Understanding Ethereum (an Illustrated Guide for beginners)

What is Ethereum?  According to Vitalik Buterin (creator), Ethereum is a platform on which decentralized apps (Dapps) can be built.  It uses a universal programming language and smart contracts, which are transacted through a blockchain, to provide a foundation for a wide array of  potential uses.


A couple years ago I began to hear about a cryptocurrency called Ethereum.  At first, I felt a little bit lost in all the techy language, and I had a hard time understanding why there was so much hype about it.  But as I began to grasp how groundbreaking this technology is I became really excited about its potential to help transform our economy.  I decided that I would write this guide to help you learn everything you need to know in simple language, and in one resource, so you don't have to look at 10 different websites.  Whether you are an investor, new developer, or the average person wanting to learn more, this article is for you!  ​

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What makes Ethereum Different Than Bitcoin?

Ethereum is not the same as Bitcoin.  It is a decentralized platform which uses smart contracts to provide a much broader foundation for project development. Ethereum is a platform on which many functions can be performed, as opposed to Bitcoin which only serves one purpose of financial transactions.

This analogy helped me. 

Bitcoin is like email, while Ethereum is like the internet. ​

Ethereum	Bitcoin
Smart Contracts	Digital Money
Transactions w/ Many Variables	Simple A to B Financial Transactions
18 Million Produced Per Year	21 Million Cap
Transaction Time 12-14 Seconds	Transaction Time 0-10 Minutes

How Does Ethereum Work?... and Smart Contracts
​
Step 1: Coding with specific instructions is written using a universal programming language.  
Step 2:  This code is then classified as either a User Account or Smart Contract account.  

User Accounts allow the user to control the private keys and make necessary changes.  

With Smart Contracts the private keys are controlled entirely by the written code. If the code is not executed the transaction will not be completed.  

Step 3:  After a smart contract is completed the transaction information is then secured, and organized, on the Ethereum blockchain.  ​

Example Of A Smart Contract

Lets say you are buying a house.  You establish the price, closing date, and all the other important details of the transaction.  This information can then be coded with all the obligations that need to be met by both the buyer and seller.  This could include title check, appraisals, transfer of money etc.  Once all the requirements have been met, the smart contract would execute, and the transfer of property would then be completed.  All of this information would be securely stored in the Ethereum blockchain. 

*This is a very simplified example of a smart contract and how they can be used.  It is an example of the type of projects that are currently in the developmental process.  ​

​Examples of Ethereum Uses

​There are 2200+ different types of projects being built on the ethereum blockchain including: 

-Financial 
-Games
-Wallets
-Data Storage
-Property Management
-Marketplace
-Media
-Development
-Governance
-Security
-Cloud Computing
-Social Media
-Online Voting      

Find a complete updated list of Dapps here.

What is a Decentralized App? (Dapp)
These are apps that do not require a centralized middleman in order to process information.  There are tons of potential uses including: business transactions, games, financial exchange and data storage to name a few. ​

​What Are The Benefits Of Dapps?

They are secure, immutable, tamper proof and have zero downtime.

How To Purchase Ethereum?

Ethereum is one of the best known cryptocurrencies and easiest to purchase.   

The simplest way to purchase ethereum is through an exchange like Coinbase which is the most well known exchange.  This is how I have purchased most of my ethereum and what I would recommend. 

Click Here for Tutorial. ​

​How To Protect Your Ethereum?

You will need to have a wallet to store your ethereum.  Depending on how you plan on using your ethereum will determine which type of wallet you will use.  You can use software wallets (desktop or mobile) and/or hardware wallets. 
​
Visit my Resource Page for recommended wallets.  
For a full discussion about wallets read: "Which Crypto Wallet And How To Use Them?" ​

Is Ether Considered An Asset, Collectible, Or Currency?   

​Ethereum is the blockchain based platform. Ether is the fuel for that blockchain platform.  When you are considering how to classify ethereum, this is an important differentiation.  When you buy ethereum you are actually buying ether in order to make the platform run. 

Asset:  An asset is a resource with economic value which an individual, corporation or country owns with the expectation it will provide a benefit in the future (according to Investopedia).  Ethereum is a programming language that allows almost anything to be coded and added to a distributed ledger.  Its value as an asset comes from the amount of customers and projects using its programming platform and language.  The more projects that are using Ether the more potential value ethereum has as an asset.         

Currency:   Ether can be used like a currency to buy online or physical items, and traded in a similar manner as paper money is.  In this way many people view ethereum as a currency that can be used across international borders and without bank or government interference.  
    
Collectible:  Even if Ethereum does not succeed as the digital currency of the future, it will likely be viewed as a collector item.  It is the second major cryptocurrency to be widely used and recognized after Bitcoin.  Think of it like owning an old Micky Mantle baseball card or piece of fine art.  ​

​What Gives Ethereum Value?

There are at least 7 important components which give ethereum value.

1) Underlying Technology:  Blockchain provides a way to make transactions securely and without a centralized processor.  

2) Security:  Having a secure and stable platform for people to build on creates trust.  With higher trust comes more users.  Ethereum has a long standing proven track record since 2014. 

3) User-ablity:  When technology becomes simpler to use, more people will use it.  Ethereum continues to develop simpler ways for people to build Dapps on its platform.  More satisfied customers equals higher value.   

4) Permission-less:  Ethereum is open source and public.  Anyone can use it.  

5) Pseudonymous:  While it is possible to find out who made transactions, it is very difficult to do.  The value comes in being able to transfer information transparently while also having full privacy.  

6) Censor Resistant:  Completed smart contracts, which are stored in a blockchain, are transparent and cannot be altered.  Anyone can build their project without the threat of a central authority cancelling it or deleting it.  
 
7) Interchangeable With Other Crypto Projects:  Using a universal coding language allows many projects to use the ethereum platform.  When many different projects are using the same language they can diversify and collaborate.     

Read "Is Cryptocurrency Dead? What Is Its True Value?" for a more in depth discussion about this topic.

​How To Make A Transaction With Ethereum?

Ethereum can be used to make purchases with some businesses, traded, and easily exchanged.  There are a couple different methods to help you successfully make a transaction.

1) QR Code:  If you are using ethereum to make a purchase from a business or online store you can open your wallet and scan the QR code at checkout.

2) Copy and Paste:  If QR code is not an option you can copy your ethereum wallet address and paste it into the payment field.    

For a full discussion read : "How To Actually Use Cryptocurrency: What, Why, And How"

​​Who Accepts Ethereum As Payment?

Here is a quick list of a few companies that accept ethereum as payment:
1. Overstock
2. Snel.com
3. Cryptoart
4. Chicago Gem Shop
5. 1000 EcoFarms
6. Laptop Power Bank
7. Peddler.com
8. FlokiNet
9. QHoster
10. Amagi Metals
11. Bitgild
12. Cryptopet
13. Ujo Music
14. CoinPayShop
15. PizzaForCoins

What Other Kinds Of Ethereum Investments Are There?

1)  Own or develop a business which accepts Ethereum.  ----->>>  Read "How To Accept Cryptocurrency.  What Why How"
2)  Ethereum IRA's.  ----->>>  Read "10 Things To Know Before Buying A Crypto IRA"   
3)  Ethereum Mining.  ​

Other Ways to Obtain Ethereum (Without Buying Them)

Mining:  Ethereum requires miners to complete and verify transactions into the blockchain.  Miners get paid Ether in exchange for computing power.

Ethereum Faucets:  Some games and faucets will pay you free ethereum for completing required actions or watching ads.  They usually pay in very small amounts but it is a way to earn some free ethereum.

Paid By Employer:  You can also ask your employer to pay you a percentage of your paycheck in Ethereum.  Many existing payment processors which companies currently use can accommodate this this for you.  ​

What is Ethereum Mining?

Ethereum transactions require large amounts of computing power in order to execute smart contracts and keep them securely organized in a blockchain.  When a smart contract transaction is executed it then needs to be verified by the complete network and also secured into an unchangeable distributed ledger (Blockchain).  Essentially, this is the function of Ethereum miners.  Miners are rewarded with Ethereum in exchange for successfully completing these duties. 

From an investment point of view, anyone can participate in Ethereum mining if they purchase the required equipment.  However, understand that market conditions, extreme competition, and increasingly sophisticated equipment is needed to be profitable.  Be sure to calculate all of these variables into your decision making process. ​

How is Ethereum Taxed (US)?

In the United States, all cryptocurrencies are currently considered property and are not recognized as currency.  Therefore they are subject to capital gains tax.  These tax rules are subject to change and are different from country to country.  Be sure to consult a tax professional before purchasing any Ethereum.  ​

How To Build Dapps On Ethereum?

If you have a basic understanding of coding using the Solidity language you can start on the ethereum foundation website.  Simply create an account and begin.

If you are new to coding you will need time and training.  Before paying large tuition fees or course fees, I recommend downloading an app called "Mimo" and subscribing for a year.  This will give you a simple step by step guide to the basics of Dapp development and other programming topics.

From there, if you are wanting more in depth training, I have enjoyed taking a training program provided by Ivan on Tech called "Ivan On Tech Academy."  It is value packed and covers a wide range of programming topics you will need to develop dapps. ​

​Scams To Be Aware Of
​Here is a quick list of the most common schemes:

Ponzi schemes, phishing, fake wallets, fake coins, ICO schemes, pump & dumps, impersonators, fake websites, corrupt exchanges and ransom. 

This is not a complete list, but they are very common scams that you should to be aware of.  

Read "10 Common Cryptocurrency Scams And How To Avoid Them"

​Advantages Of Ethereum

Wide Variety Of Potential Uses
Censorship resistant
Permission-less
Pseudonomous
Inter Operable
Low Cost Dapp Development
No Middlemen
Transparent

​Disadvantages Of Ethereum 
Slow Transaction Speed
High Price Volatility
High learning curve
High fees when transaction volume is high.

Regulation and Government

One of the main challenges that Ethereum faces in terms of becoming mass adopted is regulation regarding initial coin offerings (ICO's).  ICO's are a way for cryptocurrency projects to raise money without having to go through the scrutiny of the SEC like traditional stocks do.  Recently, the SEC has stiffened their regulations on ICO's causing many projects to either not be started or severely delayed.  Many of the Dapp projects who are building on the Ethereum have been impacted by these recent regulations causing slower development of Ethereum in general. ​

History of Ethereum and Ethereum Classic

In 2015, Vitalik Buterin introduced Ethereum as a way to further utilize the blockchain technology that Bitcoin had made popular.  The development of smart contracts allowed for the ability to create decentralized apps which could be built on the Ethereum network.  Ethereum quickly gained popularity and helped lead a new sector known as cryptocurrency. 

In 2016, there was a major debate in the Ethereum community about how developmental changes should be adopted into the network.  This difference in ideology caused a split (known as a Fork) into two separate projects: Ethereum (ETH) and Ethereum Classic (ETC).  It is important to know the difference between these two projects before making any investment decisions as they have very different fundamental ideologies.

​Ethereum Fun Facts      

1)  Ethereum is actually an alliance and collaboration between many block start ups and Fortune 500 companies (100+).
2) Ethereum created and coined the term white paper when Vitalik introduced the concept in 2014.
3) There is no fixed amount of ether that can be produced.  However, only 18 million can be produced per year and is limited by how much ether was used the previous year.
4)  The name Ethereum was created when Vitalik was doing a Sci Fi search on the internet and found the name Ether.
5)  Vitalik dropped out of college and became a world leader in coding.  He was in his early twenties when he inspired what is now known as Ethereum.

​Ethereum Competitors

Ethereum has many competitors who are trying to offer advantages that Ethereum cannot currently offer.  There are always trade offs when evaluating and comparing technologies.  Some may offer faster transaction speeds but lack security or have higher fees.  Be sure to do full research on each of these projects before making any investment decisions.  The following is a list of Ethereum's main competitors.  

EOS
Stellar
Cardano
NEO
Tron

​Ethereum And Dapp Games

While there are many uses for ethereum, one of the most popular uses is the development of decentralized games.  While on the surface this may seem a bit insignificant, it is actually very important.  Many important technological developments are coming out of gaming innovations.  These innovations can then be used in the broader business market.  Games once played a pivotal role in the development of the internet, and many people feel that games will create major inroads into the mainstream adoption of cryptocurrencies in general.

There are tons of new games being built and developed on ethereum.  There are arcade style, role play, sports games, and many other genres to choose from.

Read "6 Reasons Games Will Improve Blockchain"

See My Favorite Blockchain And Crypto Games ----->>> HERE

Conclusion:

Ethereum provides a platform that is proven, secure, and trusted.  It has also helped to usher in a technological shift that will have massive implications in our society.  While there are advantages and disadvantages to Ethereum, it is clear that the Ethereum Foundation continues to innovate and lead the cryptocurrency space into the future.  Thousands of projects are being built on the Ethereum blockchain and each of these projects represents a seed of growth for a decentralized economy.  I am excited to see where technology and innovation will take us in the near future. ​

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