Ethereum: a Beginner’s Guide

March 26, 2019

What is the topmost concern for you when you use your smartphone for financial transactions, ordering the grocery online or hiring a cab?

Quality? Service? Rates?

No, the worry that sits above all is the security of your personal info. Your address and phone that you provide to these apps, the payment that you make via mobile banking and the documents that you share with someone—all vulnerable to your identity theft.

Data and information security is a significant concern in the digitized world where a few clicks make things work for you, but at the same time, you share various data about yourself. But what makes your data insecure? It is the central authority involved in any application, which provides you the product or the service, and in turn, asks for your sensitive data. A couple of servers govern this central authority in any application and the system works on the client-server model.

Imagine your data pass to a malicious pair of hands or are sold out to the wrong people. Does this suffice to gauge the main point we are talking about?

To address such issues and bypass the central authority where the reign is in the hands of one supreme governing body or a set of people, Blockchain comes into the picture. The blockchain is that emerging technology that gives the power in the hands of the consumers and the users in any system where they can use the services and the products and at the same time earn monetary benefits. Such systems are decentralized, transparent, secure and fast. Also, users have anonymity.

Ethereum is one such network running on the theory of Blockchain.

What is Ethereum?

Launched in July 2015, Ethereum is an open network built upon the blockchain and follows certain protocols strictly. The protocols together are called smart contract, which resides on every participating node in the network. More on Smart Contracts to follow in a few minutes.

Assume a situation where you are taking a bank loan. You are asked to share your critical documents related to identity, income and current residence proof along with the educational certificates. In turn, loan authority and the real estate agency will share certain crucial legal documents with you while and after the process is completed.

Are you sure, your documents are in safe hands? What if the documents you receive from involved parties are forged sometime later considering the fact that most of the transactions happen online? It will jeopardize your trust and claims legally.

Consider a situation where a music composer uploads a mesmerizing tune over a music-sharing platform for their fans at a small price. And someone starts claiming the copyright over it. Or, if a hacker downloads the music unethically and distributes it for free? Even worse, if the platform forges with the music or deletes it without permission. The composer would have lost the bet to claim the authority.

An Ethereum network can salvage such situations.

According to CEO Gavin Wood and the founder Vitalik Buterin of the Ethereum system, they look at the Ethereum network as a large global computer with the combined power of all the nodes contributing towards the computation.

Coming back to our examples, none of your loan related documents would be tampered when the system underpinning the documents sharing system is a blockchain network. With proper time stamping and security, you can share the documents with any vendor, financial institutes or in legal proceedings. Similarly, the music files can be appropriately copyrighted, and the composer can remain assured for getting royalties in time without any malpractice or piracy.

Often, a blockchain network stores the complete data at every node. However, the data stored in the data containers (a block) are transactional data, the signature of the previous block and some more system related data. If the nodes start keeping the data files like music records or the bulky documents, the system would be impossible to maintain owing to the bulk and poor speed.

Hence, decentralized apps are built and hosted on Ethereum.

What is DApp?

Developers build applications over the Ethereum network using InterPlanertary File System (IPFS). This file system allows storing and sharing the data files using a peer-to-peer system. If you want to access the files on the network, you have to pay a meager fee in terms of Ether and can access the files.

All the transactional data still sit at the lower layer of the network at Ethereum. While the informational data and information like documents or songs—the application related content—sit in the decentralized app (DApp). The developers who host the applications have to pay a small fee to the network as hosting charges while they get the payment from the users.

DApps are used successfully in many industries like supply chain, healthcare, legal contracts, etc.

An Ethereum system abolishes the need of the third party payment gateway and the bank with the integral smart contracts and crypto wallets. This allows the reduction into any intermediary fees and makes the processes low-cost affair. Since the transactions are direct without any bridging authority or intervention, they are faster and smoother than the electronic or traditional system. Backed by the Blockchain, the system lends the high-level security apart from the above benefits.

More on Ether and Smart Contracts

Like any blockchain system, Ethereum also needs mining, tokens and a way to run smoothly. Ether—represented by ETH—is the cryptographic token or in the words of the CEO himself, it is the fuel of the network, which keeps it running. Just to clear the air, many people get confused between Ether and Ethereum just like Blockchain and bitcoin. Ether is the fuel running the Ethereum blockchain network. Over this platform, applications are created and run while ether has only one utility—drive the operations in the system as a currency. Outside the network, it has no existence.

The developers and other related entities who write the codes for DApps also receive the incentives in ETH. When a miner mines a block, they receive ether as incentives.

Usually, the capacity and number of a cryptocurrency are limited to prevent it from flooding the market and controlling the value of the virtual currency. When launched, Ethereum offered 60M ethers.

Smart contracts are a set of the rules which are deployed on the machines of each user and run seamlessly. Technically, they are small programming codes which take care of the compliance and regulations of the Ethereum. Thus, making Ethereum function without a third party. The smart contracts run on each node using an operating system. This operating system is called Ethereum Virtual Machine.

A reminder here, in a peer-to-peer network like blockchain, there is no power vested to a central processing server. Hence, all users have equal power.

Mining in Ethereum

Mining ethers in an Ethereum network is simple. You solve a mathematical problem and mine a block successfully, you get a reward of 3 ethers at a time. All you need is computational power in your hands. Here, a block is added every 15 seconds.

If a miner is able to devise a solution, they are rewarded a sum of 0.625-2.625 ethers even if their block does not make it to the chain. This incentive is called uncle or aunt reward.

The Challenges with Ethereum

Like any technology or product, the challenges are indispensable. So is with Ethereum. As this blockchain platform depends on the coding of smart contracts and the decentralized apps, hence any glitch in the code can mar the performance and security.

Apart from the loopholes in the code, the scalability is an additional problem any blockchain application can face. Mass adoption is also a road blocker for Ethereum, which is a common hurdle with technologies that are still to break into the mainstream or in fact with almost all the immature technologies.

There are more challenges an Ethereum network usually faces but that would need a separate post in itself. To keep the flavor of the article fundamental, we would explain the challenges in another post. Until then, stay tuned with CoinGrammar for more insightful posts on Blockchain and crypto world.

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