Jan 29
What is Ethereum?
My key takeaways from ch3–4 of “How to Defi Beginner”
Ethereum: The Decentralized Layer
Ethereum is an open-source platform formed by a network of computers. The computers serve as nodes which process blocks of transactions (the blockchain) while communicating with some other nodes for validating the blocks.
Smart Contract
On Ethereum, smart contracts can be written and deployed to the network to power the DApps. A smart contract is a contract turned into a computer program that can be executed without third-party involvement (e.g. lawyers). When the conditions set by the counter-parties for a transaction are met, the contract is automatically executed while the process of execution is transparent to all involved parties on the network.
Decentralized Applications (DApps)
DApps are the user interfaces (similar to web or mobile applications) where smart contracts interact with the blockchain.
Characteristics
- Immutability: information on the blockchain (also the smart contracts) cannot be changed. While immutability brings benefits, it can also exacerbate errors on chain.
- Transparent: Smart contracts can be publicly audited, but the transparency of the codes can also make them prone to attacks
- Availability: DApps are active so long the network is active.
- Scalability: The bandwidth of a DApp is usually restricted by that of the blockchain where it is built on.
Ether (ETH) and Gas
ETH is the native currency of Ethereum. It can be used for purchase, used as collateral in DeFi and used for paying the Gas — the fee for running smart contracts on Ethereum network. Gas is a unit measuring the computational effort needed for execution. The price of Gas varies with the complexity of the operation and the network demand for transactions. The more complicated the smart contract or the more congested the network is, the higher the Gas fee. In that way, miners, who help pay the computational effort for creating block of transactions to the network, prioritize higher-gas transactions and queue the remaining transactions.
Decentralized Autonomous Organizations (DAO) and tokens
On Ethereum, DAO can be created and other cryptocurrencies can be issued. A DAO is an autonomous organization governed by code based on smart contracts. For deciding on governance issues, voting can be done with DAO tokens (cryptocurrencies). The issuing of tokens are regulated by ERC-20 and ERC-721 protocol standards — ERC-20 tokens are fungible (just like money) while ERC-721 tokens are non-fungible (just like unique collectables).
Ethereum wallets
The wallet is an interface for users to manage their cryptocurrencies with their private keys. A wallet on the blockchain is not so similar to a wallet in real-life, it does not actually store your coins — if you lost your wallet in real life, you have also lost your coins; but if you lost your wallet on blockchain, you can still retrieve your assets by creating a new wallet with your original private key.
In the world of crypto, “not your keys, not your coin” holds true — anyone who holds the seed phrase for any wallet have control of the asset within.
Custodial wallets
- Third-parties keep your cryptocurrencies on your behalf
- You can get a new password for the wallet if you forgot the previous one, without losing your asset
Risks: lost of cryptocurrencies due to custodial mismanagement or hacks
Non-custodial wallets
- You take full control and ownership of your cryptocurrencies
- If you lose your private keys (seed phrase), you lose your asset as well
Thank you for reading! If you found this article helpful, don’t hesitate to 👏🏻 :)
I am Joyce, a 21-year-old who writes about things that she’s teaching herself. Currently learning about programming and DeFi 👩🏻💻.
