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Ethereum is the second largest cryptocurrency in the market (now ranks third after Ripple) according to the market cap. Before you invest in ethereum, read this guide and first understand what is it, how it works and get to know ethereum value.
What is Ethereum?
Created by Vitalik Buterin in 2015, Ethereum is a “decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference”, according to ethereum.org's introduction . In simple terms, Ethereum is a decentralized, autonomous, open-source, and blockchain-based system, and also a peer-to-peer network of virtual machines where developers can run Dapps (distributed applications) by executing smart contracts.
Taking the technology behind Bitcoin, ethereum initially used proof-of-work algorithm, called Ethash which resulting the similar consensus and incentive mechanism as that in bitcoin network. Ethereum mining is the only way to generate new blocks and get ETH reward within the ethereum blockchain network, which is almost the same as bitcoin mining. For each block transactions, miners repeatedly compete to solve the math problem until one of them works out the answer and get block reward.
Afterwards, ethereum switched to proof-of-stake to reduce the electricity that requiring to reach agreement on the state of transaction and contracts on the blockchain. Proof-of-stake relies on validator nodes to take turns proposing and validating the next block in the chain. Nodes need to “stake” a certain amount of Ether to validate new transactions, and bet on which new blocks will e validated. When betting correctly, they will get rewarded, otherwise penalized.
Basic Concepts about Ethereum
First proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold", smart contract is a code and data assemble, which is automatically executed when some certain conditions are met. Put it simply, smart contracts is a virtual agreement between two parties securing the interest of both.
2) Virtual Machine
EVM (Ethereum Virtual Machine) is the runtime environment for smart contracts. In other words, EVM is actually a Turing complete software, and every node in the Ethereum network should runs an EVM implementation on their computers and execute the same instructions.
No matter you transfer ETH, execute smart contracts, or do anything else within the Ethereum network, you need to pay for the computational resources to finish the above requests. The fee within Ethereum network is calculated based on how much “gas” an action requires. For example, the more complex a smart contract (size, types, calculation steps, etc.) is, the more gas should be paid for running this smart contract. However, you cannot directly pay for fee with any gas token, but ether instead.
Ether is a necessary fuel as well as the underlying token for operating and powering the Ethereum network. It is not only used as a form of payment made by the clients to the EVH's executing smart contract as they requested, but the incentive awarded nodes successfully validated blocks on the ethereum blockchain.
How does Ethereum Work?
Miners (or nodes) download and run the EVM software, which contains the most recent state of each smart contract within the network, users' balance and call smart contract codes stored, in their computers. EMV will schedule miners on transactions validation and smart contracts execution. Determined by the size of the contract or transaction, developer who want to create smart contracts or people who do ETH transaction, should pay enough ether to miners who process and verify their requests. And how much ETH should be paid depends on how much gas consumed when running the smart contract or verifying the transaction.
What can Ethereum be Used for?
Ethereum enables developers to build and deploy decentralized applications (DAPP) on its platform. Every developer have right to upload and publish their apps in the “decentralized appstore” without the permission of a middle man like that in Google Play or App Store currently. With DAPP, provides can directly reach to its global users, and make direct profits without paying commission fees.
Believe it or not, Ethereum has greatly inspired us in numerous aspects in our life and will have important impact on our future. Though ethereum is a promising blockchain project, whether to invest in it depends on you. Let's wait and see where will ethereum lead us to.