Cryptocurrency and Blockchain technology is still a bit, well, “cryptic” for many people. Here is a guide for beginners about Ethereum, how Ethereum works, how to buy Ether, and more.

Let’s begin with exploring what Ethereum isn’t, before we get into how it can potentially impact you.

What Ethereum Isn’t

The biggest confusion around Ethereum is the question: “Is Ethereum a cryptocurrency?” Ethereum is NOT cryptocurrency, like Bitcoin. Bitcoin is a cryptocurrency based on a public ledger technology called Blockchain.

Ethereum does have a currency that is called ‘Ether’; but this is only one part of what Ethereum is. Ethereum and Bitcoin are somewhat similar when it comes to cryptocurrency, but they are two completely different entities; the Ethereum digital currency, Ether, is just one component of its smart contract applications.

Even if you compare just the cryptocurrency aspect, Bitcoin and Ethereum are vastly different.

  • Bitcoin imposed a cap on how many Bitcoins can ever be created while the potential supply of Ether can be practically endless.
  • The average block mining time for Bitcoin is 10 minutes, whereas Ethereum aims to be less than 12 seconds
  • Successful Bitcoin mining requires massive computing power and electricity, and so it is only possible if using industrial-scale mining farms. Ethereum’s proof-of-work algorithm facilitates decentralized mining by individuals.
  • Ethereum’s internal code means anything can be calculated as long as there is enough computing power and time; Bitcoin lacks this capability. While Ethereum users enjoy practically limitless possibilities, the code’s complexity can lead to security complications.

What Ethereum Is, and What It’s Good For

Ethereum was created in 2014 by Vitalik Buterin. It is a software platform that acts as a decentralized Internet and a decentralized app store. It is a whole network, complete with its own coding language, browser, and payment system.

Ethereum is a decentralized system.

Its most important feature is that it enables users to create decentralized applications within the network. This means no single governing body controls it. By contrast, most online businesses and services are built on a centralized governance system that is seriously flawed.

  • A single point of control such as YouTube or the iTunes App Store, means a single point of failure. The entire system could crash due to hacker attacks or even something as low-tech as a power outage.
  • Users are required to provide some personal information that is then stored on servers, making it vulnerable to theft.

A decentralized system is fully autonomous and as such has no central point of failure. It can never go offline as it is run from volunteers’ computers worldwide. Even if one user’s computer is hacked, or they suffer a power outage, the system remains unaffected. Most importantly, users’ personal information remains securely on their personal computers, and content (i.e. apps) remains in the full control of its creators rather than hosting services such as YouTube or the App Store.

Ethereum is peer-to-peer and eliminates the middleman.

  • Every single interaction that happens on the Ethereum platform is between the participants only, with no involvement from a controlling authority.
  • There are no limitations on Ethereum’s app building capability other than the imaginations of the creators.
  • Ethereum-based applications also remove third-party transaction fees. Today, many services charge fees to facilitate trading goods or services (such as Ticketmaster or PayPal). Ethereum removes the need for an intermediary because of its smart contracts; intermediaries are necessary under the current system that most people use.

Fast (Instant) and Convenient

With the implementation of smart contracts on the Ethereum Blockchain, for example, insurance clients submit their insurance claim online and receive an instant automatic payout if their claim met the required criteria. This makes the process faster, more efficient, and more accurate.

How It Works

The Ethereum Blockchain is a transaction-based state machine. A state machine is something capable of reading a series of inputs and based on those inputs, transitioning to a new state. For example, any time a transaction is executed, the machine transitions into another state.

Every Ethereum state consists of millions of transactions that are grouped to form ‘blocks,’ with each block chained to its previous blocks. But before a transaction can be added to the ledger, it must be validated through a process called mining.

When ‘miners’ apply their computing power to completing a ‘proof of work’ challenge, they compete with each other to create and validate a block in exchange for new Ether tokens.

Smart Contracts

“Smart contracts” are the backbone of Ethereum. Smart contracts automatically perform transactions and other actions within the network. Each smart contract includes pre-programmed terms for both parties to fulfill, and the transaction is triggered only upon completion of the terms. Smart contracts are the wave of the future and are anticipated to reduce transaction costs and contractual risks.

Ether

Ethereum also provides a cryptocurrency token, which is called ‘Ether.’ This is the means of exchange for transactions within the platform.

Developers

Ethereum is a global network that consists exclusively of volunteers or ‘nodes’ who download Ethereum’s Blockchain to their desktops, enforce the system’s consensus rules and keep the network honest in exchange for rewards.

Pros and Cons

As with anything, Ethereum has its pros and cons.

Pros

  • The Ethereum platform benefits from all the properties of the Blockchain technology, meaning that its decentralized apps are immune to third party control.
  • Any Blockchain network is formed around a principle of consensus (all participants agree on every single change); this eliminates fraud, corruption and other dishonest activity.
  • There is no possible single point of failure due to Ethereum’s decentralized nature and cryptographic security that protect the network against possible cyber attacks and fraudulent activity.

Cons

As with anything created by humans, there is always room for human error. Smart contracts are meant to make the network fault-proof, but they are only as good as the people who write the code. Should any mistake in the code be exploited, there is no direct way to stop a hacker other than reaching a consensus and rewriting an underlying code. However, this contradicts the very essence of the Blockchain, as it is designed to be an unchangeable ledger.

Access and Decentralized Applications

Now that you know what Ethereum is and isn’t, and what it’s used for, you may want to explore Ethereum. You can access Ethereum through its native Mist browser. Mist provides a user-friendly interface and a digital wallet for storing and trading Ether. You can also access the Ethereum network through a MetaMask extension for Google Chrome and Firefox.

Here is a short list of apps developed on Ethereum. At this writing, there are more than 867 decentralized applications created on the Ethereum platform:

  • Alice – A platform that brings transparency to social funding and charity
  • Augur – An open-source forecast market that rewards correct predictions
  • Bitnation – The World’s First Virtual Nation, a Blockchain jurisdiction, with many of the same functions as a traditional nation, including insurance, education, ID cards, and diplomacy programs
  • Etheria – Similar to Minecraft, but entirely on the Ethereum Blockchain
  • EtherTweet – A Twitter-like app that provides an uncensored communication platform
  • Ethlance – A freelance platform where work is exchanged for Ether
  • Gnosis – A decentralized prediction market where users vote on anything from the weather to election results
  • Provenance – An open information network for consumers to make informed decisions on their purchases through tracing product origins and histories
  • Uport – A self-sovereign ID that facilitates interaction with Ethereum apps
  • Weifund An open crowdfunding platform that uses smart contracts

Show Me The Ether!

There are two primary ways of obtaining Ether: mine it, or buy it.

To mine Ether:

  • Mining Ether uses proof-of-work in exchange for Ether tokens: miners contribute computing power to solve a complex mathematical problem to confirm a block of actions within the network. Miners who successfully complete this task receive a reward for every block mined.

To buy Ether:

  • Ether is sold on exchanges. Find an exchange, set up an account, purchase Ether, and store Ether tokens in the exchange’s wallet, Ethereum’s native Mist browser or within various other specialized services.
  • Trade peer-to-peer and pay for Ether using any agreed-upon currency, including Bitcoin.

The Future of Ethereum

Ethereum, like Bitcoin, has been around for a few years, but it has just now started to come into the public awareness. It is a disruptive technology that will shake up services and industries, and change the way the Internet works.

Since things seem to be changing at the speed of the Internet… it’s difficult to predict the real impact that Ethereum will have; but one thing is for sure: things will never be the same, whether Ethereum is around 10 years from now, or it is replaced by something even more revolutionary.

* * *

A Beginner’s Guide To Cryptocurrency

Cryptocurrency is changing the way we pay for goods and services. Here is a beginner’s guide on cryptocurrency.

What Is Cryptocurrency?

A cryptocurrency is a virtual (digital) currency that works exactly like paper money: as a medium of exchange. It uses cryptography to secure and verify transactions and to control the creation of new units of a particular cryptocurrency. Cryptocurrencies are limited entries in a database that cannot be changed, unless specific conditions are met.

The History of Cryptocurrencies

The idea for cryptocurrency has been around since the 90s but early implementations were fraught with problems. Flooz, DigiCash and Beenz are three examples of early failures that had one thing in common: the use of a Trusted Third Party approach where the companies behind the cryptocurrencies verified and facilitated transactions; but when these companies failed, the creation of a digital cash system was deemed a failure as well.

But human ingenuity being what it is… in 2009, Bitcoin was introduced as a decentralized peer-to-peer electronic cash system without a central controlling authority. It is very similar in nature to peer-to-peer file sharing networks.

Problem, Solved

One big challenge that any payment network must address is double-spending, which is a fraudulent technique of spending the same amount twice. Traditionally, a trusted third party with a central server kept records of transactions and balances. However, this meant an “extra set of eyes” on your personal details as well as an “extra hand” controlling your funds.

Bitcoin revolutionized the system by introducing a decentralized network in which every participant has a role and a responsibility. It operates on the absolute consensus of all participants, thus eliminating the need for centralized control.

Bitcoin’s Blockchain technology acts as a public ledger of all transactions that ever happened within the network, and this information is available to everyone. Everyone in the network can see every account’s balance. Every transaction shows the amount of coins transferred as well as the sender’s and recipient’s public keys or “wallet addresses.”

To ensure the legitimacy of the transaction, it is confirmed by multiple ‘miners’ by way of solving a cryptographic puzzle. A miner takes the transaction, confirms its legitimacy, and spreads the transaction across the network at which point other miners or ‘nodes’ add the network to their database. Then, the transaction becomes permanent and unforgeable within the network’s ledger.

It’s called “cryptocurrency” because of the cryptographic nature of the consensus-keeping process that virtually eliminates the concept of trust (as in, no reason to mistrust the other party).

What Can You Do With Cryptocurrency?

Today, most of us use “plastic fantastic” to purchase goods and services. It’s not ‘real paper money’ we carry in our wallets, it’s plastic rectangles that magically move numbers from one account to another. Bitcoin and other cryptocurrency is just as ‘real’!

In the past it was extremely difficult to find merchants who would accept cryptocurrency. That’s not the situation now. You can buy:

  1. Buying goods with cryptocurrency: many merchants, both online and offline, restaurants, hotels, airlines, apps, and believe it or not, even universities, now accept Bitcoin as a form of payment. Lesser-known cryptocurrencies like Ether, Litecoin and Ripple aren’t as widely accepted, but big retailers are taking note. Apple has authorized at least 10 different digital currencies for use in its App Store. If you find a merchant who doesn’t yet accept digital currency, you can always purchase gift cards with cryptocurrency and then use the gift card to purchase something. Two new online marketplaces, Bitify and OpenBazaar, are built around cryptocurrency only.

Business owners who accept cryptocurrency are a step ahead of the competition. Crypto-ATMs are popping up worldwide, making it easier than ever for your customers to pay with digital currency.

As a business owner who wants to accept cryptocurrency… first of all let your customers know that you accept crypto coins! Payments can be processed through hardware terminals, payment services, touch screen apps, or wallet addresses through QR codes. In other words, accepting digital currency as a form of payment is exactly the same as accepting cash, gold, credit cards, or gift cards.

  1. Investing in Cryptocurrency: many people believe that cryptocurrency is *the* hot investment opportunity. Last year alone, one BTC (Bitcoin) was valued at $800; today’s market value is $7,000. The fastest rising cryptocurrency is Ether (Ethereum’s currency), which has appreciated in value by over 2,700 percent.

Don’t go rushing out to buy cryptocurrency just yet unless you thrive on risk. Cryptocurrency is still considered a high-risk investment with wildly fluctuating market values and an uncertain future. It is also unregulated, mistrusted by lawmakers to the point digital currency may become outlawed in certain jurisdictions. There is also the very real cyber-security risk of an exchange being hacked.

You have many investment options available when it comes to digital currency. While it’s easy to buy Bitcoin, others are not so easy to obtain, but some major exchanges are starting to trade in lesser-known cryptocurrencies.

Once you buy cryptocurrency, then what? You can’t keep it under your mattress… All major exchanges offer convenient wallet (storage) services but since it’s on a central server, it is more vulnerable to cyber attack, and you don’t always have full control over your assets.

As with all investments, it’s imperative to pay close attention to the cryptocurrency market, and individual currencies’ values, and tax laws. We won’t discuss taxing cryptocurrency investments here, since every country is different. For example, in the USA, Bitcoin and other digital currency is taxed as property, not currency.

As you can see, cryptocurrency is gaining momentum as a viable means of exchange and as an investment vehicle – just like good old paper money!

Mining Cryptocurrency

If you want to get some cryptocurrency so you can start spending or investing it… what do you do? You can purchase it just as you would purchase, say, Euros if you’re an American. You can trade for them. Or, you can mine them. Mining cryptocurrency is a great alternative for the tech-minded.

Obviously, one does not venture into the wilderness with a pick and shovel to mine for cryptocurrency.

Miners are the single most important element of a cryptocurrency network. Miners provide a bookkeeping service by contributing their computing power to solving complicated cryptographic puzzles, which are necessary to confirm a transaction and record it in a public ledger called the Blockchain.

The puzzles are constantly increasing in difficulty, correlating with the number of people trying to solve them. The more popular a certain cryptocurrency becomes, the more the process becomes as more people try to mine it.

People have definitely made fortunes by mining Bitcoins but today, Bitcoin mining can only be profitable if you’re willing to invest in industrial-grade mining hardware – huge, fast processors and lots of electricity.

But how do miners profit? When a miner manages to solve a puzzle, they receive a reward as well as a transaction fee. But again, given the popularity of certain cryptocurrencies, increasing competition from other miners, and the high costs of equipment and electricity, it’s not as lucrative as it once was. Early adopters are definitely the winners here. However, long-term, the future is bright. As rewards become smaller (due to more competition), every single Bitcoin mined becomes exponentially more valuable.

Are Cryptocurrencies Legal?

As with everything that hits the mainstream, the government likes to be involved. Lawmakers worldwide are scrambling to figure out the concept and how cryptocurrency fits into existing laws.

In particular, governments hate anything that is decentralized, self-sustained, or invisible. Digital currencies don’t exist in any physical shape or form. They cannot be controlled by any singular entity. And, its anonymity-of-use makes governments worry that cryptocurrency will appeal mostly to criminals who trade illegal goods, or engage in money laundering and tax evasion.

However, as of late 2017, only a few countries have banned or are set to ban cryptocurrencies.

The Most Common Cryptocurrencies

  • Bitcoin: the original
  • Bitcoin Cash: a newcomer fork of Bitcoin that has already soared to the top five cryptocurrencies in terms of market cap
  • Ethereum: a programmable currency that lets developers build different distributed apps and technologies that only work on the Ethereum platform
  • Ethereum Classic: an original version of Ethereum, developed after a decentralized autonomous organization built on top of the original Ethereum was hacked
  • IOTA: its ledger technology, ‘Tangle,’ requires the sender in a transaction to do a Proof of Work that approves two transactions, effectively removing the need for dedicated miners
  • Litecoin: created with an intention to be the ‘digital silver’ compared to Bitcoin’s ‘digital gold.’ It is a fork of Bitcoin that generates blocks four times faster and has four times the maximum number of coins at 84 mln.
  • Monero: a cryptocurrency with private transactions capabilities open and privacy-focused ideals.
  • NEM: unlike cryptocurrencies that utilize a Proof of Work algorithm, NEM uses Proof of Importance, which requires users to already possess certain amounts of coins in order to acquire new ones. It encourages users to spend their funds ranks their overall importance to the NEM network
  • NEO: a smart contract network similar to Ethereum
  • Qtum: a merger of Bitcoin’s reliability and Ethereum’s smart contracts, and targets business applications
  • Ripple: uses an iterative consensus rather than Blockchain to reach a network-wide consensus for transactions, making it faster, but also more vulnerable to cyber attack

Cryptocurrency Market Cap

Where To Buy Cryptocurrencies

There are more and more options every day to purchase cryptocurrencies.

Bitcoins:

  • Bitcoin ATMs in 58 countries
  • Gift cards
  • Cryptocurrency exchanges
  • Investment trusts
  • Peer-to-peer trading

Other cryptocurrencies:

  • Exchanges, where you purchase using Bitcoins or flat currencies
  • Peer-to-peer trading

Storing Cryptocurrencies

Cryptocurrency is digital; so you don’t really store the “coins” or units themselves (no huge roll of Benjamins in the bank), but the private key with which you sign for transactions. These keys are stored in cryptocurrency wallets. A hardware or paper wallet appeals to people for whom privacy is a high priority. Or, you can store your keys on ‘cold’ (offline) wallets that are stored on your hard drive, or online wallets that are either affiliated with an exchange or a third-party platform.

The Future of Cryptocurrency

Richard Branson, founder of 400+ businesses including Virgin Galactic said, “Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.”

Bill Gates, co-founder of Microsoft, investor, and philanthropist said, Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.”

Peter Thiel, co-founder of PayPal said, “PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.”

Eric Schmidt, executive chairman of Google, said, “[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.”

Perhaps most surprisingly, Al Gore, former Vice President of the United States, said, “When Bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the Bitcoin universe an algorithm replaces the function of the government …[that] is actually pretty cool.”

Is cryptocurrency here to stay? Well, at the rate the world is changing, “stay” is perhaps unrealistic because it’s almost certain that something new will come along and probably relatively soon. Cryptocurrency is, however, ushering in a new era of paying for goods and services, investing, and it’s completely shaking up the old paradigms of banks, insurance, and financial services.