A Beginner’s Guide to Ethereum – Part 3

Editor’s Note: This is the last article of a three-part series.

The Ether network went live in July of 2015. About 60 million Ethers went to presale contributors. 20% of this number, or around 11.9 million of additional coins, were also premined and went to early developers, contributors, and the Ethereum foundation. It was decided that future generation of tokens would have a cap of about 25% of the pre-mined amount, meaning that no more than 18 million ether coins could be mined in a year.

On the Ethereum network, miners create blockchain blocks much faster than miners on the Bitcoin network. On the Ethereum network, it takes from about 10 seconds to several minutes to create a block. Proof-of-work works in the same way as on the bitcoin network. On the Ethereum network, miners get 5 Ethers for adding a block to the blockchain.

There are 31.5 million seconds in a calendar year. If miners create a new block on the network every 14 seconds, the blockchain will add 2.25 million blocks in one year. A reward of 5 ethers per block means that the network will add a little over 11 million ethers, which meets the commitment of the network developers to generate less than 25% of the original amount of coins in a given year.

Uncle rewards

Both on the bitcoin and the ethereum network miners compete with each other to add blocks to the blockchain by trying to come up with a hash that corresponds to the requirements specified in the previous block. On the bitcoin network, blocks that do not become a part of the blockchain are useless and are discarded completely. They are also known as “orphan” blocks. This is not the case on the ethereum network. On the ethereum network, these blocks are known as “uncles” and later blocks can reference “uncle” blocks. If a later block uses a reference to an uncle block, the miner of the uncle block gets 4.375 ethers or 7/8 of the full 5 ether reward that a miner gets for mining a block that becomes a part of the ethereum blockchain. The 4.375 ether reward is also known as the uncle reward.

Currently, the ethereum network creates about 500 uncle rewards a day, which adds into circulation about 2,000 ethers a day or 700,000 ethers a year.

The miner that referenced the uncle block also gets a reward. The reward is really small, just 0.15 per uncle with a maximum of two uncles per block.

The relationship between bitcoin and ether tokens

While the Ethereum network is very different from the Bitcoin network, the Ethereum network would not exist without the open-source code created by Satoshi Nakamoto, the inventor of the Bitcoin network and Bitcoin currency. Ether is somewhat of a complementary currency to bitcoin in the decentralized ecosystem of blockchains.

While bitcoin is just digital currency, ether is more than that. Users can use it as a currency (even though this function of ether was not was the creators of the network have envisioned) but it also serves as fuel that pays for decentralized apps running on the Ethereum network and machines of network users performing various computational tasks.

There are several ways how the Ethereum network and Ethereum network users can use bitcoin. The first way is to trade bitcoin for ether or the other way around to maintain the value in the currency of a user’s choice.

If a user needs to execute a smart contract, the user can trade bitcoin to ether, execute the contract and then trade the funds straight back into bitcoin.

The second way to use bitcoin on the Ethereum network is as a pegged derivative. Using smart contracts on the Ethereum network, parties can create really complex trading contracts. For example, if all parties trust a certain bitcoin source, they can create a transaction linked to the market value of bitcoin. A contract could then prompt the exchange of bitcoins into certain tokens and back. This can preserve the financial value of a transaction and retain financial and contractual compatibility with other contracts and decentralized applications on the Ethereum network.

Finally, it is possible to use bitcoin on the Ethereum network to convert 2-way pegs that use bitcoin relays. This way, developers can use bitcoin in contracts that have a direct connection to other contracts on the Ethereum network. A contact can then issue a token that is backed by bitcoin currency.

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