Ethereum Explained
What in the world is a smart contract? How does Ethereum power the decentralized ecosystem?
Ethereum describes itself as “World’s Programmable Blockchain”.
They take the underlying workings of Bitcoin and expand it to be programmable. It allows us to build decentralized applications. I like to describe Ethereum as the project that lets us decentralized everything possible.
Smart Contracts
A smart contract is a set of computer program codes and data. It lives in a specific address in the Ethereum blockchain.
Smart contract with Real-life Explanation
For example, let’s say that I agree to give you 10% of my store if you invest $5000. Instead of a written agreement, I can make a smart contract of our agreement. Smart contracts can define specific penalties, rules, or restrictions like a traditional contract.
Unlike a traditional contract, a smart contract cannot be destroyed nor changed. It is transparent and the agreement will live on the blockchain.
Smart contracts are not controlled by anyone. Once it is deployed to the network, it runs by itself. Any developer creates smart contracts and deploys them to the Ethereum network. In turn, anyone can use that smart contract.
I don’t get it.. explain again?
You don’t have to write every single smart contract to execute it. Think of it in code terms.
In programming, we have a term called functions. A function contains code. We can call the function. Calling a function simply runs the code inside the function. Similarly, a smart contract can be called by anyone.
Why is it important to learn about smart contracts?
The functionality of smart contracts is huge. Anyone who knows to code can build anything. They can build applications, financial terms, contracts, games, and more.
This is why Ethereum allows us to practically decentralized anything! Anyone can access the Ethereum network and interact with any smart contracts that are deployed. Developers can upload reusable smart contracts. Users don’t have to write new codes every single time.
Ethereum Virtual Machine (EVM)
Cool, but how do I interact with the smart contract? How can I call smart contracts? How are peer-to-peer computers sync in the first place?
Introducing Ethereum Virtual Machine (EVM). For the code to be immutable and happen simultaneously. It needs to run through multiple internet computer nodes that execute the code in the same manner.
What is a Virtual Machine?
A virtual machine uses your computer hardware resources and is created on top of your own computer (“the host computer”). Virtual Machines can have their own distinct operating system. This allows it to run on top of the host computer so that you don’t have to delete your original operating system.
So what is EVM?
EVM is required to process Ethereum transactions and smart contracts in a streamlined matter. Imagine smart contracts code executes differently on each machine. It would be a disaster and the purpose is defeated. EVM solves this problem.
Think of EVM as a virtual computer that interacts with the blockchain. The network of computers that install the Ethereum client participates in this network. They share their computer resources to contribute to the Ethereum network.
EVM is also used to approve transactions. Currently, Ethereum is using proof of work consensus.
What is Ether (ETH)
Ether (ETH) is the currency of Ethereum applications. Built with the same underlying technology as Bitcoin, ETH is a digital currency that uses cryptographic protocols.
ETH can be described as the gas to power Ethereum based application.
Remember what I said about smart contracts can be deployed onto the Ethereum blockchain? To deploy smart contracts, developers have to pay transaction fees in the form of ETH. Anyone who wants to use smart contracts also has to pay the transaction fee. ETH becomes more valuable as more people use smart contracts or any Ethereum based applications.
ETH is a utility token. The value of a utility token is dependent on the adoption of its ecosystem. The more smart contracts developers write, the more they will pay gas fees. The more smart contracts are being executed, the more users have to pay gas fees. In a nutshell, the more the Ethereum network is being used, there will be more demand for ETH.
Currently, Ethereum is the largest decentralized programming protocol.
Decentralized Applications(DApps)
DApps have smart contracts codes that run behind the scenes and a user interacting front-end.
What is a front-end user interface? If you have visited a website, the visual you get is the front-end. The backend is full of code and databases which is not meant for the user to interact. Front-end consists of programming languages that display layouts. For example, CSS is purely for website decorative uses. It also contains languages that can “talk” to the back-end of the applications.
DApps is just a typical application but their backend code runs on the Ethereum blockchain.
Why create DApps when we have normal applications?
Reasons for DApps
Apps live forever
Once deployed, DApps can’t be taken down by anyone. Even if the team behind the production of DApps were to go out of business, it will still exist.
Say goodbye to apps that just shut down one day (I’m looking at you Flappy Bird). Similar to how once a smart contract is deployed, it exists in the network. DApps has no owners and the code can’t be taken down.
Censorship-resistant
Peer-to-peer decentralization allows censorship-resistant applications. The backend of the apps is run on the decentralized Ethereum blockchain. To decentralized the front-end of DApps developers can use Interplanetary File System (IPFS) to host their front-end code. IPFS is a peer-to-peer distributed file system. IPFS provides the tools required for decentralized web hosting.
To take it a step further, developers can use a blockchain domain name. A blockchain domain name is tied to a crypto wallet. It cannot be taken down by any central entity.
Privacy
Privacy for the user and developer. Many applications have down-right invasive privacy practices. DApps are open-sourced and be privacy-friendly.
Developers do not have to provide any personally identifiable information to deploy smart contracts. They only need a crypto wallet for gas fees. Compare this to deploying apps into the Apple Store, where you need to be verified.
Users do not have to provide any personally identifiable information to use DApps. However, DApps project developers might collect information in the front-end interface.
There are over 1,600 DApps build with Ethereum. These include:
- Uniswap: Decentralized cryptocurrency exchange.
- Compound: Decentralized crypto-lending platform.
- KnownOrigins: NFT Marketplace.
- Decentraland: Gaming. Collect and trade virtual lands.
- Tornado Cash: Anonymous transactions on Ethereum.
ETH 2.0 What is That?
Ethereum uses proof of work consensus similar to Bitcoin. However, proof of work has many drawbacks. It uses too much energy, is unsustainable, is hard to scale, and is becoming more centralized.
Too much energy — Unsustainable
As explained in my first newsletter. Mining is essentially banging a bunch of numbers till you get a suitable number that is equal to or below the targetted mining difficulty. This makes mining requiring huge amounts of computational power. To run a large proof of work network that is expanding consumes a lot of energy. Raising lots of environmental concerns for blockchain projects that use proof of work like Bitcoin and Ethereum.
Hard to Scale
Ethereum proof of work consensus has severe limitations on the number of transactions the network can process. The current limitation is 15 transactions per second.
Compare this to traditional payment providers like Mastercard who handles transactions per second!
Centralization in Mining
Electricity bills in each country are different. Mining costs electricity. The cheaper your electricity is in your country, the more you can afford to mine. China mining centralization raises lots of concerns.
Why does centralization in mining matter?
An organization contributing large amounts to the network gets into trouble, the blockchain network will be affected. China’s crackdown on Bitcoin mining results in over 50% of the global computing power of miners dropping. The network slows down.
Conclusion
Ethereum allows many of our modern applications to be decentralized. It is the initializer of the crypto utility token.
Ethereum is too complex to cover in one newsletter. I will introduce the various decentralized systems that can be built with Ethereum in later newsletters. I hoped you gained a valuable understanding of Ethereum and how it powers the decentralized ecosystem.
Reformatted content.Originally published at https://comprehend.substack.com. A weekly newsletter that shares blockchain basics and blockchain projects.
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