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Ethereum 101

Ethereum 101

If you have been looking into cryptocurrencies recently, you may have seen the word “Ethereum” appear a lot. Here, we will explain what Ethereum is and why you should care about it.

What is Ethereum?

To understand the basics of Ethereum, you must first understand the concept of cryptocurrency. Cryptocurrency is online currency. Notable examples include Bitcoin, Bitcoin Cash (no, this is not the same thing as Bitcoin), and Litecoin. Cryptocurrencies have no inherent value, and they rely mostly on hype, how much people are willing to buy into the market. Cryptocurrencies have their pros and cons, which we will discuss later. Ethereum is a cryptocurrency which took off in Q1 of this year. It initially started out being worth a couple of dollars but is now worth in the hundreds of dollars.

Should I Buy into Ethereum?

Depending on who you ask, you will receive fairly mixed answers. We will outline the pros and cons of investing into cryptocurrency.

Yes, you should buy:

  • No taxes. Fiat currencies (i.e. USD, GBP, JPY, etc.) are taxed by your bank. However, cryptocurrencies are not taxed, and this is one way of going about legal tax evasion. However, if you plan to convert cryptocurrency into any fiat currency, you must declare it on Tax Day. If the IRS wants to conduct an investigation on any cryptocurrency trader, they may tax you. These are quite infrequent, though, and more likely than not, you will not be paying taxes on your virtual currencies. Refer to this link to read more about taxes and cryptocurrencies.

 

  • Not trackable. This could be either a blessing or a curse, but I will be focusing on the “blessing” aspect for now. If you do not want your less than savory business to be tracked by anyone, then cryptocoins are perfect for you. The whole cryptocurrency network is a decentralized network of ledgers (this is slightly oversimplified, but this is the essential concept), so there is no central authority tracking down your every transaction.

 

  • Claimed to be the “next big thing.” While Samsung’s next phone might be called the “next big thing,” cryptocurrencies might actually live up to this title. Nvidia CEO Jen-Hsun Huang told ZDNet that “‘Cryptocurrency and blockchain are here to stay…The market need for it is going to grow, and over time it’ll grow quite large.’” Unlike what most critics say about the death of cryptocurrencies in the near future, cryptocoins are in huge demand, especially in China. An increasing number of merchants are now accepting bitcoin as a valid method of payment

 

No, do not invest in Ethereum:

  • Not trackable. Now, I will focus on the “curse” aspect. Suppose you buy something online using Ethereum (or any cryptocurrency for that matter), and you are eagerly awaiting your package. However, on the expected delivery date, you do not get your package, and, upon calling the seller, you get no response. You wait a month, but still no package. At this point, if you had used your credit card, you could have easily done a chargeback so that you get your money back. Unfortunately, you decided to go the route of crypto and are now at a loss. Accountability is getting much better by the day, with merchants like Coinbase and Bitpay adding chargeback features, but they have several loopholes and are not as established as initiating a chargeback from your credit card.

 

  • Volatile market. One major caveat about investing in any cryptocurrency is the volatility of the market. Within a day, the value of a currency might fluctuate by $10, sometimes even by $50. This is unlike investing in a commodity or stock, which is much more stable and predictable. As mentioned earlier, cryptocurrencies are based primarily on hype, and a major sellout can crash the market as it did earlier this summer, with the value of Ethereum on Coinbase plummeting from around $200 to 10 cents. This is not limited to Ethereum, though. Bitcoin is equally volatile as is every other cryptocoin. Cryptocurrencies can become less volatile if more people buy into the system. A more stable user-base means a more stable coin.

 

  • Do not invest now, wait. Currently, Ethereum is on its way down. Ethereum has seen fluctuations all the way down to $180. The high value at which Ethereum sits at may fall any day. Keep on the lookout for major drops (in the hundreds). Buy when the coin is cheap, sell when it increases in value. That being said, also keep on the lookout for spoofers, such as Spoofy on the Bitcoin network. These people initiate an order of a cryptocurrency (usually worth millions of dollars) and then cancel right before the order is placed. This prompts people to panic buy into the system, and the value of Ethereum increases. If a spoofer emerges on the Ethereum network, I would recommend buying. We are not expert investors or investment advisers, and we are in no way responsible if you make losses.

 

What is Mining and Why Should I Care?

All this while, Ethereum is on a system called “Proof of Work.” In this system, people with mining hardware who are able to mine for Ethereum are given a reward, Ethereum coins. You may have seen many people build mining rigs with hardware costing in the thousands. These people provide the power that Ethereum needs to operate the decentralized network. For a transaction to be placed, several calculations must be carried out to complete it. Miners are the ones who do these calculations. Their mining rigs carry out the calculations, and they are thus paid for their work in this sense. In technical terms, this is called mining blocks. When mining, you must be aware of several factors: hardware cost, potential profit, ease of mining, and electricity costs. At the end of the day, you are just trying to figure out whether mining will get you profit in the future. Day by day, difficulty of mining increases, and certain lower-end rigs can no longer mine. All calculations are carried out on a GPU (graphics processing unit), and mining rigs often consist of multiple graphics cards (cards which have a GPU inside them). Suppose you want to conduct a transaction on the Ethereum network. Whenever you want to carry out a transaction, you have to pay for something called “gas.” This is the Ethereum version of tax. This is analogous to sending money through the post. You have to pay for postage, and if you have a lot of money going through, you will have to account for the weight of the package you are sending money in. Similarly, in Ethereum, you need to pay the miners who are making your transaction possible. If you pay less gas, your transaction will take longer to complete. In the postage example, if you decide to pay for a cheaper service like USPS, your money may take longer to receive the destination.

Mining may still be profitable for some at this point in time. If you happen to have multiple graphics cards lying around, you should definitely make a mining rig and put those graphics cards to work. You should definitely consider the profitability of the mining rig before you set it up or you may be spending too much money on your electricity bill. My advice is to buy a low-powered CPU (like the Intel Pentium G4560) and at most 4GB of RAM. On the flip side, if you are a gamer or anyone looking to buy graphics cards for purposes other than Ethereum mining, you may find that most graphics cards, especially AMD RX cards, will be overpriced. As said previously, mining difficulty is increasing day by day, so cards will eventually return to their original price.

Proof of Stake: What is it?

Ethereum, being on Proof of Work, has a single, deadly flaw. There happens to be a single block, a block of death, that if mined, could cause a collapse of the Ethereum network. It is essentially a ticking time bomb that is waiting to go off. For this reason, Ethereum founder Vitalik Buterin and his team are working on moving the Ethereum network to Proof of Stake. This will get rid of greedy mining, so those who are looking to buy new graphics cards should be on the lookout for used mining cards that are being sold at a low price. In Proof of Work, one could earn Ethereum by mining blocks in the blockchain. In Proof of Stake, one can only earn Ethereum by having coins, that is, staking coins. This is a slightly simplified explanation, though. Miners may still use their hardware to complete transactions, but they may not be earning as much profit as they were before. The said switch is scheduled for either late 2017 or early 2018, and this is early enough that the block of death will not be mined.

Ethereum and Coding

Ethereum uses something called Smart Contracts. They are pieces of code that can be deployed to the blockchain and are usually created to execute a very specific task. Let’s say you want to create a betting system using Ethereum. This can be done through the use of a Smart Contract. The most popular language used for coding Smart Contracts is Solidity, and it is syntactically similar to JavaScript. While you have probably never heard of Solidity, it is worth knowing because, as of now, Solidity developers, a rare breed nowadays, are being paid upwards of $200k base salary. This is the kind of salary that Ethereum startups pay just when you start out, with almost no experience. Smart Contracts are also used to create coins on top of the Ethereum network. Suppose you want to create a coin called ABC-Coin. If you wanted to create it from scratch, you would have to recreate the whole blockchain from scratch as well. However, if you decide to build it upon the Ethereum network, it would be much easier because Ethereum already has an existent blockchain. You would typically start off the process by starting an Initial Coin Offering (ICO). This is a platform for investors in your coin to fund the process in exchange for some of the coins once you go live. ICOs are also made using Solidity (or any other Smart Contract language). Nowadays, more cryptocoins are popping up because of the expandability of the Ethereum network. If you have the knowledge and the passion, you can create your own cryptocoin.

Sources

 

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Anish Muthali
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