Ethereum

What is Ethereum?

Created by programmer Vitalik Buterin and launched in 2015, Ethereum is an open-source, decentralised blockchain platform facilitating transactions, smart contracts, and decentralised applications, it also has its own programming language, called Solidity. Ether (ETH) is the native token of Ethereumand is the second-largest cryptocurrency in terms of market capitalisation after Bitcoin.

Currently Ethereum is secured through the Proof-of-Work consensusmechanism, however, with the ETH2.0 upgrades set for launch over the next 6months Ethereum will migrate over to the Proof-of-Stake mechanism.

Ethereum is an open-source blockchain-basedplatform that creates and shares business, financial services, and entertainment applications.

Ethereum users pay fees to use dApps. The feesare called "gas" because they vary depending on the amount ofcomputational power required.

Ethereum has its own associated cryptocurrency,Ether or ETH.

Technical details of Ethereum -

• Etheriums total supply is 117,684,083 tokens to be created.
• The total circulating supply is the same because obviously etherium isnt mined into existence, but with eth 2.0 coming out etheriums supply will be burnt so it will gradually decrease.
• The total market cap to this day at the moment is $359,025,465,656
• Currently processes up to 30 transactions per second, with eth 2.0 it can potentially do up to 100,000 per second.

What is etherium used for?

Ether is used mainly for two purposes—it is traded as a digital currency on exchanges in the same fashion as other cryptocurrencies and it is used on the Ethereum network to run applications. According to Ethereum,“people all over the world use ETH to make payments, as a store of value, or ascollateral.

The potential applications of Ethereum are wide-ranging and are powered by its native cryptographic token, Ether is like the fuel for running commands on the Ethereum platform and is used by developers to buildand run applications on the platform.

What makes Ethereum so innovative and such a big deal is that itwas the first blockchain that was programmable, enabling the creation of smart contracts. The Ethereum network acts as a single large virtual machine whereby programs, called smart contracts, are executed. The state of each individua lcontract, as well as all wallet balances, are recorded on the distributedledger. Any conditional statement can be turned into a smart contract, andassets can be moved around according to the parameters programmed within thecontract.

Consequently, several smart contracts can be combined to create decentralised applications, or DApps. This innovation and versatility paved theway for decentralised finance as we know it today.

Key components on Ethereum -

Ether & ERC-20 Tokens;

One of the best known and best performing large-cap assets in thecrypto market, ETH is the fuel that powers the entire Ethereum network. Etheris used to pay for network resources by users when they are transacting,interacting with smart contracts/decentralised applications, and minting tokens,to name a few examples. The fees paid in Ether go to Ethereum miners as anincentive to provide the computing power that runs the network. This willchange when Ethereum moves from Proof-of-Work to Proof-of-Stake, as Ether willbe staked to secure the network.

ERC-20 is the standard for all tokens within the Ethereum network.This standard enables every token on Ethereum to be interoperable with anyapplication which is an essential requirement for the integrated DeFi economybeing constructed on the network. ERC-20 tokens are created through smart contracts, which store all wallet balances and define the characteristics ofthe token – total supply, emissions etc.

Smart Contracts -

By far Ethereum’s number one utility is its smart contracts. Atthe most basic level a smart contract is an on-chain agreement. They essentially execute assigned tasks when certain events occur – for example, asmart contract could send 1 ETH to a particular address every 24hours. IF 24 hours has passed (the trigger) THEN send 1 ETH(the execution). More complex operations can be performed by smart contractsand their versatility is essentially unlimited.

• Smart contracts have a state, and every single Ethereum node has a copy of this state. Once a smart contract goes live there is no way to alter them or change how they operate unless the developers make changes to the contract.
• Since each contract can be viewed on-chain, any changes made are instantly visible to anyone who wants to check. This makes the manipulation of smart contracts difficult to get away with. However, as we have seen several rug-pulls this year, it’s not impossible – in most of those cases a simple audit would have     found a lot of the malicious intent in those contracts.
• A smart contract is a contract – there is no room for negotiation. If the conditions of the     contract are met, and all parties have agreed to those conditions, then     the contract will carry out its task as intended. Since smart contract     states are recorded on the blockchain, it is impossible to change the outcome of a smart contract agreement because that would require altering     the entire Ethereum ledger.

Regarding the last point, this is referred to as “Code is Law” –if it is not in the smart contract code, it will not happen. Conversely, if itis in the code, then it will happen. Here, the technology is being used toenforce the rules. This begs the question – are lawyers necessary to ensurethat an agreement is carried out in full? Do we even need an intermediary atall? This is the whole premise behind decentralised finance.

They are permissionless - anyone can write a smart contract anddeploy it to the network. You just need to learn how to code in a smartcontract language and have enough ETH to deploy your contract. Deploying asmart contract is technically a transaction, so you need to pay your gasin the same way that you need to pay gas for a simple ETH transfer. Gas costsfor contract deployment are far higher.

Ethereum has developer-friendly languages for writing smartcontracts:

• Solidity
• Vyper

However, they must be compiled before they can be deployed so thatEthereum's virtual machine can interpret and store the contract.

They have composability - Smart contracts are public on Ethereumand can be thought of as open APIs. That means you can call other smartcontracts in your own smart contract to greatly extend what's possible.Contracts can even deploy other contracts.

Solidity & the Ethereum Virtual Machine (EVM) -

As previously mentioned that Ethereum allows for smart contracts –Solidity is the programming language used to code them. Solidity is ahigh-level, object-oriented language (like C++). Without complicating thingstoo much, here are the key points:

• Smart contract functionality is     programmed using Solidity, and the code is compiled into low-level machine     code to be processed on the EVM,with the results being secured on the     blockchain.
• A virtual machine is a     “software computer” – instead of using physical components to run     programs, a virtual machine uses software to carry out all the operations.     A non-crypto related example of this would be running MacOS on a Microsoft     PC. The Ethereum Virtual Machine turns the entire Ethereum blockchain into     a single programmable computer.
• The distributed nature of     blockchain technology, when combined with the EVM, has led to Ethereum     being called “The Unstoppable Computer”.

The etherium ecosystem -

EIP-1559

The Ethereum network has been struggling with high transactionfees caused by 2 main factors:

• The exponential price increase     of the ETH token, meaning that what was once a $10 transaction fee paid in     ETH is now equivalent to $50-100+.
• Increased gas fees caused by     network congestion – Ethereum blocks are consistently at almost full     capacity.

The explosion of DeFi over the last 12-18 months, coupled with thefact that most of the value locked in DeFi is in protocols that utilise theEthereum blockchain, means the situation has become untenable. If the DeFieconomy is to grow further then this must be resolved – sooner, rather thanlater.

Additionally, due to the high transaction costs of using Ethereum,there are now newer blockchains in a position to take a share of Ethereum’sDeFi dominance due to their higher transaction speed and lower costs – oneexample is Solana.

what is being done to resolve this? there are a few solutions indevelopment that will not only drastically reduce Ethereum transaction costs,but also exponentially increase the speed of the network.

Ethereum Improvement Proposal 1559, or EIP-1559, is a scheduledupgrade to the Ethereum network that will make Ethereum fees more predictableand less volatile. Gas is a measurement of how much computational work isrequired for each transaction on Ethereum. The gas fee is the price the usermust pay for this work to be carried out.

Currently, gas fees are determined by an almost chaoticauction-type process where the transaction that is willing to pay the mostEther in fees gets first choice. This has led to runaway fee inflation as thecompetition for space on Ethereum blocks is constantly growing due to the largeamount of DeFi applications now running on the network. The key points are asfollows:

• EIP-1559 replaces the     auction-like system currently in place with a more predictable and active     system, through the implementation of a ‘base fee’.
• This base fee is a minimum fee     that is paid and is set depending on network activity, dynamically     changing according to network demand.
• The improvement aims to set the     average amount of work done per Ethereum block at 15 million gas. It does     this by increasing the base fee by 12.5% for every consecutive block that     contains more than 15 million gas worth of work and decreasing the base     fee by 12.5% for every consecutive block that contains less than 15     million gas worth of work. 1 million gas is equal to 0.001ETH so 15million     is equal to 0.015ETH.
• This base fee is burned, which     permanently removes that ETH from the circulating supply. In theory, this     means that ETH will periodically become a deflationary asset, which     counters inflation from block rewards. Effectively, the amount of burned     ETH will be larger than the amount of new ETH being issued. This is     important because Ether does not have a maximum supply.
• Burning fees at an     exponentially increasing rate in relation to network congestion removes     the incentive for miners to artificially inflate fees.
• An optional fee called an     “inclusion fee” can be paid to speed up transactions.

Etherium 2.0 -

Ethereum 2.0 is an upgraded version of Ethereum cryptocurrencythat already exists. Ethereum 2.0 is developed with the motive to improve thescalability, speed, and efficiency of Ethereum. The upgraded version is made towork on increasing the transaction numbers and dealing with the bottlenecks.The short names used for Ethereum 2.0 are Serenity, and some people even callit Eth2. As compared to Ethereum, or the older version, Ethereum 2.0 haselementary changes in its blueprint and structure.

Ethereum used to work on a consensus method known as theproof-of-work method, but Ethereum 2.0 is built on sharding and Proof of stakemechanism.

The BeaconChain - TheBeacon Chain is the first step on the road to ETH2.0 and will bring theProof-of-Stake mechanism of validation to the network. Currently, Ethereumworks on the Proof-of-Work mechanism which is extremely inefficient and usesmonumental amounts of processing power.

With the Proof-of-Stake consensus mechanism, less computing poweris required since validators post a stake in ETH which can be forfeit if theyare found to have validated fraudulent transactions. This means that theprocessing power involved in validating transactions is massively reduced sincevalidators have a vested interest in ensuring transactions are validatedaccurately. This has the knock-on effect of increasing the transaction speed.

The Beacon Chain currently exists as a kind of ‘sidechain’ to themain-net and will be the foundation upon which the other ETH2.0 upgrades willbe built.

The Merge -Eventually, at some point in 2021, the Beacon Chain will merge with Ethereummain-net and Ethereum will become a Proof-of-Stake (PoS) secured blockchain.This will consolidate all current features of Ethereum, as well as the full historyand current state of the ledger, to Proof-of-Stake.

Mining will no longer be required; instead, rewards are given tovalidators for their work. Additionally, the Proof-of-Stake consensus mechanismfrees up more processing resources can be allocated to other operations whichin turn allows for another solution to be implemented – sharding.

Layer-1 vs Layer-2 -

Layer-1 is the term that’s used to describe theunderlying main blockchain architecture. Layer-2, on the other hand, is anoverlaying network that lies on top of the underlying blockchain. ConsiderBitcoin and Lightning Network. Bitcoin is the layer-1 network, while thelightning network is layer-2. Now that we know the core difference let’s lookat the layer-1 and layer-2 solutions that companies are currently working on.

Layer 1 -

A layer-1 blockchain is a set of solutions thatimprove the base protocol itself to make the overall system a lot morescalable. There are two most common layer-1 solutions, and these are theconsensus protocol changes as well as sharding.

When it comes to consensus protocol changes,projects like Ethereum are moving from older, clunky consensus protocols suchas proof-of-work (PoW) to much faster and less energy-wasteful protocols suchas proof-of-stake (PoS). 

Sharding is one of the most popular layer-1scalability methods out there as well. Instead of making a network sequentiallywork on each transaction, sharding breaks these transaction sets into smalldata sets which are known as "shards," and these can then beprocessed by the network in parallel. 

One of the pros when it comes to layer-1solutions is that there is no need to add anything on top of the existinginfrastructure.

Layer 2 -

A blockchain that confirms transactions faster than a majorblockchain network. Layer 2 chains are often designed to handle smalltransactions (micropayments) with lower fees or no fees, as well as to reducetraffic on the main network. At periodic intervals, Layer 2 summaries aretransmitted to Layer 1 (main network/main chain) where they are "cast inconcrete" and cannot be altered.

layer-1 Solutions -

What this essentially means is improving the baseprotocol itself to make the overall system more scalable. The two most commonlayer-1 solutions are:

• Consensus protocol changes.
• Sharding.

Consensus protocol changes -

Many projects like Ethereum are moving on fromolder, clunkier consensus protocols like Proof-of-Work (PoW) to faster and lesswasteful protocols like Proof-of-Stake (PoS). Bitcoin and Ethereum both usePoW, wherein miners solve cryptographically-hard equations by using theircomputational power. While PoW is pretty secure, the problem is that it can bevery slow. Bitcoin only manages 7 transactions per second, while Ethereum canonly manage 15–20 on a good day. This is why Ethereum is looking to change overfrom PoW to PoS (via the Casper protocol).

Sharding -  

To put it simply, sharding is the concept of sharing the networkdatabase across multiple chains, called ‘shards’, which work in unison tospread the workload out, increasing efficiency. Each ‘shard’ handles adifferent process within the wider blockchain. In its current state theEthereum network requires every validatorto carry out all theprocesses. This is highly inefficient – you would not get the chef in a restaurantto simultaneously take the orders, make all the drinks, and the food. By distributing the workto multiple chains, sharding will exponentially increase throughput of Ethereumwhilst simultaneously increasing decentralisation as well as the security ofblockchain.

Layer-2 Solutions -

• State channels.
• Nested blockchains.

State Channels -

A state channel is a two-way communicationchannel between participants, which enables them to conduct interactions, whichwould typically occur on the blockchain, off the blockchain. Doing this helpsin cutting down the waiting time since you are no longer dependent on a thirdparty like a miner. This is how a state channel works:

• A portion of the blockchain is sealed off via multi-signature or     some sort of smart contract, which is pre-agreed by the participants.
• The participants can directly interact with each other without     submitting anything to the miners.
• When the entire transaction set is over, the final state of the     channel is added to the blockchain.

Bitcoin’s Lightning Network and Ethereum’s RaidenNetwork are the two most popular state channel solutions. Both of these utilizeHashed Timelock Contracts (HTLCs) to execute state channels. While LightningNetwork allows participants to conduct a large number of microtransactions in alimited time period, the Raiden will enable participants to run smart contractsthrough their channels as well.

Nested Blockchains -

Currently, OmiseGO, an Ethereum-based dApp, isworking on a nested blockchains solution called Plasma. The design principle ofplasma is pretty straightforward:

• The main, base blockchain is going lay down the ground rules of     this entire system. It will not directly take part in any operations unless     it needs to resolve some disputes.
• There will be multiple levels of blockchains sitting on top of the     main chain. These levels will be connected to each other to form a     parent-child chain connection. The parent chain delegates work amongst its     child chains. The child chains then execute these actions and send the     result back to the parent chain.
• Not only does this solution significantly reduce the load in the     root chain, but, if executed properly, it will increase scalability     exponentially.

What are the points of differences betweenEthereum and Ethereum 2.0? -

Ethereum is an older version, whereas Ethereum 2.0 is an upgradedsystem that is introduced with new ways of operations. Ethereum 2.0 is aimed atimproving the speed, and efficiency, and a number of transactions. The maindifference between the older and new versions of Ethereum is the mechanism onwhich it is based or used. Ethereum uses a proof of work consensus mechanism,whereas Ethereum 2.0 uses a consensus mechanism of Proof of stake.

Ethereum uses the Proof of Work consensus method; the miners haveto put their efforts and energy into solving the highly complex mathematicalalgorithms. Miners use computing power to solve mathematical puzzles and toverify the Ether transactions. The miners compete, and the miner who solves thealgorithms first gets the Ether reward. This was surely a complex method, andthe earnings or rewards were less.

Ethereum 2.0 uses the Proof of stake consensus method; validatorsare used instead of miners to verify and authenticate a transaction. Thevalidators are given a specific time in which they need to validate thetransactions or cryptos. The validators in Ethereum 2.0 are required to claimto see the block after a majority of validators approve the claim, it is thenadded into a chain of blocks, and then they are rewarded in ETH2.

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