains are incredibly secure. The Ethereum network is powered by thousands of nodes worldwide, making it virtually impossible to hack.
In addition, all transactions on the network are cryptographically sealed, making them tamper-proof.
How Does Ethereum Work?
Below I've included some terminology and definitions you should know before investing in crypto. The better you understand this glossary, the easier it will be to understand more technical conversations.
What Is a Smart Contract?
Ethereum is a blockchain-based platform for the creation and execution of smart contracts. A smart contract is a piece of code that runs on the network. Smart contracts are applications that execute precisely as intended, with no possibility of foul play or third-party intervention.
It is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.
This code enables transactions to be carried out without the need for a middleman.
Ethereum is used to build Decentralized Autonomous Organizations (DAOs), which are run by code instead of by people. One example is the defi cover company I recently wrote about, Nexus Mutual. Check out that piece here to see how they use a DAO for their project.
How Is It Unique?
Ethereum is unique in that it allows for the creation of decentralized applications. New blockchains pop up all the time. However, many of them run on the Ethereum Virtual Machine (EVM).
The Ethereum Virtual Machine
The Ethereum Virtual Machine (EVM) is a Turing-complete software that runs on the Ethereum network. It enables anyone to run any program on a decentralized network regardless of the programming language used.
The EVM makes it possible for developers to create smarter contracts and decentralized applications (DApps). It executes a set of instructions called opcodes, which are used to manipulate data stored in contract storage. Each opcode has a specific function, such as adding two numbers or retrieving data from storage.
When a contract is deployed to the EVM, its code is compiled into EVM bytecode, which the EVM then executes. The EVM can also interact with other blockchains through cross-chain atomic swaps, such as Bitcoin and Zcash. This allows users to swap tokens between different blockchain platforms without the need for a centralized exchange.
In short, the Ethereum virtual machine is a powerful tool that enables developers to create DApps and smart contracts that can run on a decentralized network. It also allows for interaction with other blockchains, making it possible to build truly interoperable applications.
These applications can run without any censorship or third-party interference, making them a powerful tool for creating unstoppable applications.
In addition, Ethereum is also working on ways to reduce the environmental impact of blockchain technology by using Proof of Stake instead of Proof of Work.
This model makes it a more sustainable and environmentally friendly option compared to other blockchain-based platforms.
You may have heard of Bitcoin mining. Ethereum works a similar way, but with the release of its newest version, due out soon, it will switch to another popular model. The current one is proof of work, and the future model Ethereum will use is called proof of stake.
ERC20 Explained
What in the World Does ERC-20 Mean? I'm so glad you asked...
ERC-20 is a technical standard that defines a set of rules for creating tokens on the Ethereum blockchain. These tokens can represent anything from utility tokens to stablecoins and are often used in decentralized applications. An ERC-20 token is a token that has been created in accordance with the ERC-20 standard.
As a result, these tokens are compatible with Ethereum wallets and can be traded on Ethereum-based exchanges. While there are many different types of ERC-20 tokens, they all share the same basic structure.
This structure makes it easy for developers to create new tokens and for users to store and trade them. As a result, the ERC-20 standard has played a key role in the growth of the Ethereum ecosystem.
Think of ERC-20 tokens as denominations of American paper money. A stablecoin represents a $1 bill. And you can spend that $1 bill in any store in the US. The same goes for $5, $20, and $100 bills.
All American businesses accept this money as legal tender. The same goes for ERC-20 tokens. If it's an ERC-20 token, it can be bought, sold, and traded on the Ethereum network.
Proof of Work VS. Proof of Stake
Proof of Work (PoW) is the original consensus algorithm in a Blockchain network. With this model, miners compete against each other to complete transactions and validate blocks.
The first miner to successfully validate a block receives ETH as a reward.
PoW is a computationally-intensive process that requires a lot of energy. The intense energy consumption makes it an environmentally-unfriendly option.
Proof of Stake (PoS) is a newer consensus algorithm that is more energy-efficient than PoW.
In PoS, instead of miners competing against each other to validate blocks, the validators are chosen in a deterministic way, and they stake their cryptocurrency to bet on the correct chain.
PoS is a more environmentally-friendly option than PoW, needing far less energy to run.
Ethereum plans to eventually switch over to PoS, which will make it a more sustainable and environmentally-friendly platform.
What Can You Do with Ethereum?
There are a variety of things that you can do with Ethereum. You can use it to build decentralized applications, create smart contracts, or even launch your own cryptocurrency.
As far as use cases, these projects typically fall into one of these three categories:
Defi - Defi -- or decentralized finance -- represents financial alternatives to traditional investing. These alternatives can include making money, turning that money into more money, or turning that money into a different kind of money. I'll go over this more in my next piece in this series.
NFTs - I've already covered this topic in a decent about of detail. You can check out that piece here. But the TLDR is that they're primarily being used as digital art right now. However, there are other use cases, such as holding tokens for a locked period and gamefi applications.
Gamefi - Given the popularity of video games with adults in 2022, it was only a matter of time before developers took their ideas to a potentially more lucrative platform. Gamefi works a bit differently than the average game.
These games are what's called "play to earn". The more you play, the more crypto you get. To get the most out of this experience, you'll probably have to invest some eth or other tokens onto the platform. Defi Kingdoms is one of the most popular all-time gamefi platforms. Before an exploit that knocked the price down, their token, JEWEL, was selling for more than $20.
The possibilities are endless, and the Ethereum platform provides a powerful tool for developers to create future applications. One of the biggest complaints with this network, and one of the reasons developers are building alternatives, is the high gas fees.
What Is Gas?
Gas is a unit of measurement used to determine how much computational effort is required to execute a transaction or smart contract on the Ethereum network. Essentially, it's just a fancy term for transaction fees.
Every time you interact with the blockchain, you'll pay a fee. Depending on what you want to do, you may have to pay a couple of fees. The amount of gas required depends on the complexity of the transaction or smart contract.
Gas is measured in gwei. A single gwei is one-billionth of an ETH token. A small gas fee here and there may not seem like much, but the average cost of doing business can be expensive.
Making several moves in a day or on a day when the network is congested can cost you hundreds of dollars. So it's imperative you have enough ETH in your wallet to pay your gas fees.
What Is a Token?
A token is a digital asset built on top of the Ethereum blockchain.
Tokens can represent various things, such as loyalty points, digital assets, or even physical objects.
Using Ethereum: Centralized Exchanges VS. Decentralized Exchanges
There are two types of exchanges available for trading Ethereum - centralized and decentralized. Centralized exchanges are the traditional mechanism for exchanging currencies and involve a third-party service to hold and facilitate the transaction.
On the other hand, decentralized exchanges are peer-to-peer and do not require a third party. Both have their advantages and disadvantages.
Centralized exchanges are generally more user-friendly and offer more features than decentralized exchanges. They also tend to be more reliable, as professional organizations run them.
Remember, not your keys, not your crypto. When you use a centralized exchange, your funds are technically owned by the exchange. Coinbase recently admitted that all user funds would be lost in the event of bankruptcy.
Centralized exchanges can also be subject to government regulation, which may impact their operation.
Decentralized exchanges can offer greater security, as the funds are spread across many different users. They also tend to be more resistant to government regulation. However, decentralized exchanges can be more challenging to use, as they often lack centralized exchanges' same features and functionality.
Additionally, they may be less reliable, as they rely on the network of users to function properly.
Examples of centralized exchanges would be Coinbase or Gemini. The biggest decentralized exchange on Ethereum is Uniswap.
It's much different from Coinbase or Gemini, and you want to research how liquidity provider tokens work before you start messing around on this application. My next article in this series will be discussing more intermediate-level strategies and possibilities for investors, so keep an eye out for that.
Wrapped Bitcoin (wBTC)
It's important to note that Bitcoin is not native to the Ethereum blockchain. That's why there is a lowercase "w" before the same on these exchanges. That "w" stands for “wrapped”.
wBTC launched in 2019 amidst demand by traders on the Ethereum network. It is a digital token that is backed 1:1 by Bitcoin.
Each wBTC token represents one real Bitcoin stored in a secure vault. Investors can trade WBTC just like they would trade Bitcoin, but with the added flexibility of using it on Ethereum-based decentralized exchanges and applications.
It has already become one of the largest and most active markets on Ethereum. As the leading Ethereum-based tokenized Bitcoin, WBTC brings all the benefits of Bitcoin to the Ethereum network, including trustlessness, censorship resistance, and permissionlessness. By wrapping Bitcoin into an ERC20 token, WBTC also enables investors to take advantage of the wide range of DeFi applications built on Ethereum.
How to Get Started with Ethereum - Setting Up an Account and Buying Your First Crypto
When you’re ready to get started with Ethereum, the first thing you need to do is set up an account.
The easiest way to do this is by using an online exchange, such as Coinbase or Kraken. You'll have to fill out KYC information and be verified by the team before you can add funds to this account.
I know this post is getting pretty long, so I’ll add an explainer video so you can have a visual aid to open a Coinbase account. The process should be pretty similar to every centralized exchange.
How to Create a Coinbase Account [STEP-BY-STEP]
Once you have set up your account, you will need to purchase some ETH. You can do this by using a credit card or bank transfer. If you don't want your funds going through a centralized exchange, you can buy them directly through some hot wallets and cold wallets.
Keep in mind that you will be subject to gas fees every time you move your funds around.
Non-Custodial Wallets
A non-custodial wallet is a crypto wallet where the user owns the private keys. This means that the user has full control over their crypto assets and no one else can access them. Non-custodial wallets are often considered to be more secure than custodial wallets, as they are less likely to be hacked or targeted by scams.
I use the word "secure" here loosely. MetaMask and other hot wallets can, and often are, broken into by hackers. These people are merciless. They don't care about your situation or how hard you worked to get where you are. Hackers are thieves and they want what is yours and they will take it.
Luckily, I'm working on a post about tips to help you stay safe in crypto, so be on the lookout for that.
Some popular non-custodial wallets include MetaMask, Ledger Nano S, and Trezor. These wallets all allow the user to store their own private keys, giving them complete control over their funds. They also give users an increased level of access to defi, gamefi, and NFTs.
To get in on some of the coolest projects in crypto, you'll need a MetaMask wallet at the very least.
Wrapping It Up
In this article, we have covered everything beginners should know about Ethereum. We have discussed what Ethereum is, how it works, and what you can do with it.
We have also covered the basics of setting up an account and buying your first ETH or Bitcoin on the Ethereum network.
If you have any questions, feel free to drop them below. We’re always happy to help.
