What is Ethereum? | Understanding Smart Contracts, Ether and Ethereum 2.0

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3 years ago

Let’s take a dive into FinTech and explore what Ethereum is.

Ethereum is a decentralized network of computers offering users the ability to create decentralized applications (DAPPs), and offer them to the whole network of Ethereum users. In this video we will look into what Ethereum’s purpose is, how it works, and what is Ether. Lastly, we will look into Ethereum 2.0and the ways in which it will change Ethereum as we know it.

Ethereum's goal is to truly decentralize the internet. Similarly to how Bitcoin’s goal was to connect users directly without intermediaries such as banks, a decentralized payments system. Ethereum’s goal is also to connect users directly, without a third party, a decentralized supercomputer. People can rent hard drive space directly to other people, and make applications such as dropbox obsolete. Drivers can offer services directly to customers, and remove uber as the middleman. People can buy cryptocurrency directly from each other, without the need for an exchange that can get hacked.

Smart Contracts

Ethereum's coding language, Solidity, is used to write “smart contracts'' that is the logic that runs DAAPs. In real life, all a contract is, is a set of IFs and THENs, a set of conditions and actions. If I pay a landlord $1000 at the beginning of the month, then he lets me use an example. If I get a student loan of $100,000 thousand dollars, then I can ensure financial stability for the rest of my life. That’s how Ethereum works, and they are called smart contracts, because they run all of the aspects of the contract, including, enforcement, management, performance, and payment. If I have a smart contract that is used for paying rent, the landlord doesn’t actively have to collect the money.

Ether was created to compensate the miners who help keep Ethereum safe. When people talk about the price of ethereum, they actually refer to Ether.. In order to deploy a smart contract in the Ethereum network, its author must pay to do so. That payment is made in the form of Ether. Ether can be divided into 1 quintillion units, with the smallest one called Wei, after Wei Dai, a cryptography activist advocating the widespread use of strong cryptography, and privacy-oriented technologies. Fees for transactions are calculated in GigaWei, that is 1 billion Wei. Etherium runs on Gas, meaning that each line of code of a smart contract that needs to be executed requires a certain amount of gas. For example, sending Ether from one address to another, requires 21k Gas units.

Ethereum 2.0

Ethereum 2.0 will change how the network works and promises to solve the scalability issue, making Ethereum capable of supporting the workload of all those smart contracts.

The most significant change that Ethereum 2.0 will bring is that it will transition Ethereum from a proof of work consensus mechanism to a proof of stake mechanism. With proof of stake the energy cost is replaced with a financial commitment. Staking involves committing 32 ETH to the network.

Secondly, Ethereum 2.0 will feature shard chains: Individual blockchains that run in parallel with the main chain, called the Beacon chain. Their purpose is to take part of the load of validating and adding new blocks to the blockchain, while the beacon chain makes sure that all the shard chains are up to date with the latest data. This is done so that the network is able to process and increase the number of tps.

The introduction of Ethereum 2.0 is set to take place in three phases:

  • Phase 0 was implemented in December 2020, and introduced the Beacon chain.

  • Phase 1 is set to be implemented in 2021. Firstly shard chains will be introduced, followed by the implementation of the Proof of Stake consensus in Phase 1.5.

  • Phase 2 will involve the full implementation of Ethereum 2.0, with shards being able to communicate with each other, and developers being able to create their own shards.

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