Welcome to the second video in Ethereum Fundamentals. Today's topic is: Introduction To Mining Ether.
Let's recap what we learned in the previous video.
We looked at Geth, the command line interface for Ethereum.
We learned how to install the latest version of Geth for Windows.
In the lab session, we saw how to set up Geth, and create a private blockchain.
Lastly, we created out first Ethereum account.
So let's look at our goals for today.
We will start with an overview of ether.
Next, we will learn about mining ether, which is one of the most crucial concepts in blockchain technology and crypto currencies.
Finally, we will continue our lab, where we will learn how to create ether.
Ok, let's dive into today's topic. What is ether, what is mining, and how are the two related?
What is ether?
Simply put, ether is the “Fuel for operating Ethereum”. As we saw in the previous video, computers that run Ethereum are called nodes. These nodes need a way to be paid for "renting out" their resources, namely, computational power, storage and networking, in order to keep Ethereum up and running.
But this needs to happen without the exchange of traditional currency, given that Ethereum does not rely on a third party, like a state-backed central bank.
To solve this problem, ether is used to compensate these nodes. Think of it as a token of value that is accepted by all nodes on the Ethereum network.
Now, assuming that you have some ether, what can you do with it?
If you are a developer, who is creating applications on Ethereum, you need "space" on the Ethereum blockchain to store and run your applications.
This means, you need a way to "rent space" on the blockchain. Ether is used to compensate nodes, to provide space in the blockchain for you. We will explore this mechanism, also known as "Gas", in detail later.
Lastly, Ethereum can be traded for other currencies, including crypto currencies such as Bitcoin, or traditional currencies such as the US Dollar. Several exchanges are available online, that let you do so.
So, how is new ether created?
Ethereum relies on the growth of its blockchain. Unless new blocks containing transactions are added to the blockchain, Ethereum becomes useless.
How are these blocks created? These blocks are not created by a single node. They are created using a competition.
Ethereum nodes compete with each other to create the next block that will be added to the blockchain.
They perform complex calculations, known as hashing algorithms, that require a large amount of time and effort to generate the "right answer".
The winning node, the one who comes up with the "right answer", is rewarded with new ether, that is credited to their account.
Therefore, this process that results in the "Creation of Ether" is called "Mining”.