Everyone knows that Ethereum is the 2nd biggest cryptocurrency after Bitcoin, but there’s a catch! Ethereum is not just a currency. It is more than that.
Let us discuss what Ethereum is and how it works.
Ethereum is the do-it-yourself platform for decentralized programs, also called Decentralized apps (Dapps). You can create a program that no one controls by learning the Ethereum programming language, Solidity and begin coding.
Ethereum is the infrastructure for running Dapps worldwide.
The platform is decentralized and has thousands of independent computers running it.
Ethereum is a platform, and the currency used to incentivize this network is called Ether.
Ethereum was developed to decentralize the internet truly.
It acts as a marketplace where users can buy or sell goods and create Dapps.
It allows people to connect directly with each other without a central authority.
It is a network of computers that combines into one powerful decentralized supercomputer.
How Ethereum works?
Every activity on the web happens with the help of an intermediary or third party.
But when Bitcoin explained the decentralization concept, then a lot of new opportunities became available.
Ethereum is on the way to designing an internet that connects the user directly without the need for a centralized third party.
For example, drivers can offer their services directly to the passengers and remove “Uber” as the middle man.
People can buy cryptocurrency is now from one another and eliminate the “Crypto exchanges”.
Ethereum connects people directly through a well-built decentralized supercomputer.
Ethereum composes of several key components:
Smart Contracts
- The coding language of Ethereum, Solidity, is used to write smart contracts which run decentralized applications Dapps.
- In real life, every contract is dependent on “ifs” and “then”, meaning a set of conditions and actions.
A simple explanation would be:
If you pay rent on the 1st day of the month, the landlord allows you to use his apartment.
It is precisely how smart contract works on Ethereum.
- The Ethereum developers write the set of conditions and actions for the program or Dapps; the Ethereum network executes it.
If you have a smart contract to pay rent, then the landlord does not need to actively collect the money from you. The contract itself knows whether the money has been sent or not.
If you send the money, you will be able to use the apartment, and if you miss the payment, you will be locked out.
- These are known as smart contracts because they deal with every aspect of the contract performance, payment, management and enforcement.
- Smart contracts are letter strict, self-executing and immutable.
Ethereum Virtual Machine (EVM)
- Each node has Ethereum virtual machine which executes the smart contracts all the nodes run in sync. If you want to write software’s and run them on the Ethereum network, you need a virtual machine.
- It is a system designed to operate as a runtime environment for Ethereum based smart contracts that is sandboxed and completely isolated, meaning code running inside the EVM has no access to the network file system or other processes.
- Ethereum virtual machine guarantees security by preventing denial of service attacks, interpreting and executing Ethereum programming language, and ensuring that communication can be achieved without interference.
- It allows developers to create decentralized applications with no downtimes and keep all created objects uneditable.
- Ethereum Virtual Machine eliminates the need for powerful hardware and software’s, making it a perfect fit for beginners.
The Ethereum Blockchain
- The record of all smart contracts is stored in the Ethereum blockchain.
- The structure of the blockchain is very similar to Bitcoins. It is a shared record of the whole smart contracts and transaction history.
- If you send ETH to someone else, then the transaction data must be added to the block for the transaction to be successful.
- When a transaction happens, the transaction must be mined and included in the new block, and then the updated state will be shared with the entire network.
- Since Ethereum is decentralized, hundreds of computers around the world are storing a copy of the complete Ethereum blockchain.
Each computer is termed a node in the Ethereum network.
- Every time a smart contract is used on the Ethereum network, thousands of computer processes ensure that the user follows the rules.
Ethereum node stores more than the transaction details.
- The network keeps track of the state and all the applications’ current information, including each user’s balance, smart contract code, and any changes.
To summarise, each node contains:
- Account– each user can have an account that shows how much Ether the user has.
- Smart contract state
- Smart contract code- describes the rules needed to be followed for money to be unlocked and transferred.
Ethereum Mining
- Mining is a method by which new transactions blocks are created and added to the Ethereum blockchain.
- Transactions are mined in a very similar like Bitcoin’s.
- Ethereum miners audit the transactions and verify their legitimacy.
- The miners solve complicated mathematical equations by using powerful computers.
- After the equation is solved, the other networks on the same network provide their consensus. Then, the transaction is added to the chain.
Hence a block of these transactions gets created, and this technology is known as the blockchain.
- Ethereum miners are rewarded with ETH for providing their technological resources for transaction verification.
Ethereum uses proof of work as a consensus mechanism.
Mining is essential for proof of work.
- It ensures that anyone who wants to add a transaction to the blockchain must solve a complex puzzle that requires a lot of processing power.
- Miners and nodes are responsible for transferring the shift of ownership from one place to another without any third party’s involvement.
Ethereum Virtual Machine executes the contract with the rules the developer has programmed initially.
- Miners are the ones who prevent the bad behaviour by ensuring that no one is spending their money more than once at a time to cheat the system.
Ethereum is shifting itself from proof of work to proof of stake.
- Proof of stake is a consensus mechanism type used by the blockchain network to achieve distributed consensus.
- Proof of stake is better than proof of work ok with the following benefits:
- Better energy efficiency
- Low entry barriers
- Reducing the hardware requirements
Ether (ETH)- The Digital Asset
- People think Ethereum and Ether are the same things. Still, the difference is that if Ethereum is a blockchain-based platform, Ether is the cryptocurrency used to run this blockchain-based platform.
Ether is a cryptocurrency and is needed for doing anything on the Ethereum platform.
- Whenever Ether is used to execute smart contracts on the network, it is referred to as gas.
There are two types of accounts:
- Externally owned account: It is the account that normal users use for holding and sending Ether
- Contract account: These are separate accounts with smart contracts triggered by the transactions from the externally owned accounts or other events.
Usage
Ether is used for the following:
- Payments
Like Bitcoin, Ether is also used for payments. Users can send it to another user just like cash, and this payment does not require any centralized authority.
2. Fueling decentralized applications:
Ether is required to use the Dapps
3. Transaction’s fee
Every Ethereum action from using Dapps to payments requires a fee payment in Ether.
How Ethereum Makes Money?
- Ethereum user-pays fees for using Dapps.
The fees are called gas and is dependent on the amount of computational power required.
The average gas fee in early 2021 was 10$ per transaction.
- The cryptocurrency Ether (ETH) follows the law of demand and supply. The price volatility and fluctuations happen according to the market sentiment. So, people buy ETH as a form of currency, waiting to sell when the prices go up.
- Ethereum developers are making some changes over the coming years; however, its implementation will upgrade Ethereum works, especially the proof of work area.
- Ethereum 2.0 will allow the network for scaling up while addressing condition problems that have slowed down in the past.
*This article is for knowledge; we advise you to ask your financial experts before taking any investment decisions. *