101- ETHER
Crypto enthusiasts, DAPP developers and ICO specialists around the world are talking about Ethereum tokens. In order to understand how useful Ethereum tokens are, a detailed understanding of ETHER is a must, especially if you are a beginner.
What is Ether?
Ether (ETH) is the currency with which everything runs in the Ethereum network. Ethereum is the decentralized public platform where money, property or any valuable asset can be exchanged between two or more parties, using self-executing computer codes called smart contracts. The users need to pay Ether tokens to make such exchanges on the Ethereum network.
So, Ether is a digital asset class and it doesn’t require a third party to approve the transaction. According to Ethereum.org, Ether is the ‘fuel’ for the Apps to run on the decentralised Ethereum network. And, to have sufficient amount of ‘fuel’ for the DAPP (Decentralized Apps) you are using, you need to have sufficient number of tokens in your Ether Wallet.
What is an Ether Wallet?
To be able to pay using Ether tokens, first you need to set up an Ether wallet. An Ether wallet is nothing but a virtual place to store your ether safely. Only you can access your ether wallet using a secure password. Once you have Ether in the form of tokens, you can send it to any person with a small GAS fee to the miners.
What is a Gas Fee?
The cost of transaction in a smart contract is measured in ‘Gas’. It measures how much “work” an action or set of actions takes to perform.
A Gas fee is measured as: Gas * Gas Price.
Gas limit refers to the maximum amount of gas you’re willing to spend on a particular transaction. A higher gas limits mean that more computational work can be allowed by the user to execute the smart contract. Gas limit acts as a safety mechanism to protect you from depleting your funds due to buggy codes or an error in the smart contract.
Gas price is the price that you are willing to pay for the computation. It is susceptible to the market fluctuation and hence varies similarly to the prices of the fuels/ power.
Analogy Time: Consider your need to travel from LA to San Diego. Your car gives a mileage of 20 miles per gallon with the tank capacity of 15 gallons. So, if the fuel price is $2/ gallon, the trip to San Diego will cost you $12.
In Ethereum world, travel is the computation, car is the miner, mileage is the Gas, fuel price is Gas Price, tank capacity is Gas Limit and the cost of trip is Gas Fee.
So, in case your ether gets depleted in the middle of a contract, and you cannot pay the gas payments, all the transactions done during the course of the contract will go back to the original state. However, since all transactions made in an Ethereum network are irreversible, your ether wallet will still show the changes in the Blockchain as a ‘failed transaction’. The value to be transferred will be credited back but you won’t get back the gas ‘spent’. Hence, to avoid such a scenario, it is recommended to set a higher gas price at the beginning of the transaction.
What is a Token?
Token is a representation of an asset or utility, that usually resides on top of another blockchain. Tokens can represent basically any assets that are tradeable, from commodities to loyalty points to even other cryptocurrencies!
An Ethereum token is a virtual coin based on Ethereum smart contract. Ethereum tokens are classified into two types- Utility tokens and Security tokens.
Security token represents assets such as participation in real physical underlying, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives. Utility token provides access to the goods & services that the project will launch in the future. Also, they can be used as a type of discount or premium access to the goods & services of the project.
Now the obvious question that may arise is, if all DAPPs are made in the Ethereum network, why do we need different native currencies for different DAPPs? Why not use only ETHER for payment in all DAPPs running on the Ethereum network?
Analogy time: Consider when you go to water park, you purchase the ticket and are given several tokens which you can use to enjoy the rides of your choice or buy food in the park.
Tokens allow the users to execute certain functions in the smart contracts of the DAPPS, to make the process simpler and more seamless.
How to Get Ethereum Tokens?
When a new DAPP comes along, the easiest way to get your hands on its token is through the ICO. Initial coin Offering (ICO) is the cryptocurrency version of IPO/ Crowdfunding. ICOs help DAPP developers get the required funding for their project. Anyone can invest in a DAPP project by purchasing tokens of that particular DAPP and even can be a part of that project by buying the security tokens.
What is ERC 20 Ethereum Standard?
You must have heard a number of times that Ethereum tokens must be ERC20 compliant. ERC 20 is the universal standard for tokens. It is basically a set of functions that DAPP developers must use to make their tokens ER20 compliant. Though it is not an enforced rule, most developers prefer to make their tokens ERC20 compliant for making a smooth interaction with various wallets, exchanges and smart contracts without any issue. Moreover, it is extremely easy to make token compliant to ERC 20 standard. Hence, most DAPPS on ICO nowadays offer ERC 20 compliant tokens only.
The universal approval of ERC 20 compliant tokens has made Ethereum the most popular and widely accepted platform for developing Decentralized Apps.
In our next article, we will be talking about how secure it is to pay with Ethereum tokens. Stay tuned!
About Kratos
Our Flagship product KRATOS™ is a decentralized commodities trading platform. KRATOS™ is built on Ethereum and it uses smart contracts to remove the need for unnecessary middlemen and paper documentation, to enhance transparency and efficiency as well as to lower the cost and time involved in the trade process. Currently, in the beta testing phase, KRATOS™ will be released soon.
Email us at contact@triterras.com
