Ethereum 101 – CoinDesk

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Ethereum apps aim to give people more control over their online data. Using these apps is a matter of learning how to buy, store, and use its native token, ether

If the Ethereum protocol, sometimes called the “world computer,” develops as its proponents expect, it could provide alternatives to tech platforms, such as Facebook and Google, that many people have come to depend on. Generally, those alternatives would give users more control over their digital information.

However, this control comes at a cost: ether. Every action on an Ethereum app, even as small as posting a short message to a microblogging platform, costs a little bit of ether. With ether fees, users can tap into a variety of apps on the platform.  

These apps, also known as decentralized apps (dapps), are not free because the computing resources of the Ethereum platform are limited. The more people using the platform, the higher the fees. Since the number of services that interact with Ethereum right now is relatively high, so are the fees.

In this regard, Ethereum is still a work in progress. A network upgrade, Ethereum 2.0, is gradually being phased in to tackle Ethereum’s underlying scalability issues. That will theoretically push fees lower while bolstering the security of the network.

Ethereum apps might not be as intuitive as the apps we use today, but anyone with a computer or smartphone can access them, as long as they have ether.

What is an Ethereum wallet?

Before we get some ether, we need a place to put it. This brings us to the idea of an Ethereum “wallet.” Like its real-world counterpart, an ethereum wallet is made for storing value. (It is common practice to use lower case for “ethereum” or “ether” when referring to the currency, but upper for the network or protocol.)

Most wallets are digital apps that can be accessed from a smartphone or laptop. Furthermore, these digital wallets store digital money in the form of cryptocurrencies like bitcoin and ether.

Ethereum wallets store a user’s private keys, which are secret keys that can be used to access ether. Each key is a unique long and jumbled string of letters and numbers that looks like this:

073d9dbee8875e7c91422d80413c85ba5e8e9fe7cad5dc001871dac882d07f2f 

Only the owners of the private keys can use them to spend the money associated with them. These days, ethereum wallets 

There are several types of Ethereum wallets made specifically for storing these private keys:

  • Desktop wallets
  • Mobile wallets
  • Hardware wallets
  • Paper wallets

Choosing one depends on your preferences for convenience and security. Usually these two concepts are at odds with one another: the more convenient, the worse the security (and vice versa).

When it comes to cryptocurrency wallets, there’s one major caveat to keep in mind: losing your private key means losing your ether, forever. It is a much bigger deal than misplacing a password for an online service. This is where the absence of trusted third parties becomes a double-edged sword. While intermediaries are no longer needed to verify transactions, there’s no help desk to turn to for help recovering your secret key.

Desktop and mobile wallets

Desktop wallets run on a PC or laptop, while some wallets are more portable and can be run on a smartphone. Some wallets offer both.

Desktop, mobile, and web wallets can be either:

  • Custodial: Custodial wallets take care of your private key, which is like a password to your money. This is an easy option for users who are new to Ethereum or worried about losing their private key. However, with this type of wallet, users are still relying on a third party, which poses its own risks. These entities can get hacked, for instance.
  • Non-custodial: With non-custodial wallets, you and only you are in control of your private key.

Because desktop and mobile wallets are running on a laptop or smartphone that’s connected to the internet, they’re less secure. As such, experts suggest keeping only a little money in them. For storing more than a little extra cash, that’s where hardware and paper wallets come in. 

Hardware wallets

Hardware wallets, electronic devices that are often as small as a thumb, offer more security. These devices are built for security and detached from the internet, and can sign and send ether transactions without being online. This is more secure because it is much harder to hack and is best used for storing large ether holdings.

Ledger and Trezor are two popular hardware wallets that can be used for holding ether.

Paper wallets

Another cold storage option is to print or carefully handwrite a private key on a slip of paper, a “paper wallet,” and lock it somewhere secure like a safety deposit box. 

MyEthereumWallet, or MEW, is one popular service for generating key pairs directly on your computer – not on a website’s servers. Storing private keys on a server would mean trusting the company with access to your private keys, essentially a custodial wallet (see above). It would also leave those keys vulnerable if the site is ever hacked.

Tech-savvy users can generate keys using the command-line interface on a regular computer, which is used to directly input commands via text, provided they have the necessary cryptographic packages installed.

All that said, it bears repeating that if you lose your private key, it — and any ether associated with it — is gone for good. The best practice is to spend some extra time creating multiple copies of the private key and stashing them in different secure locations, in case one is lost or destroyed.

How can I buy ether?

The easiest way to obtain ether varies by location.

There are several methods to buy ether:

  • A centralized exchange
  • A compatible ATM
  • Buying in person or via a peer-to-peer marketplace that connects users directly to one another

Finding an online ether exchange

Buying ether via a centralized exchange is usually the easiest option.

Popular exchanges such as Coinbase and Kraken allow users to buy ether directly with dollars or bitcoin. Typically there’s a sign-up process. These exchanges usually comply with Know-Your-Customer (KYC) laws, meaning they need to confirm a user’s identity before they can buy cryptocurrencies from the platform.

Buying ether with a currency other than the dollar might take an extra step.

Bitcoin is the most commonly used cryptocurrency, and people around the world are more likely to want to trade for it in their currency. So if you want to buy ether for Russian rubles, for instance, one easy option is to purchase bitcoin at an exchange and then trade that for ether.

That said, the official Ethereum website provides a list of buying options based on the country you reside in.

Ether ATMs

There are also hundreds of ether ATMs dotting the globe. This map from CoinATMRadar shows where these ATMs are located. 

ATMs are less convenient since they can only be used in person, but they do offer a couple of advantages. While exchanges accept only digital forms of payment (such as credit cards), ATMs accept cash. Sometimes exchanges take a couple of days to send a user their ether, but ATMs are instantaneous.

Buying ether in person

Some users are privacy-conscious and would rather not use centralized exchanges, which often require a form of ID to use.

For these users, there’s always the option of meeting in person to buy or sell ether, and some cities have frequent Ethereum meetups, including New York and Toronto. However, this isn’t always an easy option in less populated areas.

Sites such as LocalCryptos connect users who want to trade by another peer-to-peer method, including directly by way of a bank transfer.

What can I do with ether?

What can users do once they have ether?

Once you have ether, you can use it to fuel decentralized apps (often called “dapps”), which are often similar to apps we use today, except they aim to cut intermediaries out of the picture. 

These dapps are built from Ethereum smart contracts, code that automatically executes the terms of an agreement so that users don’t have to rely on a third party to enforce the rules.

Examples of decentralized applications include:

  • CryptoKitties: A game for collecting and breeding funny looking digital cats. Ethereum’s innovation is that it allows users more control of their digital collectibles. For instance, the digital cat cannot be deleted, unlike in other games, where the collectibles only survive as long as the company that created them. 
  • PeepEth: PeepEth is a decentralized Twitter alternative. Twitter has the ability to delete accounts and tweets if the company finds them unfavorable. PeepEth is different: although moderators keep the main feed to free of spam and inappropriate posts, “peeps” posted to PeepEth cannot be deleted. 
  • DeFi: decentralized finance (DeFi) is the term for the array of financial applications built on top of ethereum.

Some Ethereum apps have their own token, derived from ether. To participate in these, users need to trade ether for the token powering the app. For instance, Decentraland is a virtual world where users can buy virtual plots of land. It’s different from games that don’t use blockchain because users control the game, rather than a central entity.

Aggregator State of the Dapps lists nearly 3,000 such Ethereum dapps. While many are promising services and projects, sending ether to unvetted apps is not recommended.

Authored by Alyssa Hertig

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