Entering the world of cryptocurrency and Ethereum can be very intimidating. As a recent college graduate landing a job at MEW, I found myself confronted with a myriad of crypto terms and concepts – some of which were easy to understand, and others that just confused me even more. Though I still have so much to learn, thanks to browsing (something more professional than crypto subreddits, lol) and the steady guidance of my colleagues, I now feel more equipped with the tools necessary to navigate the world of Ethereum. Here were the 3 most confusing questions I had when starting out in Ethereum, and after some research, can now explain to any newbie beginning the process of their crypto journey.
How exactly does Ethereum work...and what makes it different from other cryptos?
Ethereum and other cryptos like Bitcoin can be straightforward to understand once simplified. For example, Bitcoin and Ethereum can be differentiated by comparing them to gold and stock in the internet.
Bitcoin is like gold; its main function is to be a store of value, and its value is based on its scarcity. You can buy, sell, hold, and speculate on Bitcoin, but that’s about it. Ethereum’s capabilities, however, are much greater.
Ethereum is like owning stock in the internet itself; just like gold, it can be stored and valued based on its scarcity, but its value is also connected to the many things that can be built on it. Ethereum takes Bitcoin’s concept a step further and creates a blockchain that can use smart contracts. Think of a smart contract as a regular ETH account, but no one controls it; it has a balance and can send transactions, but all of the contract’s actions are programmed by code.
But what exactly is a blockchain? And how do ‘smart contracts’ work inside of it? Well, a blockchain is a public database that is updated and shared across many computers in a network. Whenever you send coins to someone, the transaction is encrypted into a cryptographic ‘hash’, which is like a packet of secret information that’s only known to the sender and receiver. With this hash and some other pieces of code, you can be assured that no one can replicate your transaction. Blocks are made from groups of transactions, and when the blocks are hashed together, it creates a chain with links that are impossible to replace. That’s why transaction history can’t be faked or undone.
With the addition of smart contracts, people have the ability to do more actions with ETH than with BTC, such as creating NFTs, playing video games, and borrowing/lending coins. All of these are powered by the Ethereum blockchain, and just like the internet, it has a lot more uses than gold.
An NFT is just… a picture I can save on my computer, right?
You could, but where would you sell it? How would you tell people this is an original piece of art you made? There’s a large misconception on the internet that NFTs have no real value, as anybody can ‘just steal a JPEG’, but that is not the case with NFTs. Here’s how the process goes:
An NFT is a non-fungible token, which basically means it’s unique and it can’t be replaced with anything else. A cryptocurrency like Ethereum is fungible – you can trade one ETH coin for another, and you’ll have exactly the same thing. NFTs, on the other hand, can’t be traded like this because there is no exact NFT alike.
An NFT is created by ‘minting’ a digital object, which can be anything like:
• Videos and sports highlights
• Virtual avatars and video game skins
• Designer sneakers
And many other things you can think of.
So how exactly can an NFT gain its value when people are joking about ‘right clicking’ and becoming millionaires? Well, they’re downloading the JPEG, not the actual NFT. Let's say an artist is selling a painting; once he’s made the painting, he’s at risk from counterfeit artists that would try to sell paintings that look EXACTLY like the original and claiming it’s their own. How would he try to convince the art community that he is, indeed the sole owner? With physical paintings, you can put a barcode on the back of the painting, signifying that your piece is unique, and that you were the first one to make it. Same thing with NFTs – there’s a unit of data that uses blockchain technology to establish proof of ownership. NFTs are collectable digital assets that hold value, just like how physical art holds value.
What the heck is staking?
Think of staking as something similar to dividend stocks; once you invest into a company’s stock, every quarter the company gives distributed earnings back to the shareholders. Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain.
Staking is becoming more popular due to ETH 2.0 – an upcoming upgrade to the Ethereum network that aims to improve the network’s security and scalability. ETH’s current model is Proof of work (PoW), which requires massive amounts of computing power – hence the abundance of ‘crypto miners’ that race with each other to solve a ‘math problem’ in the blockchain that rewards them with a certain amount of crypto. Proof of Stake (PoS), on the other hand, functions by relying on a number of people, aka ‘validators, to contribute or ‘stake’ their own crypto for a chance of getting to validate new transactions, update the blockchain, and earn a reward. This cuts down massive energy costs and reduces complexity, from mining crypto to staking whatever amount you choose. Currently there is a minimum of 32 ETH to stake in order to become a full validator, but there are other options such as joining a ‘staking pool’ that may require low or even no minimum to join.
Staking and becoming a validator on your own is a big responsibility, and you can't risk losing ETH by failing to validate, going offline, or for malicious actions. This is why it is very important to dig deep, understand exactly what staking is, and learn about the different ways to do it.
MyEtherWallet offers easy options for Eth2 staking both on MEW wallet app (both with full validators and pool staking) and on MEW web. If, like me, you're just getting started with Ethereum, take a look at MEW's resources, like this comprehensive beginner article, the help center, and subscribe for the MEWsletter!