What is Ethereum (ETH) and how does this crypto work?

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What is Ethereum (ETH)?

Simply put, Ethereum is a global computer: secure, always on, and anyone can use and program it however they want. It is also important to point out that everything that is done with this computer is public.

Ethereum is a blockchain-based platform that allows developers to build and deploy decentralized applications (DApps). While Bitcoin’s main role is to transfer virtual currency, Ethereum’s main role is to run the program for any decentralized application. Instead of investing in servers, developers will put the application on the Ethereum network.

The unit of account, the currency of Ethereum is the ether (or ether), whose acronym is ETH and symbol Ξ. The ether has two functions:

  1. It pays the validators (stakers) who guarantee the validity of the blockchain;
  2. It is used to pay the fees for using the DApps.

💡 Ethereum is the name of the platform and ether is the name of the native unit of account that is traded on that platform. So they are two different things, although the use of “Ethereum” to refer to the cryptocurrency is still quite common.

The Ethereum blockchain is currently secured by Proof-of-Work (miners use computing power to secure the network) but this security should evolve to Proof-of-Stake with the transition to Ethereum2.0.

Many projects are being built on this decentralized network, including projects related to decentralized finance (DeFi) that allow anyone to lend or borrow crypto-currencies.

How was Ethereum born?

Ethereum was created by Vitalik Buterin, a young Russian-Canadian who wanted to generalize the programmable aspect of Bitcoin. Indeed, although Bitcoin allows for a host of more or less complex operations (multisignature, payment channels, atomic exchanges, tokens, etc.), it is nevertheless too limited in terms of flexibility and scalability.

Ethereum represents an evolution of Bitcoin that is supposed to improve its contractual functions, sometimes at the expense of its decentralization and short-term stability.

vitalik buterin fondateur ethereum

Vitalik Buterin, the founder of Ethereum

The basic idea for Ethereum was dreamed up by Vitalik Buterin in late 2013, and a first version of the white paper was distributed during December to a number of major players in the cryptocurrency ecosystem.

The project was officially co-founded in January 2014 by 8 people – Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Hood and Jeffrey Wilcke.

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In July 2014, Ethereum’s Initial Coin Offering took place, which was conducted on the Bitcoin blockchain. As a result, over 60 million ethers were pre-sold, raising 31,529 bitcoins, or over $15 million at the time of the ICO. 12 million ethers were also created to fund the project’s pre and post development.

After more than a year of development, the launch took place on July 30, 2015. The rest of the ethers were mined over the next few years. Today (April 2020), about 5 million ethers are created per year, and the total amount of coins in circulation is 110.5 million.

Ethereum, a smart contract platform

The main role of this platform is to execute what are called smart contracts, also known as “intelligent” contracts or autonomous contracts.

A smart contract is simply a computer program that does not require a trusted third party to execute. In the context of the blockchain, it is a program that can carry out operations when certain conditions are met on the register.

💡 For example, a lottery could be set up through a smart contract. When the balance of a predefined account would exceed a certain amount, it would be automatically sent to a randomly selected participant.

Although this type of contract can be implemented in a rudimentary way on Bitcoin, Ethereum is the first platform focused on this use. The platform brings together a multitude of autonomous contracts, which are executed on the blockchain and are the basis of many decentralized applications (DApps).

The Ethereum Virtual Machine (EVM)

As mentioned, Ethereum aims to be a decentralized global computer. To achieve this, it uses a virtual machine (the Ethereum Virtual Machine or EVM) that runs simultaneously on each of the network’s nodes. This virtual machine modifies the global state of the system (consisting of Ethereum accounts, their balances, data in storage and code) according to the actions of users and the execution of smart contracts. The modifications are replicated on each of the computers of the network in consensus, hence the fact that we speak of a “virtual” machine: this one does not really exist but is a practical abstraction to represent what Ethereum is.

The Ethereum virtual machine has its own language consisting of many instructions, each of which has a different effect on the system. This language, called the bytecode, is usually obtained by compiling another, more accessible contract programming language. Thus, on this network, smart contracts are generally written in Solidity.

The main novelty brought by Ethereum is the fact that its virtual machine is almost Turing-complete: it allows autonomous contracts to loop and allows recursion (a contract can call itself). On the one hand, this makes things much better than the scripting system used in Bitcoin, which does not have the same capabilities. On the other hand, it makes Ethereum’s operation more complex: indeed, to avoid that smart contracts run endlessly, a gas system (described below) must be put in place.

ERC-20 tokens

It is possible to create your own programmable currency on the Ethereum network without any particular knowledge of blockchain technology. The created currency is managed by a smart contract that most often follows the ERC-20 standard: this is why we speak of an ERC-20 token.

Since these tokens live on the same platform, they go through the same addresses as ethers (ETH) and it is therefore possible to keep your tokens on the same address / the same Ethereum wallet (unlike other crypto-currencies which each require a different wallet).

Also note that you will need a minimum amount of ETH on the wallet to send ERC-20 tokens to another address: the ether is used to pay the transaction fees.

It is also through these tokens that Initial Coin Offering fundraisings are carried out.

A complete list of all such tokens in circulation can be found on sites like CoinGecko.

Les tokens non fongibles (NFT)

Another type of token is also available on the Ethereum blockchain: non-fungible tokens, often abbreviated as NFT.

Unlike the ERC-20 token which forms a unit of account (one can own 3.6468 tokens, send 2.1936 tokens, etc.), the non-fungible token is a unique and identifiable object that cannot be divided or mixed with other tokens. Non-fungible tokens most often follow the ERC-721 standard.

The use of non-fungible tokens can range from representing a piece of virtual land (Decentraland) to trading card games (Gods Unchained) to raising virtual cats (CryptoKitties) to tokenizing real estate (RealT).

For more details on non-fungible tokens, please read the article: What is a non-fungible token (NFT)News NFT?

How the fees work: the gas system

As we said, the fees for making transactions on Ethereum are always paid in ethers (ETH). However, the complexity of the platform makes it necessary to set up an intermediate calculation system involving what is called gas.

Think of gas as gasoline for your car: every transaction on the network consumes gas to perform a number of operations, just as your car consumes gas to move forward. These operations include ether transfers, ERC-20 token transfers, but also simple operations such as addition, multiplication, etc. They can be initiated by users or by the smart contracts themselves.

💡 Each operation has a fixed gas cost. The more complex the operation is to perform, the greater the gas cost. An addition costs 3 units of gas and a multiplication requires 5. An ETH transfer costs 21,000 gas.

Note that gas is a completely virtual unit that serves as an intermediary and that you cannot keep: you pay the fees in ethers and the validators also get ETH.

When you make a transaction, you must therefore indicate how you wish to convert your ethers to pay the fees. There are two parameters that can be modified: the gas limit and the gas price. We will look at these two notions in more detail in the rest of this sheet 🙂

The gas limit

You can adjust the maximum amount of gas to be used in a transaction: this is called the gas limit. This limit will tell the system how much gas your transaction can consume. For a transfer of ethers from one account to another (classic transaction), there is no need to modify this parameter since this transfer always consumes 21,000 gas. However, in the case of an interaction with a contract, it is necessary to estimate the potential amount of gas consumed.

There are three possible scenarios:

  • In case you set the limit too low, your transaction will run out of gas to execute all the operations. You will then lose the amount of ETH used for fees, your transaction will be cancelled, which means that those sent will not be debited from your account.
  • If you put a gas limit that exactly matches the actual consumption (like in a classic wallet-to-wallet transaction), your transaction will be validated and added to the blockchain.
  • Finally, if you enter a gas limit that is too high, your transaction will also be confirmed and you will be reimbursed for the excess amount not consumed. It is therefore advisable to overestimate this consumption if you cannot determine it with certainty in advance.

Although this is not necessarily a very serious problem, do not specify an overly large gas limit. An overly large gas limit could disrupt the miners’ economic calculations and slow down the processing time of your transaction.

The gas price

To ensure the decentralization of the system, each Ethereum block is gas-limited: the amount of gas consumed by the transactions it contains must be below a certain threshold. This is why gas is not available in abundance and therefore has a price determined by the market.

The price of gas is generally expressed in gigaweis or Gwei. The wei, named after the cypherpunk Wei Dai, is the smallest unit of the Ethereum platform and corresponds to one attoether or 10-18 ETH. One Gwei therefore represents one billionth of an ether:

💡 1 ETH = 1 000 000 000 Gwei or 1 Gwei = 0.000000001 ETH

Combined with the amount of gas consumed, the price of gas is used to determine the fees paid for the transaction. The formula is :

cost (ETH) = gas consumed × gas price

For a typical transaction (21,000 gas consumed) and a gas price of 3 Gwei, the fee will be 0.000063 ETH, or 1 euro cent at the current price (April 2020).

The gas price is used to determine the priority of transactions: miners will favor transactions with a high gas price over transactions with a low gas price. If the network is heavily used, the gas price that needs to be quoted for a transaction to be confirmed quickly will tend to increase.

L’évolution d’Ethereum

Unlike Bitcoin, whose community is very conservative, especially in terms of monetary policy, Ethereum is much more progressive and seeks to evolve quickly, even if it means neglecting its own stability. Since its creation, the platform has been upgraded many times! Here is the list of the modifications of the Ethereum protocol, which each have an original code name:

Code nameApplication dateBlock height
Ice Age08/09/2015200 000
Homestead15/03/20161 150 000
DAO Fork20/07/20161 192 000
Tangerine Whistle18/10/20162 463 000
Spurious Dragon23/11/20162 675 000
Byzantium16/10/20174 370 000
Constantinople28/02/20197 280 000
Petersburg28/02/20197 280 000
Istanbul08/12/20199 069 000
Muir Glacier01/01/20209 200 000

Although Ethereum has been upgraded a lot over the past few years, its evolution is far from over and more changes are already being considered. Many developers and researchers are working hard to ensure that this evolution goes smoothly. The next major upgrade planned by the development team, called Serenity or Ethereum 2.0, includes three major changes:

  • The passage in proof of stake with Casper.
  • The implementation of sharding to increase the scalability of the platform.
  • Virtual machine enhancement with eWASM.

In addition to sharding, other so-called second-layer projects are also being developed to help Ethereum scale up: Plasma and the Raiden network are two of the solutions being considered for the medium term.

Ethereum Classic (ETC):

Ethereum classic

You may have noticed the existence of Ethereum Classic (ETC). Don’t confuse it with Ethereum (ETH), it’s not the same thing.

In June 2016, a cryptocurrency investment fund called TheDAO was hacked and nearly $50 million worth of Ether was misappropriated. It wasn’t the Ethereum blockchain that was hacked but only the investment fund.

To return these Ethers to their owners, it was agreed to carry out a hard fork. However, a part of the community did not agree on the principle and preferred to continue mining the old Ethereum chain (the original chain) which has now become Ethereum Classic.

Ethereum (ETH) is still supported by its founder (Vitalik Buterin) and the Ethereum Foundation, while Ethereum Classic (ETC) now belongs to another community (Ethereum Commonwealth).

Benefits of Ethereum

  • A transparent, secure and reliable network.
  • Personne ne peut modifier un smart contract une fois en ligne sur le réseau.
  • Plus sécurisé qu’un format classique de contrat intelligent.
  • There is no downtime since the Ethereum network is active 24 hours a day.

Limits of Ethereum

  • DApps (decentralized applications) are dependent on the Ethereum blockchain scaling, which is not perfect. For example the network was slowed down considerably during the cryptokitties craze in December 2017.
  • You cannot modify a smart contract that contains a bug or a flaw.
  • Monetary policy is not as well defined as in Bitcoin.

How to buy the crypto-currency Ethereum (ETH)?

To trade the Ethereum crypto-currency, you can go to different platforms like eToro, Binance, Coinbase, Kraken…To learn more, you can read our explanatory article to buy ether. You will see that it is possible to buy ETH directly with fiduciary currencies (euros, dollars…). Remember that the name of the protocol is Ethereum and the name of the coin is Ether (symbol ETH).To trade the Ethereum crypto-currency, you can go to different platforms like eToro, Binance, Coinbase, Kraken…To learn more, you can read our explanatory article to buy ether. You will see that it is possible to buy ETH directly with fiduciary currencies (euros, dollars…). Remember that the name of the protocol is Ethereum and the name of the coin is Ether (symbol ETH).

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Investments in crypto-currencies are risky (read more)

Ether is a crypto-currency that has already increased in value since its inception. It was trading at less than €1 in 2015 and less than €10 in 2016, its price will have literally exploded in 2017, going from €7 to more than €1,000 in the space of a year. As you can see, the probability of the ETH price increasing by a factor of 100 now seems quite low. Nevertheless, Ethereum has been second in the ranking of cryptos (behind Bitcoin) for several years now. It is therefore a safe bet for anyone who wants to have a diversified portfolio.

Comment stocker ses tokens Ethereum (ETH) ?

It is advisable to use a hardware wallet to store your crypto-currencies and the same goes for storing your precious ETH 💎

But what is a hardware wallet? It is a highly secure electronic wallet that can be plugged into the USB port of a computer. This allows you to store your cryptos on an external medium. This means that the assets are no longer stored directly on a computer or on the Internet. There is thus no longer any risk of being hacked and losing everything. The electronic safe should then be placed in a safe place for maximum security.

We are lucky, the most famous wallet is made in France It is the Ledger Nano X which is manufactured by the company Ledger.
The best way to secure your cryptocurrenciesWe are lucky, the most famous wallet is made in France It is the Ledger Nano X which is manufactured by the company Ledger.The best way to secure your cryptocurrencies

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