Ethereum is the most widely known blockchain project besides Bitcoin, not only because of its market cap value but what it offers to the world: a decentralized blockchain platform that runs immutable smart contracts.
Bitcoin gave the world blockchain technology, the ultimate building block which is the underlying foundation of most cryptocurrency projects in existence, including Ethereum. On the other hand, Ethereum went a step further and introduced the first iteration of self-executing contracts, better known as smart contracts.
A new vision has emerged with the advent of smart contracts: decentralized applications and organizations that run precisely as they are programmed, without intermediaries.
Join us on this Deep Dive to understand how the Ethereum protocol is opening a whole new world to developers and their users; and what lies on the road ahead.
The Beginning of Ethereum
Vitalik Buterin, the creator of Ethereum, became fascinated by blockchain technology through Bitcoin in 2011. After a few years, he found himself on the cusp of realizing a groundbreaking project that would soon take the decentralized world by storm.
In 2013, he released the whitepaper for the Ethereum project. A presale went live in August 2014, and the genesis block was mined on July 30th, 2015.
Ethereum’s Smart Contracts
The traditional equivalent of a contract stems from an agreement or relationship between parties that is enforceable by the law.
Smart contracts similarly enforce agreements or relationships through pre-programmed code. Contrary to traditional contracts, smart contracts don’t need enforcement because the underlying code executes the decision initially set by its creators.
Ethereum’s smart contracts are completely immutable because the data is stored on the distributed ledger of the blockchain. The smart contract doesn’t come into play until an event occurs that triggers the code that allows it to execute its command.
Decentralized Applications and The Fuel That Powers it
The point of Ethereum’s blockchain platform is to facilitate a vast array of decentralized applications. These applications, also known as “dApps,” range from the simplicity of a future contract settlement to a fully autonomous organization.
Each operation that a client requests from the network must pay a fee to incentive those that contribute hash power and secure the overall Ethereum network.
Besides security, these fees ensure that developers produce quality code. If developers write inefficient code, costs will rise to unsustainable levels.
The Ethereum Virtual Machine (EVM)
The EVM is responsible for many of Ethereum’s most essential functions such as its consensus mechanism, zero downtime, immutability, high levels of fault tolerance, and the execution of code.
The EVM acts as a runtime environment for smart contracts in Ethereum. It resides in isolation from the rest of the network, and even smart contracts have limited interactions with other smart contracts. Once the code for smart contracts transitions into an EVM compiler, it’s then moves to the Ethereum blockchain.
The EVM is seen as a type of “world computer” because all nodes on the network must run it. Due to this, every node in the world has the exact same information and maintains its consensus across all nodes. This, however, bottlenecks the speed of the Ethereum network.
Block rewards and transaction fees incentivize miners to provide computational power. Currently, the block reward for miners is 3 ETH. In January 2019, the block reward reduction will be 2 ETH per block.
Mining ETH involves searching for a nonce, a random slice of a dataset, that is below a prescribed difficulty threshold. As the amount of hash power increases, so does the difficulty.
The search for the nonce is computational-heavy, but the verification of the solution is straightforward and cheap. This method makes a 51% attack by malicious actors economically unfeasible.
Ethereum’s Transition to Proof of Stake
This new consensus model will no longer be computational-heavy. Rather than miners, there will be stakers. Rather than expensive ASICs and GPUs, stakers will need to stake their ETH into a contract to participant in the validation of blocks.
The chance of solving a block is proportionate to the staked amount. Therefore the more ETH will result in a greater chance of solving a block and reaping the reward.
This method thwarts malicious actors because it’s economically unfeasible to own 51% of the ETH in circulation. Additionally, since ETH is necessary to stake to form a consensus, anyone found acting against the good of the system will have their stake revoked. It, therefore, keeps honest stakers incentivized and malicious stakers unable to participate.
This transition will also lower the effect of power-hungry PoW mining since staking will necessitate meager power requirements.
Ethereum’s Programming Language
Ethereum has its own unique smart contract-oriented programming language, called Solidity. Solidity uses bytecode that transitions to the EVM. Solidity is the product of Gavin Wood and Christian Reitwiessner.
Once the realization of the possibilities that arose from Ethereum’s smart contracts, developers began marketing initial coin offerings for a vast amount of blockchain projects. There have been ~1,419 ICOs that have raised ~ $20 billion in the last two years.
ICOs are the primary mechanism in which projects acquire capital to build their projects. Most ICOs raise money in ETH or BTC, and as the market has seen, there can be a downside to this once these projects decide to cash out.
Many of the projects that had ICOs were dApps based on the Ethereum network. Projects were even building their initial infrastructure on Ethereum only to then move into their own blockchains at a later time.
Nonetheless, the ability to crowdfund on Ethererum has a low barrier to entry and is a unique method for developers and businesses alike to bootstrap a project. Since its inception, Ethereum is the go-to platform where users can build a limitless amount of applications.
The ICO mania showed us a system being taken advantage of, but as with any new technology, it must first stumble before it genuinely finds its legs.
Starting with the CryptoKitty debacle of 2017, where a dApp geared toward collectible digital kittens took the crypto community by storm and put Ethereum’s lack of scalability on full display.
Currently, Ethereum is only able to handle 15-25 transactions per second. Although this is much higher than Bitcoin’s 4-7 transactions per second, it still cannot compete with institutions such as Visa.
This is all set to change once Ethereum is able to implement its long-awaited upgrades, such as Serenity. This upgrade will feature PoS and sharding, a method of compiling data into smaller subsets to create a significantly more scalable network.
Public, Consortium and Private Ethereum Blockchains
The majority of the use on Ethereum is through its public blockchain. This public chain is transparent, there is a vast amount of node operators, and users can make transactions freely on the network. This is the Ethereum that the majority of users know.
Consortium blockchains are not spread out, but instead, a small group of node operators owns them. This type of blockchain is seen a semi-decentralized.
Private blockchains, such as Quorum (J.P Morgan), use a form of Ethereum but are not open to the public. These are enterprise-ready systems solely for the benefit of a specific group of participants.
Institutions and users alike have a tremendous amount of respect for Ethereum because its possibilities are limitless. The door to decentralized applications is open to anyone willing to learn. The vast majority of developers build on its network, and some of the brightest minds commit themselves fully to the project.
Although Ethereum lost its footing in the ICO stampede, we can only recommend all of our readers to highly consider Ethereum for its long-term value. Just as Bitcoin gave the world the blockchain, Ethereum gave the world the flexibility of smart contracts.