Ethereum is a platform that makes it possible for any developer to build and publish next-generation decentralized applications. This post will address some of the FAQs people have about Ethereum and hopefully provide some insight into what makes it the second-largest cryptocurrency.
Ethereum can be used to develop applications that serve as a transparent, more democratic and efficient version of the services we use today like banking, crowd funding, or even Reddit. Some people have criticized Ethereum for its similarities with Bitcoin & called it a “Bitcoin clone”; it’s been around since mid-2015 and has gained a lot of popularity over the last year. It should be noted that although it is still possible to create applications using Bitcoin’s blockchain, Ethereum offers much more flexibility than its counterpart due to its Turing complete internal code and large development community.
1. What is a Turing Complete language?
A Turing complete Language, as explained by the MIT Technology Review, is “any programming language in which a computable function can be expressed”, meaning that unlike high-level languages like C++ or Java, it is impossible for a Turing complete language to have an algorithm where the potential output is not known.
There’s also an additional rule with Turing Complete languages called “halting problem” which means that there can never be an algorithm or program created which will tell you if a given computation will ever stop running (this ties back into how Ethereum can run indefinitely)
2. How do smart contracts work?
Smart contracts are a key part of what makes Ethereum so different from Bitcoin and other altcoins, they allow users to execute codes on the blockchain in exchange for monetary value/asset, such as if I were able to write an algorithm that paid you money every time you sent me a message on Twitter (this is an oversimplified example but it should help you get the basic idea of how smart contracts work).
The codes that are written for these contracts can be as specific or generalized as necessary, which means that they could be used for all sorts of uses: voting systems, decentralized autonomous organizations, governance systems, or even as a means of trade between two parties.
Smart contracts are also non-reversible which is something that cannot be said about Bitcoin, however, there is no need to fret because Ethereum provides an audit trail (also known as ‘modifiable computing’), which allows users to view transactions before they are completed.
3. How do I use/buy Ethereum?
At the time of writing this article, there are 3 ways to purchase ether; through exchanges like Poloniex or Coinbase (more on these later) with fiat currency, buying it directly from people who already have it using a service like LocalEthereum, or mining them with a GPU or CPU.
Depending on which way you choose to acquire ether, there are different benefits associated with each method: if you mine it yourself you will obviously have more control over your coins and won’t need to pay any fees; if you buy from an individual the benefit is that the cost of purchasing can be much less than purchasing it from an exchange, and if you buy through an exchange the benefit is that you have a much larger selection of coins to choose from (at the moment there are over 30 altcoins being traded on Poloniex).
4. How do smart contracts work on Ethereum?
As discussed earlier, smart contracts are pieces of code that have a monetary value associated with them and run on the blockchain, so if you were to buy a smart contract from someone you would basically be buying that code (which could be anything).
5. What does the blockchain look like?
Since there are many different types of transactions made every day, Ethereum’s blockchain can become quite large and unwieldy over time; however, to facilitate users’ experiences, they have implemented “sharding” which allows nodes on the blockchain to be split into smaller groups, allowing for quicker computations (also known as “virtual shards”).
It should also be noted that there is a difference between Ethereum and Ethereum Classic, with the latter being an entirely separate blockchain that was created when Ethereum’s pre-sale backer crowdfunds were hacked in 2016.
6. What’s the difference between proof of stake and proof of work?
Proof of stake is a newer consensus algorithm that was implemented on Ethereum after it had been breached several times; the basic idea behind PoS is that you lock up an amount of bitcoin (or ether) for X amount of time (a couple of weeks for example) which allows you to mine on the blockchain.
7. How can I use Ethereum?
With a blockchain that is Turing complete, users are able to do literally anything with Ether (bitcoin’s only constraint was whether or not the developers would go along with it). Users can create games, businesses, financial institutions, file storage, gambling sites, stock markets, prediction markets and much more.
If you plan on using Ethereum for any type of financial purpose you will need to use an ERC-20 compatible wallet.
8. How do I purchase an altcoin? What’s in the future for Ethereum/altcoins?
To purchase any type of altcoin you will need to first purchase bitcoin or ether, which can then be exchanged for an altcoin using an exchange like Poloniex. As far as the future of Ethereum/altcoins goes, that remains to be seen but there is no telling what may happen.
The important thing is not necessarily how, but why you’re buying it.
If you’re buying it to conduct transactions, then Ethereum may be the best option for you.
If you are buying it because of its advanced scripting language then Bitcoin has a much more extensive library.
9. How can I read the blockchain?
The blockchain is public information, which means that anyone who wishes to view it can; however, the blockchain is over 300GB in size, which makes it very difficult to analyze.
The easiest way to view and understand information on a blockchain is to visit something like Etherscan, a site that has already done all of the work for you (although make sure to double-check everything).
10. Why do developers use the Ethereum blockchain?
All blockchains essentially do the same thing, but developers choose to utilize Ethereum for a couple of reasons; first of all, it is very easy to interact with and write smart contracts on Ethereum and also because Ether has much broader use cases than bitcoin.
11. How does mining work? What are miners incentivized by? How do they get paid?
Miners are incentivized by the block reward, which is currently 5 ether, and may increase or decrease based on how much demand there is from developers (the more demand, the higher the price of Ether).
The way mining works is that each miner runs a computer program that connects them to Ethereum’s network; this program includes data on the block header (who sent how much to whom at what time) and a “nonce” which is a random number (usually a 32-digit hexadecimal string).
When run, miners are able to generate hashes that link the nonce with the information on the blockchain in a way that matches all of the previous blocks’ algorithms; this link is called a “hash”. Because each hash contains something from the block header, if it matches all of the pre-existing hashes then it is accepted by the network and miners receive their 5 ether as well as transaction fees. This process typically takes 10 minutes (or longer) and is not very energy efficient.
12. How is ether created?
Ether (the currency) is mined just like any other cryptocurrency; the only difference is that it has a pre-determined maximum supply of 100 million ether and block rewards are given out every 12 seconds instead of 50 or 25 coins per block as in Bitcoin’s case.
13. How do I use Ether?
Like any other cryptocurrency, you will need an ERC-20 compatible wallet to send and receive ether from others; MyEtherWallet is highly recommended for this purpose. You can also store your ether on exchanges like Poloniex or Bittrex just like most other cryptocurrencies but please, make sure to use 2FA every time you log in.
14. What is a smart contract? Can you give an example?
A smart contract is essentially a computer program that runs on the Ethereum network; it contains information about how the program works and what actions are taken if certain conditions are met (certain action = transaction).
Propy is an example of a project that uses smart contracts to help you buy real estate: the program and transaction information are all stored on the blockchain, so no one can tamper with any of your data. The entire process is very transparent and public.
A typical ERC-20 token contract contains things like: start date, end date, initial supply, totalSupply (total number of coins), owner address and time (block).
15. What are tokens?
Tokens are essentially applications that run on the Ethereum network; they are developed by an entity (company) in order to raise money for the project through ICOs, which is basically a process where you send Ether to the address of a smart contract in exchange for tokens.
16. How can I invest in an ICO?
If you are able to send Ether from a wallet that supports ERC-20 contracts (one that has ETH), then you can invest by sending ether directly to the transaction signed address on websites such as Token Market, Icodrops or Coin Schedule.
Everyone should be extremely careful and make sure to do their research before making any investments; in fact, many people including myself would argue that ICOs are very risky.
17. What is a DAPP?
The difference between a dapp and a DApp is simply that “dapp” is used to refer to an application or service while “Dapp” or “decentralized application” refers to the actual software that the dapp uses for storage, communication and so on.
18. What is a token sale? Can you give an example?
A token sale (also referred to as ICO) is basically just like an IPO but instead of shares of stock you are receiving tokens of the project you are investing in. Token sales can be risky ventures but also highly profitable if research has been done and the project is legit. A few examples of projects that did well after their token sale: Qtum, Iconomi, Augur, Golem, Basic Attention Token (BAT).
19. What is an ERC-20 token?
An ERC-20 token is a type of Ethereum token protocol that conforms to the rules set forth by the Ethereum developers and allows for tokens to be sent from one address (wallet) to another within seconds instead of minutes or hours depending on network congestion.
20. How do I exchange one cryptocurrency for another?
You can trade cryptocurrencies on exchanges like Poloniex or Bittrex; most of them have an option to use 2FA (2-factor authentication) for extra protection against hacks and scams. Please see the links above for further instructions and details about each exchange.
21. What is airdrop? How can I participate?
Airdrops are events in which a particular cryptocurrency will distribute free tokens or coins to anyone who owns a certain amount or type of cryptocurrency (it’s very similar to mining but instead of money they give away tokens). For example, if you are holding 1 BTC, then you may be eligible for an airdrop of 0.1 BTC depending on the rules that were set forth by a particular project.
22. What is Bitcoin? How does it work?
People often confuse Ethereum with Bitcoin (or BTC). While both projects are based on blockchain technology and share many similarities, they are two separate entities; in fact, Ethereum was actually created after people became uncomfortable with certain aspects of the Bitcoin network (i.e. lack of decentralized governance, costly transaction fees and slow confirmation times).
23. Why is Ethereum different from other cryptocurrencies?
The main difference between Ethereum and many other cryptocurrencies is that it was designed to be a platform for applications to run on (similar to how the internet works); meaning that developers can build applications (apps network) on top of the Ethereum and have them run efficiently and securely without worrying about attacks or censorship from special interest groups.
Ethereum also has a more flexible programming language than Bitcoin-based projects, meaning that it is easier to build dapps without having to learn an entirely new coding language.
24. What is Gas in Ethereum?
The network of nodes used to process transactions on the Ethereum blockchain are all connected through an internet connection and a mesh network; each node basically verifies every transaction that it receives by running them through its own code to make sure they are legitimate and then sends them along to the other nodes for verification.
To give the nodes an incentive to process and verify transactions, the Ethereum network requires users to pay a fee (in Gas) for each transaction they send out. The more complex or larger a particular transaction is, the more Gas it takes up; this means that gas acts as a way to limit how much users can do with their applications on the platform.
25. What is Ethereum Classic and what caused the split from the core Ethereum network?
Following a hack on The DAO in 2016, an Ethereum project that allowed users to develop applications using smart contracts (similar to how Google lets you create apps for phones), many people called for a hard fork of the blockchain so that they could get their money back; since the core developers of Ethereum disagreed with this decision, a group of miners (who provide computing power to the network and are compensated for doing so) decided to fork off Ethereum from its original blockchain into the new “ethereum classic” chain.
26. What is ICO (Initial Coin Offering)? How does it work?
There are a few different types of tokens that you will find on crypto exchanges; the most popular one is the coin, which is used to represent a certain cryptocurrency project (like Bitcoin and Litecoin). However, there are also other kinds of tokens such as asset-backed tokens or utility tokens.
Ethereum projects often create their own tokens to use on their platform; this is done through an ICO (Initial Coin Offering). During the ICO phase, developers will release a certain amount of coins and sell them to people who want to use that particular application. This means that if you are interested in a specific project, you can buy some of its tokens during the ICO stage before it goes live.
27. What is a token and why do developers use them?
A “token” refers to a certain digital asset that you can use on a specific platform; when you purchase tokens from an ICO, it grants you access to the related service provided by the company (i.e. if you invest in XYZ’s ICO, then you will have access to XYZ’s social network service).
A token can also be used as a representation for something (i.e. a token may be worth $0.10 in the future if it holds $0.15 USD fiat value); this means that tokens are often traded on crypto exchanges and can act as investments if you believe that the service associated with a certain token will be used by lots of people in the future.
28. What is BitconGold? How does it work?
Bitcoin Gold (aka BTG) is an alternative cryptocurrency to Bitcoin that allows miners to mine blocks faster and on a different blockchain; this means that if you own Bitcoin (BTC) you will also receive an equal amount of BTG if you hold BTC in a wallet at the time that BTG is created.
29. Why are some ICOs banned in China?
Some countries, such as China and South Korea, have banned Initial Coin Offerings because they feel that it gives off the wrong impression to investors, and it can often lead to scams or pump-and-dump schemes.
30. What is the “SkinCoin” token?
SkinCoin is a type of cryptocurrency that allows users to gamble on eSports games such as Dota2; you buy SKIN for fiat currency and use it to bet on matches in a similar manner to how you would bet with real money.
31. What is an ICO (Initial Coin Offering) rating service? How does it work?
An ICO rating service is a platform that ranks different cryptocurrencies according to certain criteria that they believe define the quality of a project; one common type of ranking system uses a letter grade to indicate how “good” a certain ICO is. Here are the key features of Ethereum:
- Smart Contract
- Decentralized Application
- Computing platform
- Peer to peer network
- Consensus algorithm (Ethereum uses proof of work)
