In this guide, we are going to discuss Ethereum. Many South Africans associate Ethereum with Bitcoin. Some people use the words Ethereum Bitcoin and Blockchain interchangeably.
By the end of this guide, 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? We have divided this guide about Ethereum into seven sections to make it simple and easy to follow.
Feel free to use the table of contents to jump around the guide.
Ethereum is a decentralised Software Platform that uses blockchain technology. The biggest differentiator Ethereum from other software platforms is that it is a Blockchain-based software platform.
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 plainest and simple explanation of blockchain is that it is records of data stored on networks of computers. There are three pillars of Blockchain that make it unique:
Decentralisation, the word decentralisation 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. Two – decentralisation also means that no one person, Company, Government, Authority or Entity controls the data record and storage process.
So instead of traditional centralised entities like the SARS, FNB, or Standard Bank recording, storing, managing and controlling data by following their own protocols. Blockchain allows for decentralised 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.
The word transparency with regard to blockchain relates to the way in whichare recorded on a ledger. The ledger is live and available for everyone to see. It 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 are by comparing these two scenarios. Currently, common citizens of South Africa are not privy to where and how their tax money is spent by the South African 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 the data. Although the office of the public protector tries to stop the government from lying to the citizens, the reality is that the system is not ‘fool-proof’.
You can see how that scenario is not transparent and not exactly trustworthy.
Let us imagine if everyone in South Africa had the ability to see a live running ledger of where every single tax Rand was spent by the government at any moment in time.
Basically, all South African citizens could see a full disclosure of how our government is managing our money and in this scenario, there would more trust and transparency. This is the second pillar of blockchain technology.
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.
So to summarise the three pillars of blockchain technology – blockchain recording and storage protocols make it such that once new data is verified it is unmodifiable, it is distributed across a vast network of computers around the world so it is hard to destroy and no one person or entity controls the data or network creating a completely transparent environment.
Great, now that you are familiar with some of blockchain’s important features let us discuss 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 have 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. Just as 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?
Many South African 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? It is commonly agreed that 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. A cap on the supply of Ether may or may not be implemented in the future. We shall see what the future holds.
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 as GWEI, which stands for Giga Wei. 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 what cents are to the South African Rand.
Similar to how South African Rands have 1 cent, 5 cents, 10 cents, 20 cents and 50 cents that represent fractions of one South African Rand, Ether has multiple denominations of fractional values: the smallest denomination being GWEI or just WEI
|Number of WEI||WEI Value||Unit Name|
|1||1 WEI||WEI (Wei)|
|1,000||1e3 WEI||KWEI (Baddage)|
|1,000,000||1e6 WEI||MWEI (Lovelace)|
|1,000,000,000||1e9 WEI||GWEI (Shannon)|
|1,000,000,000,000||1e12 WEI||TWEI (Szabo)|
|1,000,000,000,000,000||1e15 WEI||PWEI (Finney)|
|1,000,000,000,000,000,000||1e18 WEI||ETHER (Buterin)|
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.
Thus, instead of the GAS price for a transaction being let us say 0.000000003 Ether you can simply say three Giga Wei. And since the most common unit of Ether reflected in GAS prices is Giga Wei, that is what the denomination of Ether is used to represent GAS prices.
Therefore, when initiating a transaction on the Ethereum network, you will see what is 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.
Currently, 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, node are simply computers with the software installed on them that connects them to the Ethereum network. Then using computing power, they process and validate transactions in exchange for Ether.
Consequently, 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. Great. 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.
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 incentivize 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 computer 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 bit-gold 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.
Smart contracts make transactions trackable, transparent, and permanent. Great! So we have the hardware layer in the software layer of Ethereum which combined basically creates a global decentralized supercomputer 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 moment 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.
Currently, 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 all of the current DAPPS out there, you can go to stateoftheDAPPS.com and filter by the Ethereum platform.
Really Cool Stuff!
You have probably heard the term ERC-20 before. Before we delve into ERC 20 let’s talk about what ERC means. ERC is simply an acronym that stands for Ethereum Requests for Comments, it is similar to BIP which stands for Bitcoin Improvement Proposal.
Since Ethereum 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. Therefore, ERC is a process that was created as a way for people to contribute information to Etherium or introduce features to the Ethereum Network ERC’s or Ethereum Requests for Comments.
Basically, this is how developers can propose improvements to the network. The number 20 of
ERC-20 represents the unique ID number of that particular proposal.
ERC-20 is a token standard which is simply a list of rules that any tokens issued on the Ethereum blockchain must follow. You must be wondering what are tokens in the context of Ethereum.
In Ethereum, tokens are types of cryptocurrencies with different functions that represent an asset or are intended for a specific use that operates on the Ethereum blockchain. The Ethereum ecosystem allows for the creation, deployment and circulation of virtual currencies or tokens.
ERC-20 proposes the implementation of rules and regulations developers must follow on creating tokens to issue on the Ethereum 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. The Ethereum network tokens that currently run on the Ethereum blockchain are referred to as ERC-20 tokens. Currently, over 240000 have been issued on the Ethereum network. Some of the more popular ERC-20 tokens include Tether, Chainlink, Vchain and BAT.
Each token has a different function or utility. For example, the tether is a token that is tethered to the US dollar, in that it maintains the same value as the US dollar. This makes the token price stable, staying at $1 per tether. Which is why tokens with this function are called stable coins. Stable coins were designed to bridge the gap between fiat currencies and cryptocurrencies by allowing people with the token to hold an amount of cryptocurrency with a stable value.
For example, when you look at a cryptocurrency exchange you can see how Bitcoin and Ethereum prices are constantly in flux, one minute Bitcoin can be worth R200,000,00 and the next it can be worth R196,000.00. With tether, you can hold ten R100,000.00 of the token and the value remains unchanged, which gives the token a lot of utility.
An example of another token with different utility is the BAT. 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 and content creation.
ICO stands for Initial Coin Offering which operates similarly to an Initial Public Offering(IPO). An Initial Public Offering refers to when a privately held company decides to offer shares of their company to the public. An Initial Coin Offering is the cryptocurrency’s version of IPO. ICOs are done by issuing tokens on a crowdfunding platform in order to build a blockchain product or service. In 2014 Ethereum raised about R200 million worth of funds in only 42 days from conducting an ICO.
At that time Ether was worth about R5.00 each, it is now worth around R8500.00. While ICOs can be a great way for companies looking to build and offer blockchain-based products and services. Investing in ICOs is extremely risky since there is no regulation of the ICO process.
Buying Ethereum can be broken down into 3 simple steps: