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Fundamentals of Ethereum Explained
What is Ethereum?
Ethereum is a decentralized IT platform. You can think of it as a laptop or PC, but it does not work on one device. Instead, it works simultaneously on thousands of machines around the world, which means that it does not have an owner.
Ethereum, like Bitcoins and other cryptocurrencies, allows you to transfer digital money. However, it is capable of much more: you can deploy your code and interact with applications created by other users. Since it is so flexible, you can run all sorts of complex programs on Ethereum.
Simply put, the main idea of Ethereum is that developers can create and run code that runs on a distributed network, rather than on a centralized server. This means that theoretically these applications cannot be closed or censored.
What is the difference between Ethereum and Ether (ETH)?
This may not be intuitive, but the units used in Ethereum are not called Ethereum or Ethereum. Ethereum is the protocol itself, but the currency that supports it is simply called ether (or ETH).
What makes Ethereum valuable?
We discussed the idea that Ethereum can execute code in a distributed system. Therefore, programs cannot be modified externally. They are added to the Ethereum database (i.e., Blockchain) and can be programmed so that the code cannot be changed. Also, the database is visible to everyone, so users can check the code before interacting with it.
This means that anyone anywhere can run applications that cannot be taken offline. What’s even more interesting, since its unit – ether – stores the value, these applications can set the conditions for transmitting the value. We call the programs that make up the applications smart contracts. In most cases, they can be configured to work without human intervention.
Naturally, the idea of “programmable money” captivated users, developers, and companies around the world.
What is Blockchain?
The blockchain is the basis of Ethereum – it is a database that contains information used by the protocol. If you read our article What is Bitcoin? You will have a general idea of how the blockchain works. The Ethereum blockchain is similar to Bitcoin, although the data it stores and the way it stores them is different.
It is useful to think of the Ethereum blockchain as a book to which you continue to add pages. Each page is called a block and contains transaction information. When we want to add a new page, we must add a special value at the top of the page. This value should allow anyone to see that a new page was added after the previous one, and not just accidentally inserted into a book.
Essentially, this is a bit like the page number that links to the previous page. Looking at a new page, we can say with confidence that it follows from the previous one. To do this, we use a process called hashing.
The hash takes part in the data – in this case, everything on our page – and returns a unique identifier (or hash). The probability that two data will give us the same hash is astronomically small. It is also a one-way process: you can easily calculate the hash, but you cannot change the hash to get the information used to create it. We will see why this is important for mining in the next chapter.
We now have a mechanism for linking our pages in the correct order. Any attempt to reorder or delete pages will show that our book has been tampered with.
Ethereum vs Bitcoin – what’s the difference?
Bitcoin uses blockchain technology and financial incentives to create a global digital payment system. He introduced some key innovations that allow users to coordinate actions around the world without the need for a central party. Having a program that every participant runs on each computer, Bitcoin allowed users to coordinate the state of the financial database in a decentralized and untrusted environment.
Bitcoin is often called the first generation blockchain. It was not created as an overly complex system, and it is a security force. Intentionally rigidly prioritize the security of your base level. Indeed, the language of smart contracts in Bitcoin is extremely limited, and it does not support non-transactional applications.
The second generation of blockchains, on the other hand, is capable of more. In addition to financial transactions, these platforms provide more programmability. Ethereum offers developers more freedom to experiment with their code and create what we call decentralized applications (DApps).
Ethereum was the first in a wave of second-generation blockchains and remains the largest to date. It resembles bitcoins and can perform many of the same functions. Under the hood, however, they are very different, and each has its advantages over the other.
How does Ethereum work?
We could define Ethereum as a state machine. All this means that at any time you have an overview of all account balances and smart contracts in their current state. Certain actions will update the status, which means that all nodes will update their snapshot to reflect the change.
Smart contracts that are executed in Ethereum are triggered by transactions (from users or other contracts). When a user sends a transaction to a contract, each node in the network executes the contract code and records the output. To do this, he uses the Ethereum Virtual Machine (EVM), which converts smart contracts into instructions that a computer can read.
To update the state, a special mechanism is used, called mining (at the moment). The study is carried out using a work verification algorithm, as in bitcoins. We will deepen this topic soon.
What is a smart contract?
A smart contract is just a code. The code is neither smart nor contracts in the traditional sense. But we call it smart because it works under certain conditions, and it can be considered as a contract in the sense that it ensures compliance with agreements between the parties.
Computer scientist Nick Szabo can be credited with the idea that he proposed in the late 1990s. He used the example of a vending machine to explain this concept, arguing that it could be considered the pioneer of a modern smart contract. In the case of a vending machine, a simple contract is executed. Users insert coins, and in return, the machine gives out a product of their choice.
A smart contract applies this type of logic in a digital environment. You can specify something simple in the code, for example, return “Hello, World!” when two ethers are sent to this contract.
In Ethereum, the developer would encode this so that later EVM could read it. Then they publish it, sending it to a special address that saves the contract. At this point, anyone can use it. And the contract cannot be deleted if the condition is not specified by the developer when writing it.
Now the contract has an address. To interact with it, users only need to send 2 ETH to this address. This will cause the contract code – all computers on the network will execute it, see that payment for the contract has been made, and record its output (“Hello world!”).
The above is perhaps one of the simplest examples of what can be done with Ethereum. More sophisticated applications that link many contracts can be created.
Who created Ethereum?
In 2008, an unknown developer (or development team) published an official document on bitcoins under the pseudonym Satoshi Nakamoto. This has changed the landscape of digital currency. A few years later, the young programmer Vitalik Buterin came up with a way to develop this idea and apply it to any type of application. The concept was finally developed at Ethereum.
Ethereum was proposed by Buterin in a 2013 article on a blog entitled Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In his article, he described the idea of creating a complete chain of Turing blocks – a decentralized computer that has enough time and resources to run any application.
Over time, the types of applications that can be deployed on the blockchain will be limited only by the imagination of developers. Ethereum seeks to find out if blockchain technology is really beyond the deliberate design limits of Bitcoin.
How was the ether distributed?
Ethereum was launched in 2015 with an initial supply of 72 million ether. More than 50 million of these tokens were distributed during a public sale of tokens called Initial Coin Offering (ICO), where those who wanted to participate could buy ether tokens in exchange for bitcoins or paper money.
What is DAO and what is Ethereum Classic?
With Ethereum, new methods of open collaboration on the Internet have become possible. Take, for example, DAOs (decentralized autonomous organizations), which are objects controlled by computer code similar to a computer program.
One of the oldest and most ambitious attempts of such an organization was DAO. It would be composed of complex intellectual contracts working on top of Ethereum, functioning as an autonomous venture capital fund. DAO tokens were distributed in the ICO and provided the right to participate, as well as the right to vote, token holders.
However, shortly after its launch, attackers took advantage of the vulnerability and spent almost a third of CAD tools. It should be borne in mind that at that time 14% of the total supply of ether was blocked in CAD. Needless to say, this was a devastating event for the still young Ethereum network.
After some thought, the chain was rigidly divided into two chains. In one case, malicious transactions were effectively “canceled” to recover funds – this chain is now known as the Ethereum blockchain. The original chain, in which these transactions were not canceled and remained unchanged, is now called Ethereum Classic.
This event served as a fierce reminder of the risks associated with this technology and how bringing a stand-alone code to a large number of resources can have unpleasant consequences. It is also an interesting example of how collective decision-making in an open environment can create significant problems. Despite its security vulnerabilities, the DAO has beautifully illustrated the potential of smart contracts that allow for widespread trust in Internet collaboration.
Where does ether come from?
How is a new ether created?
We briefly touched on mining earlier. If you know Bitcoin, you will know that the data mining process is an integral part of protecting and updating the blockchain. Ethereum applies the same principle: to reward users who exploit (which is expensive), the protocol rewards them with ether.
How many ethers are there?
In February 2020, the total supply of ether amounted to about 110 million.
Unlike Bitcoins, the Ethereum token release time was not deliberately determined at launch. Bitcoin sought to maintain value by limiting its supply and slowly reducing the number of new coins that appeared. Ethereum, on the other hand, seeks to provide the foundation for decentralized applications (DApps). Since it is unclear what type of token issuing program best suits this purpose, the question remains open.
How does Ethereum mining work?
Mining is important for network security. This ensures that the blockchain can be updated fairly and allows the network to operate without a single decision-maker. In mining, a subset of nodes (aptly named miners) devotes computing power to solve a cryptographic puzzle.
What they do is sort the set of pending transactions along with other data. For a block to be considered valid, the hash must be less than the value specified by the protocol. If they fail, they can change certain data and try again.
Therefore, to compete with the rest, miners must be able to grind as quickly as possible – we measure their power in terms of grinding speed. The more hash speeds in the network, the more difficult the puzzle becomes. Only minors must find a real solution – as soon as it becomes known, it will be easy for everyone else to make sure that it is valid.
As you can imagine, continuous grinding at high speed is expensive. To encourage minors to protect the network, they receive rewards. It consists of all transaction blocking fees. They also receive freshly-generated ether – 2 ETH at the time of writing.
What is Ethereum gas?
Remember our hello world! earlier contract? It was a simple program to run. It is not at all very expensive in computing. But you are not just running it on your PC – you are also asking everyone in the Ethereum ecosystem to run it.
This brings us to the next question: what happens when tens of thousands of people execute complex contracts? If someone sets up their contract to continue scanning the same code, each node will have to execute it for an unlimited time. This will put too much pressure on resources, and as a result, the system is likely to collapse.
Fortunately, Ethereum introduces the concept of gas to reduce this risk. Just as your car cannot operate without fuel, contracts cannot be executed without gas. Contracts set the amount of gas that users must pay for their operation. If there is not enough gas, the contract will terminate.
This is essentially a payment mechanism. The same concept applies to transactions: miners are mainly driven by profit, so they can ignore transactions with lower fees.
Please note that ether and gas do not match. The average gas price fluctuates and is largely determined by miners. When you make a deal, you pay for gas at ETH. This is similar to the Bitcoin commission in this regard – if the network is congested and many users are trying to complete a transaction, the average gas price is likely to increase. Conversely, if the activity is low, it will decrease.
When changing the price of gas, each operation has a fixed amount of gas needed. This means that complex contracts consume much more than a simple transaction. Thus, gas is a measure of computing power. This ensures that the system can provide users with an appropriate fee for using Ethereum resources.
Gas is usually worth a fraction of the ether. Thus, we use a smaller unit (gwei) to denote it. Guay corresponds to a billion ether.
In short, you can run a program with a long loop. But it quickly becomes very expensive for you. As a result, nodes on the Ethereum network can mitigate spam.
Gas and gas restrictions
Suppose Alice performs a contract transaction. She will determine how much she wants to spend on gas (for example, using the ETH service station). She could set a higher price to encourage miners to turn on their transactions as soon as possible.
But it will also establish a gas limit that will serve to protect it. Something may go wrong with the contract, causing it to consume more gas than it expects. The gas limit is set in such a way as to ensure that after x the amount of gas consumed, operation stops. The contract will not be fulfilled, but Alice will not pay more than she initially agreed to pay.
At first glance, this may seem difficult to understand. Do not worry – you can manually set the price that you are willing to pay for gas (and the gas limit), but most wallets will take care of this for you. In short, the gas price determines how quickly miners will accept your transaction, and the gas limit determines the maximum amount you will pay for it.
How long does it take to extract an Ethereum block?
The average time required to add a new block to the chain is 12 to 19 seconds. Most likely, this will change when the network switches to Proof of Stake, which, among other things, is designed to speed up the blocking time. If you want to know more, check out Ethereum Casper Explained.
What are Ethereum Tokens?
Most of the appeal of Ethereum is that users can create their network assets that can be stored and transferred over the air. The rules governing them are defined in smart contracts, which allows developers to define specific parameters regarding their tokens.
They may include the number to be issued, how to issue them, if they are divided, if each of them is interchangeable, and many others. The most important technical standard for creating tokens in Ethereum is called ERC-20, and that is why tokens are widely known as ERC-20 tokens.
The functionality of the token provides innovators with a huge platform for experimenting with applications that are at the forefront of finance and technology. From the issuance of single tokens that serve as the currency in the application, to the production of unique tokens supported by physical assets, there is great design flexibility. It is possible that some of the best use cases for creating simple and optimized tokens are not even known yet.
Binance allows you to easily buy ETH in your browser. Do it:
- Access to the cryptocurrency purchase and sale portal.
- Select the cryptocurrency you want to purchase (ETH) and the currency you want to play with.
- Log in to Binance or register if you do not have an account.
- Select a Payment Method.
- If necessary, enter your card details and complete the identity verification process.
- This is it! Your ETH will be credited to your Binance account.
How to buy ETH in peer-to-peer markets
You can also buy and sell ETH in peer-to-peer markets. This allows you to purchase parts from other users directly from the Binance mobile application. Do it:
- Launch the application and login or register.
- Select Buy-sale in one click, then the Buy tab in the upper left corner of the interface.
- You will be offered several different offers – click “Buy” on the offer you want to use.
- You can pay with other cryptocurrencies (By Crypto tab) or fiat currency (By Fiat tab).
- Below you will be asked to specify a payment method. Choose the one that suits you.
- Choose Buy ETH.
- Now you have to make a payment. When finished, click “Mark as paid” and confirm.
- The deal ends when the seller ships your parts.
What can I buy with ether (ETH)?
Unlike Bitcoin, Ethereum is not intended to be used only as a cryptocurrency network. It is a platform for creating decentralized applications, and as a replaceable marker, ether is the fuel of this ecosystem. Thus, the main use case for ether is undoubtedly the utility that it provides on the Ethereum network.
However, ether can also be used in the same way as a traditional currency, which means that you can buy goods and services with ETH, as with any other currency.
What is Ethereum Used for?
People can use Ethereum’s currency, ETH, as a digital currency or as collateral. Many also see it as a savings tool, similar to bitcoin. However, unlike bitcoins, the Ethereum blockchain is more programmable, so you can do much more with ETH. It can be used as a vital element for decentralized financial applications, decentralized markets, trading, games, and more.
What if I lose my ETH?
Since the bank is not involved, you are responsible for your funds. You can store your coins on the exchange or in your wallet. It is important to note that if you use your wallet, you must take care of your original phrase. Keep it safe, as it is necessary to restore your funds in case you lose access to your wallet.
Can I cancel an Ethereum transaction?
After the data is added to the Ethereum blockchain, it is almost impossible to change or delete it. This means that when you make a transaction, you can think of it as frozen. Therefore, you should always check if you are sending funds to the correct address. If you are sending a large amount, it may be helpful to send a small amount first to make sure that you are sending it to the correct address.
However, due to a hacked smart contract, Ethereum forked in 2016, where malicious transactions were actually “reversed”. However, this is an extreme measure of an exceptional event, not the norm.
Are Ethereum transactions private?
No. All transactions added to the Ethereum blockchain are publicly available. Even if your real name is not indicated in your Ethereum address, the observer may associate it with your identity in other ways.
Can I make money with Ethereum?
Since this is a volatile asset, you can make money using ETH just as you can make money using ETH. Some people can keep broadcasting for a long time, believing that the network will become a global, programmable level of settlement. Others decided to exchange it for other altcoins. However, these two strategies involve financial risks.
As the main pillar of decentralized financial movement (DeFi), ETH can also be used for loans, as collateral for borrowing, hitting synthetic assets, and – at some point in the future – for equity participation.
Some investors may have long-term positions in bitcoins and not include other digital assets in their portfolios. Others, however, may choose to store ETH and other altcoins in their wallets or set aside a certain percentage of them for short-term transactions (for example, day trading or swing trading). There is no universal approach to making money in the markets, and each investor must decide for himself which strategy best suits his profile and circumstances.
How can I save my ETH?
There are many options for storing coins, each of which has its advantages and disadvantages. As with everything associated with risk, it would be best to diversify the various options available.
Typically, storage solutions can be private or non-private. A conservation decision means that you trust your details to a third party (like an exchange). In this case, you must connect to the depository platform to conduct transactions with your crypto assets.
A non-custodial decision is an opposite – you maintain control over your funds using a cryptocurrency wallet. A wallet does not contain your coins, like your physical wallet – it rather contains cryptographic keys that allow you to access your assets on the blockchain. It should be noted once again: be sure to keep the initial phase when using a non-confidential wallet!
How to deposit your ETH in Binance
If you already have ether and want to add it to Binance, you can simply follow these quick steps:
- Log in to Binance or register if you do not already have an account.
- Go to your spot wallet and select Deposit.
- Select ETH from the parts list.
- Select a network and send your ETH to the appropriate address.
- This is it! After confirming the transaction, your broadcast will be credited to your Binance account.
How to save your ETH on Binance
If you want to actively trade your ether, you will need to save it in your Binance account. Keeping ETH in Binance is easy and safe. And this allows you to easily take advantage of the Binance ecosystem with loans, bets, Airdrop promotions, and gifts.
How to withdraw your ETH from Binance
If you already have ether and want to remove it from Binance, you can simply follow these quick steps:
- Log in to Binance.
- Go to your Spot wallet and select “Withdraw”
- Select ETH from the parts list.
- Choose a network
- Enter the recipient’s address and amount.
- Confirm the process by email.
- This is it! After confirming the transaction, ETH will be credited to the address you specified.
How to store your ETH in your Ethereum wallet
If you want to store your ETH in your wallet, you have two main options: hot wallets and cold wallets.
A cryptocurrency wallet, one way or another connected to the Internet, is called an active wallet. This is usually a mobile or desktop application that allows you to check the balance and send or receive tokens. Since hot wallets are online, they are usually more vulnerable to attacks, but also more practical for daily payments. Trust Wallet is an example of an easy-to-use mobile wallet with many supported coins.
A cold wallet is an encrypted wallet that is not available on the Internet. Since there is no attack vector in the network, the probability of an attack is generally lower. At the same time, cold wallets are generally less intuitive to use than hot wallets. Examples of cold wallets may include hardware wallets or paper wallets, but using paper wallets is often not recommended, as many consider them to be outdated and risky to use.
What is the logo and symbol of Ethereum?
Vitalik Buterin designed the first Ethereum logo. It consisted of two summation symbols rotated Σ (sigma of the Greek alphabet). The final logo design (based on this emblem) consists of a rhomboid shape called an octahedron surrounded by four triangles. As in other currencies, it may be useful for the ether to have a standard Unicode character so that applications and websites can easily display the ether values. Although not as widely used as, say, $ for the US dollar, the most commonly used symbol for ether is Ξ.
The future of Ethereum
What is scalability?
Simply put, scalability is a measure of a system’s ability to grow. In IT, for example, a network or server can be expanded to meet greater demand through various methods.
In cryptocurrency, scalability refers to the ability of the blockchain to grow to accommodate more users. The more users, the more “parallel” transactions and transactions will be included in the blockchain.
Why should Ethereum develop?
Supporters of Ethereum are confident that the next Internet platform will be built on the platform. The so-called Web 3.0 will lead to a decentralized topology characterized by a lack of intermediaries, an emphasis on confidentiality, and a transition to the true ownership of data. This framework will be built using distributed computing in the form of smart contracts and distributed storage/communication protocols.
However, for this, Ethereum must significantly increase the number of transactions that it can process without jeopardizing network decentralization. Currently, Ethereum does not limit the volume of transactions, limiting the size of blocks, as Bitcoin does. Instead, there is a gas block limit – only a certain amount of gas can enter the block.
For example, if you had a block gas limit of 100,000 gwei and you want to include ten transactions with a gas limit of 10,000 gwei each, this will work. The same will be true for two transactions of 50,000 guineas. All other transactions presented in parallel will have to wait for the next block.
This is not ideal for a system that everyone uses. If there are more pending transactions in the block than free space, you will quickly get the backlog. The gas price will rise, and users will have to interrupt others so that their transactions are included first. Depending on network congestion, operations may become too costly for certain use cases.
The growing popularity of CryptoKitties has become a prime example of Ethereum’s limitations on this front. In 2017, the Ethereum-based game prompted many users to participate in breeding their digital cats (presented as non-classified tokens). It became so popular that pending transactions skyrocketed, which for some time caused excessive network congestion.
Blockchain scalability trilemma
It seems that simply increasing the block gas limit will solve all scalability issues. The higher the ceiling, the more transactions can be processed within a certain time, right?
Unfortunately, this is simply not possible without compromising the key features of Ethereum. Vitalik Buterin proposed the Trilemma blockchain (presented below) to explain the delicate balance that blockchains should find.
When choosing optimization from two of the three characteristics indicated above, the third will be absent. Blockchains such as Ethereum and Bitcoin give priority to security and decentralization. Their consistent algorithms provide security for their networks, which consist of thousands of nodes, but this leads to poor scalability. With so many nodes receiving and verifying transactions, the system is much slower than centralized alternatives.
In another scenario, the restriction on the amount of gas in the block can be removed so that the network provides security and scalability, but it will not be so decentralized.
This is because more transactions in a block result in larger blocks. However, network nodes must periodically download and distribute them. And this process is intense on equipment. When the limit of the gas block increases, it becomes more difficult for the nodes to check, store, and distribute the blocks.
Therefore, you expect nodes that do not keep up with speed to drop out of the network. Continuing in this way, only a small part of the powerful nodes will be able to participate, which will lead to greater centralization. You can get a secure and scalable blockchain, but it will not be decentralized.
Finally, we can introduce a blockchain that focuses on decentralization and scalability. To be fast and decentralized, sacrifices must be made regarding the consensus algorithm used, which will lead to a decrease in security.
How many transactions can Ethereum handle?
In recent years, Ethereum has rarely exceeded ten transactions per second (TPS). For a platform seeking to become a “global computer,” this number is surprisingly small.
Scaling solutions have long been part of the Ethereum roadmap. Plasma is an example of a descaling solution. It aims to increase the efficiency of Ethereum, but this technology can also be applied to other blockchain networks.
What is Ethereum 2.0?
For all its potential, Ethereum currently has significant limitations. We have already discussed the problem of scalability. In short, if Ethereum aims to become the foundation of a new financial system, it should be able to process many more transactions per second. Given the distributed nature of the network, this is an extremely complex issue, and Ethereum developers have been thinking about this for years.
On the one hand, to keep the network decentralized enough, you must comply with the restrictions. The higher the operational requirements of the node, the smaller the number of participants, and the more centralized the network. Thus, increasing the number of transactions that Ethereum can process can jeopardize the integrity of the system, as it will also increase the load on the nodes.
Another criticism of Ethereum (and other cryptocurrencies to test work) is that it is incredibly resource-intensive. To successfully add a block to the blockchain, they must retrieve it. However, to create a block in this way, they must quickly perform calculations that consume a huge amount of electricity.
To overcome the above limitations, a core set of updates has been proposed, collectively called Ethereum 2.0 (or ETH 2.0). After fully deployed, ETH 2.0 is expected to significantly improve network performance.
What is Ethereum sharding?
As mentioned above, each node stores a copy of the entire blockchain. Each time it expands, each of the nodes must be updated, which consumes their bandwidth and available memory.
When using a method called sharding, this is no longer required. The name refers to the process of dividing a network into subsets of nodes – these are our fragments. Each of these fragments will process its transactions and contracts but can communicate with a wider network of fragments as necessary. Since each fragment is checked independently, they no longer need to store data from other fragments.
Sharding is one of the most complex scaling approaches that require a lot of work for design and implementation. However, if successfully implemented, this will also be one of the most effective ways to increase network bandwidth by several orders of magnitude.
What is Ethereum plasma?
Ethereum Plasma is what we call an off-chain scalability solution, that is, it aims to increase transaction throughput by pushing transactions from the blockchain. In this regard, it has some similarities with the side chains and payment channels.
In the plasma, the secondary chains are fixed in the Ethereum main blockchain, but they maintain communication to a minimum. They work more or less independently, although users still rely on the primary channel to resolve disputes or “complete” their activities on the secondary channels.
In the plasma, the secondary chains are fixed in the Ethereum main blockchain, but they maintain communication to a minimum. They work more or less independently, although users still rely on the primary channel to resolve disputes or “complete” their activities on the secondary channels.
Reducing the amount of data that nodes need to store is critical to the success of Ethereum scaling. The plasma approach allows developers to describe the operation of their “daughter” channels in a smart contract on the main channel. They can then create applications with information or processes that are too expensive to store/execute in the main chain.
What are Ethereum rollups?
Coagulations are similar to plasma in that they seek to develop Ethereum by moving transactions from the main chain of blocks. So how does it work?
A single contract for the main chain contains all the means of the secondary chain and contains cryptographic confirmation of the current state of this chain. The operators of this secondary chain, who placed a deposit in the main network contract, guarantee that only valid state transitions are made in the main network contract.
The idea is that since this state is maintained off-chain, there is no need to store data on the blockchain. However, the main difference between plasma accumulations is how transactions are transferred to the main chain. Using a special type of transaction, you can group (group) a large number of transactions into a special block called an accumulation block.
There are two types of convolution: Optimistic and CK Cumulative. Both guarantee the accuracy of transitions between states in different ways.
ZK Rollups send transactions using a cryptographic verification method called proof of zero-knowledge. More specifically, the approach is called zk-SNARK. We will not go into details of how this works here, but here is how it can be used for convolution. This is a way for different parties to prove that they have specific information without disclosing what kind of information it is.
In the case of ZK accumulations, this information represents state transitions that are transferred to the main chain. The big advantage of this is that this process can happen almost instantly, and there is practically no chance for corrupt representations of the state.
Optimistic savings sacrifice some scalability for greater flexibility. Using a virtual machine called Optimistic Virtual Machine (OVM), they allow you to execute smart contracts in these secondary chains. On the other hand, there is no cryptographic evidence that the state transition represented by the main circuit is correct. To resolve this issue, there is a slight delay allowing users to dispute and reject invalid blocks sent to the main chain.
What is Ethereum Proof of Stake (PoS)?
Proof of Stake (PoS) is an alternative proof-of-work method for block validation. In the Proof of Stake system, blocks are not mined as such but are affected (sometimes called false). Instead of miners competing for hash power, the node (or validator) is periodically randomly selected to check the candidate block. If everything is done correctly, they will receive all commissions for this block and, depending on the protocol, possibly a reward for the block.
Since there is no mining, proof of stake is considered less harmful to the environment. Validators do not consume as much energy as miners, and instead, they can make blocks from high-quality consumer equipment.
It is planned that Ethereum will switch from PoW to PoS as part of Ethereum 2.0 with an update called Casper. Although the exact date has not yet been formalized, the first iteration is likely to be launched in 2020.
What do you mean by Ethereum Staking?
In the Proof of Work protocols, network security is provided by miners. Miners will not cheat, as this will result in loss of electricity and potential losses. There is no such game theory in Proof of Stake, and there are various crypto-economic measures to ensure network security.
Instead of the risk of embezzlement, which prevents dishonest behavior, this is the risk of losing money. Validators must offer a share (i.e. holding a token) to be eligible for validation. This is a certain amount of ether that is lost if the node tries to cheat, or is slowly depleted if the node does not respond or is offline. However, if the validator launches additional nodes, they will receive more rewards.
How much ETH should I stake on Ethereum?
The estimated minimum bid for Ethereum is 32 ETH per validator. This is so high that the cost of an attack attempt at 51% is extremely high.
How much ETH can I earn by staking on Ethereum?
This is not an easy question to answer. Of course, this depends on your bid, as well as on the total amount of ETH made on the network and the level of inflation. As a very rough estimate, current estimates predict about 6% of annual returns. Keep in mind that this is only an estimate and may change in the future.
How long is my ETH blocked during staking?
It will be the turn to withdraw your ETH from your validator. If there is no queue, the minimum withdrawal time is 18 hours, but it is dynamically adjusted depending on the number of validators that are being removed at a given time.
Is there a risk of placing ETH?
Since you are the network validator responsible for maintaining network security, certain risks must be considered. If your validator node shuts down for a long period of time, you risk losing a significant portion of your deposit. Also, if your deposit falls below 16 ETH at any time, you will be removed from the validator set.
It is also worth considering a more systemic risk factor. Proof of stake has not been implemented on such a scale before, so we cannot be sure that it will not fail. The software will always have bugs and vulnerabilities that can be devastating, especially when it comes to billions of dollars.
Ethereum and Decentralized Finance (DeFi)
What is decentralized finance (DeFi)?
Decentralized financing (or simply DeFi) is a movement aimed at decentralizing financial applications. DeFi is built on public and open blockchains, which anyone with an Internet connection can access for free (without authorization). This is crucial for the potential integration of billions of people into this new global financial system.
In the growing DeFi ecosystem, users interact with smart contracts and with each other through peer-to-peer networks and decentralized applications (DApps). The great advantage of DeFi is that, even if it makes all of this possible, users still retain ownership of their funds.
Simply put, the decentralized financing movement (DeFi) aims to create a new financial system that is free from the current restrictions. In this case, due to its relatively high degree of decentralization and a large development base, most DeFi is currently built on Ethereum.
Why use decentralized financing (DeFi)?
You probably already know, but one of the great advantages of Bitcoin is that it does not require a central side to coordinate the work of the network. But what if we use this as a basic idea and create additional programmable applications? This is the potential of DeFi applications. There are no central coordinators or intermediaries, and there is no single point of failure.
As mentioned above, one of the great advantages of DeFi is its free access. In the world, billions of people do not have good access to any financial services. Can you imagine how you manage your daily life without any confidence in your finances? This is how billions of people live, and ultimately it is DeFi who is trying to serve.
Will decentralized financing (DeFi) of the mainstream ever reach?
It all sounds good, so why hasn’t DeFi taken over the world yet? Well, at present, most DeFi applications are hard to use, clumsy, often broken, and very experimental. It turns out that the development of the frameworks of this ecosystem is extremely complex, especially in a distributed development environment.
Solving all the problems of building a DeFi ecosystem is a long way for software engineers, game theorists, developers of mechanisms, and many others. Thus, it remains to be seen whether DeFi applications will ever be able to integrate adoption.
What are decentralized finance (DeFi) applications?
One of the most popular use cases for decentralized financing (DeFi) is stable parts. In essence, these are tokens on the blockchain, the value of which is associated with real-world assets such as paper money. For example, BUSD is tied to the value of USD. What makes these tokens easy to use is that they exist on the blockchain, they are very easy to store and transfer.
Another popular type of application is credit. There are many peer-to-peer (P2P) services that allow you to borrow funds from third parties and receive interest in return. One of the easiest ways to do this is to use Binance Lending. All you have to do is transfer your funds to the loan portfolio and you can start earning interest the next day!
However, perhaps the most interesting part of DeFi is applications that are difficult to classify. They can include all kinds of decentralized peer-to-peer markets where users can exchange unique cryptographic collectibles and other digital elements. They can also allow the creation of synthetic assets, where anyone can create a market for something valuable. Other uses may include forecasting markets, derivatives, and more.
Decentralized Exchanges (DEX) on Ethereum
Decentralized Exchange (DEX) is a place where exchanges can take place directly between user portfolios. When you trade on Binance, the centralized exchange, you send your funds to Binance and trade through its internal systems.
Decentralized exchanges are different. Thanks to the magic of smart contracts, they allow you to trade directly from your encrypted wallet, thereby eliminating the possibility of trading hacks and other risks.
Binance DEX is a great example of a decentralized exchange. Other well-known examples built on Ethereum are Uniswap, Kyber Network, and IDEX. Many will even let you trade with a hardware wallet for maximum security.
Above we have illustrated the differences between centralized and decentralized exchanges. On the left, we see that Binance is in the middle of transactions between users. Therefore, if Alice wants to exchange Token A for Bob B token, they must first place their assets on the exchange. After the transaction, Binance will appropriately redistribute its balances.
On the right, however, is a decentralized exchange. You will notice that a third party is not involved in the transaction. Instead, Alice’s token is directly exchanged for Bob using a smart contract. Thus, none of the parties should trust the intermediary, since the terms of their contract automatically enter into force.
In February 2020, DEX was the most commonly used application on the Ethereum blockchain. However, trade volume compared to centralized trade is still low. However, if DEX developers and designers expand the user interface to make it more welcoming, DEX may compete with centralized exchanges in the future.
Join the Ethereum Network
What is the node of Ethereum?
“Ethereum host” is a term that can be used to describe a program that somehow interacts with the Ethereum network. An Ethereum node can be anything from a simple mobile phone wallet application to a computer that stores a full copy of the blockchain.
How does the Ethereum node work?
In Ethereum, unlike Bitcoin, there is not a single program as a reference implementation. When the Bitcoin ecosystem has the Bitcoin core as its main software node, Ethereum offers several separate (but compatible) programs based on its yellow book. Popular options include Geth and Parity.
Complete Ethereum Nodes
To interact with the Ethereum network in such a way that you can independently verify the blockchain data, you need to run the full node using software like the one mentioned above.
The software will download blocks from other nodes and verify the correctness of the included transactions. He will also execute any smart contracts that were invoked to ensure that you receive the same information as other partners. If everything works as expected, we can expect that each node will have an identical copy of the blockchain on its machines.
Full nodes are essential for the functioning of Ethereum. Without many nodes around the world, a network would lose its decentralized, censorship-resistant properties.
Light Ethereum nodes
Running a full node allows you to make a direct contribution to network integrity and security. But a complete assembly often requires a separate machine for operation, as well as periodic maintenance. Lightweight sites may be the best option for users who cannot start the full site (or who simply prefer not to).
As the name implies, light nodes are light – they use fewer resources and take up minimal space. As such, they may work on worse devices such as phones or laptops. But these low overheads are expensive: lightweight nodes are not completely self-sufficient. They do not synchronize the entire chain of blocks and therefore need complete nodes to provide them with relevant information.
Lightweight sites are popular among sellers, services, and users. They are widely used to make and receive payments in scenarios where full nodes are considered unnecessary and too expensive to run.
Ethereum mining nodes
The data mining node may be a full client or a thin client. The term “data mining node” is not used, as in the Bitcoin ecosystem, but it’s worth identifying these participants.
For Ethereum to work, users need additional hardware. It is common practice to create a mining platform. Thanks to this, users connect several GPUs to hash data at high speeds.
Miners have two options: mining alone or in a mining pool. Individual exploitation means that the miner works alone to create blocks. If they succeed, they do not share their mining rewards with anyone. Alternatively, when they join a mining pool, they combine their hash power with the power of other users. This will increase their likelihood of finding a block, but they will also have to share their rewards with pool members.
How to start the Ethereum node
One of the important aspects of the blockchain is open access. This means that anyone can launch an Ethereum node and strengthen the network by making transactions and blocks.
Like Bitcoin, several companies offer network-connected Ethereum nodes. This may be the best option if you just want to put the unit into operation, but be prepared to pay an additional fee for convenience.
As already mentioned, Ethereum has several software implementations of various nodes, such as Geth or Parity. If you want to start your node, you should be familiar with the process of setting up the implementation that you have chosen to run.
If you do not want to run a special node called an archive node, a consumer laptop should be enough to run the full Ethereum node. At the same time, it is better not to use the machine daily, as this can significantly slow down its operation.
Own site operation works best on devices that may be online. If your host goes offline, it can take a long time to synchronize with the network as soon as it reconnects to the network. Thus, the best solutions are inexpensive and easy to maintain devices. For example, you can run a lightweight node even on a Raspberry Pi.
How to mine on Ethereum
Since the network is about to switch to Proof of Stake, Ethereum mining is not the safest bet in the long run. After the transition, Ethereum miners will most likely send their mining equipment to another network or completely sell it.
However, if you want to participate in Ethereum mining, you will need specialized equipment such as a GPU or ASIC. If you are looking for a reasonable profit, you most likely will need a special mining platform and access to cheap electricity. Also, you need to set up your Ethereum wallet and set up data mining software to use it. All this requires a significant investment of time and money, so carefully consider whether you are ready to accept the challenge.
What is Ethereum ProgPoW?
ProgPoW is short for Proof of Work. This is the proposed Ethereum mining algorithm extension, Ethash, which is designed to make GPUs more competitive with ASIC.
ASIC resistance has been a hot topic of discussion for many years, both in the Bitcoin community and in the Ethereum community. In the case of bitcoins, ASICs have become the dominant mining power in the network.
On Ethereum, however, ASICs are present but much less – a significant part of the miners still use the GPU. However, this situation may soon change, as more and more companies are releasing Ethereum ASIC miners to the market. But why can there be problems with ASIC?
On the one hand, ASICs can significantly reduce network decentralization. If GPU miners are not profitable and are forced to close their mining operations, hashing speed can be concentrated in the hands of only a few miners. Also, developing ASIC chips is expensive, and few companies have the capabilities and resources to do so. This poses a threat of monopolization on the production side, potentially centralizing the Ethereum mining industry in the hands of several companies.
The integration of ProgPow has been controversial since 2018. While some believe it might be healthy for the Ethereum ecosystem, others oppose it because of the risk of causing a hard pitchfork. With the upcoming transition to Proof of Stake, it is still unknown whether ProgPow will ever be implemented on the network.
Who is developing the Ethereum software?
Like Bitcoin, Ethereum is open-source. Everyone is free to participate in the development of the protocol itself or to create applications based on it. Ethereum currently has the largest community of developers in the blockchain space.
Resources such as Andreas Antonopoulos and Gavin Wood’s Mastering Ethereum and Ethereum.org Developer Resources are a great starting point for developers who want to get involved.
What is solidity?
In essence, Solidity is what allows developers to write code that can be broken down into instructions that are understandable to the Ethereum virtual machine (EVM). If you want to better understand how this works, Solidity GitHub is a good place to start.
It should be noted that Solidity is not the only language available to Ethereum developers. Another popular option is Vyper, which is more similar to Python in its syntax.
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