As the second-largest cryptocurrency by market cap, Ethereum enjoys an ever-increasing following from both veteran cryptocurrency users and novice traders alike.
If you’ve ever wondered how does Ethereum work, how to buy Ethereum, or how to mine Ethereum, then read on. We’re going to answer some of the most common Ethereum questions.
1. How Does Ethereum Work?
Ethereum is a decentralized ledger, but what does that even mean?
Put simply, it’s like double-entry bookkeeping. If two people maintain a list of all bank transactions, then person A cannot manipulate the data without conspiring with person B. Scale this up to thousands of people across the world all maintaining the records, and it becomes impossible to steal, cheat, or otherwise manipulate the data.
Anyone can download the Ethereum ledger and look at the transactions. To get a transaction processed, every bookkeeper (known as nodes, operated by miners) keeps a copy of the records and updates their records with any new transactions. They check things such as account balance, and from/to addresses. If anything does not match up, all the nodes will start refusing transactions.
There is one flaw with cryptocurrencies such as Ethereum, and that’s the majority rule. As everyone on the network agrees on what to do next, it means that you can control the network if you have 51 percent of the computer power. While this is difficult to achieve, it’s not impossible. This is a 51 percent attack, and it does massive damage to a project’s reputation.
Our detailed guide to Ethereum covers the intricate details.
2. How to Mine Ethereum
Mining Ethereum works in a very similar way to mining Bitcoin. Ethereum uses a Proof of Work (PoW) consensus algorithm, so you need a lot of processing power to make it worthwhile.
As a miner of Ethereum, you compete with all the other miners to solve the riddle first and earn the block reward of three Ethereum. The more calculations your computer can solve in a given time, the better your chances of earning a reward.
Providing you have suitable equipment, Ethereum mining is a straightforward process, which involves the installation of two software packages. You need a client, which connects to the Ethereum network and synchronizes the whole blockchain. You need this to see what every other node is doing on the network, and it ensures your computer has all the data necessary to mine Ethereum.
Ethereum clients are often written in Geth or Parity, which are Ethereum programming languages, with detailed installation instructions available in Ethereum’s client guide.
Once you have a client, you can install the mining software. These packages handle all the calculations, but they rely on the client to keep the ledger data up to date. The open-source tool Ethminer is a very popular choice for mining Ethereum, and it supports a huge variety of different computer configurations.
If you don’t have the processing power required to make any money mining Ethereum, then you still have options. Mining pools let you share the task of mining Ethereum with other people. You’ll also have to share any rewards, but they allow you to contribute with modest computer specifications. Our mining pool guide covers everything you need to know.
3. How to Buy Ethereum
As the second-largest cryptocurrency, Ethereum is one of the easier cryptocurrencies to buy. If you’re happy to use a cryptocurrency exchange service such as Coinbase, then you can follow our guide on how to buy cryptocurrency on Coinbase.
If you’d rather deal with a real person, then peer to peer services such as Local Ethereum connect you with people looking to sell Ethereum, where you can find a local person to buy from.
Once you have some Ethereum, it’s wise to store it off an exchange. Secure hardware wallets such as the Ledger Nano S can help to protect your coins. If you’ve got this far, well done! Your investment is now protected, and won’t be vulnerable to the exchange going bankrupt, getting hacked, or any other catastrophe that so often befouls cryptocurrency service providers.
4. How Much Does Ethereum Cost?
Like any cryptocurrency, the Ethereum price encounters regular volatile price swings.
At the time of writing, one Ethereum costs $174.52, but that hasn’t always been the case. On January 13, 2018, Ethereum reached its all-time high price of $1,432.88. Not bad for a coin that was once worth less than a dollar.
If you can’t afford a whole Ethereum, you have several options. If you want to own one whole Ethereum, and you almost have enough money, then you can wait. With prices fluctuating daily, you may be able to buy Ethereum at a discount price.
Given its current price is only 10% of its all-time high, Ethereum may represent a bit of a bargain. If you believe the market will recover from the crypto winter, then it is a bargain right now. If you think it will go lower before going back up then you may wish to wait.
Did you know you don’t have to buy a whole Ethereum? Ethereum is divisible to 18 decimal places, and you can buy as much or as little as you’d like. Want to own half an Ethereum? What about 25%, 1%, or even 0.001%? With eighteen decimal places, you can buy as little as 0.000000000000000001 Ethereum.
Disclaimer: This is not investment advice. Bitcoin and other cryptocurrencies are highly speculative. Nothing is guaranteed in cryptocurrency. Always perform your own research before investing and never commit more money than you are comfortable losing.
5. How Is Ethereum Traded?
Trading Ethereum is like trading Bitcoin, or even traditional stocks and shares.
Most trading happens off-chain. It means exchanges manage the trades between users and don’t commit this information to the blockchain. If you own any Ethereum on an exchange right now, this won’t show up on Ethreum’s ledger. This is because the exchange is holding coins on your behalf.
The benefits of off-chain trading are massive. Exchanges can manage their own trading infrastructure, and it’s much faster. It also allows exchanges to offer trading instruments such as futures and margin.
Only the important stuff—such as a wallet to wallet trade or exchange withdrawals—needs to happen on the blockchain.
Learn More About Ethereum
Now you know about some of the more popular Ethereum talking points, you can begin to weave it into your everyday life. You can mine it, trade, buy, or evangelize about it.
If you’d like to learn more, then why not read about the best Ethereum tutorials?
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