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Get Ethereal With It: Our Guide To Ethereum Blockchain

Ting Wang

5 Min Read

Ethereum is the foundation for online ‘smart’ contracts, aiming to decentralise client-server computing. That’s a lot of fancy words, but what exactly does it mean?

The Ethereum blockchain went live in July 2015, after a crowd-sale one year earlier. The Ethereum Blockchain works by distributing records of transactions amongst its nodes. Nodes are individual computers on the network that create or validate transactions.

No entities owns Ethereum. Although there exist a Swiss-based company EthSuisse, the company does not run Ethereum like Ripple Labs runs XRP. Instead, Ethereum runs on a decentralised blockchain.

Ethereum is similar to Bitcoin but with some crucial distinctions. Let’s explore what the Ethereum blockchain is, and what makes it unique. 

ETHEREUM BLOCKCHAIN FUNDAMENTALS

Understanding how Ethereum works require a basic understanding of how cryptocurrencies work. Ethereum has unique qualities but is mostly similar to other decentralised cryptos like Bitcoin. 

Cryptocurrencies can appear complicated and foreign. Most investors will not be able to explain what they bought and how it works. Understanding how Cryptocurrencies work requires these three important concepts:

CRYPTOGRAPHY

Cryptocurrencies gained its name from the process of securing transactions by solving cryptographic problems. Each transaction or ‘block’ added is first ‘checked’ by miners. Checking blocks involves solving a cryptographic problem using computers.

Cryptographic problems need immense computing power. When the first miner solves the problem, they receive rewards in the form of Ethereum (or ETH).

As more miners join, the rewards for mining decrease and computational demands increase. Mining can be energy-consuming. Bitcoin mining consumes as much energy as the country of Austria.

Gold mining, paper printing, and minting are still far more harmful to the environment. Yet the mining community still receives some flak for its energy consumption.

THE BLOCKCHAIN

Blockchains add each new transaction ‘block’ to the chain of previous transactions, or ‘blockchain’. The data for every transaction is stored and shared between all the users on the network at the same time. This decentralisation means each new transaction must be confirmed by network members.

As a new block stacks on top of an old one, it becomes increasingly harder to change the blocks below. Doing so would demand changes to every block above it on all computers on the network (or at least 51% of them).

This system is what makes Blockchain attractive and secure. If all data for transactions remained on one computer on one copy, it would be vulnerable. Hackers would only need to change one copy to control records of all transactions.

This is why blockchains are often referred to as ‘ledgers’. Blockchains contain all transactions that ever happened using that particular Cryptocurrency.

PROOF OF WORK VS PROOF OF STAKE

Every transaction is validated using a ‘proof-of-work’ system or the ‘mining system’. Proof-of-work allows the validation of transactions without a central authority, like a bank. The mining process described above is the ‘work’ in this equation.

Ethereum is allegedly planning a switch to a proof-of-stake system instead. Proof-of-stake means that miners are instead ‘transaction validators’.

Validators agree to lock up or bet their currency against the validity of the newest block. The length of time of the bet and size determine whether the latest block can be considered to be valid or not.

Both miners and validators receive crypto payments for successful validation. In proof-of-stake systems, validators lose their staked crypto if they verify false transactions.

If the system is somehow breached, such as during the DAO exploitation in 2016, cryptocurrencies can split.

Ethereum suffered the theft of $50 million from a crowdfunding operation for smart contracts. After the theft, to preserve the money, Ethereum split their currency (known as a fork). This resulted in both ‘Ethereum’ and ‘Ethereum Classic’, the latter of which acknowledged the theft in its ledger.

ETHEREUM VS BITCOIN

Both cryptocurrencies use blockchain technology and decentralised networks. Yet Ethereum has some unique characteristics.

Ethereum enables apps to run on the platform without downtime, fraud, or interference. Ethereum transactions contain executable code, while Bitcoin only stores data in its transactions.

Every transaction has the ability to trigger executable code. The code can command contractual obligations and effects. This system is the foundation of ‘smart contracts’.

Smart Contracts can be executed without the need for human interaction. Smart contracts have limitless potential for automatic supply chains, sales, applications, and more.

Ethereum mining works explicitly by reversing a hashed version of the new block’s metadata. Hashing is simply a generator that randomises data to become random letters and numbers or varying case.

Different Cryptocurrencies take different lengths of time to mine. Ethereum blocks take 12 seconds on average, whereas Bitcoin takes approximately 10 minutes.

SMART CONTRACTS

Ethereum has more day-to-day commercial potential because transactions can be executed faster. Bitcoin, by contrast is slower and would be problematic to use in fast online transactions

High mining speeds allow an app to conclude transactions within a short time frame. All blockchains permit the inclusion of code. Ethereum is unique because of the vast variety of functions that can exist within its code.

Contracts can handle their enforcement, management, performance, and payment. Decentralised Apps, or “Dapp’s”, is the term that refers to applications that use such contacts. DApps are decentralised and not controlled by any particular entity. One might imagine more democratic versions of banking, music streaming, and journalism.

ETHEREUM 2.0?

Ethereum blockchain was the first cryptocurrency with practical applications in mind. Ethereum’s speed is unique, permitting transactions far faster than Bitcoin. This speed makes it possible to use Dapp’s and Smart Contracts in e-commerce.

Ethereum’s speed will increase with the introduction of Ethereum 2.0 shortly. If you enjoyed this article and want to learn more about cryptocurrencies (safety, security, and specifics) check out our blog.

Ting Wang

Co-founder

Ting is a finance professional and an accomplished investor. Ting is well-conversed in financial markets, as well as having a background in taxation and law. Having previously worked for a top-tier accounting firm and an US-listed fintech company, Ting decided to pursue his passion in cryptocurrency in 2017 by joining forces with high school friend Mena.

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