What is Ethereum?
Ethereum is an open-source, permissionless, decentralized blockchain network. It was created by the Ethereum Foundation led by Vitalik Buterin. The blockchain design borrows from Bitcoin, however there are some major differences. One of those being the introduction of ‘smart contracts’.
Smart Contracts are essentially small pieces of code or small programs that are saved within the blocks on the blockchain. The code is used to store and make transparent the terms of the transaction, making the contract verifiable and enforceable. They are self-executing and simply read and write data when triggered. Once they are written into the blockchain, they are also immutable. This reduces the cost of verification and execution and it makes the blockchain more secure.
This feature is what has allowed the Ethereum Blockchain to be used for more than just a payments system. Smart Contracts expand the list of possible use cases because they allow for the creation of decentralized apps (dApps) that can automate processes. The majority of dApps today are built on top of Ethereum.
Similar to the Bitcoin network, Ethereum also uses a native cryptocurrency coin, in this case Ether (ETH). The applications built on Ethereum need to use Ether to pay transaction and service fees to use the network. In order to execute smart contracts the miner/platform will need to pay ‘gas fees’, which is like an execution fee sent along with the smart contract.
Is Ethereum a currency?
Ethereum is the name of the public blockchain network. Miners work to earn Ether, which is the name of the crypto token that keeps the Ethereum network running.
Around 5 Ether are created every 12 seconds, with 18 million mined per year.
While Bitcoin uses blockchain to track ownership of cryptocurrency (Bitcoins), Ethereum uses the network to run program codes for various online applications.
In essence, Ethereum is building the first decentralised world computer on a public blockchain.
The Ethereum Virtual Machine (EVM) runs on the Ethereum network and allows anybody to run a program, making the process of building blockchain applications much simpler. Developers do not need to build a new blockchain from scratch for each application, and the most popular language used in developing Ethereum smart contracts is Solidity.
What are smart contracts?
A smart contract is a program that runs exactly as coded by its creator. It is essentially an execution that can be set up ahead of time to trigger automatically once certain conditions are met.
While Bitcoin transfers currency from one user to another, this is all it can do. Ethereum’s platform allows developers to write their own scripts and create smart contracts for a variety of uses.
‘Gas’ is the pricing value required to execute a transaction on Ethereum, priced in sub-units of Ether, also known as Gwei（1 Ether= 109Gwei） . This is used to ‘fuel’ smart contracts based on the required size, memory, or speed of the execution. It is often likened to filling up your car for the required journey.
Smart contracts are important in the Ethereum technology stack because they allow for the creation of decentralised applications (dApps) that can automate processes and run with no possibility of censorship or downtime.
History: A brief look back in time
- 2013: Vitalik Buterin published the Ethereum whitepaper describing the initial concept. He argued that a more general scripting language was needed for application development than what Bitcoin provided and that he proposed the new Ethereum platform.
- 2014: Development began and the non-profit Ethereum Foundation that would manage the project was formed. Later in the year the ICO was held during which 60m Ether (ETH) were released and $18.4m was raised.
- 2015: The first of Ethereum’s four stage development cycle, the ‘Frontier’ phase, was completed and Ethereum’s mainnet was launched.
- 2016: The ‘Homestead’ phase of development. There was a hack later in the year which led to the creation of essentially a new blockchain which reversed the hack. Members moved over to the new blockchain which became active under the name Ethereum, while the original blockchain was renamed Ethereum Classic.
- 2017: The first stage of the ‘Metropolis’ phase of development. The Metropolis Byzantium hard fork was introduced which updated the blockchain by implementing nine Ethereum Improvement Protocols (EIPs). These were designed to improve the network’s privacy, security and scalability.
- 2019: The second and third stages of the ‘Metropolis’ phase of development. The Metropolis Constantinople hard fork update took place which implemented five EIPs to the system. The enhancements included a restructuring of the transaction fees and an improvement in the speed of the system. Late in the year the Metropolis Istanbul hard fork was implemented which brought further usage models and safety features.
- 2020: In January the Muir Glacier hard fork was introduced to delay the ‘difficulty bomb’ (algorithm which gradually increases the difficulty of creating new blocks) to later blocks.
Present: Where is Ethereum now?
The current system, termed Ethereum 1.0, uses a ‘Proof of Work’ consensus mechanism which involves users trying to solve complex mathematical problems in competition with others so that they can mine the next block. This system is extremely difficult to compromise, however it also requires a lot of time and computational power, as well as a lot of electricity.
A major upgrade to the public mainnet is underway which aims to deal with some of the main problems with PoW and the current system. This update, will move the Ethereum network to the new and improved Ethereum 2.0. Some major changes will be introduced which will aim to deal with the existing issues, which are:
– Scalability: Blocks are mined sequentially so it’s currently only possible to process one block at a time. Pending transactions can have lengthy waits depending on the size and number of preceding blocks.
– Accessibility: There are high barriers to become a miner and to be able to participate in the network. These include the need for specialized and expensive hardware, and the often high cost of electricity to run the code. There are also barriers for individual miners who have to compete with companies facing subsidised costs.
Future: Ethereum 2.0
The upgrade to Ethereum 2.0 will involve significant changes to the current system with the two most notable being the introduction of Proof of Stake and Sharding.
- The Proof of Stake (PoS) consensus mechanism will be introduced to replace Proof of Work (PoW). This aims to improve the accessibility issues by lowering the barriers to entry. The move involves changing two fundamental PoW components:
- Firstly, ‘Miners’ will be replaced with ‘Validators’. These are the people that maintain the agreed-upon state of the network. For the new system, validators will need to download and run the Ethereum 2.0 client software and can then be randomly selected to propose and attest blocks. Those who correctly propose and attest to blocks will receive a reward, in the form of a percentage of their stake. If they fail to stay online, their reward will be decreased, a measure put in place to keep validators online. If a validator tries to compromise the network, they will be penalised by all or some of their staked ETH.
- Secondly, ‘Work’ (hash power) is replaced with ‘Stake’. Instead of having to work by using their hash power and expending electricity, validators will have to commit at least 32ETH as their ‘stake’. This is done by depositing it into the ‘official deposit contract’.
- Sharding is being introduced to help solve the scalability issue. It involves partitioning the single blockchain into smaller parts, specifically into 64 separate chains, that will run parallel to one another. These separate chains will be interoperable and can theoretically be run simultaneously.
Ethereum 2.0 Planned Rollout
- Phase 0 (Ethereum 1.x): 2020
The ‘Beacon Chain’ will be launched which will require a minimum staking of 524,288 ETH and a minimum of 16,384 validators. This chain won’t be able to process transactions, execute smart contracts or host dApps. The original Ethereum PoW blockchain will continue to run in parallel. Proof of Stake will be implemented.
- Phase 1 (Ethereum 1.x):
The construction, validity and consensus on the shard chains will be worked on. It is planned that 64 shard chains will be deployed.
- Phase 1.5 (Ethereum 1.x):
In this phase the Ethereum PoW blockchain 1.0 will be merged with the Ethereum PoS blockchain 2.0. The original PoW chain will exist as one of the 64 shard chains.
- Phase 2 (Ethereum 2.0):
Ether accounts, transactions, transfers, withdrawals and smart contract execution.