Innovation

Ethereum: A cheat sheet for professionals

Ethereum, one of the most popular cryptocurrencies, has more tricks than just cash value up its sleeve: It's also fuel for building computer applications.

Cryptocurrency: It's a word that anyone who spends any time online is sure to have heard of by now. Decentralized digital cash like Bitcoin has made cryptocurrency, and by extension the blockchain, a hot topic for discussion, and the cryptocurrency known as Ethereum is one of the hottest.

But Ethereum isn't technically just another cryptocurrency—it's a whole decentralized computer network powered by a cryptocurrency called Ether. Instead of just being an alternative to the dollar, euro, or pound, Ether has a specific application.

Ether can be traded for its cash value, and it is one of the most highly valued cryptocurrencies. But to simply call it a cash alternative misses out on a lot of what it's actually for.

SEE: IT leader's guide to the blockchain (Tech Pro Research)

What is Ethereum, and how does it differ from Ether cryptocurrency?

Despite their often interchangeable usage, Ethereum and Ether are technically two different things. Ethereum is a decentralized computer network that runs applications, and Ether is the cryptocurrency that fuels it. For the sake of consistency, we'll use those specific terms throughout this guide.

There are basically three layers to Ethereum: The Ethereum Virtual Machine (EVM), the cryptocurrency Ether, and gas, which is the actual EVM "fuel" that Ether translates to.

The EVM is a decentralized runtime environment for building and operating smart contracts, also called decentralized applications (DApps). The definition of what DApps are is up for debate, but at its most basic level a decentralized application is one that has no central point of failure.

In the case of EVM DApps, failure points are eliminated because the apps are built on the back of the Ethereum blockchain, which spreads out the code, assets, and management of applications over the entire EVM network.

Creating a shared network the size of the EVM isn't cheap, and that's where the Ether cryptocurrency comes in. Ether is the part of the Ethereum network that has actual relatable real-world value, and it in turn can become gas to fuel the EVM. Here's where things get a bit confusing.

Gas is a way of describing the amount of work being done by the EVM, similar to kilowatt hours being a measure of expenditure and not an actual unit of energy. Much in the same way that a kWh will cost a certain amount on your electricity bill, gas has an Ether cost that anyone using the EVM has to pay in order to commit a change to the Ethereum blockchain.

Also like a kWh, the cost of gas isn't fixed to a certain amount of Ethereum—it can be adjusted so that EVM operational costs don't become prohibitively high, or so cheap that the network is flooded with junk transactions.

SEE: All of TechRepublic's cheat sheets and smart person's guides

Ether is paid to miners who work to process changes to the blockchain as a way to incentivize their work, much in the way Bitcoin fees are paid (there are some differences, however). Here's the catch: The person requesting the transaction has the ability to set the amount of Ether they're willing to commit to the sale. The more they commit, the greater the incentive, and the faster the transaction will likely be processed.

Getting the ratio of Ether-to-gas just right is important when a user wants to submit a change to a DApp, either as the programmer or a user. Try to go cheap by cutting back on the amount of Ether (and thus gas) that you're willing to pay, and the transaction may never get processed; plus, you're still out the money you fronted as the transaction fails.

In short, Ethereum is a decentralized virtual machine that runs on blockchain technology. It uses the cryptocurrency Ether to pay for the costs of operating decentralized applications since committing changes to the DApps by users or programmers requires mining done by other users.

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What can you do with Ethereum?

Ethereum is built to run smart contracts, which the Ethereum Foundation says are "applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference."

Don't let the name contract fool you into thinking the EVM can only be used to operate transaction-based apps like ecommerce, currency exchanges, or identity verification. There are countless other things being done with the EVM, with smart contracts only being the foundation on which they're built.

Some of the things being built with the EVM are:

If you're wondering what you can do with Ether, the cryptocurrency used by the EVM, it can be traded like any other cryptocurrency, turned into fiat currency (government issued), or used to operate DApps as a user (everything you do in a DApp costs some amount of gas).

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How is Ether different from other cryptocurrencies?

Aside from its biggest difference—that it's an entire virtual machine network and not just a currency—there are a lot of ways in which Ether, the cryptocurrency that powers Ethereum, is different than other currencies.

Ethereum was heavily influenced by Bitcoin. Ethereum's designer, Vitalik Buterin, was involved in the Bitcoin community and wanted to use the Bitcoin blockchain to build decentralized applications, later creating Ethereum to develop his theory.

Ethereum now has the second highest market cap, right behind Bitcoin, so for the sake of comparing Ether to other cryptocurrencies we'll stick to those two.

First off, the speed at which a block of transactions can be solved and added to the blockchain, called block time, is much faster for Ethereum. While a Bitcoin block can be mined in an average of 10 minutes, the Ethereum block time averages around 10 to 20 seconds. That means more transactions are added to the Ethereum blockchain in less time.

Another major difference between the two is the reward for solving blocks: The Bitcoin reward halves approximately every four years, while Ether mining rewards remain largely consistent. This is largely due to the fact that Ether won't reach a hard cap like Bitcoin, of which there will never be more than 21 million.

Ether, on the other hand, has a cap of 18 million per year; the cap is designed to create a consistent regeneration of Ether to offset coins lost to misuse, key loss, and other errors. An upcoming Ether shift from the current proof-of-work model to a proof-of-stake one called Casper is likely to greatly lower reward amounts due to less need for mining subsidy, making the 18 million cap unlikely to be reached.

Casper's proof-of-stake model shifts the value generation for Ether from miners to stakeholders, who vote on blocks instead of mining for hashes. Each stakeholder gets a proportion of votes based on the stake (in Ether) that they've invested.

SEE: TechRepublic's Bitcoin and cryptocurrencies Flipboard magazine

Another major difference between Bitcoin and Ethereum is how each treats stale blocks. Stale blocks occur when two separate miners arrive at a solution for the same hash, but because of inherent lag times sending block changes from one node to another, one of the miners submits the transaction first.

In the Bitcoin world, the second miner is simply out of luck: Their stale block goes unrewarded, and the time and computing resources invested is lost. Ethereum, on the other hand, provides a partial reward to stale blocks using the GHOST protocol, so no one spending time and resources is out of luck. This is done largely to offset the power inherent in large mining pools, which have a high likelihood to push small-scale miners into stale territory since they are unable to keep up with pool processing capabilities.

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Is Ethereum more stable than other cryptocurrencies?

The new year was a big dose of reality for cryptocurrency watchers and investors. From the end of December 2017 into early January 2018, cryptocurrency values plummeted—Bitcoin in particular was hard hit, dropping from a high of nearly $20,000 to less than $10,000 by late February 2018.

Ether fared slightly better, and while its value followed the late-December spike other cryptocurrencies had, it's not in as nearly bad a state as Bitcoin and others. As Matthew Godshall pointed out in a VentureBeat piece, Ether's value relative to Bitcoin has risen by 50% in 2018.

So why has Ether fared so well when other cryptocurrencies have been riding a value rollercoaster? Ether has a purpose beyond just being money.

As Godshall points out, Ethereum founder Buterin saw a much greater use for blockchain technology than just creating decentralized cash, and Ethereum has done just that. There are already over 1,000 applications for the Ethereum blockchain listed in its main app repository, and more are being developed all the time.

While Ether's value isn't directly tied to the price of gas needed to operate the EVM (as mentioned above), that doesn't mean one doesn't affect the other, and as long as the EVM is healthy and in use there's no reason to expect Ethereum to bottom out in the way that Bitcoin could.

SEE: What is blockchain? Understanding the technology and the revolution (free PDF) (TechRepublic)

If Ethereum's co-creator Steven Nerayoff is to be believed, investment in the EVM and its apps could trigger explosive growth in 2018. In an interview with CNBC, Nerayoff said that there are 10 times more projects being developed for the EVM than there were in 2017, which he predicts could lead to the price of Ether doubling or tripling by the end of 2018.

As more businesses realize the usefulness of decentralized applications for their industries, like less downtime, enhanced trust, and increased security, it's likely the EVM will continue to grow, and Ether with it.

That doesn't mean Ether couldn't devalue in the long term, especially considering that there isn't a hard cap on the amount of Ether that will ever be generated. If natural loss of Ether doesn't keep up with its creation, the value could dip, but it's far more likely that's a ways off into the future.

In short, Ether is more stable than other forms of cryptocurrency because it isn't centered on only being valuable—it is, first and foremost, a way to fuel an application ecosystem. As more businesses realize the power of decentralization, it will probably just keep growing.

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Should I invest in Ethereum?

Nerayoff's statement makes it sound like investment in Ether is a sure thing: If it's going to triple in value over the next 12 months, you'll want to be in at the (relative) ground floor of $1,000 per coin, right?

As with all things, it's not that black and white. If Casper is released this year, Ether prices could drop, as a shift from mining payouts to yearly dividends for stakeholders under proof-of-stake could alienate some users, causing them to dump coins due to uncertainty. Buterin also mentioned that it will take around 1,000 ETH to become an initial stakeholder—that's over $800,000 USD.

When it costs nearly $1 million to buy a voting stake in the future Ethereum blockchain, a lot of small-time investors are going to feel left out.

All of that only matters if you're investing in Ether purely for its financial value. If you're interested in Ether for its applicational uses, that's an entirely different story. Whether you want to use DApps or build your own, you'll need to invest in Ether, and it can be expensive to get involved—even simple transactions can cost $10, which isn't much but can be enough to discourage experimentation as an interested investor or app developer.

What investment boils down to, as a programmer, an EVM user, or a financier, is doing research. Know what you're getting into with cryptocurrencies of any kind, and you won't end up surprised when prices fluctuate, fees sap the value of your digital wallet, or big changes upset how you interact with the blockchain.

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How do I get started with Ethereum?

How you get started with Ethereum and Ether all depends on what you want to use it for. DApp developers, DApp users, and Ether investors are all going to take different approaches.

If you want to develop decentralized applications for the EVM, you'll need to do a few things:

Those who want to use DApps need to start by opening a wallet and buying some Ether. From there, you'll need to install a bridge app like Metamask that will move Ether between your wallet and the DApp you're trying to use. Before installing a bridge app, check with the DApp you want to use to ensure the app is supported.

Investors who simply want a piece of the Ether pie can follow the same first step listed for DApp users above to open a wallet and buy some Ether. It doesn't have to leave your initial wallet, which exchanges like Coinbase generate for you, if you don't intend to do much with it beyond watch it (hopefully) accumulate value.

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Image: Ethereum Foundation

About Brandon Vigliarolo

Brandon writes about apps and software for TechRepublic. He's an award-winning feature writer who previously worked as an IT professional and served as an MP in the US Army.

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