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What is Ethereum?

Blockchain became a buzzword in 2017, several years after it was first described in Satoshi Nakamoto’s famous Bitcoin whitepaper. On the Bitcoin blockchain, transactions in the network are bundled together and stored in blocks, with each block referencing the previous one, all the way back to the first generated block, known as the “genesis block”.

This chain of connected blocks became known as the blockchain; essentially a ledger of all transactions which have ever taken place. The blockchain is stored across thousands of computers (called “Nodes”) which agree on the history of the Bitcoin network and its consensus rules. By distributing the blockchain in this way, the risk of shutting down the system is mitigated.

The Ethereum blockchain is built in much the same way. Every transaction, whether to another individual’s wallet or smart contract, is recorded on its public blockchain. Each transaction broadcast to the network is also processed (validated) by every node on the network to ensure that it follows consensus rules. This means that a single transaction to perform any arbitrary function would need to be executed once for every node on the network. This type of validation brings enormous security to the network, however it has a considerable trade-off with scalability. Software upgrades to improve the scalability of the network whilst retaining this key feature of security are well underway for Ethereum.

Ethereum was developed by the Ethereum Foundation, a Swiss non-profit.

What are the major features of an Ethereum Blockchain ?

  • Ethereum is decentralized; a record of all Ethereum transactions are stored on thousands of different computers around the world. In traditional systems, data is far more centralized, and it can become enormously expensive to achieve the same level of distribution (and thus security) that is enabled by Ethereum.
  • Ethereum is trusted; thanks to cryptographic signatures and complex mathematics, Ethereum can be interacted without a 3rd party. Information entered into the network is immutable (will not change) and ownership of said information can be proven by its rightful owner.
  • Ethereum is pseudonymous; with cryptographic signatures, users who own information on Ethereum do not need to release personally identifiable information to prove their ownership. Transacting value across the Ethereum network can be done pseudonymously, and personal details can be revealed only if the sender chooses to do so.
  • Ethereum is fast; storing and transferring data on Ethereum can happen in seconds, whilst retaining the trust, privacy and decentralized (secure) fundamentals with which Ethereum provides. Once the protocol fully matures and the Ethereum application layer is established, the system will provide utility that is several orders of magnitudes greater than alternative options today.
  • Ethereum is young; It launched in June 2015 and is still working through a number of upgrades focused on scaling the protocol. However, in its short existence it has made progress at a phenomenal rate. The network value has risen from thousands of dollars to billions in its short lifetime, and this guide will help you to understand what Ethereum has the potential to achieve in the near future.

Who are the major participants in an Ethereum blockchain?

  • Nodes enforce consensus rules and validate transactions. This covers multiple facets; as one example, a node would validate the balance of an account – ensuring that a transaction plus its “gas” fee (transaction fee) is not be greater than the balance. A transaction which did not validate would simply be ignored and not included in a block – therefore failing to be recorded in the agreed ledger.
  • Light Clients - Most Ethereum wallets are “light clients”. Unlike a node, a light client does not store a full or pruned copy of the Ethereum blockchain. Instead, these light clients connect to nodes to receive relevant data about the state of the blockchain, allowing the user to safely transact on the network without the complexities of running a node. The size of the Ethereum blockchain is many gigabytes large; light clients allow users to use the Ethereum blockchain without having to download, store and process a copy of every transaction ever created.
  • Exchanges are the on and off ramps to and from Ethereum and fiat currency (USD, EUR, GBP etc). Exchanges operate outside of the blockchain, however some decentralized crypto-to-crypto exchanges are being built which operate using smart contracts on the Ethereum blockchain. An exchange is a 3rd party private enterprise, and storing funds in an exchange has its own risks (see the risks section to this guide).
  • Miners secure the network by bundling valid transactions together into blocks, connecting each new block with the one previously forming immutable history of Ethereum transactions and balances (known as the “state”). This is the blockchain. Finding a block rewards the successful miner with 3 Ether plus the transaction fees of every transaction inside that block. To mine a block, the miner must provide a “Proof of Work” to satisfy a condition. The condition is that the hash of the block is below a certain target. The target is set in such a way that to meet the condition, the miner must have spent work solving it – “Proof of Work”. The target is dynamic, making the condition easier or more difficult to reach depending on how much effort is being put in by the miners. Through mathematics, the target ensures that – on average – a new block will be found every 12 seconds. If less effort is being spent mining, the target will adjust to become easier, ensuring that the average block time remains at 12 seconds.

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