Step-by-Step Guide to Ethereum
Ethereum Guide
Contents
What is Ethereum?
Ethereum is a decentralized blockchain and computing framework that makes it easy for people to create their own decentralized applications and cryptocurrencies. Ethereum enables developers to create decentralized applications that can take advantage of the security and decentralization of Ethereum’s blockchain. These apps “live” on the ethereum blockchain, and they can again have their own cryptocurrencies. In this way Ethereum’s network becomes the “rails” and infrastructure for the “new Internet” built with blockchain technology.
How does Ethereum work?
Like Bitcoin, Ethereum is a solution based on blockchain technology. A blockchain is, in short, a log of transactions and data secured by an open, global, decentralized network using computing power.
Similar to Bitcoin’s blockchain, where you can send and receive bitcoins, Ethereum’s blockchain is used to send and receive Ether globally, without a third party being able to see or enter unexpectedly.
Where Bitcoin was developed for the purpose of being a digital currency, Ethereum was created as a more flexible blockchain that makes it easy for developers to build decentralized applications, also known as dApps on top of the Ethereum blockchain.
New Ether comes into circulation in the form of rewards to miners who secure the Ethereum network. There are today approx. 120,000,000 Ether in circulation.
This flexibility is due to the fact that Ethereum makes it easy for developers to publish software on Ethereum’s blockchain through smart contracts. Software that in practice is significantly more complex than what Bitcoin’s blockchain can handle.
A smart contract is simply explained a contract (agreement between two parties) that is stored in a blockchain. The contract is written with a data code. Smart contracts on Ethereum make it possible to automate the implementation of an agreement or contract without the involvement of a third party or to need trust in the other player with whom you have a contract.
Smart contracts are based on “if, then” logic, so if X action is performed, then Y action is performed. With smart contracts, you can be sure that the outcome of what has been agreed will be implemented through the blockchain automatically, without the risk of downtime, fraud, censorship and involvement from third parties.
How does Ethereum work for users?
Ethereum is an open protocol. Anyone can use the network to send, receive and store ether. In practice, this is done by creating a decentralized Ethereum wallet, and by using digital signatures.
In order to participate and interact with the Ethereum network and applications built on Ethereum as a user, you must pay for those who secure the network to verify the transactions you perform. This payment is made in the form of Ether and the transaction fees paid are defined as “gas” (just like needing gas for the car).
Because the majority of all decentralized applications are smart contracts built on Ethereum, this means that you need to have Ether in your digital wallet if you are to use most of the services that exist in the crypto world today.
How much you have to pay in “gas” depends on how much traffic there is on the Ethereum network. Increased traffic means higher competition to have their transactions verified on the blockchain, which results in more expensive fees.
In recent times, the number of applications based on Ethereum’s blockchain has increased significantly, which has also resulted in sky-high prices for transaction fees because the network is congested. In a way, it can be said that Ethereum has had scaling problems as a result of its own success.
One of the most important challenges that one is working to solve is namely to have both fast and cheap transactions on the network at the same time as it is decentralized and ensures top security.
Work is now underway to address these scaling challenges for Ethereum. We will return to this later in the article.
How is Ethereum’s blockchain secured?
Ethereum Virtual Machine (EVM) is used to store all information about transactions, accounts and smart contracts that exist in Ethereum’s blockchain.
The information stored in Ethereum Virtual Machine is verified through a decentralized global network of participants who use their computers to ensure that all information is accurate at all times. These participants are either known as nodes or miners.
A node stores a copy of all data in the Ethereum blockchain, and comes to a common agreement with other nodes that the information is correct using that data power and power. A miner secures the blockchain using computing power and power, but unlike nodes, miners do not store a copy of the blockchain.
This way of securing a blockchain is called Proof of Work, and was first introduced through Bitcoin. Ethereum primarily uses Proof of Work to secure its blockchain.
The computers that nodes and miners have to set up are referred to as a mining rigs. It is these computers that perform the registration and storage of new transactions in the blockchain.
In practice, these computers are used to solve a cryptographic math problem for each new block extracted in the Ethereum blockchain. This is how Ethereum is structured, and for each new block there is a new math problem that must be solved by the mining rig.
It solves the problem with its mining rig first, can receive a prize in the form of ether. In practice, this means that Ethereum’s blockchain is secured through the use of incentives. People can earn ether (ETH) by securing the network and by using computing power and power.
In addition to receiving prizes in the form of Ether from the network itself, nodes and miners also receive additional prizes in the form of transaction fees paid by people who use the Ethereum network.
Migrating to Proof of Stake
In September 2022, Ethereum made the transition to a so-called “Proof of Stake” system instead of using mining. Thus, the “mining” of Ethereum is now over.
It will mean over 99% lower energy use for Ethereum because “Proof of stake” does not require the same electricity use and computing power, but rather is a mechanism where participants come to a common agreement on the information in the block by using the cryptocurrency ether as security. You can read more about this later in this article.
What is the difference between Ethereum and Bitcoin?
Launched in 2015, Ethereum builds on Bitcoin’s innovation, with some big differences.
Both let you use digital money without payment providers or banks. But Ethereum is programmable, so you can also build and deploy decentralized applications on its network.
Ethereum being programmable means that you can build apps that use the blockchain to store data or control what your app can do. This results in a general purpose blockchain that can be programmed to do anything. As there is no limit to what Ethereum can do, it allows for great innovation to happen on the Ethereum network.
While Bitcoin is only a payment network, Ethereum is more like a marketplace of financial services, games, social networks and other apps that respect your privacy and cannot censor you.
How to buy and store Ethereum (ETH)?
There are primarily two ways you can buy ether (ETH). You can either buy ether through a crypto exchange, or you can buy ether from a private individual who wants to sell their ether.
Regardless of which method you use, you must store your ether in a digital wallet for cryptocurrency.
You can choose between creating an account on a crypto exchange and letting the crypto exchange take care of your cryptocurrency for you, or creating a decentralized Ethereum wallet where you are responsible for the storage and security of your ether.
Buy and store ether (ETH) with a crypto exchange such as Firi.
An easy and cheap way to buy and store ether is through a crypto exchange such as Firi. Firi makes it easy to buy, sell and store your ether and other cryptocurrencies.
When you create an account through Firi, an Ethereum wallet is automatically generated for you. In practice, this means that Firi safely stores your ethers for you and that you do not have to worry about the security of your Ethereum wallet.
You can access your Ethereum wallet by logging in to your user by e-mail or vipps, and by verifying yourself with BankID or MidID. You can easily send and receive ether to your Firi wallet from other exchanges or other Ethereum wallets.
This is how you can buy and store ether in three easy steps.
Cryptocurrency can be bought every day 24/7, and Firi makes it easy to switch between ether and NOK/DKK. In less than one business day, you can also sell your ether and several other cryptocurrencies for NOK/DKK to your bank account if you wish.
Store ether (ETH) in a decentralized wallet.
Because Ethereum is a decentralized network, it is possible to create a separate, private Ethereum wallet where you can store your ether.
Only you have access to this. When you create a digital wallet directly on the Ethereum network, you receive what is called a public key and a private key that is associated with your wallet.
A public key can be compared to an account number for your Ethereum wallet. For example, if someone is going to send you ether, they need access to your public key associated with your Ethereum wallet.
A public key might look like this: 0xab5801a7d398351b8be11c439e05c5b3259aec9b
You can safely send others your public key. A public key is a combination of letters and numbers that are unique to your Ethereum wallet.
A private key can be compared to the password of your digital wallet. A private key is a combination of letters and numbers that are unique to your Ethereum wallet.
A private key can also be generated in the form of a seed phrase, which in practice is 12 words that acts as a backup of your private key. If someone has access to your private key or your seed phrase, they will also have access to all of your cryptocurrency.
It is therefore important not to share your private key with anyone.
Why would I use Ethereum?
If you’ve ever sent money overseas (or plan to), or had to worry about the future of your assets due to external forces outside of your control where you live, or been fed up by the numerous restrictions and fees imposed by traditional financial institutions for everyday transactions, you might be interested in what cryptocurrencies have to offer.
Bear in mind that Ethereum is a story that is still being written, and many more reasons to use it are being uncovered as it evolves and develops over time.
Cheaper and Faster Crossborder Payments
Stablecoins are a novel type of cryptocurrency that relies on a more stable asset as the basis for its value. Most of them are linked to the United States dollar and therefore maintain the value of that currency. These allow for a very cheap and stable global payment system. Many current stablecoins are built on the Ethereum network.
Ethereum and stablecoins simplify the process of sending money overseas. It often takes only few minutes to move funds across the globe, as opposed to the several business days or even weeks that it may take your average bank, and for a fraction of the price. Additionally, there is no extra fee for making a high value transaction, and there are zero restrictions on where or why you are sending your money.
Who runs Ethereum?
Ethereum is not controlled by any one entity. It exists solely through the decentralized participation and cooperation of the community. Ethereum makes use of nodes (a computer with a copy of the Ethereum blockchain data) run by volunteers to replace individual server and cloud systems owned by major internet providers and services.
These distributed nodes, run by individuals and businesses all over the world, provide resiliency to the Ethereum network infrastructure. It is therefore much less vulnerable to hacks or shutdowns. Since its launch in 2015, Ethereum has never suffered downtime. There are thousands of individual nodes running Ethereum network. This makes Ethereum one of the most decentralized cryptocurrencies out there, second only to bitcoin.
FAQs
What is an Ethereum smart contract?
A smart contract is application code that resides at a specific address on the blockchain known as a contract address. Applications can call the smart contract functions, change their state, and initiate transactions. Smart contracts are written in programming languages such as Solidity and Vyper, and are compiled by the Ethereum Virtual Machine into bytecode and executed on the blockchain.
What is an Ethereum account?
There are two types of accounts in Ethereum: Externally Owned Accounts (EOA) and Contract Accounts. An EOA is controlled by a private key, has no associated code, and can send transactions. A contract account has an associated code that executes when it receives a transaction from an EOA. A contract account cannot initiate transactions on its own. Transactions must always originate from an EOA.
What is an Ethereum transaction?
A transaction in Ethereum is a signed data message sent from one Ethereum account to another. It contains the transaction sender and recipient information, the option to include the amount of Ether to be transferred, the smart contract bytecode, and the transaction fee the sender is willing to pay to the network validators to have the transaction included in the blockchain, known as gas price and limit.
How can I pay for transactions on Ethereum?
You can pay for transactions using Ether. Ether serves two purposes. First, it prevents bad actors from congesting the network with unnecessary transactions. Second, it acts as an incentive for users to contribute resources and validate transactions (mining). Each transaction in Ethereum constitutes a series of operations to occur on the network (i.e. a transfer of Ether from one account to another or a complex state-changing operation in a smart contract). Each of these operations have a cost, which is measured in gas, the fee-measure in Ethereum. Gas fees are are paid in Ether, and are often measured in a smaller denomination called gwei. [1 ether = 1,000,000,000 gwei (10^9)]
Where can I get Ether, and where do I store it?
You can buy Ether with fiat currency from a cryptocurrency exchange like Coinbase or Kraken. Ether is associated with your Ethereum account. To access your account and Ether, you must have your account address and the passphrase or the private key.
How does Ethereum work for applications?
When a transaction triggers a smart contract, all nodes of the network execute every instruction. To do this, Ethereum implements an execution environment on the blockchain called the Ethereum Virtual Machine (EVM). All nodes on the network run the EVM as part of the block verification protocol. In block verification, each node goes through the transactions listed in the block they are verifying and runs the code as triggered by the transactions in the EVM. All nodes on the network do the same calculations to keep their ledgers in sync. Every transaction must include a gas limit and a fee that the sender is willing to pay for the transaction. Miners have the choice of including the transaction and collecting the fee or not. If the total amount of gas needed to process the transaction is less than or equal to the gas limit, the transaction is processed. If the gas expended reaches the gas limit before the transaction is completed, the transaction does not go through and the fee is still lost. All gas not used by transaction execution is reimbursed to the sender as Ether. This means that it’s safe to send transactions with a gas limit above the estimates.
What does signing a transaction mean?
Signing a transaction generates a signature on a transaction using the private key of the transaction sender’s account. Transactions need to be signed before they are submitted to the network.
How can I deploy a smart contract on Ethereum?
Transactions can also be used to publish smart contract code to the Ethereum blockchain. You can follow the transaction status with the method eth_getTransactionReceipt, which will also return the newly created smart contract address once it’s included on the blockchain. The resulting smart contract address cannot be chosen, as they are calculated using a hash function and can’t be easily predicted.
What is a hard fork in Ethereum?
A hard fork is a change to the underlying Ethereum protocol, creating new rules to improve the protocol that are not backwards compatible. All Ethereum clients need to upgrade; otherwise, they will be stuck on an incompatible chain following the old rules.