Coin Highlight: Ethereum

Ethereum has emerged as a groundbreaking cryptocurrency and blockchain platform poised to reshape the industry in numerous ways.

While Ethereum remains a work in progress, its potential to transform various industries like finance, gaming, and even the internet itself is substantial. Thus, delving into Ethereum and exploring its potential applications becomes crucial.

Let's delve into comprehending what Ethereum truly is.

What is Ethereum?

Ethereum is a decentralised, open source blockchain network that enables developers to create & deploy smart contracts and Dapps without intermediaries.

Its native token, ETH, now ranks as the second-largest cryptocurrency in the world by market capitalisation. Ethereum’s market cap is above $350 trillion with 445214 daily active addresses. The cryptocurrency does not boast a limited number of tokens, and there have been 120,156,542 ETH in circulating supply.

Ethereum Journey: A brief of milestones

Vitalik Buterin, a Canadian computer programmer, created Ethereum in 2013. Later, Buterin was awarded a Thiel Fellowship to dedicate his efforts entirely to Ethereum. He then established a non-profit to help launch the project, eventually known as the Ethereum Foundation. In early 2014, the Ethereum Foundation conducted an online crowd sale, selling 72 million ETH tokens and amassing around $18 million in funding.

Here is a brief introduction to the Ethereum technical milestones:

• 2013 - Whitepaper released: The introductory paper, published by Vitalik Buterin before the project’s launch in 2015
• 2014 – Yellowpaper released: The Yellow Paper is a technical definition of the Ethereum protocol
• 2014 – Ether sale: Ether officially went on sale for 42 days. You could buy it with BTC
• 2015 – Frontier: A live, barebone implementation of the Ethereum project. Blocks had a gas limit of 5,000. This ‘thawing period enabled miners to start their operations and for early adopters to install their clients without having to ‘rush’.
• 2015 – Frontier thawing: The frontier thawing folk lifted the 5,000 gas limit per block and set the default gas price to 51 gwei. The allowed for transactions – transactions require 21,000 gas.
• 2016 – Homestead: The emergence of the Homestead folk. The ETH price was $12.50
• 2016 – DAO folk: The DAO fork occurred following the 2016 DAO attack, during which an insecure DAO contract was exploited, resulting in the theft of over 3.6 million ETH. The fork involved transferring the funds from the compromised contract to a new one, featuring a simplified function solely for withdrawal purposes. Individuals affected by the attack were permitted to withdraw 1 ETH for every 100 DAO tokens held. Certain miners objected to the fork, arguing that the DAO incident did not stem from a flaw in the protocol. Consequently, they established Ethereum Classic.
• 2016 – Tangerine Whistle: The Tangerine Whistle fork was the first response to the denial of service (DoS) attacks on the network.
• 2016 – Spurious Dragon: The Spurious Dragon fork was the second response to the denial of service (DoS) attacks on the network.
• 2017 – Byzantium: The Byzantium fork reduced block mining rewards from 5 to 3 ETH, added the ability to make non-stake-changing calls to other contracts, and added specific cryptography methods to allow for layer 2 scaling.
• 2019 – Constantinople: The Constantinople fork reduced block mining rewards from 3 to 2 ETH
• 2019 – Istanbul: The Istanbul fork made Layer 2 scaling solutions based on SNARKs and STARKs more performant and enabled Ethereum and Zcash to interoperate.
• 2020 – Muir Glacier: The Muir Glacier fork introduced a delay to the difficulty bomb.
• 2020 – Staking deposit contract deployed: The staking deposit contract introduced staking to the Ethereum ecosystem. Despite being a Mainnet contract, it had a direct impact on the timeline for launching the Beacon Chain, an important Ethereum upgrade.
• 2020 – Beacon Chain genesis: The Beacon Chain needed 16384 deposits of 32 staked ETH to ship securely. The Beacon Chain started producing blocks on Dec 1, 2020.
• 2021 – Berlin: The Berlin upgrade optimised gas cost for certain EVM actions and increases support for multiple transaction types.
• 2021 – London: The London upgrade introduced EIP-1559, which reformed the transaction fee market, along with changes to how gas refunds are handled and the Ice Age schedule.
• 2021 – Altair: The Altair upgrade was the first scheduled upgrade for the Beacon Chain. It facilitated "sync committees," which empowered light clients and led to amplified penalties for validator inactivity and slashing as development advanced towards The Merge.
• 2021 – Arrow Glacier: The Arrow Glacier network upgrade delayed the difficulty bomb by several months. This was the sole modification implemented in this upgrade, akin to the nature of the Muir Glacier upgrade. Comparable adjustments have been executed during previous network upgrades such as Byzantium, Constantinople, and London.
• 2022 – Gray Glacier: The Gray Glacier network upgrade pushed back the difficulty bomb by three months.
• 2022 – Bellatrix: The Bellatrix upgrade was the second scheduled upgrade for the Beacon Chain, preparing the chain for The Merge. It brings validator penalties to their full value for inactivity and slashable offences. Bellatrix also includes an update to the fork choice rules to prepare the chain for The Merge and the transition from the last proof-of-work block to the first proof-of-stake block. This includes making consensus clients aware of the terminal total difficulty of 58750000000000000000000.
• 2022 – Paris (The Merge): The Paris upgrade was triggered by the proof-of-work blockchain passing a terminal total difficulty of 58750000000000000000000. Paris was The Merge transition - its major feature was switching off the proof-of-work mining algorithm and associated consensus logic and switching on proof-of-stake instead. Paris itself was an upgrade to the execution clients (equivalent to Bellatrix on the consensus layer) that enabled them to take instruction from their connected consensus clients.
• 2023 – Capella: The third major upgrade to the consensus layer (Beacon Chain) and enabled staking withdrawals. Capella occurred synchronously with the execution layer upgrade, Shanghai, and enabled staking withdrawal functionality.
• 2023 – Shanghai: The Shanghai upgrade brought staking withdrawals to the execution layer. In tandem with the Capella upgrade, this enabled blocks to accept withdrawal operations, which allows stakers to withdraw their ETH from the Beacon Chain to the execution layer.

Ethereum co-founder Vitalik Buterin also released the Ethereum Network 2024 Roadmap with significant upgrades anticipated, focusing on six main components – the Merge, the Scourge, the Verge, the Purge, and the Splurge. All of which we will cover in more detail.

How Does Ethereum Work?

Ethereum Blockchain Technology

Blockchain is the cornerstone of Ethereum's functionality, operating as a decentralised and immutable ledger distributed across a network of computers known as nodes. Transactions and data are recorded on this ledger, with cryptographic hashes linking them for security and integrity. Ethereum's blockchain, not controlled by any central authority, fosters trustless and transparent interactions among participants, eliminating the need for intermediaries. The transition from a proof-of-work to a proof-of-stake mechanism, known as "The Merge," in September 2022 significantly reduced energy consumption and paved the way for scalability improvements.

• Proof-of-Work (PoW): Initially, Ethereum employed a Proof-of-Work (PoW) mechanism, where miners competed to validate and add new blocks to the blockchain by solving complex mathematical puzzles, receiving Ether rewards for their efforts. This process, though secure, demanded substantial computational power.
• Proof-of-Stake (PoS): In contrast, Proof-of-Stake (PoS), Ethereum's current consensus mechanism, requires validators to stake ETH in a smart contract. Validators risk losing their staked ETH if they attempt to cheat the network, promoting network integrity.

Nodes

Nodes, comprising a distributed network of computers, are pivotal in powering Ethereum's blockchain. They store transaction history, verify transactions, and execute smart contracts, ensuring network security. With over 6.1 million nodes globally, Ethereum's decentralised nature makes it challenging to control a majority of the network, thwarting potential attacks. Validator nodes, or stakers, play a crucial role by locking away ETH for transaction verification. As the network expands, the cost of gaining majority control increases, reinforced by an automated penalty system called "slashing" to deter malicious activities.

Key Elements of Ethereum

Ethereum Virtual Machine

The Ethereum Virtual Machine (EVM) acts as a decentralised computing system within the Ethereum blockchain. It provides the environment for Ethereum accounts and smart contracts to operate. As the blockchain progresses, the EVM regulates the computation process, ensuring the creation of a new valid state at each block.

Being Turing-complete, the EVM can execute any program given enough gas to cover the computational expenses, enabling a broad range of applications on the Ethereum platform due to its flexibility.

Additionally, the EVM ensures the deterministic execution of smart contracts, meaning that for a given input and state, the outcome remains consistent. This characteristic is crucial for achieving consensus within the Ethereum network.

Smart Contracts

Smart contracts are self-executing agreements embedded on the blockchain, comprising lines of code that activate under specific conditions. Their execution upon trigger renders Ethereum highly adaptable in its capabilities. These programs act as building blocks for decentralised apps and organisations. Since smart contracts are automated, they do not discriminate against any user and are always ready to use.

Smart contracts are processed on the EVM, and deploying a smart contract on the Ethereum blockchain requires the user to spend ETH as gas fees to interact with the Ethereum blockchain.

Once deployed, smart contracts are immutable and final, and transactions sent to smart contracts are also irreversible.

Popular examples of smart contracts are lending apps, decentralised trading exchanges, insurance, quadratic funding, social networks, NFTs - basically anything you can think of.

Ether – Ethereum blockchain’s native token

Ether is used as a fee payment for activities on the Ethereum blockchain (e.g., to exchange data or validate transactions). Commonly, these fees are referred to as gas fees – the transaction costs for using the Ethereum network. They’re paid to compensate the network’s validators for participating in the processing and validating of transactions on the network.

The smallest ETH unit is called a wei. One wei is 10^-9 ETH. Another ETH unit is gwei. One gwei is equal to 1 billionth of an ETH, and it is used more frequently when talking about gas fees. For instance, if the gas fee is 100 gwei, it costs 0.0000001 ETH to execute a transaction.

You can use other cryptocurrencies to get Ether tokens, but vice versa is impossible. This means that ETH cannot be interchanged by other cryptocurrencies to render computing power for Ethereum transactions.

Nodes and clients

Nodes

A blockchain node is a computer that participates in the blockchain network by maintaining a copy of the blockchain ledger and verifying transactions.

There are 3 different types of nodes on the Ethereum blockchain, depending on the node runner’s goals, computing power, and hardware storage availability:

1. Light nodes: help verify network transactions by checking the block headers but do not participate in blockchain consensus processes.
2. Full nodes: store the blockchain’s data, including all transactions and blocks. It plays an integral role in verifying the authenticity of transactions and blocks.
3. Archive nodes: store the entire history of the Ethereum blockchain, encompassing all previous blocks filled with transactions and data.

If you want to start running a node on Ethereum, there is no need for holding ETH. Plausible instruction is provided on the Ethereum website.

Clients

Clients run as an integral component responsible for validating data according to the protocol’s rules in the Ethereum ecosystem. Two normally deployed sorts of clients are:

1. Execution client: core components that facilitate transaction processing, maintaining state, and ensuring every node follows the consensus rules. Key responsibilities include:
   • Handle transactions sent to the Ethereum network
   • Keep track of the current state of the blockchain; sync with the overall networks involving account balances, smart contract execution, and block information
   • Validate blocks and ensure they follow the Ethereum network’s agreed-upon rules
2. Consensus client: a software deploying the Proof-of-Stake algorithm to help ensure that all nodes agree on the state of the blockchain. Key responsibilities include:
   • Validate transactions: make sure that any transaction made over the Ethereum network adheres to the predetermined rules.
   • Block Proposal: organise a set of valid transactions into groups and public them to the Ethereum network for proposal.

Simplified diagram of a coupled execution and consensus client. Source: Ethereum

Accounts

Ethereum accounts come in two forms – the externally owned account (EOA) and the contract account.

An EOA account enables users to store, receive, and send ETH or tokens built on the Ethereum blockchain (e.g., ERC-20 tokens). This account is manipulated by a private key, meaning that anyone who possesses the key can access the account and its assets.

Ethereum contract accounts, however, are controlled by smart contracts and cost ETH to set up.

The key difference between the two kinds of accounts lies in their interaction capabilities. External Owned Accounts (EOAs) can engage with both other EOAs and smart contracts. Meanwhile, Contract Accounts can also communicate with EOAs and other contracts but rely on smart contracts to operate.

Ethereum Token Standard

Ethereum Token Standards encompass a set of rules and protocols established within the Ethereum blockchain framework. They govern the management and represent diverse types of assets, including points, currencies, digital assets, and others, in tokenised form. These standards guarantee interoperability among various applications and services leveraging tokens within the same blockchain network.

• ERC-20: The most widely used token standard on Ethereum (Ethereum Request for Comments 20). It is frequently used to generate standard tokens like virtual currencies, points of loyalty, and ownership rights in non-financial applications. With the use of a standardised protocol, ERC-20 defines core operations for tasks like token transfers, balance checks, and communicating with contracts.
• ERC-721: This non-fungible token standard is used to represent special and non-transferable assets. Tokens that represent in-game items, digital land rights, works of art, and other things are classic examples. Each ERC-721 token has a distinctive identification that is impossible to copy or replace.
• ERC-777: A token standard for the Ethereum network that provides many improvements over the current ERC-20 standard, including brackets, clarity around decimals, and backward compatibility with ERC-20. However, it is difficult to implement properly and is vulnerable to various forms of attacks.
• ERC-1155: A digital token standard that Enjin created to create assets that are both Fungible (currency) and Non-Fungible (digital tokens, pets, and game items) on the Ethereum network. The ERC-1155 token standard permits users to transfer multiple tokens to the same wallet address during a single transaction. Users can save time and money by using this method instead of sending tokens individually.
• ERC-4626: The ERC-4626 standard is used to develop yield-bearing tokens. Like other standards, ERC-4626 (Tokenized Vault Standard) was born to provide a framework for the development of Yield-token, helping the developing platforms of Yield-bearing tokens such as Aave (aToken), Yearn (yTokens)… have their Yield-bearing token standardisation developed.

Ethereum Uses: Real-world Applications

The realm of payment gateways has witnessed some of Ethereum's earliest and most renowned implementations. Ether (ETH), Ethereum's native currency, serves dual purposes of value storage and facilitating decentralised transactions.

Through trustless payment gateways built on Ethereum, individuals and businesses can conduct transactions without relying on traditional intermediaries like banks. This has led to faster international transactions, reduced fees, and increased financial inclusion, particularly in areas with limited access to traditional banking services.

ICO Platforms

Entrepreneurs have leveraged Initial Coin Offerings (ICOs) on the Ethereum blockchain to raise capital in innovative ways by issuing their digital tokens. ICOs enable businesses to access global pools of investors without the need for traditional venture capital firms.

While ICOs initially offered a groundbreaking approach to fundraising, they have faced regulatory hurdles and evolved into more regulated forms such as Security Token Offerings (STOs) or Initial Exchange Offerings (IEOs).

Tokenising Assets

Ethereum's ability to create fungible and non-fungible tokens has facilitated the tokenisation of physical assets such as real estate and artwork. This process enables fractional ownership, improves liquidity, and streamlines ownership transfers. Investors can now diversify their portfolios by purchasing fractions of high-value assets, democratising access to wealth previously reserved for the affluent.

Health Applications

Blockchain technologies like Ethereum have the potential to revolutionise the healthcare sector. Ethereum-based applications can enhance patient privacy and facilitate interoperability among healthcare providers by providing a secure and immutable ledger for health data. This could lead to more comprehensive medical records, fewer errors, and enhanced research opportunities.

Digital Identity Management

Ethereum's self-sovereign identification concept empowers individuals to own and manage their data without relying on centralised authorities. Secure and verifiable identity verification is made possible through decentralised identifiers (DIDs) and verifiable credentials. This has applications ranging from simplifying KYC procedures for financial services to enhancing online authentication and access management.

These above implications represent just a few examples of how Ethereum is revolutionising industries and driving the adoption of decentralised technologies. As Ethereum continues to evolve, its impact across various sectors is expected to grow, presenting both new opportunities and challenges along the way.

How staking works on Ethereum

Staking on the Ethereum blockchain is integral to its consensus mechanism, particularly the Proof-of-Stake (PoS) model, which Ethereum adopted after the Ethereum Merge. Unlike the Proof-of-Work (PoW) model where miners solve complex puzzles to validate transactions, PoS selects validators based on the amount of cryptocurrency they commit to "stake" or lock up.

1. To become a validator, a participant must stake at least 32 ETH, Ethereum's native currency.
2. Once staked, validators propose new blocks and validate transactions.
3. The protocol randomly chooses a validator to propose a block, which is then verified by others. If the majority agrees on its validity, the block is added to the blockchain.
4. Validators have a strong incentive to uphold honesty and network integrity since they risk losing a portion or all their staked ETH through a process known as slashing if they validate fraudulent transactions or act maliciously.
5. In exchange for staking and validating, validators receive additional ETH rewards. These rewards include newly generated ETH from network inflation and transaction fees from validated blocks.

However, not everyone possesses enough ETH to stake or wants to manage their validating node due to technical complexities. Consequently, staking pools and services have emerged, enabling users to pool their ETH together, meet the staking threshold, and collectively share in the rewards.

Ethereum Scalable Solutions

Scalable solutions are geared towards enhancing transaction speed on a network, employing diverse methods to expedite transaction processing, notably layer 2 rollups and sidechains. Here are some innovative solutions currently in use or under development:

Rollups

Rollups function independently to manage tasks and leverage Ethereum for additional security checks, blending efficiency with Ethereum's safety features.

Plasma Chains

Plasma chains offer a scaling alternative utilising fraud-proofing techniques akin to optimistic rollups but maintaining data accessibility off-chain, distinct from optimistic rollups.

State Channels

State channels enable secure off-chain transactions with minimal interaction on the Ethereum Mainnet. Users can conduct numerous off-chain transactions, requiring only two on-chain transactions to initiate and terminate the channel, ensuring rapidity and cost-effectiveness.

Sidechains

Sidechains are autonomous blockchains linked to the Ethereum Mainnet via a bridge, facilitating expedited transaction processing. Unlike layer 2 solutions, they do not relay data back to the Ethereum Mainnet.

Ethereum 2.0 vs Ethereum 1.0: Key distinctions

Ethereum’s Journey

The primary objective of Ethereum's core developers has always been to introduce the protocol in multiple phases. Given Ethereum's intricate nature and its ability to sustain a wide array of applications, it necessitates meticulous development to ensure security, scalability, and decentralisation. Phased launches enable developers to thoroughly test each aspect of the protocol in real-world scenarios.

These Ethereum phases include:

• Frontier
• Homestead
• Metropolis
• Serenity

The initial three upgrades, Frontier, Homestead, and Metropolis, collectively form "Ethereum 1.0," while Serenity represents "Ethereum 2.0" or what is now referred to as the Consensus Layer. Let's delve further into these significant milestones of Ethereum.

As previously described in the Ethereum Journey: A brief of milestones section, all these milestones in Ethereum 1.0 and Ethereum 2.0 have already been discussed. Therefore, this section will only guide you through the main phases of Ethereum 1.0 and Ethereum 2.0.

Ethereum 1.0: Building the foundation

• Ethereum Frontier – 30 July 2015
• Ethereum Homestead - 14 March 2016
• Ethereum Metropolis – 16 October 2017
• Byzantium – 16 October 2017
• Constantinople – 28 February 2019
• Istanbul – 8 December 2019

Ethereum 2.0: The green and scalable world computer

• Phase 0: Initiated at Beacon Chain block number 1 – to build the validator set for Ethereum PoS.
• Phase 1: Phase 1 will introduce shard chains and initiate layer 1 scalability.
• Phase 1.5: The Ethereum PoW chain will become one of the 64 shard chains alongside the Beacon Chain.
• Phase 2: Phase 2 will cover multiple technological innovations: cross-shard interoperability, individual shard chains to handle transactions and smart contract operations, and letting developers code smart contracts in the language they want.

The Differences

Ethereum vs Bitcoin BTC

Similarities

• Blockchain Technology: Both Bitcoin and Ethereum utilise blockchain technology to record and verify transactions, ensuring security and transparency through decentralised and distributed ledgers.
• Cryptocurrency: Bitcoin (BTC) and Ether (ETH) are both widely used cryptocurrencies, serving various purposes such as transactions, investments, and value transfers within their respective networks.
• Limited Supply: Both Bitcoin and Ethereum have a predetermined supply limit. Bitcoin's supply is capped at 21 million coins, while Ethereum is transitioning towards a proof-of-stake consensus, likely resulting in a more controlled issuance rate.

Differences

• Purpose and Functionality: Bitcoin primarily functions as a digital store of value and a medium of exchange, whereas Ethereum is a platform designed for building decentralised applications (DApps) and executing smart contracts, offering a diverse array of use cases beyond currency transactions.
• Smart Contracts and DApps: Ethereum pioneered the concept of smart contracts, enabling self-executing contracts with automated terms and conditions and facilitating the creation of decentralised applications that can manage assets and execute code without intermediaries.
• Consensus Mechanism: Bitcoin employs proof-of-work (PoW) as its consensus mechanism, while Ethereum is transitioning from PoW to proof-of-stake (PoS) to enhance scalability and energy efficiency.
• Development Community: Ethereum boasts a more active and versatile development community, attributed to its emphasis on smart contracts and DApps, fostering innovation and a broader range of applications.

Ethereum FAQs

What is Ethereum used for?

Ethereum is a platform enabling the creation of secure digital technologies. Its native cryptocurrency, Ether (ETH), serves to pay for supporting blockchain work, and it can also be utilised for purchasing tangible goods and services if accepted by the seller.

Why is Ethereum so popular?

Ethereum's popularity stems from its programmable blockchain, distinguishing it from Bitcoin. This feature allows users to develop and operate new tools, applications, DeFi, smart contracts, and NFTs within its software network.

Does Ethereum have a better future than Bitcoin?

Ethereum's flexibility and scalability make it increasingly popular among large institutions. While Bitcoin is often likened to "digital gold," Ethereum, with its broader range of practical applications, is considered more akin to "digital oil." Over the long term, Ethereum is expected to become the more valuable cryptocurrency due to its expanding practical use cases.

How does Ethereum differ from Bitcoin?

Ethereum differs from Bitcoin as it was designed not just as a currency but as a decentralised computing platform. This platform enables developers to construct and deploy decentralised applications, including smart contracts, using blockchain technology.

What is Ether and how is it used in Ethereum?

Ether is Ethereum's native cryptocurrency, utilised for paying transaction fees and computational services on the network. It is also tradable on cryptocurrency exchanges like other digital currencies.

What is a smart contract, and how does it work on Ethereum?

A smart contract is an automatic computer program enforcing agreement rules between parties on the Ethereum blockchain without the need for intermediaries.

What is gas and how is it used on the Ethereum network?

Gas is a fee paid in Ether to compensate miners for processing transactions and running smart contracts on the Ethereum network.

What is the Ethereum Virtual Machine (EVM), and how does it work?

The EVM is a software environment where smart contracts execute on the Ethereum network.

What is the future of Ethereum?

The future of Ethereum appears promising, with decentralised finance and limitless possibilities, shining brighter than the moon on a cloudless night.