You missed the point if you think Ethereum is valuable because it has the second-biggest market cap and a relatively high value per unit. And just by trading and hodling the cryptocurrency, you are kicking yourself out of a much more fantastic opportunity.
The cryptocurrency market is indeed a little bit of a wild west these days, and many people are just looking for some profits. However, understanding Ethereum will give you a glimpse of Vitalik Buterin’s bigger picture and why his project is so great.
But let’s not forget that there have been some changes when it comes to Ethereum. The so-called 2.0 version, the Staking process, and the protocol changing to proof-of-stake has started, yet it’s still to be seen how Ethereum will ultimately work.
First of all, Ethereum is a platform founded by Vitalik Buterin to make the internet decentralized, where the code is the law. Its coin is the most well-known altcoin, more than a regular cryptocurrency, the Ether.
Ethereum is a do-it-yourself platform for decentralized applications (DAPP). It allows you to build an application that no single person controls and is backed by blockchain technology. Therefore, it removes the need for a third party, as everything is managed through smart contracts.
The dApps are built through Solidity and Vyper, and you can give them virtually any capability.
More experienced developers also might want to use YUL, an intermediate language for the Ethereum Virtual Machine, or Yul+, an extension to Yul.
The platform is somewhat complex and continuously evolving, so we won’t get into coding specifics. But to understand Ethereum, it’s enough to know that it has a central aspect:
Ethereum virtual machine calculates elements that dictate how smart contracts work.
As for how big the Ethereum blockchain is, it’s size passed over 1000 GB in November 2022.
Getting started with Ethereum
To get started with Ethereum, you first must understand that the Ethereum Blockchain recently changed consensus protocol from proof-of-work (PoW) to proof-of-stake (PoS).
This action was called “The Merge.” It became a relatively new reality on September 15, 2022, when the original execution layer of Ethereum called Mainnet fused with its new proof-of-stake consensus layer, the Beacon Chain.
Before “The Merge,” Ethereum Blockchain worked like a giant, decentralized supercomputer. It gained its computing power from around the world, and that computing power required gas paid in Ether.
For example, the gas price was approximatively in April 2022, 36 Gwei (0.000000001 Eth). Besides, the PoW Ethereum energy consumption (TWh) had an average value of 78.
After “The Merge,” Ethereum Blockchain worked like a giant, but in a greener way, transforming this blockchain into a green one. Let’s make it clear, since September 15, 2022, Ethereum’s proof-of-stake mechanism only uses ~0.0026 TWh/yr.
The PoW consensus had a value of 30.000x bigger than the PoS protocol in the Ethereum case. This significant blockchain upgrade lowered the network’s energy consumption by 99,99%! That’s dope, right?
After this resume, you will understand more about the importance of “The Merge” on the Ethereum blockchain. But now, you are interested in how to get started for real with Ethereum, isn’t it?
So first, you will need a wallet to store Ethereum. There are many Ethereum wallets – some are better, some worse. That’s why you should read our Cryptocurrency wallet guide before picking one.
Then you can go forward with writing smart contracts and building dApps.
What is Ether used for
There is no data for the max supply of ETH, but at the time of writing, there are 122.37M ETH on the market.
The primary use of Ether is to power and incentivize the Ethereum network. But at this point, you may want to know what Ether is used for aside other than buying gas.
And there are several use cases for it outside the platform. People use Ether to send money abroad, with minimal fees, through peer-to-peer transfers. Also, you can use Ether to buy products or services from all the providers that accept them. Or you can just trade it on exchanges.
SIDENOTE. To facilitate the connection of your internet browser with the dApps, you can use Metamask, especially if you want to make small transactions here and there.
Ethereum Smart Contracts
The significant innovation Ethereum brought was the smart contract.
Smart contracts are little programs that are established before launching a token, then stored on the blockchain. After you write the function’s characteristics, they will run autonomously without anyone being able to modify them.
Basically, a smart contract defines the condition upon which all parties agree by using it. Also, smart contracts can contain various information, from the number of tokens to even a type of insurance.
In the beginning, creating a new smart contract and a token was like reinventing the wheel. Almost every new token would require special customization for an exchange, a wallet, or an app to communicate with.
There was a lot of room for errors and changing your dApp after launching it on the main net would require a hard fork. So, the need for a token standard appeared.
Ethereum Request Comment (ERC)
Imagine Ethereum Request for Comments (ERC) as a document programmers use to write smart contracts on Ethereum Blockchain. They define rules in these documents that Ethereum-based tokens must obey.
Nowadays, many ERCs matured, so below, we will present just a few of them, which are also the most important:
ERC20 appeared in 2015 and gave Ethereum users guidelines for creating a fungible token. It’s the most spread token and, by far, the easiest to make.
You don’t even have to write a smart contract yourself. You can go on a token generator to automatically create your cryptocurrency. You just have to put in basic info like:
- the name of the token;
- the symbol;
- max supply;
- gas limit.
Some of these platforms even allow you to generate an ICO.
Over time, people noticed a lot of issues with ERC20, and one of the most well-known issues is sending a token to a smart contract that is not made to support it. Millions of dollars have been lost due to blocked transactions.
ERC223 comes to solve this problem by adding a token fallback function. It is an improved version of the ERC20 that rejects unsupported transactions and uses two times less gas.
ERC721 is the token standard that proposes a non-fungible token. If ERC20 comes with a token valued the same as the next, ERC721 introduces indivisible and unique tokens. The most popular use of ERC721 is in CryptoKitties.
ERC777 represents a new way to interact with contracts. It enables everybody to add extra functionality to tokens, similar to a mixer contract, for greater transaction confidentiality or an emergency recovery feature to guide you if you lose your private keys.
ERC1155 is a unique approach that proposes a standard where a single contract acts as an interface for multiple types of tokens, such as fungible, non-fungible, or other configurations.
Ethereum 2.0 and the merge
Ethereum 2.0 brings improvements designed to innovate the Ethereum network by planning to decentralize the network’s scaling and transition to proof-of-stake. Around 2018 all the researchers’ work was combined into a single roadmap under the “Ethereum 2.0 “umbrella.
The former chain existed before September 15, 2022, when Ethereum migrated to proof-of-stake; a former proof-of-work Eth1 chain would eventually have been depreciated via met difficulties. Since September 15, 2022, users and applications have migrated to a new proof-of-stake Ethereum chain known as ETH2.
The process of changing the consensus protocol to proof-of-stake started with Phase 0 in December 2020 with the official launch of the Beacon Chain. In this phase, the Beacon Chain manages the registry of validators and implements the Proof of Stake (PoS) consensus mechanism for Ethereum 2.0.
The Beacon Chain adds a native staking feature to the Ethereum blockchain as a primary feature of the network’s shift to the PoS consensus mechanism.
The second phase, named “The Merge,” combined the Beacon Chain with the Ethereum mainnet, which happened recently on September 15, 2022. The final upgrade for the ETH2 will see the implementation of Shard chains.
And now, if you’re wondering if it’s possible to mine Ethereum, the answer is NO. At least not in the classical way it took place. After “The Merge,” the consensus protocol has been changed to proof-of-stake, which means that you can’t mine Ethereum. However, you will be able to gain Ethereum by staking 32 Ether and using an average laptop.
The merger comes with a transaction speed of tens of thousands per second. Also, the costs and fees will be cut down.
The interface is also more user-friendly so that people can develop even more projects on Ethereum.
Before the Merge upgrade in September 2022, the energy consumption of Ethereum for the previous month (August 2022) was approximately 86 TWh per year. That’s about what an average-sized country consumes/per year. After replacing mining with staking, this indicator dropped by 99.95%.
Introducing sharding to Ethereum 2.0 should allow for heightened scaling of Ethereum as transactions can be split across 64 new chains.
This means that running an Ethereum node will become considerably easier from a hardware standpoint since significantly less data has to be stored on a system.
The complete upgrade is expected to take place by 2023.
SIDENOTE. Remember that the Ethereum organization is phasing out the Ethereum 2.0 and ETH2 terminology. However, the roadmap and the developments remain the same.
In the previous status quo, Ethereum could support 15 transactions per second. To expand, “The Merge” of Ethereum came with several updates centered around staking, which led to the phasing out of proof-of-work mining.
By switching to staking, Ethereum means supporting thousands of transactions per second.
Also, the increase in transactions per second does not come at the expense of current nodes. The proof of stake consensus mechanisms relies on an economic incentive to keep the validators honest.
The validators can open up staking nodes by locking 32 ETH in a staking contract. And as they secure the network, they will receive a specific APR that can vary from 3.9% to 5.4% APR to upwards of 9% to 12% APR.
SIDENOTE. The current APR can be checked on launchpad.ethereum.org.
The proof of stake system opened up a node requiring significantly less hardware power than the previous consensus method, as the node needs to handle less information at a time. A node operator has to run one shard on his node, which will be possible even with an office laptop.
More important in the staking process is randomness. Nodes are assigned randomly to shards and transactions so they cannot collude and take over a shard.
Staking Ethereum is made to be more accessible to encourage decentralization. You only need a dedicated computer and 32 ETH. If you want to lock up more ETH, you must open up a separate node with another 32 ETH stake.
But remember that the technical knowledge to set up a node correctly is a must. If you mess up the node setup, get hacked, or attempt to damage the network (even by mistake), your stake can get slashed and even kicked out.
And, of course, there are some packages for everybody to find the most suitable option for them and the network. The options are:
Solo home staking – known as the gold standard for staking, provides total participation rewards, improves the decentralized network, and does not require trusting anyone else with your funds.
Staking as a service – this package is made for people that do not feel comfortable dealing with hardware but still want to stake. This one allows you to delegate the hard part while you earn native block rewards. Doing this will enable you to walk through creating a set of validator credentials, uploading your signing keys to them, and depositing your 32 ETH.
Pooled staking – several pool solutions will assist the users who do not want to stake 32 ETH. Includes what is known as “liquid staking,” which involves an ERC-20 liquidity token representing your staked ETH. This solution enables easy and anytime exiting and makes staking as simple as a token swap. It also allows users to hold custody of their assets in their own Ethereum wallet.
Centralized exchanges – many centralized exchanges provide staking services if you do not want to hold ETH in your wallet. This can be a fallback to earn some yield on your ETH holdings with minimal oversight or effort.
The Ethereum proof of stake is currently launched. The Beacon Chain merged into the Ethereum mainnet on September 15, 2022.
The Ethereum Shard chains
Sharding is a concept that splits the entire Ethereum network into multiple portions called “shards” that will reduce network congestion and increase transactions per second. Each shard would contain its independent state, meaning a unique set of account balances and smart contracts. Besides, sharding will provide extra, cheap storage layers for applications and rollups to store data.
This concept also enables layer two solutions that offer low transaction fees while leveraging the security of Ethereum.
Sharding can be considered the most complex of Ethereum scaling solutions. It’s expected to be released sometime in 2023, giving the developers the necessary time to thoroughly scope it out and test it in production environments.
Before going any further, it is essential to know the roles the nodes play in the Ethereum network. These nodes are created to verify the miners’ work and follow consensus rules. The best way is to keep a full copy of the Ethereum ledger and begin most straightforwardly. Still, it is hard as the Ethereum blockchain is approaching 1 TB of storage, making it impractical for a regular person to run a node.
What does sharding solve? Well, nodes might become too expensive to run on Ethereum, making the network more susceptible to centralization. At the same time, each transaction processed by every node will make it, so Ethereum never scales.
The sharding does not intend to move transactions off the blockchain but improve the network without sacrificing decentralization, scalability, and security.
Future of Ethereum
The hottest topic in 2022 for Ethereum was the merger between Beacon Chain and the Ethereum mainnet, which happened on September 15, 2022.
Now, all eyes are on the sharding upgrade. For the Ethereum team, this upgrade has become more of a focus since Ethereum moved to proof-of-stake.
Sharding could ship sometime in 2023.