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Ultimate Ethereum Blockchain Guide

We know why you’re here.

You’ve heard all about Ethereum but have no idea what it is, or what it does.

That’s where Bitpremier comes in.

Let’s jump right into it!

What is Ethereum?

EthereumLogoReleased in 2015, Ethereum is a cryptocurrency similar to Bitcoin with several key differences.

In Bitcoin’s case, no money was raised to release Bitcoin and the creator, Satoshi Nakamoto, has remained anonymous to this day.

The fact that Bitcoin grew without funding or distinguishable founders leads arguments on why Bitcoin is seen as truly decentralized.

In comparison, Ethereum raised more than $18 million through crowdfunding in which investors purchased Ethereum tokens at a rate of ~25 cents per ETH.

Ethereum is built for programmers, by programmers. By taking Bitcoin one step further, Ethereum allows users to create smart contracts or programs that can send transactions when their conditions are met.

A good example of a smart contract is a rent agreement, where your funds are automatically withdrawn at the first of the month. Bitcoin doesn’t work with smart contracts, so for a rent agreement, you’d have to manually send a transaction each month.

Before we can dive deeper into Ethereum and smart contracts, we need to do a brief lesson on blockchain technology.

So… What is a Blockchain?

In a nutshell, a blockchain is a continuous string of connected transactions.  When it comes to the way blockchains work, processing transactions individually is not very efficient.

What is a blockchain?

Instead, a block of transactions is created at a normal time interval.

Ethereum’s average block time is around 15 seconds. Meaning, that every 15 seconds a new block added to the Ethereum blockchain.

A blocks size also limits the number of transactions they can hold. If there aren’t enough transactions to fill up an entire block, it’s appended to the blockchain.

Unfortunately, the chain of blockchain is a lot more complex than blocks and there’s been plenty of discussions on which chain is best. Simply put, each block is chained to the next block using highly complex math equations (cryptography).

You can use these equations to prove the exact order of blocks in the blockchain, and once a block is created, it’s almost impossible to change transaction information in the block.

Why is it so hard to change transaction information inside a block?

Once a block is created, the cryptography securing the block creates a special string known as a hash using all information inside the block.

This hash is special because changing a single character in the block will change the entire hash.

For example:

Now, imagine you have a long history of connected transactions, similar to an Excel spreadsheet.

Unlike Excel, if you change one number in one cell, the entire document will become unreadable, because hashes are connected to one another, and changing one hash changes every hash.

You may have noticed the only letters in a hash are from A to F.  All of the complex strings you’ll see in with Ethereum are “hexadecimal”, and work differently than the 0-9 number range we all know.

Hexadecimals

Hexadecimals make each digit up to 16, with A=10, B=11, and so on all the way until F, which equals 16.

For example, “10” in hexadecimal would be “A”, “100” would be “64”, “1000” would be “3E8”, etc.

Can you prove that hexadecimal “64 – A = 5A”?

What about “100 – 10 = 90”?

Hexadecimal may be confusing to us, but to computers, they save time and memory.

Proof of Work

One of the hardest parts about sending transactions over a blockchain is verifying the transaction and preventing changes to past transactions.

What happens if Bob wants to send Alice 1 ETH and 15 minutes later he wants his money back?

Or if Bob wants to pretend to send Alice 1 ETH but only record that he sent 0.2 ETH?

These situations are huge problems, as you’d never know who was telling the truth. In order to keep transactions 100% honest and accurate, Ethereum proves transactions through proof of work.

In proof of work (PoW), computers compete to solve complex math problems. The computer that solves the problem first wins a reward and in return, their math is used to secure a block of transactions.

In a common analogy, computers are miners digging for gold and the miner that finds the gold is paid for his work.  The reward for finding gold is good enough that thousands of miners are digging for gold 24/7.

One possible downside to miners running nonstop is the “wasted electricity“, equal to 0.2% of the world’s supply or the electricity consumption of Switzerland.

For the time being, Ethereum uses PoW (like Bitcoin) to verify transactions while maintaining blockchain integrity.

However, there are pitfalls with PoW other than wasted electricity, including inefficient transaction fees, miners picking which transactions to include over others, and a bottleneck on network speed.

Ethereum was launched using PoW because PoW has been proven itself with Bitcoin to work for years, and since research on other blockchain Proof methods had only just begun, proof of work was the only trustworthy verification method.

This will all change with Proof of Stake (PoS).

Proof of Stake

As we saw with Proof of Work, miners work against each other to verify the next block and reap the rewards.  In proof of stake, users can choose to stake 32 ETH (lock it up), verify transactions automatically, and get to keep some of the ETH paid towards transactions.

From there, each stake of ETH is used as a validator and randomly grouped with other validators. This group of validators works together to keep each validator in check and ensure there are no ill-intentioned validators in the group.

If a majority of validators can agree on a block of transactions, the block will be added to the blockchain.

Validators need to be constantly verifying transactions.  If there are too many validators offline it’s easier to manipulate transactions, and if every validator is offline, transactions will freeze and not process.

Fortunately, Ethereum has a mechanism in place to keep validators online and honest by increasingly punishing validators.

The more often a validator is offline or proposes wrong transactions, the more ETH will be reduced (“slashed”) from the original 32 ETH stake.

It’s realistic to expect a validator to occasionally be offline and miss verifying a batch of transactions, so the ETH punishments start extremely small.

The longer a validator is offline, ETH slashed from the validator stake will increase dramatically, so the incentive to remain online also increases dramatically.

Dishonest validators have a more extreme ETH slashing structure. Slashing documentation for the mathematically inclined.

ETH 1.0 and ETH 2.0

Ethereum’s Proof of Stake model is still in research and early development.  Until PoS is fully tested and developed, Ethereum will continue to be solely Proof of Work.

Each transaction you complete on Ethereum is on the Proof of Work Ethereum, or Ethereum 1.0. Development on Ethereum is split between Ethereum 1.0 (PoW) and Ethereum 2.0 (PoS), and each team has different purposes.

ETH 1.0 developers are working towards improving the current protocol by optimizing ETH transactions and integrating system-wide features that we can use today.

ETH 2.0 development focuses on Ethereum’s PoS protocol through research and tests, one iteration after another.  Both 1.0 and 2.0 teams are equally important in our journey of blockchain innovation and application.

The end goal is to connect the old PoW chain with the new PoS chain and combine the strengths from both protocols.

Ethereum Improvement Proposals (EIPs)

eip

Ethereum Improvement Proposals describe standards for the Ethereum platform, including core protocol specifications, client APIs, and contract standards.  As EIP’s are open-sourced, anyone can propose an EIP.

EIP’s are thoroughly validated, audited, and tested by Ethereum Core developers, and are grouped together every couple months for a system-wide upgrade (called a hard fork).

The most recent hard fork, codenamed “Constantinople”, happened in February of 2019. Ethereum’s next scheduled hard fork upgrade (“Istanbul”) is slated for Fall 2019.

Why are EIP’s important?

All technology needs to be regularly updated to stay relevant.  Could you imagine using the original iPhone for 10 years or Excel 2000 for 20 years?

Blockchain is a new technology and there’s still plenty of room for improvement.

Now, Bitcoin may be an exception as the gold standard. Bitcoin needs to remain pure, and modifying Bitcoin would be against what it stands for. Ethereum, on the other hand, will be consistently upgraded to offer blockchain solutions for centralized problems.

Common Ethereum Terms

Here’s some background on some commonly-used Ethereum terms:

  • Public Key or Address: starting with “0x”, this is a hexadecimal anyone can see.  You use an Ethereum address to send or receive ETH.

Example: 0x4E9ce36E442e55EcD9025B9a6E0D88485d628A67

  • Private Key: An automatically generated hexadecimal password for a public key/address. Cannot be changed. You can use your private key to send transactions from your address using any computer.

Example: F02DBB676567E27E4E673FE52728797CA988E5DEDABB9C9710527972A9DB09E1

  • Seed Phrase: Use this to create as many addresses (with private keys) as you want.  Randomly combines words using this document. Cannot be changed.
  • ERC-20 token: Created from an EIP (Ethereum Improvement Proposal), this token is built on top of Ethereum.  ERC-20 tokens can be compared to in-game currency and you are able to send ERC-20 tokens with decimals.
  • ERC-721 token: Another token based on Ethereum.  Each ERC-721 token is unique and you’re not able to send part of an NFT, but only the entire token.  Think of an unlockable character with their own special abilities.

Ethereum Wallets

An Ethereum wallet can contain several addresses and provides an interface to send transactions from the connected addresses.  Upon wallet initiation, a 12-24 word seed phrase will be tied to the wallet.

Each connected address will also contain any ERC-20 and ERC-721 tokens linked to the address. To start using Ethereum you first need a wallet to hold your ETH, ERC-20, and ERC-721 tokens.

For more information on Ethereum wallets, please check out our official guide.

Metamask

Metamask

Metamask is a free, simple, and easy to use Ethereum wallet that fits right into the chrome browser. It provides a beautiful user interface easy for people of all cryptocurrency backgrounds to use.

Ledger Nano X

The Ledger Nano X is one of the most secure hardware wallets out there. For those looking to store large amounts of Ethereum over a long period of time, this is one of the better options out there.

To find out more about the Ledger Nano X, please check out our official wallet review + setup guide.

My Ethereum Wallet is Setup, now what?

Once you have your wallet connected and running, you have the ability to create Ethereum addresses that only you can access.  Essentially your seed phrase is used to create unique, non-duplicate addresses.

Each ETH address can send or receive Ethereum, ERC-20, and ERC-721 tokens.

How To Buy Ethereum

The easiest way to purchase Ethereum or ERC tokens is through a cryptocurrency exchange such as Coinbase or Coinmama.

By linking your bank account to your exchange account, you’re able to deposit cash into your exchange account to purchase Ethereum on the exchange.  You can then withdraw your cryptocurrency to the ETH address of your choice.

For more information on purchasing Ethereum, please check out our in-depth guide to purchasing Ethereum.

Cool Ethereum Use Cases

Ethereum Naming Service

Copying and pasting complex ETH addresses can be frustrating.  It’s hard to memorize an entire address and it’s hard to make sure the address you’re sending to doesn’t have any wrong or missing numbers or letters.

Quite frankly, Ethereum addresses are not very human-friendly. That’s where the Ethereum Naming Service (ENS) comes into play.  From their website:

ENS eliminates the need to copy or type long addresses.  With ENS, you’ll be able to send money to your friend at aardvark.ethinstead of 0x4cbe58c50480. Interact with your favorite contract at ‘mycontract.eth’, or visit a Swarm-hosted site at ‘swarmsite.eth’.

ENS is built to link your public key (address) with a human-readable word, similar to a username.

The .eth at the end tells computers how to find your address, similar to how .com tells computers to load a web page.  You can edit the .eth addresses you own at any time to point to any address you like.

You can even transfer ownership of your ETH username to other addresses.  If you use Venmo, Chase QuickPay, or any other centralized payment platform, your payments are moderated and controlled, your account can be frozen at any time, and payments can even be reversed by the platform.

The beauty of ENS is the lack of centralized governance like Venmo and Chase QuickPay, and because there is no central party to control payments, users can send ETH or ERC tokens to a username knowing the transaction cannot be prevented, stopped, or reversed.

Uniswap

One of the downsides of centralized exchanges is the limited number of cryptocurrencies you can buy on the platform.  Uniswap is a user-friendly, decentralized exchange with dozens of available cryptocurrencies you won’t find at a normal exchange.

Cryptocurrencies offered on Uniswap are 100% provided by users.  It works by allowing anyone to lock up ETH with any ERC-20 token, and by locking up ETH with another cryptocurrency, you make a portion of the transaction fees involving that other cryptocurrency.

Uniswap has been consistently adding new cryptocurrency pairs and increased exchange liquidity over time, and will continue to grow as more people learn about the exchange.

The only requirement to be able to use Uniswap is a connection to your Ethereum wallet.  As far as decentralized exchanges go, Uniswap is the easiest to understand and use.

Current Ethereum Downfalls

Ethereum still has several things to figure out before it can be widely adopted.  The most obvious weakness of Ethereum is the fact that Ethereum cannot handle more than 20 transactions per second.

This weakness falls heavily on the inefficiencies of PoW and likely won’t last forever. Ethereum developers have solved the bulk of PoS difficulties and the remaining research involves edge cases and code reduction.

It’s only a matter of time before PoS is fully implemented and transaction max bandwidth is no longer an issue.

Banking and complex taxes also plague Ethereum and other cryptocurrencies.  A cash deposit can take several business days to fully process, depending on your bank, day of the week, and time of deposit.

Unfortunately, while the internet and cryptocurrency run 24/7/365, banks only run for several hours on business days.

Figuring out your taxes from crypto purchases is another issue entirely.  If you trade one token for another, you have to record the price of each token at the time of transaction, use those prices to calculate your new average price per token, as well as the difference in price from when you bought and sold the token.

If it sounds confusing that’s because it is! Accountants also struggle with calculating crypto taxes and only a handful of accountants are capable of accurately recording taxes

Conclusion

Ethereum is trying to completely change the way we think about the internet today.  As Ethereum continues to innovate with new technology standards and unexpected use cases, the ETH development team continues to push forward towards ETH2.0, the first scalable, entirely decentralized Proof of Stake protocol.