Welcome to Ethereum, a bustling, virtual city with no physical manifestation. Imagine a metropolis where transactions occur, contracts are signed, applications are developed, and even art is bought and sold. Ethereum is not merely a digital currency like Bitcoin, which was designed to facilitate digital transactions, as we explored in our previous article. It’s a fully-featured digital civilization.
Ethereum was developed in 2015 by Vitalik Buterin to be far more advanced, akin to ancient Rome compared to Bitcoin’s primitive structures. Its “Turing completeness” denotes that, given enough resources and the right instructions, it can solve any computational problem. This is the foundation that allowed Ethereum to develop “Solidity”, its unique programming language, enabling developers to build advanced applications on its blockchain. In this article, we explore this bustling digital metropolis, its unique architecture, and the blueprint for its future.
Ethereum’s foundation
Like the infrastructure underpinning a city, Ethereum’s foundation is its blockchain technology. Imagine the blockchain as a city’s road network, connecting everything within Ethereum. This infrastructure is open, transparent, and decentralized — it belongs to all its residents, not a single entity.
In Ethereum City, the native currency, Ether (“ETH”), is similar to a city’s standard currency. Ether is used for transactions, like buying goods or paying for services. Miners earn it by validating transactions, akin to workers earning wages. Don’t get confused through, this is distinctly different from Ethereum, which refers to the blockchain network instead of the currency.
Just as laws are vital to maintain order within cities, smart contracts facilitate transactions in Ethereum City. Like impartial judges, these digital contracts automatically execute when their conditions are met, eliminating the need for a middleman. These contracts are stored on the decentralized Ethereum blockchain, ensuring transparency and immutability, thereby making it more trustworthy.
Keeping the lights on in the Ethereum city
Just as a city needs workers to keep the system running, Ethereum relies on a specialized workforce known as miners. These miners however, aren’t digging underground for precious minerals — they are the computational workers verifying transactions and adding them to the Ethereum blockchain. Every time a citizen of the Ethereum city conducts a transaction, such as sending Ether or interacting with a smart contract, miners do their work. They validate these transactions and ensure that everything goes as planned.
As with all workers, miners too need to get paid for their services of maintaining Ethereum’s network security. This is apportioned to them from the ‘gas’ fees that are paid when transactions are executed. These gas fees are paid in Ether. While simpler transactions are cheaper relative to more complex transactions, the absolute amount of gas to be paid fluctuates based on the prevailing level network usage. During periods of high network usage, gas prices can increase drastically as people compete to have their transactions included in the next block, leading to what we can compare to traffic congestion in a physical city.
The job of these miners is crucial for the city’s functionality. They provide security to Ethereum by preventing fraudulent activity and maintaining order in the city. Just like a city’s police force or security personnel, miners keep Ethereum safe from potential ‘bad actors’. Without miners, Ethereum city would be vulnerable to attacks and malpractices, resulting in chaos and disruption.
Just like a city’s police force or security personnel, miners keep Ethereum safe from potential ‘bad actors’.
Features of the Ethereum city
DeFi: The Financial District
Just as the financial district in a city hosts banks, investment firms, and insurance companies, Decentralized Finance (“DeFi”) encompasses an array of financial applications, all built on Ethereum’s blockchain. However, unlike the traditional financial systems, DeFi operates without central authorities and is instead governed by smart contracts. Below, we explore some popular DeFi use cases:
- Lending and borrowing platforms — These replace the services of traditional banks by allowing users to lend and borrow funds directly from each other. These platforms leverage smart contracts to automate the lending process and enforce loan terms, without the need for tedious KYC (“Know Your Customer”) processes. Some examples of popular lending and borrowing platforms include Aave and Compound.
- Decentralized exchanges (“DEXs”) — These act as a marketplace, allowing users to trade digital assets directly with one another without an intermediary. These platforms aim to replace centralized exchanges like Binance and Kraken, which are crypto equivalents of the NYSE or NASDAQ. Some examples of popular DEXes include Uniswap and Balancer.
DAOs: The city council
In the cityscape of Ethereum, among the myriad of structures, there exist organizations that function without any central authority. These are known as Decentralized Autonomous Organizations (“DAOs”). Much like a republic in the world of governance, DAOs operate based on rules encoded in smart contracts. Members of the DAO can make decisions by casting votes, their weight often determined by the number of tokens they hold, thereby bringing democracy, transparency, and autonomy to the forefront. DAOs can fundamentally change how businesses operate, ensuring that all stakeholders have a voice and removing the necessity for a central, controlling authority. This democratic, transparent way of decision-making is a significant departure from traditional hierarchical organizational structures, akin to how republics differ from monarchies.
Members of the DAO can make decisions by casting votes, their weight often determined by the number of tokens they hold, thereby bringing democracy, transparency, and autonomy to the forefront.
DAOs, like the buildings within a city, can serve a multitude of purposes. They can be utilized to manage decentralized venture capital funds, where investment decisions are made collectively by the members. DAOs can also be employed for managing decentralized networks and applications and so much more. Some examples of DAOs include Apecoin DAO, and BitDAO.
NFTs: Unique artifacts
Think about how a city might be home to unique artifacts, such as a one-of-a-kind sculpture or a rare historical document in a museum. In the Ethereum city, these artifacts translate to Non-Fungible Tokens (“NFTs”). Unlike regular tokens like Ether, which are interchangeable or ‘fungible’, NFTs are unique. They each have their own distinct qualities, making them different from all other tokens. It’s like having a painting where there’s only one original; copies can be made, but the original will always hold unique value.
These unique tokens leverage the transparent and secure nature of Ethereum’s blockchain. When an NFT is bought or sold, the transaction is recorded on the Ethereum blockchain, just like a property deed in a city’s record office. This blockchain record proves who owns the NFT, and because the blockchain is transparent and unalterable, the ownership of the NFT is clear and indisputable. It’s this system that guarantees the uniqueness and provenance of the NFT.
NFTs can represent a wide range of unique items or pieces of content. Digital art has been one of the most popular uses of NFTs, with artists creating digital artwork and selling it as NFTs. But the uses of NFTs go far beyond digital art. They can represent ownership of virtual real estate in digital worlds, unique in-game items in video games, or even ownership of real-world assets. It’s like the diverse range of unique attractions and properties you’d find in any city, each with its own story and value.
Upgrading the city of Ethereum
Despite its inherent strengths and offering, as with any metropolis, Ethereum City has its challenges — key of which is scalability. As the city grows and more citizens join, the current infrastructure struggles to process transactions quickly and cost-effectively. It’s like a city dealing with traffic congestion due to population growth. Another challenge is the city’s complexity. Just like a new resident might find it hard to navigate a large city, new users often find it challenging to understand and use Ethereum. As Ethereum City continues to develop and welcomes more citizens into its city, it is in the process of addressing these challenges to ensure a sustainable and inclusive future for all its citizens.
Layer 2 Solutions
Scalability in Ethereum City is akin to dealing with traffic congestion in a physical city. Just as more roads or a mass transit system can help handle more cars or people, Layer 2 solutions are like adding extra lanes or high-speed trains to Ethereum’s infrastructure to handle more transactions. Layer 2 solutions sit on top of the Ethereum blockchain (Layer 1) to process transactions off-chain. These transactions are only added to the main Ethereum blockchain once the user decides to make a transaction on the Layer 1 network. It’s like taking a fast, direct express train and only stopping at the main station when needed.
Layer 2 solutions help Ethereum City handle more transactions, faster and with lower fees. By taking transactions off the main blockchain, they reduce the load on the network and make it more efficient. It’s similar to how an express train or highway bypass can allow for quicker travel times by avoiding the busy city center. Some Layer 2 solutions can process hundreds or even thousands of transactions per second, significantly more than Ethereum’s current capability. This increased capacity not only improves speed but also reduces transaction fees, making it cheaper for citizens to interact within Ethereum City.
Various Layer 2 solutions are being developed and implemented in Ethereum City. One example is ‘rollups’, which bundle or ‘roll up’ many transactions into one, greatly increasing the city’s capacity. They’re like a super-efficient bus system carrying many passengers at once. Another example is ‘state channels’, which allow participants to exchange multiple transactions off-chain before settling the final state on-chain, similar to setting up a tab at a bar and paying the total bill at the end. Some popular examples of Layer 2 solutions include Arbitrum, Polygon and Optimism. These solutions, among others, are helping Ethereum City manage its growth and ensure it remains a bustling, efficient, and inclusive digital metropolis.
The merge: PoW to PoS
When Ethereum was created, it used a Proof of Work (“PoW”) consensus mechanism to verify new transactions. While this was revolutionary for its time, it grew to consume vast amounts of energy and became an issue for Ethereum’s sustainability. To change this, the Ethereum Foundation successfully executed “The merge” in Sept 2022 to transition to a Proof of Stake (“PoS”) consensus which amongst other things, drastically reducing its energy consumption by ~99.95% while still retaining the network’s security.
The master blueprint
Beyond the upgrades that Ethereum has already undergone, the Ethereum Foundation still has a long way to go to achieve its ultimate goal. To achieve that, Vitalik proposed to embark the team on a multi year journey which would see the network go through the following upgrades
- The Surge: upgrades related to scalability by rollups and data sharding
- The Scourge: upgrades related to censorship resistance, decentralization and protocol risks from MEV
- The Verge: upgrades related to verifying blocks more easily
- The Purge: upgrades related to reducing the computational costs of running nodes and simplifying the protocol
- The Splurge: other upgrades that don’t fit well into the previous categories.
If you like a more diagramatic illustration of the above, Vitalik did the work and had the below diagram in his tweet.
Conclusion
As we reach the end of our tour of this digital city, Ethereum, we see how it has grown from a promising project into a bustling metropolis of the blockchain world. With a solid foundation based on Turing completeness, Ethereum has attracted countless developers and companies, leading to innovative applications and services built upon its platform.
Like Rome, Ethereum wasn’t built in a day. It’s constantly growing and evolving, with a dedicated community of developers continually working on improving its infrastructure, capacity, and security. The journey to Ethereum 2.0 with its PoS consensus mechanism, sharding, and scaling solutions signifies the beginning of a new era in Ethereum’s history, just like how Rome’s transformation from a republic to an empire was a significant event in its history.
Remember, as we’ve journeyed through Ethereum, we’ve only scratched the surface. Just as Rome has centuries of history and culture, Ethereum has layers of complexity and innovation that are still being discovered and understood. Happy exploring, dear reader. Welcome to the city of Ethereum.
