How Does Ethereum Work?
What is Ethereum?
Ethereum was co-founded by 8 developers from around the world. They met for the first time on 7 June 2014 in Zug, Switzerland and joined forces. Russian-Canadian Vitalik Buterin is the most well-known developer. The author of the original 2013 Ethereum white paper, Vitalik has continued to be an active contributor to the development of Ethereum and continues to develop the platform.
You probably heard about Bitcoin before, but there is another useful technology named Ethereum. Basically, Ethereum is a decentralized blockchain platform that establishes a peer-to-peer network that securely executes and verifies application code, called smart contracts. Smart contracts allow participants to transact with each other without a trusted central authority.
When we look at the definition of Ethereum on its website, it says:
“Ethereum is a technology that lets you send cryptocurrency to anyone for a small fee. It also powers applications that everyone can use and no one can take down.”
In short, Ethereum wants to become a “World Computer” by decentralizing, according to some democratizing, the existing client-server model.
It’s the world’s programmable blockchain.
Ethereum builds on Bitcoin’s innovation, with some big differences.
Both let you use digital money without payment providers or banks. But Ethereum is programmable, so you can also use it for lots of different digital assets — even Bitcoin!
This also means Ethereum is for more than payments. It’s a marketplace of financial services, games and apps that can’t steal your data or censor you.
Is Ethereum a cryptocurrency?
Ethereum itself is essentially not a cryptocurrency, the word Ethereum refers to the digital platform. The actual tokens (used for payment on the network) are called ether. In other words, ether is the ‘crypto-fuel’ (or cryptocurrency) for the Ethereum network. When it comes to trading, the prices you see will refer to ether. Nonetheless, you will commonly see the cryptocurrency referred to as Ethereum.
What are the differences between Ethereum and Bitcoin?
Ethereum’s blockchain technology is similar to Bitcoin’s, however Bitcoin only uses one specific application of blockchain technology. Ultimately, it’s an electronic cash system that enables online bitcoin payments. The Ethereum blockchain does track ownership of digital currency, but also focuses on running the programming code of a range of decentralized applications.
The main difference between the two cryptocurrencies is that Ethereum is a programmable blockchain.
So, we can assume that it is useful in numerous fields.
Banking for everyone
Not everyone has access to financial services. But all you need to access Ethereum and its lending, borrowing and savings products is an internet connection.
A more private internet
You don’t need to provide all your personal details to use an Ethereum app. Ethereum is building an economy based on value, not surveillance.
A peer-to-peer network
Ethereum allows you to move money, or make agreements, directly with someone else. You don’t need to go through intermediary companies.
Censorship-resistant
No government or company has control over Ethereum. This decentralization makes it nearly impossible for anyone to stop you from receiving payments or using services on Ethereum.
Commerce guarantees
Ethereum creates a more level playing field. Customers have a secure, built-in guarantee that funds will only change hands if you provide what was agreed. You don’t need large company clout to do business.
Compatibility for the win
Better products and experiences are being built all the time because Ethereum products are compatible by default. Companies can build on each other’s success.
There are also some benefits of Ethereum. Let’s look at them.
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Ethereum offers an extremely flexible platform on which to build decentralized applications using the native Solidity scripting language and Ethereum Virtual Machine. Decentralized application developers who deploy smart contracts on Ethereum benefit from the rich ecosystem of developer tooling and established best practices that have come with the maturity of the protocol. This maturity also extends into the quality of user-experience for the average user of Ethereum applications, with wallets like MetaMask, Argent, Rainbow and more offering simple interfaces through which to interact with the Ethereum blockchain and smart contracts deployed there. Ethereum’s large user base encourages developers to deploy their applications on the network, which further reinforces Ethereum as the primary home for decentralized applications like DeFi and NFTs. In the future, the backwards-compatible Ethereum 2.0 protocol, currently under development, will provide a more scalable network on which to build decentralized applications that require higher transaction throughput.
So, what is an Ethereum smart contract?
Smart contracts are programs that will work without being affected by any intervention when the time comes or when appropriate conditions are met. Languages such as Solidity, Serpent, LLL are generally used to write smart contracts. The most popular one is Solidity.
A smart contract is application code that resides at a specific address on the blockchain known as a contract address. Applications can call the smart contract functions, change their state, and initiate transactions. Smart contracts are written in programming languages such as Solidity and Vyper, and are compiled by the Ethereum Virtual Machine into bytecode and executed on the blockchain.
Smart contracts are a type of Ethereum account. This means they have a balance and they can send transactions over the network. However, they’re not controlled by a user, instead they are deployed to the network and run as programmed. User accounts can then interact with a smart contract by submitting transactions that execute a function defined on the smart contract. Smart contracts can define rules, like a regular contract, and automatically enforce them via the code. Smart contracts cannot be deleted by default, and interactions with them are irreversible.
What is a transaction?
An Ethereum transaction refers to an action initiated by an externally-owned account, in other words an account managed by a human, not a contract. For example, if Bob sends Alice 1 ETH, Bob’s account must be debited and Alice’s must be credited. This state-changing action takes place within a transaction.
Gas and Fees
Gas is essential to the Ethereum network. It is the fuel that allows it to operate, in the same way that a car needs gasoline to run.
What is Gas?
Gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network.
Since each Ethereum transaction requires computational resources to execute, each transaction requires a fee. Gas refers to the fee required to conduct a transaction on Ethereum successfully.
Base fee
Every block has a base fee which acts as a reserve price. To be eligible for inclusion in a block the offered price per gas must at least equal the base fee. The base fee is calculated independently of the current block and is instead determined by the blocks before it — making transaction fees more predictable for users. When the block is mined this base fee is “burned”, removing it from circulation.
Priority fee (tips)
Before the London Upgrade, miners would receive the total gas fee from any transaction included in a block.
With the new base fee getting burned, the London Upgrade introduced a priority fee (tip) to incentivize miners to include a transaction in the block. Without tips, miners would find it economically viable to mine empty blocks, as they would receive the same block reward.
Max fee
To execute a transaction on the network, users can specify a maximum limit they are willing to pay for their transaction to be executed. This optional parameter is known as the maxFeePerGas. For a transaction to be executed, the max fee must exceed the sum of the base fee and the tip. The transaction sender is refunded the difference between the max fee and the sum of the base fee and tip.
One of the main benefits of the London upgrade is improving the user’s experience when setting transaction fees.
EIP-1559
The implementation of EIP-1559 in the London Upgrade made the transaction fee mechanism more complex than the previous gas price auction, but it has the advantage of making gas fees more predictable, resulting in a more efficient transaction fee market. Users can submit transactions with a maxFeePerGas corresponding to how much they are willing to pay for the transaction to be executing, knowing that they will not pay more than the market price for gas (baseFeePerGas), and get any extra, minus their tip, refunded.
And you may hear about the Ethereum 2.0 thing. It is also known as Serenity. So, what is it and what can it change?
Ethereum 2.0, also known as Eth2 or “Serenity,” is an upgrade to the Ethereum blockchain. The upgrade aims to enhance the speed, efficiency, and scalability of the Ethereum network so that it can avoid bottlenecks and process more transactions simultaneously.
We can explain it like this briefly.
When is Ethereum 2.0 happening?
Ethereum 2.0 is launching in several phases, with the first upgrade, called the Beacon Chain, going live on December 1, 2020. The Beacon Chain introduces native staking to the Ethereum blockchain, a key feature of the network’s shift to a PoS consensus mechanism. It is a separate blockchain from the Ethereum mainnet.
The second phase, called “the Merge,” is expected in the second quarter of 2022 and will merge the Beacon Chain with the Ethereum mainnet.
The final phase is shard chains, which will play a key role in scaling the Ethereum network. Instead of settling all operations on one single blockchain, shard chains spread these operations across 64 new chains.
The full upgrade to Ethereum 2.0 is expected to take place by 2023, according to the Ethereum Foundation.
The main difference is that while Ethereum 1.0 uses a consensus mechanism known as proof-of-work (PoW), Ethereum 2.0 will use a proof-of-stake (PoS) mechanism.
Umutcan ÇAKAR-Uludağ University
Sources:
https://www.cmcmarkets.com/en-sg/learn-cryptocurrencies/what-is-ethereum
https://ethereum.org/en/what-is-ethereum/
https://aws.amazon.com/blockchain/what-is-ethereum
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