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Ultimate Guide to Mining and Trading Ethereum

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Ultimate Guide to Mining and Trading Ethereum

Etherium emblem

 

 

 

 

 

 

 

 

 

As far as cryptocurrency is concerned, Ethereum (ETH) is unique. Whereas its main competitors – Bitcoin and Dogecoin – are primarily known as a digital currency, ETH goes beyond that; applications can be built and run on the Ethereum blockchain network. Its ambitions rely more on its smart contract capabilities, rather than its coin. Although, admittedly, its coin is what drives the network.

Another thing which creates a clear distinction between Bitcoin and Ethereum is the fact that its founders are prominent figures in the public-eye. There is no mystical figure like Satoshi Nakamoto standing in silhouette behind the coin. Instead, Vitalik Buterin, Gavin Wood, Amir Chetrit, Jeffrey Wilcke, Mihai Alisie, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin are often seen talking openly to the media about their Ethereum or other projects.

The Ethereum network went live in 2015 after first being introduced in a 2013 whitepaper and, seven years on, is set to undergone major upgrades via a merge in 2022. This is the key to Ethereum: the network will always be on an improvement roadmap, and its founders are happy to openly discuss general concepts and ideas regarding upgrades and the future of Ethereum.

It is, at its core, a living, breathing project.

The Breadth and Depth of the Ethereum Network

Decentralized autonomous organizations (DAOs) and non-fungible tokens (NFTs) are already making a seismic impact on the digital world, largely through Ethereum’s blockchain. The former is a new type of business structure, and the latter is non-replicable digital data which is often sold as original art pieces, audio, and videos.

Since 2021, NFTs have seen a boom in interest. Celebrities have bought, minted, and launched various NFT collections – like the Bored Ape Yacht Club – or based on their own lives and cultural products. Their use has extended to gaming, digital real estate, and tokenized communities. It’s all about rarity and access, building worlds and social circles that emphasise ownership – the big it-word of the Web3 era – and participation.

DAOs are less-discussed simply because they aren’t consumable, and their use is limited to the world of business. However, their usurpation of exclusive hierarchy and their emphasis on member-owned communities and business make them and intriguing prospect for many. The ambitions of DAOs are plain to see: one DAO has expressed the ambition to own an NBA team. Many grassroots organisations see DAOs as a route to ownership, entering into worlds previously exclusive.

Ether on the Market

Ether is second-largest coin on the market behind Bitcoin but is seen as a rival to  the leader due to its scope and its creators’ commitment to making progress and improvements. As of now, the two are separated by tens of thousands of dollars in price. People are bullish, though, that being involved in the Ethereum network will pay off

Mining Ethereum

The Consensus Mechanism: POW to POS

Most miners will be familiar with the Proof of Work (POW) consensus mechanism which Ethereum currently uses. It was the original mechanism built and used when bitcoin first launched in 2009. Ensuring that users aren’t ‘double spending’ – copying their digital money and reusing it, which increases the total supply of coins and devalues them – is much more difficult in a decentralised ledger rather than a centralised one. This is what the POW mechanism sought to solve, and it does so effectively.

Miners – either solo or part of a pool – work as a node in the decentralised system. They hook up their hardware and work to solve complex mathematical problems – which will find the hash of a block that satisfies the conditions imposed by the system – to validate transactions, add the new block to the chain, and receive coins as a reward.

The success of the operation is heavily dependent on the node’s computational power. Thousands of calculations need to happen every second. It’s a hardware- and electrical-energy-intensive process that is most often completed by pool miners, as opposed to solo miners, simply because it’s more efficient and affordable to group power as a team. While the odds are in favour of pool miners, solo miners have had notable success recently mining bitcoin, earning themselves around $250,000. Pool miners earn income more reliably and consistently, but at a reduced rate as the reward is distributed among the pool. Partial or full rewards, low and high odds – these are the compromises miners must make.

Ethereum can only be mined with a GPU, as opposed to Bitcoin, for instance, which can be mined with ASICs too. It is built this way to improve accessibility for those who wish to mine.

Following the implementation of Ethereum Improvement Proposal 1559, Miners earn a static block reward, a tip from the transactors for faster transactions, and a base fee (which is burned, but more on that later). 

Mining vs. Staking

As mentioned above, the POW mechanism is what Ethereum is currently using. However, switching to the Proof of Stake (POS) mechanism is scheduled for 2022. Ethereum, though, is notorious for delaying upgrades. Ethereum’s next stage has mutated numerous times over the years, and what has come to be known Ethereum 2 is a multi-phased upgrade that will see the original Ethereum chain merge with a new chain. It’s definitely an across-the-network upgrade rather than a square-one, new network.

POS will turn miners into validators (also known as stakers). Operating as nodes still, validators will still secure the blockchain by validating transactions, adding new blocks, and they will receive rewards for their efforts. Where it differs from mining is that there is no ‘race’ to mine. Instead, the validators are chosen to validate the block, and the odds of this are relative to the numbers of coins they’ve staked, which means they’ve invested in at least 32 ETH (based on prices as of early June 2022 this amounts to roughly $58K).

POS is much more about staking coins rather than having hardware and is, as such, considered to be the more accessible mechanism. This accessibility improves scalability too, as the network isn’t beholden to the production and acquisition of hardware. In this sense, bitcoin’s POW mechanism can become centralised as the power to validate is only available for those who have the computational power. Though, of course, it still requires funds to become a validator.

However, the POS system has inherently more chance of being decentralised, preventing malicious attacks via a concentration of power by accumulating nodes (which is possible in a POW mechanism, called a 51% attack). Security is just one of the benefits of upgrading to a POS system, which, coupled with other upgrades Ethereum intends to implement, will lead to a much healthier network.

Once they’ve been chosen, they validate the transaction, store the data and add blocks to the Ethereum’s new network (which will be merged with the original network) called the Beacon Chain. Validators earn interest on the coins they’ve staked. They’re also responsible for checking blocks they themselves don’t contribute.

This stake acts as a deterrent too. Should a validator participate in any negative behaviour or neglect their responsibilities they lose a percentage or all of that stake. It’s possible to delegate a stake, so as to alleviate the responsibility of validating to another user. Passive income can be earnt this way.

The Particulars of Staking Ethereum

  • Transactions in 32 blocks are in each round of validation. These are called ‘epochs’. Once two further epochs are added to an epoch, the network considers the chain irreversible.
  • A validator is part of a 128-validator committee, which is assigned a random block. That committee is given a set time to validate the transactions in a block, before proposing it to the chain. Each of the 32 blocks must be validated for the epoch to be completed.
  • A single validator from a committee is given the power to add the block to the chain. The other 127 validators vote on the proposal of the block and support the transaction validations.
  • Rewards are based on how much ETH a validator has staked. The single validator gets a fixed 1/8 of the base reward. The rest of the committee have the other 7/8 distributed among them, and this figure declines proportionally to how long it takes each individual to support the transaction validation.

How to Stake ETH

There are systems – called custodial systems – which set up, run, and manage the node for a validator. All that the validator need do is stake the 32 ETH. These systems take a cut of the rewards as payment for their services. Also, the validator has no control over the node itself.

To control the staking operation, a validator needs to staking use Ethereum 1.0 – the first Ethereum network which uses the POW mechanism – and Ethereum 2.0 clients, which are applications that enable networks to communicate. Storage space is necessary to do this, as both networks will need to be downloaded, with enough extra space for the growth of both. It goes without saying that the node will always have to be live, meaning the PC will need to be connected to the internet 24/7. Once everything is a-go, a validator will become a validator once 32 ETH is sent to a staking address.

Until the merge happens – which, despite being slated for 2022, might not happen for years – validators cannot withdraw their rewards. A withdrawal passkey can’t be created until that merge happens. The only key a validator will be able to use is one to sign and validate transactions. Waiting to withdraw rewards may put off potential stakers looking for profits. While the ETH price might be attractive now, there is no way of knowing what the price will be when the merge finally happens. This is where the speculative nature of crypto comes to the fore again. Though, of course, Ethereum’s utility as a platform, in addition to a coin, makes many crypto pundits and enthusiasts optimistic about Ethereum’s future.

The Supply Cap and the Burning

To continue our loose comparison of Ethereum and Bitcoin, supply is an important note that impacts the future prices of the coin itself as well as rewards for staking.

Bitcoin’s supply is capped at 21 million BTC. That is a steadfast, programmed limit. Reaching this figure is unlikely as the bitcoin mining rewards are reduced at fixed intervals so as to slow production, meaning there will always be some space between the maximum 21 million BTC and what’s in circulation.

Ethereum, on the other hand, has an infinite supply. What’s important to note, though, is that the developers of Ethereum are considering introducing a cap. Buterin has previously expressed 120 million ETH or 144 million ETH may be the limit. However, these are subject to change depending on when the merge happens and what is expected of Ethereum at that point. An infinite supply offers more guarantee that power can’t be accumulated among a concentrated minority – a common theme among Ethereum’s upgrades and ethos – and to mitigate inflation, maintain a certain degree of accessibility.

Implemented as part of the series of upgrades Ethereum is undergoing, the Ethereum Improvement Proposal 1559 created a new system that burned – destroyed – ETH coins upon their issuance. The splitting of mining rewards (not staking rewards) into the base fee and the tip was part of this update, as it allowed the network to burn the base fee, meaning in insistences of the burn the miner only receives the tip. Developers explain that it’s an attempt to limit how much miners can ‘game the system.’ Any spam transactions miners put through – raising the fee costs for everyone else which they then make back via mining – are negated via the burn, keeping fees consistent.

Trading Ethereum

 

Etherium, blockchain 3D render

 

 

 

 

 

 

 

 

 

Much of what the Ethereum improvement roadmap concerns is enabling more transactions to happen faster, cheaper, and more securely. Fundamentally, it’ll be easier to trade Ethereum. But what does it mean to ‘trade Ethereum’, and how does one become a trader?

Why Trade Ether?

Ethereum’s coin (ETH) is what fuels the Ethereum Network. Every application that the Ethereum platform encourages the development and use of via its smart contract capabilities are interacted with and powered by ETH.

Bitcoin’s premise as a cryptocurrency is much simpler: it is purely digital money. It’s future entirely depends on its adoption by vendors, by governments, by consumers, and this future is looking possible as bitcoin’s price and use-cases continue to increase and expand. Faith in Bitcoin is faith in the use of it as digital money. However, Ethereum’s future is markedly different, functioning as a platform. The faith in Ethereum is the faith in it both as a coin and as a functioning piece of software.

That being said, other crypto assets can be used on the Ethereum network. Tokenizing cryptocoins like Bitcoin makes a representation of the value a user is moving off the coin’s native network. They are not using the original coins on whichever network they’ve move the tokenized coins too, rather a representation of them. As such, Ethereum remains more flexible than other networks.

How to Trade Ether

Trading ether is done is exactly the same way as you would trade bitcoin.

First, you must have an account with a crypto exchange based on a few key traits:

Accessibility

Accessibility (and legality) is the initial criteria: you may not live in a country or state that supports, or at least makes it easy, to perform ether trading. Ensuring you comply with legislation is paramount. Crytpo legislation, in general, is constantly making headlines, as governments and institutions reckon with consumer demand for both the ability to participate in this financial and technological revolution but, also, for the protections afford to investors and users of other products.

Keeping up-to-date on developments means you are both informed about the legality of trading and, also, about what is impacting the price of coins, potentially influencing your trading strategy.

Security

Security is second. Hacks and scams are part of the risks of trading ether and other coins. However, you needn’t accept them nor make it easy. How you store your coins dictates the risk of using crypto exchanges: if you store them online with the exchange, you are handing security responsibility of all your coins over to that exchange. Not all traders take that risk, but, for first-timers, it might be the best and most appealing decision. Size, though, remains the best indicator of security because the more people using an exchange shows that they trust and feel secure using them.

Transaction Fees

Transaction fees charges may impact your decision. Some will charge more because they offer different features or better protections. The fee will also depend on whether you’re a buyer or seller. Knowing how much an exchange charges, though, is important, though it could be negligible if you find they excel in other areas.

Liquidity and Coin Availability

Liquidity and coin availability is a two-pronged criterion. Essentially, to trade ether, for example, on an exchange, that exchange must have a store of ether to perform transactions and they must have enough of it. Availability won’t be an issue for coins like Ether and Bitcoin as they are major crypto players. Every exchange will have these coins in stock, so to speak, unless it’s a conscious, steadfast decision. For small altcoins, it may present a problem.

Storage

Finally, storage, which was alluded to above, is the final hurdle. It is possible to store your coins online with the exchange. This custodial, hot wallet may divide crypto enthusiasts who don’t trust such centralising organisations to protect their investments. However, in general, the major exchanges like Binance, eToro, and Robinhood, for instance, have enough security nous and history for you to be comfortable until you find a non-custodial, cold, hardware wallet. These wallets are external devices without internet connection which allow you to plug-in and unplug the passkeys for your coins. Cold wallets are the most popular.

Signing Up with an Exchange

Once you’ve found the exchange you wish to trade ether on, the next step is register. This won’t be an unfamiliar process. Some exchanges require more personal information than others, but, in general, it won’t be anything you’re not already used to giving away to sites: legal name, DOB, email address, phone number, address (and some will require evidence to verify that address), social security number, and photo ID (with a photo of you holding that ID). How long it takes before you can start trading depends on the exchange: instant access is possible, as is having to wait a few days. Legislation informs this, as Know Your Customer and financial regulations may require the exchange to know you a little better than most.

The next question will be about the method you choose to deposit and withdraw funds. Visa/Mastercard, PayPal, or digital coins are all viable options.

Finally, you can begin your journey trading ether.

The Bottom Line

Mining, staking, and trading ether – much like all of crypto – is about speculating what the Ethereum network can become. When comparing Ethereum to Bitcoin, one can see why ether is touted to be the biggest cryptocurrency on the market. However, it is the more complex, and largely requires that not only that Ethereum functions as itself – that the network runs as efficiently and accessibly as possible – but that its weaved into the wider internet ecosystem. It’s likely that what becomes of Web3 and the Metaverse – as well as DeFi and crypto’s integration into the wider infrastructures of smart cities, healthcare, and other such public bodies and interests – will play the biggest role in Ethereum’s future.

Involving yourself in ether is always intended be possible, as this guide has shown: the Ethereum network wants you to participate, and its upgrades seek to secure that privilege for as many people as possible. But, for the future it wants, it also has to inspire and rely on faith.

Q&As

Can I Build on the Ethereum Network?

Of course. It’s an open-source public blockchain. It’s a complex process of design and coding, but what you’re essentially doing is creating a private chain on the Ethereum network, and ether will be the way users interact with your app.

Do NFT Sales Impact the Price of Ether?

It depends. Some say that the price of NFTs has little bearing on the price of ETH. However, if millions of dollars’ worth of ETH was spent on an NFT, and that NFT’s artist traded the ETH for fiat money, that would impact the price (slightly). So, again, as with all crypto, it’s a complex relationship where direct causation is difficult to pin. But it contributes.

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