AllY Archives | Page 74 of 76

Nov

2021

What Are Nodes? 7 Types of Blockchain Nodes

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Nodes are critical aspects of blockchain security. Broadly speaking, a cryptocurrency node is a participant in a blockchain network. Without blockchain nodes, there can be no blockchain.

The key feature that makes blockchain technology unique, and part of why cryptocurrency has been so revolutionary, is decentralization. Bitcoin and most other cryptocurrencies aren’t controlled by a central server or group of servers. Instead, the network functions in a peer-to-peer (P2P) manner. People interact with each other directly rather than through a third-party intermediary, thanks to network nodes.

Recommended: How Do Bitcoin Transactions Work?

How Do Blockchain Nodes Work?

For decentralization to work, there has to be a way for the network to maintain its integrity. Everyone has to be assured that all transactions are valid and that no one on the network is cheating by double spending or reversing transactions.

The process of everyone on the network agreeing that transactions are valid in the absence of a central authority is known as “achieving consensus.” It is the network nodes that achieve this consensus among users, helping to make the blockchain secure.

Consensus Algorithms

Consensus refers to the rules by which a blockchain network operates and confirms the validity of information written in blocks. Confirming this information can be complicated with large networks involving large numbers of people, hence the need for a consensus algorithm.

The original consensus algorithm is Bitcoin’s proof-of-work (PoW) algorithm. Proof-of-Stake (PoS) is another popular consensus algorithm that works somewhat differently but seeks to achieve the same goal. Many DeFi protocols utilize PoS. Both algorithms rely on full nodes for the validation of transactions and enforcement of network rules.

For the sake of simplicity, in this article we will assume that someone is interested in learning about Bitcoin nodes that run on PoW.

Anyone can download the entire Bitcoin blockchain and validate blocks. This increases both the security and the decentralization of the network, as more copies of the ledger come into existence and can be referenced by others. Bitcoin nodes can be run by anyone in the world with the proper hardware and an internet connection.

7 Types of Blockchain Nodes

To recap: A node is one computer in a network of many that follows rules and shares information.

The term “node” is sometimes used interchangeably with the term “full node,” but they are not the same. A “full node” is a computer in the Bitcoin network that stores and synchronizes a copy of the Bitcoin network’s entire blockchain history.

Full nodes are important for several reasons, not the least of which being that they vote on proposed changes to the network. When more than 51% of full nodes don’t agree on a proposal, it gets skipped. Sometimes this leads to a hard fork, as was the case in 2017 with the Bitcoin Cash fork.

Recommended: What Happens When Bitcoin Forks?

While there are several types of full nodes, there are also lightweight nodes. Below, we’ll highlight both lightweight and full nodes.

1. Light Nodes

Lightweight nodes or “light nodes” do not hold full copies of the blockchain. Light nodes only download blockheaders, saving users significant download time and storage space. Nodes of this nature depend on full nodes to function and are used for simplified payment verification (SPV).

2. Archival Full Nodes

Most often, when someone uses the term “full node,” they are referring to an archival full node. This is the primary node type that forms the backbone of a blockchain network. Archival full nodes are servers that host the entire blockchain, with every single transaction recorded in their databases. The main task of these nodes is to validate blocks and maintain consensus.

Archival nodes can be broken down further into two subcategories: nodes that can add blocks to the chain and those that cannot.

3. Pruned Full Nodes

A pruned full node is one that saves hard disk space for its users by “pruning” older blocks in the blockchain. This type of node will first have to download the entire blockchain from the beginning. After that, it will begin deleting blocks beginning with the oldest and continue until the node only holds the most recent transactions up to a set size limit. If a node operator were to set the size limit to 250 MB, then a pruned full node would hold the most recent 250 MB worth of transactions.

4. Mining Nodes

In crypto mining, miners are either full or light nodes that try to prove they’ve completed the work required to create a new block. This is where the term “proof-of-work” comes from. To accomplish this task, miners have to either be an archival full node themselves, or get data from other nodes to learn the current status of the blockchain and how to work on finding the next block. (Those who seek to run mining nodes might want to take into account crypto mining electricity costs.)

5. Authority Nodes

Authority nodes are used by consensus algorithms for networks that aren’t fully decentralized, including Delegated Proof of Stake and Proof of Authority. In these networks, either the development team will decide how many authority nodes are needed and who will run them, or the community could vote for the decision. The task of these nodes is the same as full nodes in other networks.

6. Masternodes

Masternodes cannot add blocks to a blockchain. They only serve to validate and record transactions. Running a masternode can earn users a share of the network’s rewards. Doing so requires first locking away a certain amount of money in the form of the network’s native token.

7. Lightning Nodes

Lightning nodes don’t quite fit the mold of any of the nodes discussed so far. The main idea of a lightning node is to establish a connection between users outside of the blockchain, enabling what are referred to as “off-chain transactions.”

This reduces the load on the network and allows for much faster and cheaper transactions. Bitcoin lightning transactions typically cost 10 or 20 satoshis, or the equivalent of a fraction of a penny.

How to Set Up and Run a Full Node

Running a full blockchain node comes down to the following:

• Choose a blockchain (Bitcoin, for example)

• Acquire the hardware and/or software needed

• Start running the node

The first thing required for running any kind of node is the necessary hardware. This often involves a small computer like a Raspberry Pi. There are three different ways to run a full node. They include:

• Hosting a node in the cloud via Amazon Web Services or Google Cloud

• Running a node on your local device (which requires a lot of hard disk space and RAM)

• Using a “node-in-a-box” solution or building one from scratch.

After that, it’s just a matter of maintaining and monitoring the node.

The Takeaway

People might choose to run full nodes for a variety of reasons, including increased privacy or a desire to support their network of choice. Lightweight nodes and full nodes alike come with wallets that can be used for making cryptocurrency transactions. Full nodes provide greater privacy, as outside observers have a hard time distinguishing between transactions being processed by the node and transactions sent by the person running the node.

Photo credit: iStock/A stockphoto

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

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Nov

2021

What Is a Bond Option? Definition & Examples

By Brian O'Connell | Growing Wealth, invest, Investing, Terminology | Comments Off

A bond option allows the contract holder to buy or sell an underlying investment (in this case, a bond) at a specific price and at a specific time. While considered less risky than stock options, bond options still typically carry higher risk than more traditional investments.

Like all options, bond options are derivative securities, used by investors to bet on the direction of an underlying security. Understanding what bond options are and how they work can help you understand these risks and determine whether bond options make sense for your portfolio.

Here’s a closer look at bond options, and the risks and rewards they bring to investors.

What are Bond Options?

A bond option is a legal contract to buy and sell underlying bond assets, usually via a call bond (i.e., the option to buy an underlying bond) or a put bond (the option to sell a bond) at a specific price (known as the “strike price)” at or before a specific time deadline (known as the “expiration date”).

For example, an investor might purchase a bond call option with a strike price of $900. The level value (also known as “par value”) of the underlying U.S. government bond is $1,000. Let’s say market conditions push the value of that bond up to $1,100. In that scenario, the option holder has the right to buy the government bond at $900 – even as the value of that underlying bond now stands at $1,100.

Investors typically trade options, including bond options, through over-the-counter exchanges. Bond options are also typically available wherever U.S. Treasury bonds are sold in fund form through investment companies.

Recommended: A Beginner’s Guide to Options Trading

Pros and Cons of Bond Options

There are benefits and drawbacks to incorporating bond options in your portfolio.

Pros of Bond Options

Higher return potential. As discussed in the example above, when executed well a bond options strategy can increase a trader’s gains on a particular investment. Bond options can also protect against downside risk. Investors often use bond options as hedges against more risk-laden investment strategies.

Risk hedging. Bond options investors can leverage derivative contracts to take advantage of interest rates and other short-term drives of investment performance. Investors can also lean on bond options to take advantage of pricing variations in options pricing or to position their portfolios ahead of major geopolitical events, like presidential elections, potentially big Federal Reserve policy decisions, or major recessions and other powerful economic forces.

Cons of Bond Options

The risk of non-exercise. Bond options investors may do well to let an options contract expire rather than execute a trade that goes awry and loses money. While a bond options investor isn’t obligated to exercise their bond options contracts, letting a contract expire means the original money used to buy or sell a bond option is gone forever. So, too, are the fees investment companies charge to handle options trades.

The risk of unlimited investment loss. While call options provide an investor with the possibility of unlimited gain if the underlying security rises in value, that same investor faces unlimited loss potential if that investor is selling a call or put option. If the underlying assets plummet to a value of zero, the options investor could face massive financial losses.

The risk of losing money quickly. As options, by nature, are short-term investing instruments, investors need to have extensive knowledge of near-term investment price movements to minimize the downside risk of investing in bond options. Often, traders make decisions about their options strategy based on a short time horizon. That means all options investors must master two key trading objectives – knowing the right time to purchase an options contract and knowing when to sell that contract, or cut losses by allowing the contract to expire without exercising the option to buy or sell by the expiration date.

Recommended: 10 Options Trading Strategies

Types of Bond Options

Bond options offer investors the right to buy or sell (via calls and puts) an underlying investment security at a specific time and at a set price.

Call Option Bonds

With a bond call option, if the price of the underlying bond option rises in value, the contract holder can earn a profit on the call by exercising the option to purchase the asset (with a call option) at a lower price and then selling it when the underlying asset goes up. A call option is in the money if the strike price is lower than the current market price of the underlying bond.

Bond Put Options

A bond options investor who buys believes a bond will go up in price may purchase a put option or put bond. With that option, buy the asset at the current low price and sell it at the rising strike price, assuming the price moves in the direction the trader had hoped. What a bond investor strives to avoid is being on the wrong side of an options trade, i.e., selling at a below market rate or buying at an above-market rate.

If an investor anticipates that bond prices will decline, given future expected market conditions, they’d purchase a put option. If the level value of the underlying bond option were$1,000, a bond put option gives the contract holder the right to sell the option contract at the strike price of $900 – on or before the expiration date. If bond prices fall, the underlying bond is now valued at $870. Now, that bond option investor can exercise the sale of the options contract at the strike price of $900, even as the bond’s value has fallen to $870. That guarantees a big profit for the investor, given the outsized nature of options contracts.

Embedded Bond Options

Embedded bond options are bonds in which the holder or the issuer has a right to take a specific action with a certain period going forward. Examples of embedded bond options include call provision, convertible provisions, and floored floating-rate provisions.

Callable Bond Options

Callable bonds are one type of embedded bond option. With callable bonds, the issuer has the option to repay investors the face value of the bond before the maturity date.

Bond Options Pricing

Given all the variables, including the current price and future price of a bond, volatility levels, interest rates, and time to expiration, it can be very complicated to properly price a bond option. Investors rely on several different mathematical formulas for this, including the Black-Derman-Toy Model and the Black Model.

The Takeaway

Options traders may use a bond option as a hedge against economic volatility in key areas like interest rates, currency rates, and bond yield rates, a bond option can be a useful portfolio management tool. However, there are plenty of other types of investments that an investor can use when building a portfolio, without trading bond options.

But for investors who are curious to start options trading, SoFi offers a user-friendly platform to do so. With an intuitive and approachable design, you can trade options on the web platform or through the mobile app.

Trade options with low fees through SoFi.

Photo credit: iStock/PeopleImages

Nov

2021

What Is Bancor (BNT)? How to Buy BNT Crypto

What Is the Bancor Network Token (BNT)? How Does It Work?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Developers created the Bancor blockchain to help provide liquidity for token swaps. It does this by providing economic incentives (money) to users who lock up their crypto in pools. The incentives come in the form of fees paid by traders who buy and sell the locked-up tokens.

All of this happens automatically via smart contracts, without any financial institution managing the system. Cross-chain conversion is what’s known as an automated market maker (AMM), a cornerstone of the decentralized finance (DeFi) ecosystem. AMMs like Bancor aim to make more niche altcoins that have smaller market caps more liquid by making it lucrative for users to sustain pools of tokens, and allowing for the swaps to take place without relying on a large exchange.

Bancor has one feature other DeFi platforms do not – interoperability. Bancor works across both the EOS and Ethereum blockchains, whereas most DeFi protocols only work on Ethereum or another, similar smart contract platform.

Having launched in 2017 when DeFi was still new, Bancor is one of the more established AMMs. Other types of cryptocurrencies and platforms that leverage more than one crypto or blockchain were less common back then.

Here in this guide to crypto, we’ll explore how the Bancor cryptocurrency works.

History of the Bancor Network Token (BNT) Crypto

In 2017, the Bancor project raised $153 million in a token sale, managed by Bprotocol Foundation, a Swiss non-profit organization. Participants of the token sale received half the tokens, while the other half went to the founders of the project, Galia and Guy Benartzi. Silicon Valley venture capitalist Tim Draper is also an investor in the project.

How Does BNT Work?

Bancor automates its service by incentivizing users to deposit crypto into pools. A pool has two components – a token trading pair and a reserve of the BNT crypto.

Users deposit coins into a pool and receive new pool tokens in exchange. These pool tokens allow the user to get back their original funds they’ve locked away in the protocol.

BNT crypto serves as an intermediary between the trades of each token. In other words, the first token converts to BNT, and then BNT is converted to the second token. Because the process happens through a smart contract, some people refer to BNT as a “smart token.”

These automated features of the network may appeal to some traders as a security feature, since the crypto market is still largely unregulated.

Bancor also allows users to lock in one token at a time as opposed to a pair. Other AMMs sometimes require users to lock up pairs of tokens in certain proportions to each other. In a Bancor liquidity pool, users have the option to deposit ETH or DAI, for example. Some alternatives to Bancor would require a deposit of both ETH and DAI.

It’s worth noting that users also have to deposit BNT into the Bancor pool of their choice.

Using liquidity pools and the BNT token in this manner differentiates Bancor from some other decentralized applications, which require each trade order to match with another order. Instead of having to wait for a buyer or seller, Bancor users can access liquidity right away, thanks to the BNT smart token.

Developers overhauled the platform in 2020 to make it more user-friendly.

💡 Recommended: What Is a Liquidity Pool?

The Use of Price Oracles

In order to access accurate pricing information for the coins locked into the protocol, Bancor V2 uses a solution called an “oracle.” Oracles send real-time price information from an external source into an existing blockchain.

With this price data, the pools on Bancor can automatically adjust token proportions in alignment with changes in price. Liquidity providers can then withdraw tokens of the same value they originally deposited.

BNT Coin Price

At the time of writing, BNT was the #104 cryptocurrency by market cap and trading at $4.29 per BNT. This represents an approximately 150% increase year-to-date, as the token began 2021 trading at around $1.30.

The all-time high for the BNT price was about $9.30, reached in January 2018. The all-time low was about $0.14, reached in March 2020. That kind of volatility could make a difficult coin to HODL long-term.

How to Use BNT

You can use BNT tokens to exchange one type of crypto for another without needing a third-party. This may help traders who hold low liquidity tokens that don’t have a lot of trading volume on large exchanges.

BNT holders can also earn interest by locking up their tokens in the protocol. Those who stake tokens receive a portion of the trading fees incurred by traders using the platform.

BNT Coin Storage

BNT holders can keep their coin in any crypto wallet that supports ERC-20 tokens. ERC-20 is a type of standard for tokens that run on the Ethereum network. Many utility tokens fall under this category. Popular Ethereum wallets like MyEtherWallet support storage of ERC-20 tokens like BNT.

Traders might also hold their BNT tokens on an exchanged-hosted wallet. After buying coins on an exchange, the exchange will automatically hold it in a wallet on behalf of the investor. This method of storage is only as secure as the exchange itself, and is generally not advised for large amounts of funds held over the long-term.

How to Buy BNT Cryptocurrency

Buying Bancor network token is similar to buying other digital assets. Doing so involves a few simple steps.

• Step 1: First, choose an exchange that supports BNT trading.

• Step 2: Sign up for an account on the chosen exchange.

• Step 3: Fund your account. Make sure the exchange supports a trading pair of the currency you deposit. For example, if the exchange only supports BTC/BNT, you will have to deposit bitcoin. If it only supports USD/BNT, you will have to deposit U.S. dollars, and so on.

• Step 4: Place a buy order for BNT. Doing so could work differently depending on the exchange. Beginner-friendly exchanges allow users to simply place an order for a certain amount of BNT and have it instantly executed at the current market price. Other exchanges require users to select an existing ask (sell) order from the order books, and buy at that price, or create a new buy order at a price of their choosing.

• Step 5: Optionally, users can then move their BNT off of an exchange, into their own crypto wallet.

• Step 6: As with all assets, traders must keep track of their transactions so that they can declare the value of their crypto holdings at tax time.

BNT can also be acquired directly through the Bancor smart contract. Users can convert any supported ERC-20 token on Bancor’s web app.

The Takeaway

BNT is a smart token that facilitates decentralized trading through an automated market maker by functioning as a reserve currency. It may be a way for some investors to bet on its technology, or to build a diversified portfolio of cryptocurrency.

Photo credit: iStock/gradyreese

Nov

2021

What is Distributed Ledger Technology (DLT)?

Distributed Ledger Technology (DLT): What It Is and How It Works

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Distributed ledger technology (DLT) provides a new way of storing data and processing transactions, keeping a record of transactions across multiple computers.

DLT and blockchain are the building block of what’s become known as the “internet of value.” These technologies allow people to transfer value between themselves in a peer-to-peer fashion without needing a centralized third-party intermediary. This is a new digital frontier that has only become widespread since the invention of Bitcoin in 2009.

In this article, we’ll answer questions like what is a distributed ledger, how does distributed ledger technology work, and what are the pros and cons of DLT.

What is Distributed Ledger Technology?

A distributed ledger, sometimes referred to as a shared ledger, is a type of digital record that uses independent computers to record, share, and synchronize transactions.

Whereas a traditional ledger would be contained on a centralized server, distributed ledgers have many different servers in different geographical areas. These servers are referred to as “nodes.” In a blockchain, data gets organized into blocks, which are chained together in a way that makes them immutable, meaning the record can’t be tampered with.

All the computers work in concert to agree that transactions are valid in a process called “achieving consensus.” The entire record of transactions is then kept on file with each computer in the network forever.

DLT is instrumental in Bitcoin transactions, which allow for the peer-to-peer transfer of monetary value over a blockchain. But there are also other potential use cases for DLT and blockchain. Decentralized finance (DeFi), which can bring financial services to those without access to the traditional financial system, is one sector that could be transformative for the world economy.

The Difference Between DLT and Blockchain

While all blockchains are distributed ledgers, not all distributed ledgers are blockchains.

Blockchain technology involve the creation of a specific type of distributed ledger that often establishes an immutable database within a decentralized network that uses cryptography to record and validate all transactions through the use of a specific consensus mechanism. Transactions are processed in groups known as “blocks,” with each block being cryptographically linked to the one that came before it, giving rise to the term “blockchain.”

One fundamental way that blockchains differ from distributed ledgers is consensus. A blockchain has to get all of its nodes to agree that transactions are valid, which is referred to as achieving consensus. Distributed ledgers can be designed in such a way as to achieve this goal without validation from the network as a whole.

Pros and Cons of Distributed Ledger Technology

There are pros and cons of using distributed ledgers. Here are the highlights.

Pros of DLT

The upside of distributed ledger technology includes increased security and transparency, and the lack of need for third-party intermediaries. Let’s do a deeper dive.

Security

A distributed ledger removes the possibility of a single attack vector. From a cybersecurity standpoint, this is an outstanding benefit. With a centralized database, attackers only need to compromise one computer or system. With a distributed ledger, attackers would have to compromise the majority of nodes in the network. This can be difficult if not impossible to accomplish.

Transparency

Most distributed ledgers, including blockchains, are fully public, meaning anyone can see their activity. The records kept by a distributed ledger can only be altered by a party in control of at least 51% of the network’s computing power.

Recommended: What Is a 51% Attack?

No Need for Intermediaries

Using a distributed ledger tends to reduce operational inefficiency. Cutting out third parties can save time and money. These ledgers are beneficial for financial transactions, which currently come with high costs and long wait times.

DLT also has the potential to contribute to positive change in industries like clean energy, manufacturing, and government financial management systems.

Cons of DLT

There are some downsides of distributed ledger technology.

Lack of Agility

Because they are decentralized, making changes to blockchains can be a slow and cumbersome process. A majority of nodes on the network have to agree to any proposed changes.

The Bitcoin Cash (BCH) hard fork of the Bitcoin network in 2017 exemplifies this kind of conflict. Some people wanted to increase the block size for Bitcoin’s blockchain, leading to greater transaction throughput, while others wanted to implement different software changes to achieve similar ends. The result was a hard fork, where some of the computers in the network adopt a slightly different protocol and go on to create their own blockchain.

Potential for Centralization

Distributed ledgers can also take a centralized, permissioned form, and this can create problems. When under the control of a single entity, a distributed ledger could empower a person or organization to do just about anything with the data at their disposal. They would be able to decide who gets access to the system and who doesn’t, while possibly presenting the system as democratic. Permissioned ledgers also require participants to be approved before they can participate in the network.

Recommended: What Happens When Bitcoin Forks?

DLT in Blockchain

A blockchain is a specific type of decentralized, permissionless distributed ledger that groups transactions into blocks. Each block gets attached or “chained” to the previous block, creating a chain of blocks, i.e., a blockchain.

Blockchains are decentralized because their distributed ledgers must achieve consensus across its nodes, meaning no single entity can control the network on its own. Blockchains are permissionless because anyone can use them without needing to obtain permission from a third-party intermediary.

DLT in Finance

DLT has the potential to bring fundamental change to the financial sector, increasing efficiency, reliability, and resiliency in many areas.

The use of DLT could lead to solutions for problems that have plagued financial institutions for many years. Central banks are exploring the possibility of their own central bank digital currencies (CBDCs) using DLT or blockchain. This would, in theory, give central banks direct control over monetary policy and money creation, possibly bypassing national treasuries.

In early 2021, China became the first country to run a real trial of its CBDC, the digital yuan. The digital currency was distributed to a number of digital wallets held on the smartphones of Chinese citizens.

A central bank digital currency would presumably be issued on a permissioned distributed ledger or blockchain, making it subject to the cons of the tech detailed in the section on pros and cons of DLT.

The Takeaway

A distributed ledger is a type of database that gets duplicated, synchronized, and shared across multiple regions, users, and servers without needing centralized confirmation or a specific data structure. Blockchains, for example, are distributed ledgers. But distributed ledger technology could have broader applications, within finance and beyond.

Photo credit: iStock/andresr

Nov

2021

How Do ETH Transactions Work? 3 Types of Transactions

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

When most people think of a crypto transaction, they think of the simplest type: a token transfer, in which one wallet sends coins to another wallet. On Ethereum, users can send ETH to each other in this manner. These transactions function in the same way as those on Bitcoin or other networks do.

But thanks to its smart contract capability, Ethereum has two additional types of transactions that can be performed on its network. These transactions involve deploying a smart contract, and interacting with contracts that have already been deployed.

What Is an Ethereum Transaction?

Ethereum transactions are like instructions that accounts give to the network. When an account sends a transaction, the state of the Ethereum network will be updated accordingly.

The simplest type of transaction is a token transfer, which involves transferring ETH from one account to another. Smart contracts also function through the use of Ether transactions. Each time a smart contract gets deployed onto the network, it must be done with a transaction. And each time someone interacts with a smart contract, this action also takes place through an Ethereum transaction.

Before we dive deep into each type of Ethereum transaction, here’s an overview of how ETH transactions work.

How Do ETH Transactions Work?

A transaction alters the state of the Ethereum Virtual Machine, and as such must be broadcast to the entire network. Nodes broadcast the request for a transaction to be carried out by the EVM. Once that happens, miners initiate the transaction and propagate the change in state to all the other nodes.

A transaction fee paid to miners must be included for the transaction to be mined and become valid. On Ethereum, transaction fees are called Gas.

What Are Gas Fees?

The term “Gas” is used to describe a unit of measurement for the amount of computational power needed for performing tasks on the Ethereum network. Because every Ethereum transaction requires computational power, transactions come with a cost. Gas is the fee needed to conduct an Ethereum transaction.

Gas fees must be paid in ether (ETH), the native currency of Ethereum. ETH Gas prices are denominated in a unit referred to as gwei, which is a term assigned to an amount of ETH equal to 0.000000001 ETH.

Recommended: How to Buy Ethereum (ETH)

What Information Is Included in an Ethereum Transaction?

While an Ethereum transaction looks relatively simple on the user end, there is quite a lot of information involved. A single transaction contains the following:

• Recipient: This is the address that will receive the transaction. For externally-owned accounts, the transaction will involve a transfer of value. For contract accounts, the transaction will result in the contract’s code being executed.

• Signature: This identifies the sender. The signature is generated when the transaction is signed by the sender’s private key.

• Value: The amount of ETH that will be transferred between the sender and recipient

• Data: An optional field to include any additional data (such as the bytecode for a smart contract)

• Gas Limit: The maximum number of Gas units that the transaction will be allowed to consume

• Max Priority Fee Per Gas: The amount of gas intended to serve as a tip to the miner who processes the transaction

• Max Fee Per Gas: The max Gas fee a user is willing to pay for the transaction to be processed

Types of ETH Transactions

Whereas blockchain networks can only transfer value, Ethereum can transfer value as well as handle “normal” smart contract transactions as well as internal transactions.

All Ethereum transactions include each piece of information listed in the section about what information is included in transactions. Both the information included in the data field and where the transaction is sent to differentiate one type of transaction from another.

Token Transfer

A token transfer is the simplest Ethereum transaction type. It involves one ETH account sending ETH to another. When someone sends ETH from their crypto wallet to a friend’s crypto wallet, a token transfer has taken place.

Normal Transaction

A normal Ethereum transaction deploys a smart contract on the Ethereum network. A smart contract is compiled into what’s known as bytecode and then deployed onto the network through a transaction.

In this type of transaction, the “to” field is empty, since no individual entity like a user’s wallet will be receiving the transaction. Instead, the “data” field includes the bytecode of the contract to be deployed.

Internal Transaction

An internal Ethereum transaction is one that executes a function on an existing smart contract. The main difference between this type of transaction and the others is that the “data” field contains a piece of code called a function selector. The account sending the transaction is known as a function executor, and the transaction gets sent to that of the smart contract account.

ETH Transaction Life Cycle

After a transaction is submitted, a series of events takes place:

1. A transaction hash gets cryptographically generated.

2. The transaction is broadcast out to the network in a pool of numerous other transactions.

3. A miner selects the transaction and includes it in the next block to verify the transaction and declare it “successful.”

4. The transaction receives “confirmations.” Each confirmation equals one new block created since the block that the transaction was a part of. The more confirmations, the more certain it is that the transaction will be properly processed by the network.

Sometimes recent blocks can get re-organized, which can make it appear as though the transaction wasn’t successful. But the transaction could just wind up being included in a different block. The likelihood of this happening decreases with each confirmation.

The Takeaway

Token transfers are one type of Ethereum transaction that work just like any other crypto transaction. Users can send each other coins over the blockchain using their Ethereum transfer ID without the need for any third-party intermediary.

The other types of Ethereum transactions could look very different from a user’s perspective, as it might not even be obvious that any transaction is happening. Interacting with smart contracts can take many different forms depending on the application. But under the hood, everything is being powered by an ETH transaction of some kind. The main thing that differentiates these transactions is the type of information contained within.

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