What is Ethereum? A Comprehensive Blockchain Handbook

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8 months ago

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Prominent entities like Samsung, Amazon, and Microsoft have embraced Ethereum. What qualities of Ethereum are drawing the attention of investors, entrepreneurs, artists, and corporations?

Ranked as the second-largest cryptocurrency following Bitcoin, Ethereum is hailed as the "mother of decentralized applications."

This piece encompasses fundamental insights into Ethereum, distinguishing it from Bitcoin, exploring smart contracts and their applications, and providing a beginner's guide to embarking on this innovative technology.

What is Ethereum?

Introduced in 2015, Ethereum is a groundbreaking open-source blockchain platform that has transformed our understanding and utilization of digital contracts and applications. At its essence, Ethereum operates as a decentralized network, powering smart contracts and decentralized applications (dApps) designed to operate without the risks of downtime, fraud, or interference from external parties.

In the dynamic landscape of the internet, Ethereum stands at the forefront of Web3, exerting influence across various sectors, notably in Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs). The disruptive potential of Ethereum lies in its ability to support a global, decentralized platform for currency and a new wave of applications, ushering in a fresh era of digital interactions.

It's crucial to acknowledge the role of Ether (ETH), Ethereum's native cryptocurrency, acting as the transactional fuel and computational service catalyst on the network. While a detailed exploration of Ether and its significance will follow in subsequent sections, its existence remains a pivotal factor in the functionality and allure of Ethereum.

This article will intricately navigate the diverse layers of Ethereum's multifaceted ecosystem, examining its numerous applications, distinguishing features from other blockchains like Bitcoin, and its pivotal role in shaping the future of the digital landscape. Join us on this exploration into the captivating realm of Ethereum, serving as the backbone of the Web3 industry.

How does Ethereum work?

Picture the Ethereum network as an expansive, potent, decentralized computer.

Empowered by computer code, it possesses the capability to execute nearly any task given adequate time, processing power, and instructions.

This versatility allows for the construction of a diverse array of applications on its blockchain, positioning Ethereum as the foundational infrastructure on which numerous blockchain-based projects operate.

Ethereum's Evolution: Embracing PoS through 'The Merge'

Ethereum's trajectory has been characterized by a commitment to continuous improvement, sustainability, and efficiency. In its early stages, Ethereum employed a Proof-of-Work (PoW) consensus mechanism, akin to Bitcoin. However, 2022 marked a momentous shift in Ethereum's evolution as it successfully transitioned from a PoW framework to a Proof-of-Stake (PoS) model in a groundbreaking event known as 'The Merge.'(Ethereum mining farm before Ethereum 2.0)

In September 2022, Ethereum achieved a significant milestone by seamlessly adopting a PoS blockchain. This transition not only marked a pivotal upgrade in Ethereum's journey but also represented a transformative event in the broader history of cryptocurrency.

While this shift did not directly impact Ethereum's transaction speeds or fee structures, it laid the essential groundwork for subsequent enhancements geared towards making Ethereum faster, more cost-effective, and overall more efficient.

An immediate positive outcome of this transition was the substantial reduction in Ethereum's carbon footprint, achieved by eliminating the need for energy-intensive GPU miners. This shift transformed Ethereum from a major energy consumer to a blockchain that is notably more environmentally friendly.

'The Merge' also ushered in notable changes to Ethereum's daily issuance. Post-transition, approximately 1,700 ETH entered circulation each day, a significant decrease from the previous issuance rate of 13,000 ETH per day under the PoW network.

How do Ethereum and Bitcoin compare?

Ethereum and Bitcoin, both titans in the blockchain domain, exhibit notable distinctions in functionality and structure, presenting distinct features and advantages:

Basic Similarities

• Both are not owned or regulated by a third party, such as a central bank.
• They employ blockchain technology to record and store transaction details.
• Both have digital currencies (BTC and ETH) that can be stored in cryptocurrency wallets.

Main Differences

• Transaction Speed: Ethereum boasts an average block time of 12 seconds, ensuring quicker transactions compared to Bitcoin's 10-minute average.
• Scarcity: Unlike Bitcoin, which follows a scarcity model with halving block rewards every four years, Ethereum maintains a consistent annual release of Ether.
• Consensus Mechanism: Ethereum recently transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS) through the 'Ethereum Merge,' rendering traditional mining obsolete. In contrast, Bitcoin persists in utilizing the energy-intensive PoW mechanism, where mining power directly influences network competitiveness.
• Dominance in dApps: Ethereum's pioneering invention of smart contracts positions it as the leader in the realm of decentralized applications (dApps). This innovation provides developers with a practical, democratic means to govern and monetize their content. Consequently, Ethereum-based dApps have disrupted various sectors, playing pivotal roles in gaming, gambling, decentralized finance (DeFi), exchanges, non-fungible tokens (NFTs), marketplaces, and even social media.

ETH: the ether token

Ether (ETH), the native cryptocurrency of the Ethereum network, emerged in 2015 as a pivotal element within Ethereum's open-source blockchain platform. Beyond serving as a digital currency akin to Bitcoin, ETH functions as the vital force behind executing commands and energizing applications on the Ethereum network.

Over time, ETH has transformed into a versatile token, playing a critical role in the expansive Ethereum ecosystem. Its utility extends beyond facilitating transactions, encompassing compensation for computational services on the Ethereum network, commonly known as "gas."

Presently, ETH serves as the economic foundation for Ethereum-based decentralized applications (dapps), serving as an incentive for developers and validators to uphold the network's security and integrity.

What can you do with Ethereum?

In addition to using ETH as a currency or a means of storing value, the majority of applications built on Ethereum fall under the category of decentralized applications, or dApps.

A dApp, short for decentralized application, operates on a decentralized peer-to-peer network, distinguishing it from applications that run on centralized servers (such as Uber or Twitter).

This inherent permissionless quality allows developers to freely experiment without the need for input from a central authority.

Here are some illustrations:

• DeFi (Decentralized Finance)
  Decentralized finance encompasses a range of financial services and products, including lending, borrowing, and interest earning. These services are accessible on public blockchains without the need for permission from a third party, such as a traditional bank.
• NFTs (Non-Fungible Tokens)
  NFTs are unique digital assets stored on a blockchain, rendering them impossible to replicate. Although other blockchains have introduced their versions of NFTs, the very first NFT was created on the Ethereum blockchain. These tokens can represent various items, from digital art to in-game assets and even tangible assets like real estate.
• DAOs (Decentralized Autonomous Organizations)
  DAOs operate without a traditional CEO; instead, they are collectively owned. The functioning and expenditure within the organization are encoded into the Ethereum blockchain through the use of smart contracts.
• Other Cryptocurrencies
  On the Ethereum blockchain, you can create your own cryptocurrencies, purchasable with ETH. Specific guidelines or standards, such as the ERC-20 standard, must be followed to ensure compatibility with online exchanges like the Blockchain.com Exchange. Notable examples of cryptocurrencies built on Ethereum include Tether and USDC, the two largest stablecoins in the crypto market.

ERC-20 and ERC-721 Tokens

Within the Ethereum ecosystem, two prominent token standards are ERC-20 and ERC-721. Launched in 2015, ERC-20 tokens simplify the process of generating new tokens on the Ethereum blockchain, featuring popular examples such as USDT (Tether) and UNI (Uniswap). These tokens find primary utility in fungible assets, where each token is indistinguishable from others, making them particularly suited for cryptocurrencies.

Conversely, ERC-721 tokens, introduced in 2017, enable the creation of non-fungible tokens (NFTs) like CryptoKitties and Cool Cats. In this framework, each token contains unique information, allowing it to represent distinct digital assets.

The array of token standards underscores Ethereum's flexibility, providing adaptable solutions for diverse digital assets.

How do you buy ETH?

Here's a straightforward breakdown of the process when someone intends to purchase Ether using blockchain technology.

1. Transaction Recording:  Every Ethereum transaction, along with the sender's public key, is documented in a publicly accessible ledger known as the blockchain. Each transaction incurs a 'gas fee' for the sender.
2. Proof of Stake Mechanism: The primary method for confirming and validating Ethereum transactions is through a mechanism called "proof of stake." In this system, individuals seeking to add new blocks to the chain must stake a minimum of 32 ETH and run specialized validator software.
3. Block Addition and Gas Fee Payment: Randomly selected participants are responsible for adding blocks to the blockchain in exchange for the gas fee. The comprehensive transaction ledger is then distributed to every computer connected to the Ethereum network.

Recap: Understanding Gas Fees
Ethereum "gas" refers to the fee associated with conducting a transaction or executing a smart contract on the Ethereum blockchain. The "gas fee" is denominated in fractions of ETH and varies based on the network's supply and demand dynamics during the transaction.
Recap: Exploring Proof of Stake
The recent Ethereum Merge denotes developers transitioning Ethereum's consensus mechanism from proof of work to proof of stake, ensuring the validity of each transaction and newly added block on the network.

How can you build on Ethereum?

Each node (a computer participating in the Ethereum network) possesses a copy of the Ethereum Virtual Machine (EVM).

The EVM functions as software resembling a decentralized "computer," capable of executing myriad projects through the utilization of "smart contracts."

What is a Smart Contract?

A smart contract is an automated and self-executing agreement wherein the terms between multiple parties are expressed as lines of code embedded in the blockchain.

In contrast to traditional contracts, which can be sluggish and reliant on trust with physical record-keeping, smart contracts leverage the transparency of a public ledger. This distribution across the blockchain network ensures the immutability of the agreement's terms, protecting them from tampering or alterations.

Think of smart contracts as digital "if-then" statements that seamlessly synchronize with external databases. If a specified condition within the contract is met, the agreement is automatically approved.

What industries use Ethereum smart contracts?

• Insurance
  AXA Insurance leveraged smart contracts to automate the payout process for flight delay insurance claims. By integrating smart contracts with air traffic databases, the system automatically disburses payments to eligible customers upon detecting a flight delay.
• Supply Chain
  Major retailers like Walmart have adopted smart contracts to trace the complete journey of products. This implementation enhances transparency in tracking product origins and promptly identifies any missing items in the supply chain.
• Real Estate
  In the realm of real estate, SMARTRealty, a Seattle-based company, has introduced smart contracts to record crucial information such as monthly payment details, contract duration, and automatic contract renewal directly onto the blockchain.

Exchanges and DeFi on Ethereum

In 2023, one of the most prosperous sectors within the decentralized application (dapp) industry is DeFi. The continually advancing financial applications rely on the unmatched security of the Ethereum blockchain to deliver their services. Here are some noteworthy Ethereum DeFi dapps and decentralized exchanges (DEXs) to be aware of:

• Uniswap: A protocol facilitating trading and automated liquidity provision on the Ethereum network.
• Curve: An exchange and DeFi savings tool tailored for stablecoins.
• MetaMask: A crypto wallet trusted by a user base exceeding 5 million worldwide.
• dydx: A leading DeFi platform specializing in margin and perpetual trading.
• Lido: Ethereum's largest liquid staking protocol.

NFT collections on Ethereum

The majority of highly successful NFT collections find their home on the Ethereum blockchain. Despite the explosive growth of the NFT market in 2021 and the associated transaction costs on the Ethereum network, these digital assets continue to retain substantial value, often regarded as premium or "blue-chip" investments within the web3 landscape. Some of the notable collections on Ethereum boasting the highest total sales volume include:

• Bored Ape Yacht Club: Renowned for its collection of 10,000 distinctive Bored Ape NFTs.
• CryptoPunks: Pioneering the Ethereum ERC-721 standard, it stands as the first-ever NFT collection.
• Meebits: Comprising 20,000 unique 3D characters, with a trading marketplace that incurs no fees.
• CloneX: Featuring 20,000 next-gen Avatars from the RTFKT Studios, designed by artist Takashi Murakami.

Gaming on EVM-Compatible Chains

While Ethereum may not always be the primary choice for web3 game developers, several games on EVM-compatible chains offer diverse functionalities, including in-game NFTs, DeFi features, or tokens on the Ethereum network. Notable gaming blockchains with strong connections to Ethereum include:

• Polygon: An EVM-compatible Proof-of-Stake (PoS) Layer-2 solution featuring games like The Sandbox.
• Ronin: A gaming blockchain serving as the home for Axie Infinity.
• Immutable X: A prominent Layer-2 solution and the blockchain for Gods Unchained.
• Arbitrum: A Layer-2 scaling solution for Ethereum, serving as the ecosystem for gaming on TreasureDAO.

What’s the future of Ethereum?

In 1989, British scientist Tim Berners-Lee laid the groundwork for the open-source and free-to-use World Wide Web (WWW), enabling the rapid evolution of the internet. Ethereum's founder, Vitalik Buterin, embraced this ethos when crafting the Ethereum whitepaper.

In a symbolic transition, the original source code for the WWW was sold as an NFT on the Ethereum blockchain by Berners-Lee in 2021, passing on a metaphorical baton.

Ethereum's impact extends beyond creating new revenue streams for creators and providing technical foundations for emerging developers. Its pivotal role in shaping an internet where users reclaim ownership is significant.

Following the successful Ethereum Merge, showcasing the network's resilience, a new chapter in Ethereum's history has recently unfolded.