Ethereum 2021 Explained: What Is Ethereum &Amp; How It Works (Ultimate Beginner'S Guide)

Ethereum 2021 Explained: What is Ethereum & How it Works (Ultimate Beginner’s Guide)

Ethereum 2021 Explained

What is Ethereum

Hello, I’m Crypto Swami. In this video we are going to talk about Ethereum. Many people associate Ethereum with Bitcoin and some people use the words Ethereum Bitcoin and Blockchain interchangeably. By the end of this video you will know the key differences between Ethereum and Bitcoin and their relationship with the Blockchain technology. Specifically we will discuss – What Ethereum is; What Ether is; How they work and What the future holds for this Blockchain project?

I’ve divided this guide about Ethereum into seven chapters to make it simple and easy to follow. So feel free to use the time-stamped table of contents below to jump around this video and stick around until the end of this video for an interesting bit of information that most beginners aren’t aware of that makes Ethereum an exciting project to follow.

So let’s get started. Chapter 1: What is a Ethereum? Vitalik Buterin is a Russian Canadian programmer and Cryptocurrency researcher who came up with the idea for Ethereum in 2013 which finally went live in 2015.

The most plain and simple explanation of Ethereum can be broken down into two words – Software, Platform. Now what makes Ethereum different from other software platforms is that it’s a Blockchain-based software platform.

So what is Blockchain? The most plain and simple explanation of blockchain is that it’s records of data stored on networks of computers and there are three pillars of Blockchain that make it unique: Decentralization Transparency and Immutability. So let’s break down these three pillars.

Number one: Decentralization, the word decentralization with regard to Blockchain is two-fold. One it means the data is recorded and stored on multiple devices in multiple locations around the world as opposed to one central place and two – decentralization also means that no one person, Company, Government, Authority or Entity controls the data record and storage process.

So instead of traditional centralized entities like the IRS, JP Morgan, or MIT, recording storing, managing and controlling their data by following their own protocols, deciding which servers to use, where the servers are located and using their own proprietary software and security systems to protect their data, blockchain allows for decentralized record-keeping where data is recorded, stored, and managed on a network of computers with open source software around the world. Any changes to the blockchain protocol go through a consensus process that no one person or entity has control over.

So that is the essence of the decentralization pillar.

Number two : Transparency

The word transparency with regard to blockchain relates to the way in which transactions are recorded on a ledger that is available for everyone to see and that is saved on a network of computers around the world making the data impossible to change or alter. The best way to see the value of transparency and data recording, storage and management is by comparing these two scenarios. Currently common citizens of the United States are not privy to where and how every single tax dollar is spent by the United States government. We just have to take the Government’s word for it and even if the Government had to show their records it would be very easy for them to create, forge or manipulate any data they chose to share with us since they control their own data.

You can see how that scenario is not transparent and not exactly trustworthy. So let’s imagine if everyone in the United States had the ability to see a live running ledger of where every single tax dollar was spent by the United States government at any moment in time. Basically all US citizens could see a full disclosure of how our government is managing our money and in this scenario there is more trust and transparency – the second pillar of blockchain technology.

Number 3: Immutability –

Immutability simply means that the data recorded and stored on the blockchain cannot be changed, forged, or altered and this is achieved through Cryptography and blockchain hashing processes. If you would like to watch a more in-depth video explaining – What blockchain is? and Why it was developed ?

Click on the link above to check out my blockchain video guide. So to summarize the three pillars of blockchain technology – blockchains recording and storage protocols make it such that once new data is verified it is unmodifiable, it’s distributed across a vast network of computers around the world so it’s hard to destroy and no one person or entity controls the data or network creating a completely transparent environment.

Awesome, now that you’re familiar with some of blockchains important features let’s talk about the role blockchain plays in Bitcoin and Ethereum. Bitcoin and Ethereum are both use cases of Blockchain technology with different purposes. Bitcoin is simply a digital currency that people can use as a form of payment to send to and from each other or hold as a store of value.

While Ethereum is basically a programmable blockchain that people can build software on to create valuable products and services or just for fun and due to the decentralized properties of Blockchain technology. The software people can build on Ethereum are called Decentralized Apps or DAPPS for short and the nature and potential of these Decentralized Applications or DAPPS has inspired the idea and desire for a crusade towards decentralized finance or DeFi for short. The DeFi movement aims to transform the current financial system into a more transparent and trustworthy system like I described in the scenario we discussed in the transparency blockchain pillar segment. So how is Ethereum’s blockchain based software application able to operate if it’s not owned or controlled by a central entity or authority?

The answer to that question leads us to Chapter 2

Chapter 2 : What is Ether?

Many people commonly use the words Ether and Ethereum interchangeably, when they are actually two different things. Ether is the Ethereum blockchain’s native Cryptocurrency.

It operates similarly to Bitcoin and that it’s a digital currency that can be transferred to people around the world, used as a form of payment, or act as a store of value. However Ether was created for an entirely different purpose. So why does Ether exist?

In previous videos, I explained the similarities between Bitcoin and Gold. So if Bitcoin is digital gold, Ether could be described as digital Oil. Ether was designed with the intention of fuelling the Ethereum Network. Going back to the decentralized pillar of blockchain technology, we discussed how open source software is distributed across a vast network of computers around the world. To incentivize people to host and maintain the data on the blockchain Ether was created as a form of payment to fuel the Ethereum network.

So anyone who wants to build a software application on the Ethereum network has to pay for the computing power and space required using Ether. And the amount of Ether required for network fees is determined by a built-in pricing system known as GAS.

Two other key differences between Bitcoin and Ether is that Bitcoin has a fixed supply and halving events, while Ether currently does not. A fixed supply and halving events protect Cryptocurrencies from inflation. In a cap on the supply of Ether may or may not be implemented in the future.

We shall see what the future holds. If you would like more information about Bitcoin halving, you can click on the link above to check out my video about the Bitcoin Halving event in 2020. Nice. Next, let’s talk about how Ethereum network fees are calculated.

Chapter 3: What is GAS?

GAS considers the bandwidth and space requirements as well as the computational difficulty of each transaction to calculate the amount of fees it will take to complete. The term GAS was created to differentiate the cost of performing transactions on the Ethereum network from the actual value of the Ether currency. So when executing transactions on Ethereum you will see GAS prices denoted GWEI, which stands for Giga Wei.

Ethereum 2021 Explained: What Is Ethereum

Giga Wei which is also referred to as Nano Ether or just Nano simply represents a fraction of Ether to the 9th power. You can think of Giga Wei is to Ether as pennies is to the US dollar.

Similar to how US dollars have pennies, nickels, dimes, and quarters that represent fractions of one US dollar, Ether has multiple denominations of fractional values: the smallest denomination being Wei or W E I.

Here’s a chart showing all of the different denominations of Ether.

So if we look at one Giga Wei of Ether – it’s depicted as a decimal point followed by 8 zeros and a one in the ninth place. You can see how it would be difficult to determine the amount of Ether transactions will cost with all of the decimal places to keep track of. So instead of the GAS price for a transaction being let’s say zero point zero zero zero zero zero zero zero zero three Ether you can simply say three Giga Wei.

And since the most common unit of Ether reflected in GAS prices is Giga Wei that’s what denomination of Ether is used to represent GAS prices.

So when initiating a transaction on the Ethereum network, you will see what’s called a GAS limit. In this field you can choose to increase or decrease the amount of Ether you are willing to spend to complete the transaction. The higher the GAS price the faster the transaction will be processed. And if there’s not enough Ether to complete the transaction you desire, you will receive an “Insufficient funds for GAS” notification or similar.

Current network processes on Ethereum are completed by miners via a proof-of-work protocol which involves performing computational work on computer hardware to complete transactions.

And miners which are actually called nodes are simply computers with software installed on them that connects them to the Ethereum network. Then using computing power they process and validate transactions in exchange for Ether. So using the built in GAS system, miners or nodes are able to set minimum amounts of GAS prices they are willing to accept to process transactions. And if you don’t have enough Ether to cover the GAS costs, then node miners will perform the computational work required to complete the transaction.

Now when you use Ethereum you will understand the difference between Ether and Gas as well as the reason why Gas prices are denoted in Giga Wei.

And now that we have a basic concept of what Ethereum is and the roles ether and gas play in the network, let’s get into more detail about how the Ethereum software platform works.

Chapter 4: How the Ethereum network works?

Let’s break down the Ethereum network into three simple layers so that we can understand how it works in a nutshell conceptually.

Imagine the base layer of Ethereum consists of a vast network of computers called nodes.

These nodes are connected to the internet with software installed on them that runs the Ethereum Blockchain. And this base layer of nodes is where transaction data is processed, validated, broadcasted, and stored.

And as these nodes perform the computational work required to process transaction data, they are rewarded with Ether dictated by the Gas prices we discussed earlier. These rewards incentivized nodes to maintain the Ethereum network by processing transaction data. Transaction data can contain value in the form of Ether and information in the form of code.

And these codes can transmit data and trigger actions in the next layer of the Ethereum network. So imagine another layer on top of the base hardware layer as a software layer. This software layer supports a programming language library that consists of languages like solidity, viper, bamboo, and more. Using these computer languages developers can write what are called smart contracts.

The term smart contract was actually coined back in 1998 by an American computer scientist named Nick Szabo who invented the digital currency bitgold ten years before Bitcoin was created.

Sabo’s idea was to basically use computer code to execute terms of sophisticated contracts in the buying and selling of securities like options and futures. So smart contracts are just lines of code that dictate the terms of a contract and control the execution of the contract. And with the nature of Ethereum’s Hardware layer and its blockchain based software, this creates the perfect trustworthy digital environment for building and executing smart contracts. Smart contracts have the unique ability to authorize transactions and carry out terms of contracts within a trusted environment which eliminates the need for a central authority like a government, bank, or a legal system.

So smart contracts make transactions trackable, transparent, and permanent. So we have the hardware layer in the software layer of Ethereum which combined basically creates a global decentralized super computer known as the Ethereum virtual machine or EVM.

In computing, virtual machines or VM’s are simulations of computer networks that can be used for many different cases.

In the case of the Ethereum virtual machine or EVM, a very basic and general idea of its role in the ecosystem is to improve the flexibility of the software and ensure separation of each software host in each software application. And software applications bring us to the final layer of Ethereum. The application layer is where developers can build and launch third party decentralized applications or DAPPS for short. These applications are decentralized because they operate on Ethereum’s decentralized blockchain based platform.

Popular examples of DAPPS, that have been created are crypto kitties which is a game in Augur which is a prediction market platform.

At the time of this video a total of 2772 DAPPS have been launched on the Ethereum network of which around 1500 are alive.

There are several different DAPP categories including games, exchanges, identity, health, property, and much more. At the time of this video the categories with the most transactions are games and exchanges, while the categories with the most active users are finance and exchanges. If you want to check out all of the current DAPPS out there, you can go to HTTPS colon forward slash forward slash state of the DAPPS.

com and filter by the Ethereum platform.

Cool, now another popular element of the Ethereum ecosystem and DAPPS brings us to the next chapter.

Chapter 5: What are ERC-20 tokens?

You probally have heard the term ERC-20 before and before we talk about ERC 20 let’s talk about what ERC means. ERC is simply an acronym that stands for a etherium requests for comments. It is similar to BIP which stands for 15 improvement proposal since a etherium and Bitcoin are blockchain based technologies; there is no one person or entity in charge of deciding what new features to add changes to make or fixes to implement to the protocols.

So ERC is a process that was created as a way for people to contribute information about etherium or introduced features to the etherium Network; ERC’s or etherium requests for comments are basically how developers can propose improvements to the network, so the number 20 of ERC 20 represents the unique ID number of that particular proposal.

What ERC 20 is all about the ERC 20 is a token standard which is simply a list of rules that any tokens issued on the etherium block chain must follow. So what are tokens? In the context of etherium tokens are types of cryptocurrencies with different functions that represent an asset or are intended for specific use that operate on the ethereum blockchain, so the etherium ecosystem allows for the creation, deployment and circulation of virtual currencies or token.

ERC 20 proposed the implementation of rules and regulations developers must follow on creating tokens to issue on the etherium network. These rules can dictate how the tokens can be transferred transaction approval methods user access to the tokens in the total supply or number of tokens available; so ERC 20 basically ensures compatibility of new tokens issued on the etherium network.

Tokens that currently run on the ethereum blockchain are referred to as ERC 20 tokens. Currently over two hundred forty two thousand different tokens have been issued on the etherium network some of them are popular ERC 20 tokens include tether, chain link, v chain.

Each token has a different function or utility; for example tether is a token that is tethered to the US dollar. It maintains the same value as the US dollar this makes the token price stable staying at $1 per tether. Tokens with this function are called stable coins. Stable coins were designed to bridge the gap between fiat currencies and crypto currencies by allowing people with the token to hold an amount of cryptocurrency with a stable value.

When you look at a crypto currency exchange you can see how Bitcoin and ethereum prices are constantly in flux, one minute Bitcoin can be worth $10,000 and the next it can be worth $9600. With tether you can hold ten thousand dollars of the token and minutes a minute and day by day the value will remain unchanged. Which gives the token a lot of utility.

An example of another token with different utility is BAT stands for basic attention coin and it was created to be used as the currency for a web browsing. DAP called brave BAT was designed as a form of payment to be traded between users, advertisers, and publishers in exchange for users attention to advertisements.

Another popular utility of tokens has been to raise capital to finance cryptocurrency projects which brings us to our next chapter.

Chapter 6 what is ICO? ICO stands for initial coin offering.

Which operates similarly to an IPO or initial public offering. An initial public offering refers to when a privately held company decides to offer shares of their company to the public, in the form of stock on the stock market. An initial coin offering is the cryptocurrency world’s application of this process by issuing tokens that are similar to stocks, that sometimes depending on the utility of the token, have a function within the product or the service. ICO’s are used to raise capital through crowdfunding in order to build a product or service typically a startup company wants to bring to market. In fact ethereum raised 18 million dollars worth of funds in only 42 days from conducting an ICO—- back in 2014. At that time either was worth about 30 cents per ether now at the time of this video ether is worth around $3850 dollars. So while ICO can be a great way for companies looking to build and offer blockchain based products and services to secure funding, investing in ICO is extremely risky since there is no regulation of the ICO.

Many investors risk losing any funds they allocate towards ICO due to fraudulent projects. 2018 flushed out many ICO scams. Legitimate projects being shut down for one reason or another. Legitimate crypto currency projects failing many times when an ICO raises so much capital that the team loses any incentive to go through with the project.

Many ICO Teams decided to take the money and abandon the project altogether, for that reason I do not highly recommend investing in ICO until more regulations have been implemented.

That protect investors interests awesome now that we are familiar with the ICO process, ERC 20 tokens and how the ethereum ecosystem works. Conceptually let’s take a look at what the future holds for this blockchain.

Chapter 7 Ethereum 2.0

Ethereum has undergone a major Network update it has been nicknamed the OEM 2.0 ETH – and Serenity Ethereum 2.

The final intergration of the ethereum networks evolution launch later year in 2020. Which will coincidentally be a few months after the Bitcoin having. The event if everything stays on schedule this update will involve switching from miners processing transactions through proof of work protocols; to validators processing transactions through what is called Proof of Stake.

In addition the update will feature sharding, a new virtual machine. One of the main goals of this update is to improve the ethereum networks efficiency and ability to scale ethereum 2.0

Ethereum 2.0 will allow the platform to handle the growing demand for DAPs and the defy movement at large there are many phases to this massive upgrade. So if everything stays on schedule it will be a few years until the upgrade is 100% implemented and complete.

Read More: What is Tezos? XTZ

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