What Is Ethereum? (2/6) - Where does ether come from?


Begginer Level

Contents





How is new ether created?

We briefly touched on mining earlier. If you’re familiar with Bitcoin, you’ll know that the mining process is integral to securing and updating the blockchain. In Ethereum, the same principle holds: to reward the users that mine (which is costly), the protocol rewards them with ether.


How many ether are there?

As of February 2020, the total supply of ether is around 110 million.

Unlike Bitcoin’s, Ethereum’s token emission schedule intentionally wasn’t decided at launch. Bitcoin set out to preserve value by limiting its supply, and slowly decreasing the amount of new coins coming into existence. Ethereum, on the other hand, aims to provide a foundation for decentralized applications (DApps). As it’s unclear what type of token emission schedule fits this purpose the best, the question remains open-ended.


How does Ethereum mining work?

Mining is critical to the security of the network. It ensures that the blockchain can be updated fairly and allows the network to function without a single decision-maker. In mining, a subset of nodes (aptly named miners) dedicate computing power to solving a cryptographic puzzle.


What they’re actually doing is hashing a set of pending transactions alongside some other data. For the block to be considered valid, the hash needs to fall below a value that’s set out by the protocol. If they’re unsuccessful, they can modify some of the data and try again.


To compete with others, miners therefore need to be able to hash as fast as possible – we measure their power in hash rate. The more hash rate there is on the network, the harder the puzzle becomes to solve. Only miners need to find the actual solution – once it is known, it’s easy for all other participants to check that it’s valid.


As you can imagine, continuously hashing at high speeds is expensive. To incentivize miners to secure the network, they earn a reward. It’s made up of all of the fees for transactions in the block. They also receive freshly-generated ether – 2 ETH at the time of writing.


What is Ethereum gas?

Remember our Hello, World! contract from earlier? That was an easy program to run. It’s not very computationally expensive at all. But you’re not just running it on your own PC – you’re asking everyone in the Ethereum ecosystem to run it, too.


That leads us to the following question: what happens when tens of thousands of people are running sophisticated contracts? If somebody sets up their contract to keep looping through the same code, every node would need to run it indefinitely. That would put too much strain on the resources and the system would probably collapse as a result.


Fortunately, Ethereum introduces the concept of gas to mitigate this risk. Just as your car can’t run without fuel, contracts can’t be executed without gas. Contracts set an amount of gas that users must pay for them to successfully run. If there isn’t enough gas, the contract will halt.


In essence, it’s a fee mechanism. The same concept extends to transactions: miners are chiefly motivated by profit, so they may ignore transactions with a lower fee.


Note that ether and gas are not the same. The average price of gas fluctuates and is largely decided by the miners. When you make a transaction, you pay for the gas in ETH. It’s like Bitcoin’s fees in that regard – if the network is congested and many users are trying to transact, the average gas price will probably rise. Conversely, if there isn’t much activity, it will decrease.


While the price of gas changes, every operation has a fixed amount of gas required. This means that complex contracts will consume a lot more than a simple transaction. As such, gas is a measure of computational power. It ensures that the system can provide an appropriate fee to users depending on their use of Ethereum’s resources.


Gas generally costs a fraction of ether. As such, we use a smaller unit (gwei) to denote it. One gwei corresponds to one-billionth of an ether.


To make a long story short, you could run a program that loops for a long time. But it quickly becomes very expensive for you to do so. Because of this, nodes on the Ethereum network can mitigate spam.


The average gas price in gwei over time. Source: etherscan.io


Gas and gas limits

Suppose that Alice is making a transaction to a contract. She’d work out how much she wants to spend on gas (for instance, by using ETH Gas Station). She might set a higher price to incentivize the miners to include her transaction as quickly as possible.


But she’ll also set a gas limit, which serves to protect her. Something could go wrong with the contract, causing it to consume more gas than she plans for. The gas limit is put in place to ensure that, once x amount of gas is used up, the operation will stop. The contract will fail, but Alice won’t end up paying more than she initially agreed to pay.


It might initially seem like a confusing concept to grasp. Not to worry – you can set the price you’re willing to pay for gas (and the gas limit) manually, but most wallets will take care of it for you. In short, the gas price defines how quickly miners will take your transaction, and the gas limit defines the maximum amount you will pay for it.



How long does it take to mine an Ethereum block?

The average time it takes for a new block to be added to the chain is between 12–19 seconds. This will most likely change once the network makes the transition to Proof of Stake, which aims, among other things, to enable faster block times.



What are Ethereum tokens?

A large part of Ethereum’s appeal is the ability for users to create their own assets on-chain, which can be stored and transferred like ether. The rules governing them are set out in smart contracts, allowing developers to set specific parameters regarding their tokens. These can include how many to issue, how to issue them, whether they’re divisible, whether each is fungible, and many others. The most prominent of the technical standards that allow the creation of tokens on Ethereum is called ERC-20 – and that’s why the tokens are popularly known as ERC-20 tokens.


Token functionality provides innovators with a vast playground for experimenting with applications on the cutting edge of finance and technology. From issuing uniform tokens serving as in-app currency, to producing unique ones backed by physical assets, there’s a great deal of design flexibility. It’s entirely possible that some of the best use cases for easy and streamlined token creation aren’t even known yet.


See next : What Is Ethereum (3/6)

-> Getting started with Ethereum



Source : Binance

12 views0 comments

Recent Posts

See All