What is Ethereum(ETH)? – Beginners Guide.

Feb 3, 2021 | Community Guides

Ethereum is a globally-distributed, open-source ecosystem powered by smart contracts, that allows for the use, and development of, decentralised applications (DApps). All of which is powered by its native currency ether (ETH)… No, no, no, no, nooooWhy make it more confusing than it needs to be. Let us break it down for you into actual words that people can understand.

Vitalik Buterin the Ethereum founder in 2013 released a white paper outlining his plans for a global computer. Buterin, who was inspired first by the global file-sharing platform BitTorrent and subsequently the first cryptocurrency ever created Bitcoin, came up with the idea for Ethereum at the tender age of 19…

I can’t begin to comprehend what I was doing at 19 that would constitute a revolutionary idea. I think I thought of converting an ice-cream van into a mobile alcohol wagon that served fresh pints of beer at the click of a button. Apples and oranges to say the least.

Fascinated by the distributed use of the internet with BitTorrent and in Satoshi Nakamoto’s invention of Bitcoin and its underlying technology the blockchain, Vitalik set out to create Ethreum. Just as Bitcoin seeks to revolutionise the financial industry by allowing peer-to-peer (P2P) transactions without the need for a middleman. Ethereum seeks to decentralise and P2P, well… everything.

If you are unsure about either Bitcoin or the blockchain you can read our easy to follow articles by clicking the links. We recommend reading both to give you the best understanding of Ethereum.

So what is it? Ethereum is, in its simplest form, a platform in which other cryptocurrencies, smart contracts, DApps, DAOs and DEXs can be built. But what are those?

Cryptocurrencies built on Ethereum – Chainlink, USDC and Basic Attention Token, to name a few.

Smart contracts – Are contracts written in code that carry out if-this then-thatfunctions. Sergey Nazarov the founder of Chainlink describes them, “tamper-proof digital agreements beyond the control of any single party”. Smart contracts are revolutionising the way the businesses work and interact with one another. They remove any ability for personal gain once bound by a contract. The easiest way to think of it is a vending machine analogy.

The bottle of water you want to buy is £2. You can insert £1 and the drink will not be dispensed. You can try this 1,000,000 times and the drink won’t be released. This is because the ‘contract’ is that, if you pay £2 then you get the water. If you don’t, then it looks like you will be thirsty.

If you are wanting to write a smart contract on the Ethereum blockchain you would write this is Solidity, a programming language written by the Ethereum team. Keep smart contracts in mind for later when we tie this all together. 

DApps are decentralised applications – Look at your phone, all the apps on your phone will be controlled by a central authority i.e. Facebook, Google, Twitter etc. All of which are trusted with your data and information. They obviously look after this data and information and don’t do anything untrustworthy with it…

All jokes aside, DApps are controlled and governed in a decentralised way. This removes any sneaky board members or shareholders getting ideas about how they can best farm your data and information out to turn a profit. Decisions are made by computer code which is free and available to see and use by all. This is called open source.

This transparency in 99% of all cryptocurrencies is what people love the most. It also helps the industry move very quickly with the sharing of ideas. This is why I believe it is inevitable that decentralised finance/DeFi (with the help of Ethereum) is the future. The regular financial industry just can’t move that quick, nor does it want to.

DAOs – Decentralised autonomous organisations are another fascinating use of the Ethereum blockchain. DAOs are organisations that can be run entirely or almost entirely based off of the coding software. No human decisions or third-party input can change the way it operates. DApp developers and its users must vote to steer the direction of the DApp itself, incentivizing the voters to come to the best consensus for the future of the DApp.

A brief look into the future –

The year is 2030, UBER is a thing of the past, NEWBER has built its own DAO using the Ethereum blockchain. Board members, incentivised by profit, are replaced by decentralised software, whilst drivers are inevitably replaced by self-driving vehicles. Owners of the vehicles or people who use the NEWBER service trade in NEWB tokens also built on Ethereum. These tokens can be used to vote how the service can be improved upon and how the direction of NEWBER should go. This may seem a little far fetched but this decentralised decision making is very common in the crypto-world.

Although the possibilities for building on top of the Ethereum are endless and the best possible uses for it haven’t been thought of yet. This is similar to the way some of the largest apps and websites of the internet are less than a few years old. As the industry and Ethereum itself develops as will bigger and brighter ways to use the ecosystem.

To wrap some of the use cases up, let’s take a look at a decentralised exchange built on Ethereum which uses a lot of the above in some genius ways.

With the likes of Coinbase and Binance etc., you have buyers and sellers putting out buy and sell bids. If we say If for argument’s sake ETH is currently at $1000.

Person A wants to buy 1 x ETH but thinks it is worth $950.

Person B is willing to sell ETH buy values it at £1050.

If there are enough people happy to be selling and buying at these prices then exchanges happen freely and there is plenty of liquidity.

If both sides are uncompromising then, in centralised exchanges, market makers are traders who will buy and sell, person A and Bs, ETH respectively. The trading fees for market makers are less than those who are effectively market takers (Person A and B here). Market makers provide liquidity or allow trades to occur. Liquidity is how easy a token or asset is to sell.

This is all known as the order book model and is common on centralised exchanges like Coinbase and Binance.

Uniswap on the other hand is a decentralised exchange or a DEX. Uniswap is effectively a collection of smart contracts (let’s hope you remember them), that allows people to trade with one another in a P2P way, passing through a smart contract as opposed to a centralised exchange order book.

Uniswap

Uniswap

The way it manages to buy and sell orders without an order book is quite clever indeed. Person X wants to buy 1 ETH which is currently 1000 USDT (USDT is a stable coin which is algorithmically pegged to the US dollar and hence has the same price). But without an order book where does the ETH come from?

Liquidity Pools – The trade can happen due to something called a liquidity pool. A liquidity pool is a pool in which traders can deposit their crypto for a non-fixed amount of time and provide liquidity for such trades to happen.

For example, if I own ETH and USDT but I am not planning on selling each asset for a while I can deposit them in an ETH/USDT- LP on Uniswap. This effectively provides both assets for buying and selling of the ETH/USDT market pair. In doing so, I am rewarded in more ETH and USDT for helping provide liquidity. This is called liquidity mining.

An easy way to think of it is like a bank, you provide liquidity to the bank to loan out your money by leaving it sitting in a savings account. In return, the bank pays you handsomely in interest… or they are supposed to but, you know, 0.1% APY interest rates and all that…

Some of the liquidity providing fees you get paid in some high in demand pools can reach up to 100% APY. Or in some crazy cases 3% per day! I know crazy.

Getting back to Ethereum and Uniswap – The way that this DEX can provide this liquidity and hold your assets in secure smart contracts is through the Ethereum blockchain.

What I should mention at this time is that to interact with each trade on Uniswap or provide liquidity or any other interaction. These are also instances of you entering a smart contract. The code for these particular contracts could be written to effectively carry out the following protocol “If I send 1000USDT to the liquidity pool smart contract, then 1ETH is sent to my wallet”.

Each interaction with a smart contract requires decentralised verification on the Ethereum blockchain. To verify these transactions and interactions, lots of different distributed computers known as nodes that make up the Ethereum network all race to solve a cryptographic puzzle known as a hash.

The first to do so broadcasts the solution to the rest of the network and other nodes confirm the solution to be true. This decentralised way of proof-of-work secures the transactions on the Ethereum blockchain. The transaction is then added to a block on the blockchain and stored permanently.

For more on this please read our What is Bitcoin and What is the blockchain posts on our blogmates.

So, now you know what types of technology you can build on top of Ethereum. What the hell does ether (ETH), the native cryptocurrency on Ethereum do? Just like you need GBP to transact whilst in the UK, you need ETH to transact in the Ethereum ecosystem.

Like Bitcoin, ETH is a cryptocurrency. It is scarce, decentralised and completely permissionless. On the Ethereum blockchain, ETH can be used for the following but is also not limited to; P2P payments, interacting with smart contracts or for trading fees on DEXs like Uniswap.

There is a fixed supply of ETH which is 114,517,118, so no printing more like the banks currently are with your hard-earned savings. You can store your ETH on DApps like MetaMask and Trust Wallet or on hardware wallets like Trezor Wallet or a Ledger Nano S, we recommend both, although the Ledger Nano or the Nano S may be the best out there. These both have ETH wallets and allow for extremely seamless uses of DEX.

We also need to talk about the elephant in the room… gas fees. The term gas fees refer to any transaction that occurs on the Ethereum blockchain. This is paid in ETH. ETH is the ‘gas’ for running the Ethereum blockchain. Those supporting and securing the network (miners), running Ethereum nodes need to be paid for their hard work. The gas fees are currently very high for transactions on Ethereum.

I have several tokens built on Ethereum that I want to buy, but can’t at this moment bring myself to pay $40-50 for a single transaction!!! Be aware of this when using Ethereum at the moment. If you are looking to learn how to use DEX in a cost-friendly way, get in touch and we can take you through that. There are a lot of early-stage projects with huge upside potential on DEX that aren’t yet listed on centralised exchanges.

Tokens built on Ethereum have to comply with the ERC-20 standard. This is a protocol that has to be followed when creating a token on Ethereum. Hence, if you are ever sending an ERC-20 token you will be paying fees in ETH as they are tokens built on the Ethereum blockchain.

Hopefully, these fees won’t stay like this forever. There is an evolution on the horizon and its name is ETH2.0. This update seeks to increase Ethereum’s scalability and solves its cost problems. It plans to do this by implementing a few cool bits of technology which we will discuss below.

Increasing scalability – ETH2.0 seeks to increase transactions per second from around 15 to 1000s and it wants to do this without increasing the number of nodes in the network.

Moving from proof-of-work to proof-of-stake – As mentioned above miners on the Ethereum blockchain are required to validate and secure the network. If this still doesn’t make any sense consider reading out what is Bitcoin and what is the blockchain articles. This mining activity requires a lot of energy and limits the transactions and scalability of Ethereum. This way of validating the Ethereum blockchain is known as proof-of-work.

Sustainability – When we say requires a lot of energy, we don’t mean a few kWs. Bitcoin also uses proof-of-work to verify its transactions on its blockchain. It is estimated that the current mining equipment supporting the Bitcoin network, requires 54 TWh of electricity. To put that into perspective, this could fuel the full of New Zealand for a year!

ETH2.0 is shifting away from this rate-limiting technology and moving towards proof-of-stake. Proof-of-stake is effective, those who hold large amounts of ETH (greater than or equal to 32 ETH) can stake their ETH and act as transaction validators. More ETH deposited results in a more likely chance of that computer/node to be chosen to mine the next block (collection of ETH transactions).

The nodes are incentivised to perform and validate well as their deposited/staked ETH will be subject to ‘slashing’ if not, whilst also receiving the block reward and transaction fees inside of the block they are validating.

Although, for any bad actors to try and manipulate such transactions this would require a 51% attack. Effectively, a node would have to own over 51% of all ETH staked on the network… Not going to happen.

Sharding is another scaling solution that Ethereum is going to implement in the ETH2.0 upgrade. This effectively creates smaller shard chains that help relieve congestion and increase transaction speeds across the network. Think of that congested motorway on your daily commute getting some additional lanes that take you to the same destination 64 more lanes (shards) to be exact.

Tokenomics of ETH –

When ETH was released in its initial coin offering (ICO) of July 2014, the team raised around 31,000 Bitcoin (~$13.8 million at the time) or roughly $1B with today’s bitcoin price. ETH was roughly $0.3 at the time, which equates to greater than 533,300%  increase… yeah pretty crazy.

With its fixed supply of 114,521,632 ETH, this reduced any chance of inflation. As you know by now, transactions between smart contracts built on Ethereum are paid for in ETH whilst the ever-increasing use of the Ethereum blockchain reduces the availability of the coin itself. A fixed supply combined with increased demand equated to a higher price per ETH over time.

ETH2.0 on top of this as previously mentioned will utilise proof-of-stake. The long and short of it is, that for validators to use secure the network and verify transactions they are required to lock up their funds in the ETH2.0 validator contract. Currently, around 3 million ETH or 4.7 Billion dollars is locked up and increasing by the day. Again, this is deflationary as it removes ETH for circulating supply.

This is not to mention all the ETH that is currently locked in liquidity pools on DEX at the minute. At the time of writing this 03 February 2021, ETH has just tipped over $1,609 which we believe will increase drastically from here (not financial advice just our uneducated opinion).

As ETH2.0 reduces gas fees for the DEX transactions, we can also see how more adoption of this DEX will result in further demand for the token. Given it is fundamentally the backbone of the DeFi boom which in our opinion is only just beginning, there are lots of reasons to be bullish on ETH.

Institutions – The big institutional investors who have seemed to just figure out the value of these assets after years of calling them scams are turning their attention to what they keep describing as “the next Bitcoin” – if they had any sense they would be extremely dangerous.

In the Coinbase annual review, it states that institutions are recognising ETH as a store of value for reasons we have described above. The game for them aims to beat inflation of local fiat currencies of their investors and the fixed scarcity of ETH is attractive. No excessive printing here.

The likes of Grayscale and Microstrategy who hold billions in cash to invest it where they see fit on behalf of their customers both have opened Bitcoin trusts, whilst Grayscale has recently reopened its ETH trust which currently has over $4 Billion in assets.

Verdict –

The institutions are here and wider adoption is on the horizons. This is why we hold ETH in our portfolios and are extremely bullish on the coin for the foreseeable future.

Best Twitter accounts for Ethereum info –

@koroushAK – Great easy to follow technical analysis

@teddycleps – Beautiful charting and technical analysis

@VitalikButerin – Founder of Ethereum

@ethereumJoseph – Ethereum Co-founder

If you liked this article and want to learn more, we offer free one-to-one support online to help you set up and get involved in the cryptocurrency space. Hit the ‘book for free button’ at the top of this page to get started.

We operate on a donation basis. So if you liked what you just read or what we are doing here at blocmates then you can buy us a pint or a cup of coffee below. Equally, we offer guaranteed slots and exclusive content to our Patrons which you can sign up to below. Again, this service is completely free so if you don’t feel like it, that’s cool too!

You can sign up to Coinbase and Binance by clicking through both links.

Become a Patron!

0 Comments

Want access to our portfolio?Join our exclusive Patreon community for the price of a pint or cup of coffee

Our Patreon is home to our portfolio, what we are buying and what coins are soon to be released.

Exclusive content that you won’t get anywhere else is just the price of a cup of coffee or a pint a month.