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Ethereum

What is Ethereum 

Ethereum is a decentralized open-source blockchain platform. The revolutionary technology behind the network made the existence of smart contracts possible, which created industries such as DeFi and NFT, triggered the creation of countless projects, and shifted the world’s focus to crypto.

Behind the Ethereum network stands a computer referred to as the Ethereum Virtual Machine or EVM, whose state is being agreed on by everyone participating in the network (nodes) and a copy of it is kept by each of them. Each participant in the network can broadcast a computation request referred to as a transaction to the EVM, which alters its state and is verified, validated, and executed by all nodes. 

Originally built as a PoW (Proof-of-Work) network, Ethereum switched to PoS (Proof-of-Stake) on September 15, 2022, in an event known as “The Merge” as the original Ethereum execution layer was joined with the new PoS consensus layer.

How does Ethereum work

The Ethereum blockchain maintains a public database updated and shared across numerous computers. The network consists of blocks – data stored in groups, all of which are cryptographically connected to the previous one in a chain-like order. 

A key difference between Ethereum and Bitcoin is that while the latter has a fixed block size of 1 megabyte, Ethereum’s block size varies as it is bound by how many units of gas can be spent per block. Due to this model, it cannot be calculated how many transactions a block can include, however, the base computational cost of any transaction is 21,000 units of gas which increases with the complexity of the transaction. Currently, each block on the Ethereum blockchain has a target size of 15 million gas units and a limit of 30 million gas units to address the increase in demand on the network. This is meant to ensure blocks don’t become arbitrarily large, which would cause less performant full nodes to stop being able to keep up with the network due to its space and speed requirements.

To allow any node to add a block to the chain without malicious intent, the network uses a consensus mechanism through which it checks the legitimacy of the new blocks. Currently, Ethereum uses a Proof-of-Stake, or PoS consensus mechanism, however, in the past the network used to be secured through a Proof-of-Work or PoW consensus mechanism which required anyone wanting to add a new block to the network to solve a difficult cryptographic puzzle. This process was referred to as mining and was rewarded with the company’s native cryptocurrency – Ether or ETH. However, as the complexity of these calculations grew, the requirements for the miners’ hardware also grew, which led to an inevitable increase in Ethereum's fees. For this and other reasons, the network decided to change its consensus mechanism to a more cost-efficient and energy-friendly PoS algorithm. 

Ethereum’s PoS was first described in the project’s original whitepaper, however at the time the method was seen as non-trivial to an extent that made it impossible to implement. The mechanics behind it are simple, instead of relying on miners’ expensive hardware to prove their reliability, the network employs so called validators which can run a lighter version of the project’s software, however, they are required to lock, or stake, a certain amount of tokens that can be slashed if they are found to misbehave. 

Smart contracts represent a fundamental building block for all Ethereum-based applications. Essentially, they are computer programs stored on the blockchain, that can be set to follow predetermined logic and execute certain actions when specific conditions are met. The idea was first envisioned by Nick Szabo in two research papers in 1994 and 1996. Smart contracts are meant to digitally take the place of the party responsible for executing a contract that two entities have beforehand agreed upon.

Smart contracts can be created using various programming languages, however, the most often used one is Solidity. The language was initially proposed by Gavin Wood, Ethereum’s co-founder, and was later developed by the company’s Solidity team.

There are some known limitations within smart contracts such as their maximum size limit of 24KB and their inability to send HTTP requests which results in being unable to get information regarding events outside the blockchain. However, both of those have solutions, the size limit is handled by the introduction of the EIP-2535 standard – a standard for creating modular smart contract systems, extendable after deployment. The other limitation is solved by Oracles, which are essentially bridges between the blockchain and the real world.

How to use Ethereum

The Ethereum EVM exists as a single entity maintained by numerous computers running the Ethereum client, while connected to each other. Deploying code to it and having it broadcasted onto the network through its various nodes is how smart contracts, followed by dApps, and further whole businesses can benefit from the network’s abilities.

Users wishing to take part in the Ethereum network can do so by running a node. Also referred to as “client”, nodes represent a dedicated software downloading a copy of the Ethereum blockchain and verifying the validity of each block on it, while also keeping it up-to-date with recent changes and updates, and helping others download and update their own copies. Ethereum nodes are designed to run on average consumer-grade computers, however, most users choose to run their nodes on dedicated hardware devices to eliminate performance impact on their machines.

To interact with a dApp created on the Ethereum blockchain or a smart contract, users need to have a wallet Ethereum tokens support and connect it to the platform of choice. Furthermore, to send a request to a dApp there occurs a transaction that is paid for in ETH tokens and can be viewed as a fee, otherwise known as gas fee, paid to the network and later down the line given to the nodes operating it.

The Ethereum fees or gas fees had been notoriously growing in value with the growth of the network which provided room for other projects similar to Ethereum to pop up and try to solve this issue. However, following the Merge, the Ethereum fees have significantly dropped down. Ethereum gas fees are calculated through a mathematical formula comparing the size of the blockchain’s previous block with the target size (15 million Gas units) and increasing it by a maximum of 12.5% if the target block size is passed. 

Ethereum staking

With the arrival of the new Ethereum consensus mechanism users were provided the option of staking ETH. Currently, there are three options for users interested in staking Ether. The first, named “Solo staking” requires a minimum of 32 ETH tokens to be staked and a dedicated computer connected to the internet at all times, through it users become validators of the network. More details are available through the official Ethereum website. The second option, or “Staking as a service” - the official name given to it by the Ethereum team, also requires a minimum of 32 ETH, however through it users are not required to run their dedicated nodes - this is handled by a trusted third-party. The final official staking option is named “Pooled staking”, through it users can stake any amount of ETH they wish, however this is not a service that is native to the Ethereum network.

The Ethereum ETH token

The initial use of the ETH token was to provide mining rewards and serve as means of payment for anyone willing to accept it as such. The digital asset also acts as the only acceptable form of payment for transaction fees on the network and any project built on it. The currency is often the primary form of collateral in various DeFi lending markets and is a unit of account in NFT marketplaces.

Following the latest update of the Ethereum protocol, the token is used to verify the state of the network by being staked by its nodes.

Ether is an inflationary token based on the ERC-20 token standard. Each time a transaction happens on the Ethereum network, the base gas fee accrued by it gets destroyed or burned, which removes it from circulation. Depending on the network demand, some blocks may burn more ether than they mint. 

The digital currency has several denominations used when a smaller amount of the token is being referred to. “Wei” is the smallest of them and accounts for 10-18 of 1 ETH. “Gwei” is short for giga-Wei and is often used as a unit of measure when it comes to gas prices and accounts for 10-9 of one ETH.

Is Ethereum safe

The current Ethereum team is still led by Ethereum co-founder and sole creator of the Ethereum whitepaper - Vitalik Buterin. Another key co-founder and core Ethereum team member - Gavin Wood, wrote an implementation of Ethereum in C++ and later was the first to run the Ethereum testnet. In April 2014, he published the Ethereum Yellow Paper and later proposed Ethereum’s native programming language - Solidity. Due to disagreement with the amount of decentralization in the project, he left the Ethereum team in 2016 and founded Polkadot - a major Ethereum competitor. In total, the Ethereum co-founders are eight - Vitalik Buterin, Gavin Wood, Mihai Alisie, Anthony Di Iorio, Amir Chetrit, Charles Hoskinson, Jeffrey Wilcke, and Joseph Lubin. 

So far, there are no security issues concerning the Ethereum blockchain made public but it is rumored that such have been previously found and patched with updates of the protocol. However, there is one event from 2016 involving Ethereum which sparked a debate and later resulted in a split within the community. 

The Ethereum Foundation which stands behind the Ethereum team decided to establish a DAO and did a 28-day crowd sale which resulted in $150M worth of funds being gathered by the DAO only during the first three weeks of the event. In exchange for their investment, the crowd sale participants were given tokens holding voting rights. Later, token holders were supposed to figure out how to disperse the gathered funds through voting. However, before the end of the sale, several experts expressed their concerns regarding vulnerabilities in the smart contract responsible for the DAO’s wallet. While the team behind the development of DAO was working on fixing the bug, the contract was exploited by an anonymous party.

What made the Ethereum DAO hack possible was that the developers had created a governance mechanism similar to that of publicly traded joint-stock corporations. The minority was protected from the majority by being able to retrieve their funds in cases where a proposal they didn’t agree with would be approved. The mechanism, similar to the appraisal right in corporate law, would split the DAO into two DAOs - the original Ethereum DAO and a so-called child DAO which would hold the minority’s funds for 28 days. Any token holder was allowed to initiate the split procedure and take their Ether into the new DAO.

However, the code was found to contain a critical vulnerability - after the split function was called, the Ether was to be retrieved before the balance was updated, and the algorithm wasn’t checking whether there was a recursive call - an indication of a function calling itself. The loophole allowed the exploiter to recursively call the split function and retrieve their funds numerous times before the app would check the balance - essentially what is known as a “recursive call exploit”.

Since the community was heavily invested in the DAO financially, with an estimated 14% of all ETH in circulation at the time being locked in the wallet of the organization, debates began on how to deal with the incident. At first, Ethereum founder Vitalik Buterin proposed to do a soft fork of the network and add code blacklisting the attacker from the blockchain and preventing them from moving the stolen funds. However, the attackers or someone posing as them shortly published an open letter to the community stating the funds had been obtained legally since they didn’t break any of the rules set in the smart contract. Besides that, the attacker was now threatening to take legal action against anyone attempting to seize his funds.

Nevertheless, the company decided to proceed with the soft fork however, at that point a bug was discovered in the update code which would potentially make it vulnerable to attacks. It was then decided to do a hard fork of the blockchain and return it to its previous state from before the attack, following which investors would be able to withdraw their funds.

The way Ethereum wanted to solve this problem caused controversy in the community as blockchain technology is supposed to be immutable and censorship-resistant. As a result, two groups formed within the stakeholders of the DAO, and eventually the hard fork was executed, but at the cost of some of the community forming another Ethereum blockchain named Ethereum Classic which was essentially a continuation of Ethereum’s version from after the DAO attack and before the hard fork.

Partners 

Ethereum was funded through an ICO in 2014 where buyers received ether in exchange for bitcoin. The sale amounted to around $17.2M out of which $2.2M were sold in the first 12 hours of the event. At the time, the offering sparked controversy as 9.9% of it was allocated to the company’s founding team while another 9.9% was given to the Ethereum Foundation. Some assume Ethereum is the first company to hold an Initial Coin Offering in the crypto industry.

The Ethereum Foundation operates as a non-profit organization dedicated to the support and development of Ethereum. Although there is a disclaimer on the Foundation’s website stating it doesn’t control Ethereum but is only part of a large ecosystem of organizations, individuals, and companies supporting Ethereum some see its role in the development of the network as crucial. 

The organization was created in July 2014 in Switzerland by Vitalik Buterin and Gavin Wood, who collaborated with a team of developers passionate about the growth of the network. The initial goal of the Ethereum Foundation was to organize a common governance point leading the development of Ethereum and control its treasury which was at the time worth more than $18 million in the form of bitcoin which was being collected for the development of the project. 

The current Ethereum Foundation executive board includes Aya Miyaguchi - Executive Director, Vitalik Buterin Ethereum’s co-founder, and Patrick Storcheneger a board member.

What's next

The current Ethereum roadmap consists of employing a mechanic known as sharding. The upgrade will include multiple phases and is expected to go live starting in 2023. 

Sharding, a common concept in computer science, represents splitting a database horizontally in order to spread the load of a network. The technology will allow Ethereum to scale as it is seen as an alternative to increasing the size of its database. This will also further improve the project’s decentralization as it will allow even more network validators to take part in securing the blockchain, as the hardware requirements for running nodes will become even lower since validators won’t be required to store the entire Ethereum database. 

Links

https://ethereum.foundation/

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