Ethereum Explained for Noobs

The Basics of Ethereum (ETH)

Ethereum’s purpose is to be a decentralized monetary system. It is one of the most versatile cryptocurrencies with many forms of utility, including: smart contracts, defi, and dapps. I will try to explain these things in the most simple way possible. This will be based on Ethereum after its two biggest updates are released in the next 1-2 years. (EIP 1559 and ETH 2.0) Ethereum also goes by ETH and ether.

Decentralized Apps (dapps)

One of Ethereum’s biggest use cases is that it can have tokens built on top of it that can perform a variety of functions and tasks. Some of them can be used to borrow and get loans using cryptocurrency, and some can be used to buy/sell stocks on the blockchain. This is known as decentralized finance (defi). Another use for dapps is decentralized exchanges like Uniswap and 1inch token. These can be used to trade ethereum tokens without a middleman, completely decentralized. These trades require ETH (Ethereum) in order to be finalized. These ETH fees are also known as “gas”.

Staking

With a future update known as ETH 2.0, Ethereum will be moving from mining to staking. Not only does this require far less energy, but it will also allow people to earn interest on their ETH. You use your ETH to help secure the network, and in return you receive the reward of interest on your coins. This interest level will likely be between 5-10%, and will scale up if the price of ETH goes up over time. If you stake 1 ETH, and the interest rate is 10%, you will earn 0.1 ETH no matter what, even if the price were to double. (This interest on your ETH comes from the transaction fees that happen every time someone sends ETH to another address.)

Smart Contracts

Smart contracts are probably the most complicated for some people to understand. But it’s basically telling the ETH network that you want it to perform a task if a certain outcome happens. Here’s an example. Let’s say you are going to bet your friend that a certain coin will double in price by the end of the year. You both lock your ETH up in the network, and all of it is given to the person who was correct. Basically a decentralized middleman.

EIP 1559

EIP 1559 is a very important ETH update that is expected to roll out within the next few months. Every time someone sends ETH, there is a network fee. Some of this fee will go to the stakers who earn interest on their ETH to secure the network. EIP 1559 will make it so a part of this fee is completely burned, and will never exist. This will drastically lower the ETH’s inflation rate from about 4.5% to around 0.5-1%. Equivalent to multiple bitcoin halvings.

Gas

Ethereum has transaction fees known as "gas", this is used to do almost everything on the network. Any time you send ETH, use smart contracts, or use a decentralized app; you will be required to pay some of your ETH. While the fee is considered high by some, it is necessary for the network to remain highly secure. (There are many solutions that will likely lower this transaction fee in the future. It is currently about $20, but is expected to be drastically reduced at some point with ETH 2.0 and EIP 1559. ) This transaction fee or "gas" is used to pay the stakers that secure the network, and will be partially burned with EIP 1559.