What is Ethereum (ETH) if Bitcoin (BTC) is the claimed future of money? That’s a reasonable question for someone new to the cryptocurrency field to ask, given that Ethereum and its native Ether (ETH) token are frequently seen alongside Bitcoin on exchanges and in the headlines. However, putting Ethereum in direct rivalry with Bitcoin isn’t entirely accurate. It has a variety of objectives, features, and even technology.
Ethereum is a decentralized blockchain network powered by the Ether token that allows users to do things like executing transactions, collect interest on their holdings through staking, utilize and store nonfungible tokens (NFTs), trade cryptocurrencies, play games, and use social media.
It’s now a proof-of-work (PoW) blockchain, but with Ethereum 2.0, it’ll switch to proof-of-stake (PoS) for scalability and a more ecologically friendly method.
Ethereum is widely regarded as the internet’s next step. If Web 2.0 represents centralized platforms like Apple’s App Store, Web 3.0 represents a decentralized, user-powered network like Ethereum. Decentralized applications (DApps), decentralized finance (Defi), and decentralized exchanges (DEXs), for example, are supported by this “next-generation web.”
These are all secure, automated versions of traditional money and internet usage that are frequently used. Defi already has billions of dollars invested in projects, and that number is anticipated to rise.
Ethereum was not always the world’s second-largest blockchain project. Vitalik Buterin co-founded the project to address Bitcoin’s flaws. In 2013, Buterin published the Ethereum white paper, which described smart contracts, which are automated, immutable “if-then” expressions that allow decentralized applications to be built. While there was previously DApp development in the blockchain arena, the platforms were not compatible. Ethereum, according to Buterin, was created to bring them together. To him, the only way to retain adoption was to unify the way DApps function and interact.
As a result, Ethereum 1.0 was created. Consider it similar to Apple’s App Store: a single location for tens of thousands of different apps, all adhering to the same set of standards, but those rules are hardcoded into the network and enforced autonomously, with DApp creators empowered to enforce their restrictions. There is no central party like there is with Apple when it comes to amending and enforcing regulations. Instead, the power is in the hands of a group of people who act together.
Of course, putting together a network like this isn’t cheap. So Buterin and his co-founders Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alise, Anthony Di Iorio, and Amir Chetrit launched a token presale to raise $18,439,086 in Ether, which will be used to fund Ethereum’s current and future growth.
The Ethereum Foundation was established in Switzerland by the organization to maintain and develop the network. Buterin revealed shortly after that the foundation will be managed as a nonprofit, prompting some co-founders to resign.
Developers began to flock to Ethereum with their decentralized ideas over time. The DAO, a democratic group that voted on network modifications and suggestions, was created by these users in 2016. The company was supported by a smart contract, which eliminated the need for a CEO to wield power over Ethereum. Changes could only be made if a majority of people voted for them.
However, everything went wrong when an unknown hacker used a security flaw to steal $40 million from The DAO’s holdings. The DAO voted to “hard fork” Ethereum, separating from the old network and upgrading to a new protocol, effectively performing a large software upgrade, to reverse the theft. The previous network is known as Ethereum Classic, whereas the new fork is known as Ethereum.
What is Ethereum and how does it work?
The Ethereum network, like Bitcoin, is distributed among thousands of computers throughout the world, thanks to people acting as “nodes” rather than a centralized server. As a result, the network is decentralized and highly resistant to attacks, and it is virtually impossible to bring down. It makes little difference if one computer fails because the network is supported by thousands of others.
Ethereum is a single, decentralized system that is powered by the Ethereum Virtual Machine, a computer (EVM). Every node has a copy of that computer, therefore any interactions must be confirmed so that everyone’s copy may be updated.
Otherwise known as “transactions,” network interactions are recorded in blocks on the Ethereum blockchain. Miners validate these blocks before committing them to the network, which acts as a digital ledger or transaction history. A proof-of-work consensus technique is used to verify transactions. Each block is identified by a 64-digit code that is unique to it. Miners devote their computing resources to finding the code and confirming its uniqueness. Miners are rewarded in ETH for their efforts, and their computer power serves as “proof” of that labor.
All Ethereum transactions, like Bitcoin, are completely public. Completed blocks are broadcast to the rest of the network, validating the modification and adding the blocks to everyone’s copy of the ledger. Confirmed blocks are immutable and serve as a perfect record of all network transactions.
But, if miners are compensated for their efforts, where does the ETH originate? Each transaction is accompanied by a cost known as “gas,” which is paid by the user who initiates the transaction. This fee is paid to the miner who validates the transaction, which encourages more mining and ensures network security. The gas acts as a limit, limiting the number of actions a user can perform each transaction. It’s also there to keep network spam at bay.
The supply of ETH is endless since it is more of a utility token than a value token. Ether enters circulation in the form of miner incentives regularly, and it will do so with staking rewards once the network switches to PoS. In principle, Ether will always be in demand, therefore inflation should never depreciate the asset to the point where it is no longer useful.
Unfortunately, depending on network traffic, Ethereum gas prices might be fairly high. This is because a block can only carry a certain amount of gas, which changes depending on transaction kinds and amounts. As a result, miners will prioritize transactions with the greatest gas prices, putting users in a race to validate the most transactions first. Fees are being pushed higher and higher as a result of the competition, which is clogging the network during peak hours.
Network congestion is a big issue, but it will be solved in Ethereum 2.0, which is a comprehensive revamp that will be described in its section.
To interact with Ethereum, you’ll need Bitcoin, which you’ll keep in a wallet. That wallet links to DApps and serves as an Ethereum ecosystem passport. Anyone can buy things, play games, lend money, and do all sorts of things from there, just like they can on the traditional internet. The traditional web, on the other hand, is free to users because they are handing out personal information. The data is then sold to gain money by centralized corporations that control websites.
In this case, cryptocurrency replaces data, allowing users to explore and engage anonymously. This also implies that the adoption of DApps is not discriminatory. No lending or banking DApp, for example, can reject someone based on their race or financial situation. What an intermediary considers a “suspicious transaction” cannot be blocked. Many consider Ethereum to be Web 3.0 — the future of web interaction — since users have complete control over what they do and how they do it.
Key differences between BTC and ETH
While both Bitcoin and Ethereum are built on the concept of distributed ledgers and encryption, their technical specifications are radically different. While Bitcoin is intended to store value as a digital version of gold, Ether is utilized to power the Ethereum network and its applications.
On both the Bitcoin and Ethereum networks, new tokens can be created. The Omni layer, which is used by Bitcoin, is a platform for producing and trading currencies on the Bitcoin network. The adoption of the Omni layer has centered on stable coins. Ethereum tokens, on the other hand, are created using a variety of standards, the most prominent of which being ERC-20.
The ERC-20 standard establishes a set of rules for the network’s tokens. Before launching their tokens, developers must implement many functions specified in the ERC-20 standard. These features include presenting information on the token’s total supply, account balances on users’ addresses, and the ability to transfer payments across addresses.
Although Bitcoin transactions are monetary, they can include notes and messages by encoding these notes or messages into data fields in the transactions. Ethereum transactions can include executable code that can be used to establish smart contracts or interact with self-executing contracts and apps.
The time it takes for new blocks of data to be uploaded, which impacts the time it takes to confirm transactions, is another distinction between these networks. Blocks are added to the Bitcoin network every 10 minutes on average, but they take roughly 15 seconds on Ethereum.
Both networks have different public wallet addresses. These wallet addresses are unique identifiers that enable users to receive funds, similar to an International Bank Account Number (IBAN), which financial institutions use to determine which bank and country a client’s account belongs to. Addresses on Bitcoin can begin with a 1, a 3, or “bc1,” whereas on Ethereum, they begin with “0x.”
While both Bitcoin and Ethereum have used a proof-of-work consensus process, Ethereum is switching to a proof-of-stake mechanism. Proof-of-stake is based on the stake of a transaction validator in the network. Users must stake their ETH to become validators on Ethereum, which are entities that verify transactions to ensure the network is not tampered with.
Instead of having miners with specialized computers, proof-of-stake consensus methods reduce the amount of energy required to obtain consensus by allocating mining power to the proportion of validators’ tokens. Because it is easier to become a validator in a proof-of-stake network, it is more energy efficient with lower entry barriers for validators and higher resiliency to decentralization.
ERC-20 tokens, which are based on Bitcoin, are also available on the Ethereum blockchain. A tokenized version of Bitcoin was produced and launched on Ethereum to take use of DApps.
On the Ethereum network, there are various tokenized versions of Bitcoin. These are backed by Bitcoin at a 1:1 ratio, which means that for every ERC-20 token that represents Bitcoin in circulation, one BTC is held in custody. On Ethereum, tokenized versions of Bitcoin allow users to preserve their Bitcoin while using decentralized applications. Token holders, for example, can earn interest by lending their BTC.
Scaling solutions for Bitcoin and Ethereum
The foundation Both the Bitcoin and Ethereum networks have scalability difficulties. The Ethereum network can handle roughly 30 transactions per second, compared to Bitcoin’s average of seven transactions per second. Visa, on the other hand, processes roughly 1,700 transactions per second and claims to be able to grow up to 24,000.
With the increasing number of people utilizing both blockchains, both Bitcoin and Ethereum are approaching their capacity limits and need solutions to assist them to handle additional users. When demand for block space exceeds what both networks can handle, transaction costs on both networks rise.
When it comes to scalability, BTC and ETH take different approaches. Bitcoin has developed technical upgrades such as Segregated Witness (SegWit), a feature that “segregates” some data from the rest of the data in each block sent to the network. SegWit enables for more efficient use of each Bitcoin block’s 1 MB of storage space.
Furthermore, engineers have been working on a layer-two scaling solution, which refers to a Lightning Network-based transaction layer built on top of the main blockchain. Transactions on the Lightning Network are quick and fees are low since they are routed through payment channels that users construct.
The Lightning Network’s user-generated payment channels are pre-funded with BTC, and they may be able to migrate most transactions from the basic blockchain to this layer-two network.
The Lightning Network is expected to be capable of handling up to 15 million transactions per second, according to proponents. The only transactions that would be finalized on the underlying Bitcoin blockchain would be those building and shutting Lightning Network payment channels, therefore these would not be settled on the Bitcoin network itself.
Scaling solutions are also being implemented by Ethereum, which will function on both the Ethereum network and layer-two networks. Sharding, Ethereum’s main bet for expanding its base blockchain, would reduce network congestion and boost transactions per second by generating new blockchains called “shards,” which would reduce network congestion and increase transactions per second.
Because shard chains can help spread the processing resources needed to run Ethereum among a total of 64 networks, every device running the Ethereum blockchain would notice a large reduction in RAM and storage requirements.
On Ethereum, layer-two scaling solutions rely on servers that bundle huge numbers of transactions before submitting them to the blockchain. How these transactions are bundled and then broadcast to Ethereum differs greatly between implementations. Sidechains are other layer-two options for Ethereum.
Sidechains are other networks that run alongside the Ethereum network and are interoperable with it via protocols that allow users to transfer tokens from one network to the other, effectively allowing them to access ETH-based applications while paying lower costs. Multiple scaling strategies are used by Bitcoin and Ethereum to help alleviate network congestion and improve the number of transactions they can handle per second.
How far has Ethereum progressed?
The Ethereum network’s most significant success has been decentralized finance. DApps that can perform several functions inside the ecosystem began to appear around 2019 to 2020, and their popularity is growing by the day. The Ethereum network will be used more as a result of the increased use of DApps. The Ethereum Defi scene is the largest in the world, with successful DApps garnering the platform greater attention over time.
Nonfungible tokens, or NFTs, are helping artists make millions of dollars by taking their work to the blockchain. Why buy digital art when we can just screenshot it, one could question. That is why collectors seek ownership. NFTs also function as a secure method of storage and proof of ownership. It’s essentially a one-stop-shop for collectors, so it’s easy to see why.
It’s the same reason why someone would choose the original “Mona Lisa” to a duplicate, even if the copy is nearly identical to the original. In online games, NFTs also represent usable things and accessories. Players can use unique elements from artists to decorate their homes and personalities, giving yet another source of income for artists.
Uncensorable social media apps have been created, allowing users to tip one another for content. Users can invest in assets, play to increase them, and then sell for a profit, allowing them to get real money out of their game time. There are prediction platforms that payout for accurate predictions, as well as freelance platforms that don’t take a large percentage of each payment.
All of this is automated thanks to blockchain and smart contracts, and Defi gives customers more power over their money than ever before.
Aside from decentralization and anonymity, Ethereum has several other advantages, including the absence of censorship. If someone tweets anything inappropriate, Twitter, for example, can opt to remove the tweet and punish the person. On an Ethereum-based social media site, however, this can only happen if the community agrees. Users with differing points of view can converse as they see fit, and the public can decide what should and should not be spoken.
Requirements imposed by the community also prevent negative actors from gaining control. To make a change, someone with nefarious motives would need to control 51% of the network, which is practically difficult in most situations. It’s far more secure than a simple server that can be hacked.
Then there are smart contracts, which automate many of the traditional web’s actions taken by central authorities. Upwork, for example, requires a freelancer to use the platform to acquire clients and set up payment arrangements. Upwork’s business strategy pays its staff, server costs, and other expenses by taking a share of each contract. A client can simply construct a smart contract on Web 3.0 that says, “If the task is turned in by X time, the payments will be released.” Once written, the rules are hard-coded into the contract and cannot be changed by either side.
Ether is also becoming more accessible than ever before. PayPal and its Venmo subsidiary, for example, allow users to buy cryptocurrency using fiat currency straight within the app. Given the millions of customers on each platform, they’ll almost certainly participate sooner rather than later.
While it appears to be the ideal platform, Ethereum has a few major flaws that need to be addressed. The first consideration is scalability. Buterin envisioned Ethereum in the same manner that the internet does now, with millions of users participating at the same time. However, due to the PoW consensus mechanism, block validation durations and gas fees limit such engagement. Decentralization is also a barrier; a centralized corporation, such as Visa, handles everything and has refined the transaction process.
Then there’s the issue of accessibility. Ethereum is expensive to create and difficult to communicate with for individuals inexperienced with its technology at the time of writing. Some sites demand specialized wallets, which implies that ETH must be transferred from one wallet to another. For people used to our present financial ecosystem, this is an unnecessary step that is not beginner-friendly in the least.
PayPal is adding cryptocurrency support, but customers won’t be able to do anything with it other than keep it there. To expand accessibility in a meaningful way, the platform must interface with Defi and DApps.
The site does feature some well-written documentation on the subject, which is yet another important technique to attract new users. However, the process of actually using Ethereum needs to be streamlined. Learning about blockchain is not the same as actually using it.
How does Ethereum 2.0 work? (Eth2)
Ethereum is gradually updating to version 2.0, which will include a proof-of-stake consensus process. The original Ethereum network is planning on combining with the Beacon Chain – Ethereum 2.0’s first new feature — between 2020 and 2022.
The Beacon Chain doesn’t appear to change much at first glance, but it introduces the underlying modifications required for future enhancements like shard chains. Remember how we talked about scalability earlier? Shard chains and the sharding process play an important role in resolving scale challenges.
The act of dispersing transactions across many, smaller blockchain networks is known as sharding. Users with less powerful hardware can run these smaller networks because they only need to store data from a single shard rather than the complete network. Sharding, in essence, makes Ethereum validation more accessible while also helping to decongest the main network.
Many cryptocurrency aficionados are optimistic about Ethereum 2.0. NFTs are gaining popularity among celebrities, and public blockchain awareness is increasing. All of this activity, on the other hand, has resulted in higher transaction fees and longer validation periods, demonstrating the necessity for Ethereum 2.0. This can be a concern because fees can sometimes cost more than half of the transaction amount. Fortunately, DApp developers are working hard to make it more accessible in preparation for widespread use.
Proof-of-stake consensus, a crucial component of Ethereum 2.0, is one part of the solution. Ethereum 2.0 represents the transition to a PoS consensus algorithm, which is less energy-intensive than mining. Miners are replaced with validators in Proof-of-Stake, which are users who maintain the Ethereum blockchain, validate transactions, and so on. They’re nothing more than a different type of node.
A minimum of 32 ETH must be staked to become a full validator, at least during the early days of Ethereum 2.0. Validators earn ETH for their efforts by leaving a computer connected to the network. The premise is that people who put their ETH on the line have the best interests of the network at heart and will go to any length to ensure its success. Furthermore, if a validator fails to participate or engages in malevolent behavior, they risk losing their ETH.
Proof-of-stake is said to be a speedier and more accessible method of blockchain consensus. It doesn’t require any particular hardware, unlike mining, so anyone with money and a smartphone can take part. In theory, the network should develop as a result of this accessibility. The greater the number of validators, the more blocks are validated. Additional validators further decentralize Ethereum, boosting security as the role grows.
What is Ethereum mining?
Mining cryptocurrency is a method of resolving difficult mathematical problems. Miners are the backbone of many cryptocurrency networks, as they devote their time and processing power to solving math problems, thereby providing a “proof-of-work” for the network to verify Ether (ETH) transactions. Ethereum, like Bitcoin (BTC), currently uses a proof-of-work (PoW) consensus mechanism but will soon transition to a proof-of-stake (PoS) system.
Miners are also in charge of creating new Ether tokens as a result of this process, as they earn Ether as a reward for completing a PoW operation.
PoW is based on the hash function, which is an “encrypted” piece of data that is procedurally generated from any arbitrary input. The difference between hashes and traditional encryption is that hashes are one-way processes.
The only method to figure out what input was used to generate a hash is to hash all of the available input combinations and determine which one fits. This is exacerbated even more by the fact that little changes in the initial data might result in completely different outcomes.
The “difficulty” option is used to create a list of required hashes in proof-of-work. Miners must brute force a combination of parameters, including the hash of the previous block, to construct a hash that meets the difficulty’s requirements. This is an energy-intensive chore that can be readily controlled by increasing or decreasing the difficulty level.
Miners have a “hash rate” that determines how many combinations they try in one second, and the more miners that participate, the more difficult it is for outside entities to reproduce the network. Miners protect the network by putting in real effort.
Why should you mine Ethereum?
Mining transforms the act of securing a network into a complicated but usually lucrative enterprise, hence profit is the fundamental motivator for mining. For each block, miners are paid a fixed amount, plus any transaction fees paid by customers. Fees typically contribute a modest portion of overall revenue, but Ethereum’s decentralized financial surge in 2020 helped to shift that equation.
Other reasons exist for why someone could wish to mine Ethereum. An altruistic member of the community might elect to mine at a loss solely to help secure the network, as each additional hash counts. Mining can also be used to obtain Ether without needing to make a direct investment.
A novel application of home mining is as a kind of low-cost heating. Mining equipment converts electricity into cryptocurrency and heat, which could be valuable for individuals living in colder areas even if the cryptocurrency is worth less than the cost of energy.
Will the switch to proof-of-stake put an end to Ether mining?
The Ethereum 2.0 roadmap, which presented intentions to move to proof-of-stake, a consensus mechanism that would deprecate miners and leave all existing Ethereum miners with limited time to earn a return on their investment, is a common source of fear for any potential Ethereum miner. Thankfully, PoW mining will most likely continue to function until around 2023.
The debut of Ethereum 2.0 Phase 0 is scheduled in 2020, and it is a distinct blockchain that will have no impact on mining. Mining may only be phased out in Phase 2, but no firm plans for that transition have been made as of October 2020.
Phase 2 is scheduled to begin in late 2021 or early 2022. However, it’s worth noting that Ethereum has a history of roadmap delays; in 2017–2018, it was commonly assumed that the changeover would be finished by 2020. Nobody knows when Ethereum 2.0 will be completed, but most estimates imply that new miners will have enough time to repay at least a fraction of their hardware investment by October 2020.
What is the mining process for Ethereum transactions?
Ether was created to be mined only with consumer graphics processing units, or GPUs. This contrasts with Bitcoin, which can only be effectively mined using specialized devices known as application-specific integrated circuit machines, or ASICs. Because these devices are hardwired to perform only one task, they are much more efficient than more generic computational hardware.
Making an “ASIC-resistant” mining algorithm is theoretically impossible and extremely difficult in practice. In 2018, ASICs for Ethereum’s mining algorithm, Ethash, was finally available. However, in terms of hashing efficiency, these miners are only marginally better than GPUs. Due to the characteristics of the Bitcoin mining algorithm, ASICs are significantly more efficient than GPUs.
The FPGA, or field-programmable gate array, is another sort of specialized device. These are a halfway ground between ASICs and GPUs, providing some configure ability while still outperforming GPUs for specific sorts of computations.
All of these devices can mine Ethereum, however, not all of them are practical or sensible. FPGAs, for example, are in most cases inferior to GPUs. They are costly and complicated gadgets that require significant technical knowledge to operate properly. Their mining performance is quite near to that of leading GPUs, hence the reward is perhaps not worth it.
Ether ASICs outperform graphics cards by a significant margin, but they have a slew of downsides in practice. The biggest issue is that ASICs can only mine Ethereum and a few other coins that use the same hashing method.
GPUs may mine a variety of other coins and can be resold to gamers or used to build a gaming PC if necessary. Furthermore, ASICs are more difficult to come by because few stores sell them, and ordering directly from manufacturers may necessitate large order quantities and long lead times.
GPUs remain the most obvious choice for the hobbyist home miner due to their flexibility and reasonably good performance compared to price.
How do you go about finding the greatest mining hardware?
Three aspects should be considered while choosing the correct hardware: the maximum feasible hash rate, energy consumption, and purchase price.
Although the purchase price is often overlooked, it can make or destroy a mining enterprise because the hardware does not live indefinitely. Component wear down is a factor, as all devices will ultimately fail. However, this issue is sometimes exaggerated because GPUs are extremely durable hardware, with several stories of GPUs mining for more than five years.
The most major risk for miners is that their hardware will become obsolete. Existing miners, especially those with greater electricity costs, may be pushed out nearly entirely by more modern GPUs or ASICs. As a result, the “payback period” — the time it takes for the miner to recoup its investment — has become a critical metric in mining financial analysis.