Ethereum

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21 Feb 2024

Ethereum is a decentralized computing platform. You can think of Ethereum like a desktop or laptop computer, but it doesn't run on a single device. Instead, it runs simultaneously on thousands of machines from all over the world, which means Ethereum has no owner.

Like Bitcoin and other cryptocurrencies, Ethereum allows you to transfer digital money. However, it is capable of much more than that. For example, you can create your own code and interact with applications created by other users. Because it is so flexible, all kinds of sophisticated programs can be made available on Ethereum.

In its simplest form, the main idea behind Ethereum is that developers can create and make available code that runs on a distributed network rather than a central server. So, in theory, these applications cannot be closed or censored.

What is the difference between Ethereum and ether (ETH)?

Although unusual, the units used in Ethereum are not called Ethereum or Ethereums . Ethereum is the protocol itself, but the currency it uses is called ether (or ETH).

What makes Ethereum valuable?

We briefly mentioned that Ethereum can run codes on a distributed system. Therefore, external parties cannot manipulate the programs. These codes are added to Ethereum's database (e.g. blockchain ) and can be programmed to be unalterable. In addition, the database is publicly viewable so users can audit code before interacting with it.

This means anyone, from anywhere, can launch untakeable apps. More interestingly, since ether, a platform-specific unit, stores value, these applications can determine the conditions for value transfer. These programs that create applications are called smart contracts . In many cases, they can be arranged to work without human input.

Predictably, the idea of “programmable money” has attracted users, developers, and businesses from all over the world.

What is Blockchain?

Blockchain underlies Ethereum and is the database that holds the information used by the protocol. If you have read our article What isBitcoin, you should have basic knowledge of how a blockchain works . The Ethereum blockchain is similar to Bitcoin, but the data held and the way this data is kept is different.

You can think of Ethereum's blockchain as a book to which you add new pages. Each page is called a block and contains information about transactions. When you want to add a new page, a special number must be added at the top of the page. Thanks to this number, everyone can see that the new page is added behind the previous page , and is not placed at a random point in the book.

This number is essentially like a page number that references the previous page. By looking at the new page, it can definitely be said that the previous page is followed. To do this, a process called hashing is used.

Hashing consists of taking a piece of data (in this case, everything on the page) and outputting a unique token ( hash ). The probability that two different pieces of data will create the same hash is astronomically low. The process is also one-way: it is extremely easy to calculate a hash, but it is almost impossible to get the actual information by returning the hash. We will talk about why this feature is important for mining in a later section.

We now have the mechanism to link our pages together in the correct order. Any attempt to change the order or remove pages will clearly indicate tampering with the book.

If you want to learn more about Blockchains, you can read our Blockchain Technology Guide for Beginners article.

What is the difference between Ethereum and Bitcoin?

Bitcoin uses blockchain technology and financial incentives to create a global digital currency system. It has introduced some important innovations that allow users in different parts of the world to coordinate without the need for a central party. Thanks to Bitcoin, it has become possible for users to reach consensus on a financial database in a trustless, decentralized environment, with each participant running a program on their own computer.

Bitcoin is often referred to as the first generation blockchain. It was not created as a very complex system, and this feature offers strength in terms of security. It is specifically designed to be inflexible, prioritizing security as the base layer. Therefore, the smart contract language in Bitcoin is extremely limited and does not succeed in incorporating applications other than money transfer.

In contrast, second-generation blockchains have more capabilities. These platforms allow for a higher level of programmability in addition to financial transactions. Ethereum allows more freedom for developers to experiment with their own code and create Decentralized Applications (DApps) .

Ethereum is the first example of the second generation blockchain wave and remains at the forefront to this day. It is similar to Bitcoin and can perform many of the same functions. But the two blockchains are extremely different from each other and each has its own advantages over the other.

How does Ethereum work?

We can define Ethereum as a state machine . This means that at any given time you have a snapshot of the current view of all account balances and smart contracts. Certain actions cause the state to be updated, meaning that all nodes update their snapshots to reflect this change.

A change in Ethereum's status.

Smart contracts running on Ethereum are triggered by transactions (from users or other contracts). When a user submits a transaction to a contract, each node on the network executes the contract and records the output. This is done using the Ethereum Virtual Machine (EVM) , which translates smart contracts into instructions that computers can read .

A special mechanism called mining is used to update the state (for now). Mining is done with a Proof of Work algorithm , similar to Bitcoin . We will talk about this in detail in the coming sections.

What is a smart contract?

A smart contract is just a code. The code is not a smart contract or a contract as we know it. However, the code is called smart because it implements itself under certain conditions, and it is a contract in a sense because it ensures that the agreements between the parties are fulfilled.

Computer scientist Nick Szabo proposed this idea in the late 1990s. He used an example of an automaton to explain the concept and stated that automatons can be considered as the predecessor of modern smart contracts. There is a simple contract implemented in the vending machine example. The user inserts a coin into the machine and the machine dispenses the product the user wants.

A smart contract applies the same logic to digital conditions. Koda says that when two ethers are sent to this contract, “Hello, World!” A simple condition such as send your answer can be entered.

In Ethereum, the developer encodes this input so that it can then be read by the EVM. It then publishes this code by sending it to the special address that implements the contract. At this point the contract becomes available to everyone. Additionally, the contract cannot be deleted unless the developer specifies a special condition while writing the code.

The contract now has an address . To interact with this address, all users need to do is send 2 ETH to the address. This triggers the contract's code – it runs it on every computer on the network, sees that the contract has been paid, and records the output ( “Hello, World!” ).

The transaction we mentioned above is one of the simplest examples of what you can do with Ethereum. More sophisticated applications that tie together many contracts can (and have) been created.

Who created Ethereum?

In 2008, an anonymous developer (or developer community) published the Bitcoin whitepaper under the pseudonym Satoshi Nakamoto . As a result, the world of digital money has changed permanently. A few years later, Vitalik Buterin, a young programmer, started thinking about taking this idea one step further and finding a way to use it on all kinds of applications. The concept eventually emerged as Ethereum.

Ethereum was introduced by Buterin in 2013 in his blog post titled Ethereum: The Ultimate Smart Contract and Decentralized Application Platform . In this article, Buterin explained the idea of a full Turing blockchain , a decentralized computer that can run any application given enough time and resources .

Over time, the types of applications that can be used on a blockchain have become limited only by the developer's imagination. It aims to find out whether Ethereum blockchain technology has valid uses outside of Bitcoin 's intentional design limitations.

How was Ether distributed?

Ethereum was launched in 2015 with an initial supply of 72 million ether. More than 50 million of these tokens were distributed in a public token sale called an Initial Coin Offering (ICO), in which interested participants could purchase ether tokens in exchange for bitcoin or fiat currencies .

What was The DAO and what is Ethereum Classic?

With Ethereum, entirely new ways of open collaboration over the internet have become possible. For example, DAOs ( decentralized autonomous organizations ) have emerged that are governed by computer codes similar to computer programs .

One of the first and most ambitious attempts at such an organization was “The DAO”. It would consist of complex smart contracts running on Ethereum and operate as an autonomous venture fund. DAO tokens were distributed via ICO , giving ownership and voting rights to token holders.

But soon after its launch, malicious actors discovered a vulnerability and withdrew almost a third of the DAO's funds. It should also be noted that at the time, 14% of the entire ether supply was locked up in the DAO. Predictably, this incident caused great damage to the nascent Ethereum network.

After the evaluations, the chain was split in two with a hard fork . In one, malicious transactions were “reversed” to recover funds – the chain now known as the Ethereum blockchain. In the original chain, now known as Ethereum Classic, transactions were not reversed and the principle of immutability was preserved.

The incident was a harsh reminder of the risks of this technology and how entrusting large amounts of funds to autonomous codes could backfire. It also offered an interesting example of how making collective decisions in an open environment can create challenges. But security vulnerabilities aside, The DAO demonstrated the potential of smart contracts to enable large-scale trustless collaboration over the internet .

How are new ethers created?

We briefly mentioned mining before. If you know about Bitcoin , you probably know that the mining process is closely related to the security and updating of the blockchain. The same principle applies in Ethereum: to reward users who mine (which is a costly process), the protocol gifts them ether.

How many ethers are there in total?

As of February 2020, the total ether supply is around 110 million.

Unlike Bitcoin , Ethereum's token emission program is not specifically finalized from the beginning. Bitcoin attempts to maintain its value by limiting its supply and slowly reducing the amount of new coins created . Ethereum, on the other hand, aims to provide a foundation for decentralized applications (Dapps). Since the token emission program that will best serve this purpose is not clear, the question remains open-ended.

How does Ethereum mining work?

Mining is critical to the security of the network. It ensures that the blockchain can be updated fairly and that the network can operate without a single decision-maker. In the mining process, a subset of nodes ( miners ) devote their computing power to solving a cryptographic puzzle.

What they actually do is hash a group of pending transactions and some other data. For the block to be considered valid, the hash must be below a protocol-specified value. If the miner cannot reach this value, it can try the operation again by changing some of the data.

Therefore, in order for miners to compete with other miners, they need to be able to hash as quickly as possible. Therefore, the power of miners is measured by hash rates . The higher the hash rate on the network, the more difficult the puzzle to solve. What miners have to do is find the actual solution, once found the validity of this solution can be easily checked by other participants.

As you can imagine, constantly hashing at high speeds is costly. Miners are paid a payment to incentivize them to keep the network secure. The payment consists of all expenses paid for transactions in the block . Miners also receive newly created ether (2 ETH as of now).

What is Ethereum gas?

The aforementioned Hello, World! Do you remember our contract? This is an easy program to run and is not computationally expensive at all. However, this program cannot be run only on one's own personal computer; everyone in the Ethereum ecosystem is also asked to run the program.

So the question arises: what happens when tens of thousands of people run sophisticated contracts? If one were to set up their contract to repeat the same code, each node would have to run it infinite times. This puts a huge strain on resources and will probably eventually crash the system.

Fortunately, Ethereum introduced the concept of gas to eliminate this risk. Just as your car cannot run without gas, contracts cannot be implemented without gas. Users must pay a certain amount of gas to run contracts successfully. If there is not enough gas, the contract stops working.

At its most basic, this is a transaction fee mechanism. The same concept is reflected in transactions: miners' primary motivation is to make a profit, so they may ignore low-cost transactions.

It is important to note that ether and gas are not the same. The average price of Gas varies and is largely determined by miners. When you make a transaction, you pay gas in ETH. In this respect, it is similar to Bitcoin 's transaction fees – if the network is congested and many users are trying to make transactions, the average gas price will likely rise. Conversely, when there is not much movement, the gas price drops.

Although the gas price changes, the amount of gas required for each transaction is constant. This means that complex contracts will be more costly than simple transactions. So gas is a measure of computing power . It ensures that users can be offered an affordable transaction fee based on how much of Ethereum's resources they use.

Gas generally consists of a small percentage of ether. Therefore a smaller unit ( qwei ) is used for gas. One gwei is one billionth of ether.

In short, you can run a program that will loop for a long time . But doing this quickly becomes very costly. In this way, nodes on the Ethereum network can block spam.

Average gas price in gwei over time. Source: etherscan.io

Gas and gas limits

Suppose Alice pays into a contract. She first calculates how much gas she wants to spend (e.g. using ETH Gas Station ). It may set a higher price to encourage miners to add the transaction as soon as possible.

Alice also needs to set a gas limit to protect herself . Something might go wrong with the contract and he might have to spend more on gas than he planned. Thanks to the gas limit, it is guaranteed that the transaction will stop after x amount of gas is spent. The contract fails, but Alice does not have to pay more than she originally agreed to.

This may seem like a difficult concept to understand at first. But don't worry, you can manually set the gas price (and gas limit) you want to pay, but most wallets will handle this for you. In short, the gas price determines how long it takes miners to process your transaction, and the gas limit limits the maximum amount you can pay.

How long does it take to mine an Ethereum block?

The average time for a new block to be added to the chain is between 12-19 seconds. This will likely change as the network moves to Proof of Stake , which aims for faster block times among other improvements . If you want to learn more about this topic, What is Ethereum Casper? You can read our article.

What are Ethereum tokens?

The appeal of Ethereum is largely based on the fact that users can create their own assets on the chain and that these assets can be stored and transferred like ether. Rules for assets are determined by smart contracts so developers can set specific parameters for their tokens. Parameters may include how many assets to mine, how the assets are mined, whether they are divisible, whether they are fungible, and other things. The most widely used technical standard that allows creating tokens on Ethereum is ERC-20 . This is why the tokens are commonly known as ERC-20 tokens.

Token functionality gives developers great room to experiment with the latest financial and technology applications. There is a wide range of design flexibility, from issuing single types of tokens to serve as in-app currencies to issuing unique tokens backed by physical assets. It is very possible that best practices for simple and seamless token issuance have yet to be discovered.