Ethereum is a groundbreaking blockchain platform that extends well beyond the concept of digital currency. It empowers developers to build decentralized applications (DApps), it allow for the execution of secure smart contracts, and the creation of unique digital assets like non-fungible tokens (NFTs).
This guide will cover everything you need to know: Ethereum’s origins, its unique features, the move from proof-of-work to proof-of-stake, the exciting upgrade to Ethereum 2.0, and both the potential and the challenges this technology brings.
Whether you’re just starting your Ethereum journey or looking to expand your knowledge, this guide will shed light on this transformative technology.
What is Ethereum?
Ethereum, at its core, is a decentralized open-source blockchain platform renowned for its ability to execute smart contracts. Unlike centralized systems, Ethereum operates on a vast network of computers around the globe which ensures maximum security and resilience against tampering.
Smart contracts are the foundation of Ethereum’s innovation.
These are self-executing contracts containing the terms of an agreement, directly written into lines of code. This allows for trustless transactions and agreements between parties to be executed without the need for intermediaries.
The Ethereum platform enables developers to build and deploy decentralized applications (dApps). These applications leverage the power of blockchain for various use cases, such as finance, gaming, identity verification, and more.
Ethereum’s Origins
The Ethereum story starts with the vision of Vitalik Buterin, a programmer captivated by blockchain’s potential to move beyond mere digital currency.
In late 2014, Vitalik Buterin published the Ethereum whitepaper, a document that captured his ambitious vision for blockchain technology. This concept quickly gained traction, securing over $18 million in funding to fuel its development.
This funding was the first ever case of an ICO (Initial Coin Offer).
The first live version of Ethereum debuted in July 2015. This launch proved monumental, enabling the creation of decentralized applications. From this point forward, Ethereum firmly established itself as an essential building block of the decentralized web, a testament to innovation in the digital world.
How it Compares to Bitcoin?
Bitcoin and Ethereum are the two most prominent cryptocurrencies, but they have significant differences. Understanding these differences will help to clarify the unique role Ethereum has in the blockchain world.
Similarities:
- Decentralization: Both are built on decentralized blockchain technology, eliminating middlemen and giving users control over their assets.
- Cryptography: Both use cryptography to secure transactions in the blockchain and uphold network integrity.
- Open-Source: Both projects rely on open-source development, encouraging community contributions and transparency.
Differences:
- Purpose: Bitcoin primarily function as a digital store of value and medium of exchange. Ethereum goal is to be a world decentralized computer.
- Consensus Mechanism: Bitcoin uses Proof-of-Work (PoW), where miners compete to solve complex puzzles to validate transactions. Ethereum has transitioned to Proof-of-Stake (PoS), where validators stake their ETH to secure the network. PoS is significantly more energy-efficient.
- Smart Contracts: Ethereum’s core innovation is the implementation of smart contracts. Bitcoin’s scripting capability is more limited.
- Programmability: Ethereum is a programmable blockchain, allowing for the creation of complex applications. Bitcoin is less flexible in this regard.
The best way to understand these two cryptocurrencies is to think of Bitcoin as digital gold, while Ethereum is a programmable decentralized app store.
Ethereum 2.0
Ethereum 2.0 refers to a major set of upgrades to the Ethereum blockchain. These upgrades are designed to significantly improve the network’s:
- Scalability: The ability to handle vastly more transactions per second, making it suitable for large-scale applications.
- Security: Efforts to strengthen the network’s resilience against attacks.
- Sustainability: A shift to a far more energy-efficient consensus mechanism.
Important Note: The term “Ethereum 2.0” is becoming less common. Instead, developers now refer to ongoing upgrades to the Ethereum blockchain. These key upgrades are rolled out in phases, reflecting the ongoing development.
Instead of a single software update, it helps to think of these upgrades as improvements to the core infrastructure of Ethereum. These upgrades are designed to support growing demand and maintenance of the network.
The Shift to Proof-of-Stake
In September 2022, the original Ethereum network merged with the Beacon Chain, a parallel Ethereum blockchain introduced earlier in 2020 to initiate the process of moving Ethereum from proof-of-work to proof-of-stake.
Here’s how proof-of-stake functions and why it matters:
- Staking replaces mining: Instead of computers competing to solve complex puzzles (as in PoW), PoS involves users “staking” their ETH as collateral to become validators on the network.
- Validators chosen at random: Validators are selected to propose and attest to new blocks based on the amount of ETH they stake and other factors. The more ETH staked, the higher the chance of being selected.
- Incentivizes honest behavior: Validators are rewarded in ETH for securing the network. However, acting dishonestly can lead to a loss of staked ETH.
Advantages of proof-of-stake:
- Energy efficiency: PoS drastically reduces energy consumption compared to PoW, making Ethereum more environmentally friendly.
- Lower barrier to entry: PoS doesn’t require specialized hardware, opening up the network to more participants.
- Enhanced security: Some argue that PoS strengthens network security because financial consequences for misbehaviour are significant.
The transition to proof-of-stake is a significant update to the Ethereum network, addressing scalability and sustainability while improving decentralisation.
The Upcoming Sharding Update
Ethereum’s popularity has highlighted its current limitation: it can only process a limited number of transactions per second before becoming congested. These congestions lead to high gas fees making transactions cost-prohibitive.
Sharding is a complex but crucial step in Ethereum’s evolution. It holds the promise of a truly scalable, affordable, and decentralized blockchain, capable of supporting widespread adoption and innovative use cases.
What are Smart Contracts?
Smart contracts are a revolutionary concept introduced by Ethereum. They are self-executing agreements written in code and stored on the blockchain.
Here’s how smart contracts work:
- The terms of an agreement are written into the code of the smart contract. This might include things like the transfer of funds, the release of goods, or the execution of any specified action at a specific time.
- The code is deployed on the Ethereum network. Once deployed, it creates a permanent and immutable record on the blockchain.
- The smart contract automatically executes the terms of the agreement when certain conditions are met. For example, if the contract specifies releasing funds upon the delivery of goods, this release will happen automatically once delivery is verified.
In short, smart contracts eliminate the need for intermediaries.
Here are the benefits to smart contracts:
- Automation: Contracts execute autonomously, reducing delays and errors
- Transparency: The code and execution are visible on a public blockchain.
- Security: Blockchain’s immutability makes them difficult to tamper with.
- Efficiency: They streamline processes and eliminate middlemen.
Popular Use Cases for dApps (smart contracts):
- Decentralized Finance (DeFi): A new breed of financial services like lending, borrowing, and trading, all operated on the blockchain.
- Gaming: Games where in-game assets and rewards are truly owned by players, and are verifiable on the blockchain.
- NFTs: Unique digital assets representing ownership of art, collectibles, music, and more, all secured on the blockchain.
- Supply Chain Management: Transparent tracking of goods and materials along the supply chain, enhancing efficiency and accountability.
- Prediction Markets: Platforms enabling users to bet on the outcome of real-world events.
- Digital identity & verification: Systems offering secure, user-owned identity verification on the blockchain.
Smart contracts have the potential to disrupt a wide range of industries by enabling secure, transparent, and automated transactions.
The Ether Coin
Ether (ETH) is the native cryptocurrency of the Ethereum network, and it plays several crucial roles within the ecosystem:
- Transaction fees: Every action on the Ethereum network, including deploying smart contracts and executing transactions, requires a fee. These fees are paid in ETH to the validators who maintain the network’s security.
- Unit of account: ETH is the primary unit of value within the Ethereum ecosystem. It denominates the cost of of services and goods offered.
- Security incentive: In Ethereum’s Proof-of-Stake (PoS) system, validators must stake their ETH to participate in the consensus mechanism.
Think of Ether as the fuel that powers the entire Ethereum machine. It’s essential for every transaction, interaction, and operation on the network.
The Role of Gas in the Network
Every action on Ethereum, from a transfer of ETH to executing a smart contract, requires a gas fee paid in Gwei. This is a very small fraction of an Ether. More specifically, one Gwei equals to one-billionth of an Ether (0.000000001 ETH).
Here’s how gas works:
- Gas as a unit: Gas is a unit used to measure the computational effort required to execute a transaction or smart contract.
- Complexity determines cost: Transactions and smart contracts with more complex operations (like large amounts of data or loops) typically require more gas to execute, resulting in higher fees.
- Users set the gas price: Users determine the price they are willing to pay per unit of gas. This price is denominated in Gwei (a tiny fraction of an ETH).
- Miners/validators prioritize: Miners or validators on the Ethereum network prioritize transactions with higher gas prices, incentivising users to pay a bit more for faster processing, especially during periods of network congestion.
Why Gas Fees are Important:
- Prevent spam: Gas fees discourage malicious actors from spamming the network with unnecessary transactions.
- Reward network participants: Fees paid in ETH go to miners or validators who secure the network, compensating them for their computational resources.
- Network regulation: Gas fees help regulate network usage and prevent overload. By carefully setting gas prices, users can influence the speed of their transactions.
Gas is crucial element for the functioning of the Ethereum network. It ensures a smooth-running network while rewarding those who work to maintain it.
The Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine (EVM) is the software component at the heart of Ethereum. It’s the environment where smart contracts are executed and where the state of the Ethereum blockchain is continuously computed.
Key functions of the EVM:
- Executes smart contract code: The EVM reads and processes the instructions written in a smart contract’s code. It ensures that the contract runs precisely as intended regardless of where or when is executed.
- Manages the state of Ethereum: The EVM updates the global state of the Ethereum network with each transaction. This includes things like account balances, smart contract data, and other network information.
Why the EVM matters?
- Decentralized Execution: Every node in the Ethereum network runs a copy of the EVM, ensuring consistent and tamper-proof execution.
- Standardisation: The EVM provides a standard environment for smart contract execution, regardless of the hardware or operating system.
- Platform Independence: Developers can build smart contracts that are compatible with any Ethereum node, promoting a robust ecosystem.
- Turing-complete: The EVM can theoretically handle any computation, offering vast possibilities for developers.
Think of the EVM as the global supercomputer that powers Ethereum blockchain network and its vast universe of decentralized applications.
Conclusion
Ethereum’s evolution mirrors the ever-changing nature of technology.
While challenges remain, Ethereum has consistently demonstrated its resilience and adaptability. As we witness the rise of Ethereum 2.0 and beyond, it’s clear that this journey is far from over. The future of Ethereum is decentralized, it’s trustless, and ultimately, it’s in the hands of its users and builders.