So you’ve learned about Blockchain and Bitcoin. They sure sound cool, but definitely not as cool as the World Computer, Ethereum. Come, let me explain!
What is Ethereum?
Ethereum is a decentralized blockchain platform that enables the creation of decentralized applications and smart contracts.
Ethereum is Bitcoin, but Better
We have previously learned that Bitcoin is a value network that enables its users to store, transfer, and manage value in a secure and decentralized manner through computer code. However, as Bitcoin gained popularity and more people started mining the currency, its high energy consumption became a major concern. It has limited uses beyond value storage.
In 2013, Vitalik Buterin, who was a co-founder of Bitcoin Magazine, argued to Bitcoin core developers that blockchain technology could be used for more than just money, and proposed a more robust language for developing applications that could attach real-world assets such as stocks and property to the blockchain. He then proposed the development of a new platform, Ethereum, with a Turing-complete programming language allowing for the creation of more sophisticated smart contracts and decentralized applications.
The Ethereum Network
The Ethereum network relies on thousands of independent computers functioning as nodes to keep it alive, executing the code that is written and thereby decentralizing the internet and enabling direct connections between users without the need for a middleman.
Within the Ethereum ecosystem, there are many things that we can already do, and many more innovations are on the horizon. Some examples include creating immutable websites, using flash loans, establishing provenance for products, and secure voting.
Smart Contracts and “Code is Law”
Smart contracts are similar to vending machines that operate based on a set of conditions, such as if-else statements. For example, if you want to get a cold Coke from a vending machine, you need to insert a dollar note and select your desired beverage. Similarly, if you want to exchange currencies on a decentralized exchange run entirely automatically on Ethereum, you only need to provide the correct amount, and you will receive the currency in exchange. Smart contracts on Ethereum are self-executing and follow the code instructions precisely, making them immutable and irreversible.
The Ethereum community initially believed in the principle that “Code is Law”. However, after The DAO hack, where $150 million in ETH was raised but the code was not secure and resulted in the money being drained from the DAO, the community realized that the code was no longer absolute. The majority of the community agreed to fork the state just before the hack occurred to restore the funds. However, some members of the community continued to support the principle that “Code is Law” and continue to operate the Ethereum Classic chain to this day.
Native Currency on Ethereum — Ether (ETH)
The native cryptocurrency of Ethereum is Ether (ETH), which is designed to pay for gas for each transaction made on the Ethereum network. This is due to the fact that each transaction requires energy and block space, and gas is implemented to prevent spam and wastage of computing power on unnecessary tasks and transactions. The more complex the transaction and the more congested the network, the higher the gas fees for Ethereum users, especially if they do not want to wait for a longer period to have their transactions included in the block.
The Merge — A Major Ethereum Network Upgrade
The Ethereum Merge event that occurred on September 15, 2022, is a groundbreaking technological upgrade that transitions Ethereum from a Proof-of-Work consensus mechanism to Proof-of-Stake. This transition results in a reduction of energy consumption by approximately 99.95%, making the network more eco-friendly. Additionally, it enhances the network’s security and allows for higher transactions per second.
The Merge involves merging the consensus state of the Beacon chain with the EVM state of the Proof-of-Work chain, without interrupting block production so that transactions can be processed regularly. This ensures that all applications on Ethereum will continue to operate as they did before the merge, with their state and transaction history maintained.
Before The Merge, the responsibility of securing the network rested primarily with large institutions and sophisticated miners. The upgrade allows anyone to participate in securing Ethereum from home, without the need to purchase expensive and powerful hardware for mining. This increases security and decentralization as more participants join the network.
Additionally, the upgrade paves the way for Sharding, which can be envisioned as dividing a single highway lane into 64 smaller lanes, which in turn can help in lowering network congestion and enhancing the blockchain’s transaction processing capacity.
Proof-of-Work vs Proof-of-Stake Consensus Mechanism
Proof-of-Work
Every miner competes to solve complex mathematical problems and earn rewards. It’s like a race to the finish line, and only one miner can win each time. However, luck also plays a role in mining, and having a better computer increases one’s chances of success. Anyone can join the race, but the cost of mining and total electricity consumption increases as more people participate.
Proof-of-Stake
Instead of everyone running towards the finish line, one runner is chosen at random to run and receive a reward. Since runners no longer have to compete with each other, the track difficulty is reduced. This results in energy savings of 99.95%, making the system more ESG compliant and welcoming to those who are concerned about the environmental impact of Ethereum.
Each validator has to put up a stake to ensure they do not engage in malicious behavior. If a validator does not finish validating a block or gives up, a portion of their stake is slashed, which encourages validators to be reliable. Validators who cheat will be fact-checked, and their stake is removed, resulting in a financial loss for them.
Timing of the Transition in Consensus Mechanism
The transition of consensus mechanism in Ethereum is a significant upgrade that has been carefully timed to balance the risks of a 51% attack and the waste of electricity. If the switch to PoS was made too early, it would have left the network vulnerable to 51% attacks from coin holders who could potentially dominate the consensus process. On the other hand, if the switch was made too late, it would have led to the wastage of massive amounts of electricity in mining, which is environmentally unsustainable.
The timing of the transition is crucial, and the Merge has been implemented at the sweet spot where there are not many sizable whales holding a significant amount of ETH. This reduces the risk of centralization of the network and makes it more decentralized and secure.
Closing Thoughts
The introduction of Ethereum to the world has sparked many meaningful innovations that could propel humanity forward. In particular, it represents a step in the right direction as the risks of centralization in today’s society are growing by the day. We will be uncovering interesting projects on smart contract platforms like Ethereum in the upcoming articles.
*Disclaimer: None of the things I have mentioned here can be taken as financial advice, I am just sharing my knowledge and perspectives on the crypto industry.*Good-to-know: I hired ChatGPT as my editor where I provided my original thoughts and have it polish sentences and paragraphs. Proofread by yours truly.New to trading? Try crypto trading bots or copy trading on best crypto exchanges
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