Comprehending the Ethereum Great Idea

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Engineering drawings Ethereum - coincryptoasia.com

What Is Ether?

Summary

Ether (ETH or Ξ) is the original cryptocurrency used on the Ethereum network and is used to compensate miners who secure transactions. A planned increase to the Ethereum protocol in 2019-2021 will replace mining with a computational cheaper Proof of Ownership mechanism that will be secured by the validator, who is also expected to receive proportional compensation in Ether. Ether also has many current use cases, such as store of value (eg in loan collateral), medium of exchange (eg in trade and payments), and account units (eg in digital markets).

Ether Usage Case

Network Usage

Ether is required to transact on the Ethereum Blockchain network.

As explained in the gas section, each transaction that occurs on the network requires a specified amount of gas, which is the unit used to measure the computational power needed to process the transaction. To process the transaction and put it in a block, the miners are expected to be compensated for this task. This is achieved by setting the price of gas with each transaction, which is the cost of 1 unit of gas, denominated in Gwei (1 ETH = 1,000,000,000 Gwei).

For example, when you simply send ETH from one account to another, this costs 21,000 gasoline. If you set the price of 1 Gwei gas, this transaction will cost 0.00000021 ETH.

Saving Value

Ether, the original currency of the Ethereum network, derives its value from various factors. This is used in the Ethereum network to perform various functions, including:

Payment of Ethereum transaction fees is available as 'Gas', used as collateral for various open financial applications (MakerDAO, Compound), can be lent or borrowed (Dharma), received as payment by retailers and certain services providers use it as a medium of exchange for buy Ethereum-based tokens (via ICOs or exchanges), crypto-collectibles, in-game items, and other non-equivalent tokens (NFT) that are obtained as prizes for completing prizes (Gitcoin, Network Bounties). In the future, in Ethereum 2.0 / Serenity, users will be able to become validators and can help secure networks by providing computing resources and locking 32 Ether per validator. Because of this, it is hoped that Stake Evidence will lock in a large amount of Ether supply in circulation. There was also discussion around introducing a 'fuel-cost' model in which the percentage of Ether used to pay transaction costs would 'burn' and thus reduce Ether's circulating supply.

Behind the utility value, Ether also has a speculative value. This is the value derived from speculative activities (such as trade and investment) which currently accounts for most of the value behind all crypto assets. As observed in 2017, crypto assets can attract huge speculative interest, with some assets increasing in value 1000x in just a few months. This speculative interest often brings new capital into the ecosystem which can be reinvested into various verticals, but can damage the short-term market sentiment of all crypto assets.

Can't the token on Ethereum be used instead of Ether?

Theoretically, yes. Practically, no. The concept of using another digital asset to secure the Ethereum network is called 'economic abstraction' (a good primer can be found here. This will involve miners/validators who receive tokens other than Ether in exchange for adding valid transactions to new blocks.

It is very unlikely that the Ethereum protocol will implement economic abstraction because it has the potential to reduce blockchain security by compromising Ether value.

How can a valuable Ether help secure a network?

In the Proof of Work system, miners compete with each other to find blocks and are therefore rewarded for their work (in the form of the protocol's original crypto assets). When asset prices increase, naturally it brings in more miners, which then increases the difficulty of the network. As network difficulties increase, it becomes increasingly difficult for miners to find blocks that produce large-scale mining operations (usually called "mining agriculture") to be one of the only profitable ways to mine on a Proof of Work network (once reaching a certain size). Miners can also join the 'mining pool' to increase their chances of finding blocks and thereby increase their rewards.

At present it will cost individuals or groups large amounts of money to successfully attack or control the Bitcoin or Ethereum PoW blockchain

When Ethereum transitions to Proof of ownership under Ethereum 2.0, it is hoped that users will be able to bet 32   Ether per validator and receive prizes for their work in additional Etheric forms (at a dynamic publishing level, discussed later in this essay).

Under Proof of Stake, the cost to attack Ethereum will be linked to Ether cost. Instead of using energy-intensive mining (as in Proof of Work), validators will "risk" Ether, and will lose some or all of their shares if they attempt to behave fraudulently. The more validators with Ether secure the network, the more Ether an attacker needs to buy to carry out attacks. Such an attack is likely to quickly increase Ether's price and hence make it more expensive for the attacker.

Payment tool

For something to function as money in an economy, it needs to act as a good medium of exchange (MoE), account unit (UoA) and store of value (SoV). Ether is used as a medium of exchange in the Ethereum economy for various applications, with dApp providers accepting it in return for equivalent / not-narrow tokens, or other services. It is also used as an account unit by various parties (including companies that have raised Ether through ICO). Finally, Ether has historically been used as a store of value, with investors and speculators buying Ether for investment purposes, given its relative scarcity, predictable supply growth, and default utility.

An object (physical or digital) usually has to display five different attributes in order to be considered money: portability, durability, shareability, functionality and established history (see Lindy effect). Ether is very portable (because it's digital), durable (again, because it's digital), can be shared (up to 18 decimal places), but has limited equivalence because ETH tokens can be exchanged with each other, but accounts / addresses can be entered in a list black easily. Privacy protocols such as zk-SNARK will eventually increase this property for Ethereum.

Ethereum has been operating since 2015 and continues to build a strong history. The Ethereum (and Ether) network has been functioning as expected for 99.99% of its life. Other 0.01% included the survival of DAO, several large smart contract hacks, various protocol-level exploits, Shanghai DoS attacks, constant negative comments from the wider crypto community and bear markets (including a recent 94% price reduction).

In addition, Ether has additional properties such as sensor resistance, without permission, pseudonym, and can be operated with other crypto networks.

The crypto asset supply scheme is being hotly debated among various parties (especially those in the Bitcoin community) and currently there are two main approaches: limited supply (such as Bitcoin) or low publishing rates, predictable and difficult to change (like what planned for Ethereum 2.0).

In Ethereum 2.0 (with Sharding and Proof of Stake implemented), while a low inflation rate will always guarantee validators are valued to secure the network, it suffers from the fact that it can weaken Ether values   for those who are not validators. In fact, this was offset by Ether being released from supply that circulated through its influence, various open financial applications, cost cutting, and people lost access to their Ether.

Resources: ethereum.org