Everything you need to know about Ethereum, explained in a four-part series, by Colin Adams
Part 3: The Applications of Ethereum
What can Ethereum be used for?
Perhaps the most exciting feature of Ethereum is the wide range of things it can potentially be used for.
It may also be worth reiterating at this point that ETH was never designed to be a ‘currency’ per se. Many people use it as a link between fiat currency and altcoins. For example, if you wanted to buy the Lisk token you’d need to change fiat currency into Bitcoin or Ethereum which are paired for trading with Lisk.
Other people simply use it as the aforementioned fuel for the ecosystem. ETH is also traded and bought by speculators and investors who believe that the value of the Ethereum project and network of dapps will appreciate over time. So far they’ve been very right.
There are, of course, many other other uses for Ethereum:
- ICOs – The lion’s share of ICOs that have taken place in the last few years have been located on the Ethereum blockchain. In terms of open-source projects and startup funding, Ethereum is clearly the preferred option.
- Dapps – Quite a few dapps have been built on Ethereum and more are joining the ranks. There is Augur, the decentralized prediction market; etherTweet , the uncensored, blockchain-based communication platform; TenX, an application that plans on letting people use ether pretty much everywhere; and Uport, the app that provides users with a way to take complete control of their identity and personal information.
- DAOs – Beyond the infamous DAO, there are other examples of decentralized autonomous organizations cropping up on Ethereum. The Dash cryptocurrency is technically a DAO, and the Digix.io token is another example.
When you consider the future uses of Ethereum, the cliche ‘tip of the iceberg’ really fits. If the technology realizes its potential, it could support programs that handle all manner of financial services, health information, organizational tools from A-Z, and a wide range consumer-facing applications.
The potential use cases of Ethereum are really only bounded by one’s ability to be creative.
Advantages of Ethereum
Because Ethereum is providing a decentralized platform for dapps to run on, it enjoys all the groundbreaking benefits of blockchain.
Ethereum is:
- Immutable. The data written on the blockchain cannot be changed or deleted by any third party.
- Censorship-free. Ethereum apps are based on a network formed around the principle of consensus. This makes censorship nearly impossible.
- Secure. Protected by cryptography, the blockchain has proven thus far to be immune to tampering or hacking. There is no central point of failure (like so many other systems we have).
- Transparent. All records are publicly available for anyone to check; although privacy is rumored to be coming in the future, for now, everything is out in the open.
Disadvantages of Ethereum
Ethereum has plenty of upsides but nothing is perfect. Here are a few disadvantages:
- Smart contract code isn’t perfect. The DAO was a prime example of how human error can lead to major problems. If a mistake in the code gets taken advantage of, there is no real way in which an attack can be stopped, save for obtaining a (quick!) network consensus and/or reworking the underlying code.
- Transactions on Ethereum aren’t that fast. While speed may not be its essential selling point, it can be frustrating in numerous different scenarios. Ethereum maxes out at about 20 transactions per second, while Visa can process over 1,500 transactions per second.
- Scaling is the challenge for almost every blockchain at this point, and Ethereum is no different. These are difficult computer science and game theory problems. Most of them have never been solved before. Even Buterin doubts Ethereum’s current ability to scale: “Scalability [currently] sucks; the blockchain design fundamentally relies on bottlenecks where individual nodes must process every single transaction in the entire network.”
How to run Ethereum
Having read this far, you’re excited and want to get started. To run Ethereum, all you need to do is download an Ethereum client. Like other similar programs, the Ethereum client will connect to all the other computers running Ethereum the world over.
The Ethereum client software allows you to do a few things, the most important of which are:
- Connect to the Ethereum network
- Explore Ethereum’s blockchain
- Create new transactions and smart contracts
- Run smart contracts
- Mine for new blocks (or stake ether PoS)
By downloading and running the Ethereum client, your computer will become a ‘node’ on the network, running the aforementioned EVM. It will behave the same as all the other nodes running this software.
How to buy Ether
If your interest has been sufficiently piqued and you want to buy some ether, it’s actually quite simple. All you need to do is step through the following process thereby creating a link between your fiat currency and an Ethereum exchange.
- First, you need to create an account on an exchange. Coinbase is probably the easiest to use but it also tends to charge higher fees (more experienced people tend to use the GDAX exchange). There are many others to choose from: Binance, Kraken, Gemini, and Bittrex to name a few. Select one and create an account.
- Go through a verification process. Any reputable exchange is going to require that you verify your identity through a number of different methods. Expect to upload some documents, a few photos, provide a bit information and wait a few days. You can often start using an exchange instantly but to withdraw funds (beyond a certain limit) verification must be completed.
- Fund your exchange account with fiat currency. This is typically done through a wire transfer, a bank transfer or a credit/debit card (added fees for using plastic). The payment options accepted and the time it takes to go for the funds to go through varies by exchange.
- Begin purchasing ether. With signup, verification and funding all taken care of, you can get down to business. Every exchange has a slightly different interface, but most have YouTube tutorials that walk you through the process if you get stuck. Just go slow and be sure of every step you’re making.
Once you’ve bought your tokens, you’ll probably want to move them off the exchange to a more secure location (we’ll explain how to do this in the next section).
How to securely store your Ether
The trick to keeping your ETH safe is keeping tight control of your private key(s). What are these keys we’re referring to?
Ethereum uses asymmetric cryptography (Elliptic Curve Digital Signature algorithm to be specific) to generate strings of numbers that act as ‘keys’. Your public key is generated by your wallet (and tied to your private key). It’s what you use to receive ETH, and also your address on the Ethereum blockchain.
On the other hand, your private key is another long randomly-created string of numbers that allows you to authorize transactions of ETH.
(Source: Wikipedia)
An easy way to think about it is your public key is like your account or routing number and your private key is like a pin. Treat them accordingly.
Once you’ve bought your ETH, you have a few options as to where to keep it.
You can leave it sitting on the exchange account, you can move it to a mobile or desktop wallet, or you can move it to an offline (‘air-gapped’ or ‘cold’) hardware wallet or paper wallet.
It’s almost never advisable from a security perspective to leave money on an exchange. A mobile or desktop wallet is slightly safer but still at risk of being hacked. The most secure option is to move your tokens into a hardware or paper wallet and store them safely.
Think of it this way: if you had $20, you might leave it lying in the cup holder of your car. This is like an exchange. If you had $1,500, you might keep it in your wallet or an envelope but you’d be very careful with it. This is like a mobile or desktop wallet. If you had $100,000, you would probably keep it in an insured bank account or safety deposit box. This is like a hardware wallet.
There are many different wallets to choose from, but many people opt for the myetherwallet to start. If you want to go for tighter security, Ledger Nano S is a popular hardware wallet.
Aside from making sure your tokens are in a safe place, be mindful of your personal information and be measured in how you speak about crypto online. Being negligent in either sense can also open you up to the risk of theft.
Also be very careful when downloading or installing any wallet as there are more than a few phishing scams out there. To learn more about how your storage options, check out our guide to cryptocurrency wallets.
In the fourth and final part of this series I’ll be comparing Ethereum to Bitcoin.
