Writer’s Block(Chain): A Byte-Sized Summary Of Ethereum
Ethereum aims to provide a decentralized peer-to-peer network to facilitate the use of smart contracts and transfers of value online.
(This is a follow-up article to Writer’s Block(chain): A Byte-Sized Summary Of Bitcoin — read first if you want a review of the game theory and cryptographic principles behind blockchain tech)
The Ethereum “yellow paper” provides the technical background for the Ethereum blockchain platform, weighing in at a hearty 39 pages. As it stands today, Ethereum is the most viable and truly decentralized smart contracting platform in the world — currently handling over 1500 actively used dApps (AKA, decentralized applications), with over 20,000 smart contracts executed on an average day. Ethereum also allows for transfers of value just like bitcoin and other cryptocurrencies. Due to the power of blockchain, millions of dollars worth of Ether can be sent across the world in mere seconds, with a transaction cost of only a few dollars.
The Basics
Ethereum is a generalized and decentralized blockchain platform. This means that there is no central entity that acts as an intermediary party between transactions and that the use of the platform is not limited in scope. Just like Bitcoin, blocks of Ethereum transactions are cryptographically signed and chained together using block headers. However, instead of only allowing transfers of one form of value (like Bitcoin) Ethereum provides a platform for the creation and governance of smart contracts and dApps (decentralized applications that use smart contracts to interact with the blockchain). This means that other prospective cryptocurrencies can utilize the existing, robust, ethereum smart contracting platform to, for example, launch their own tokens or coins. Since Ethereum is itself decentralized through blockchain technology, these smart contracts for tokens or dApps can themselves be decentralized and more secure without needing to achieve a critical mass of miners and nodes.
However, smart contracts on the ethereum platform aren’t limited to the creation of other currencies. The ethereum platform is a Turing-complete toolset to utilize what could be equated to decentralized cloud computing to run publicly verifiable applications and broadcast their execution on the ethereum blockchain. From non-fungible tokens for digital ownership to publicly verifiable and immutable data storage, the implications are as head-spinning as they are exciting. Below we will work through the way that Ethereum works, as well as discuss some of the myriads of current or future uses for the platform.
The Power Of Cryptography
Just like Bitcoin, Ethereum uses game theory and cryptography to ensure the security and immutability of the blockchain. However, instead of the SHA-256 used by Bitcoin, Ethereum uses a different and more secure hashing function called Ethash. There are a few small but important design differences from SHA-256 that were intended to make Ethash more secure, including ASIC resistance. Ethash requires miners to utilize a special key (the “DAG”) in order to mine, and this key changes over time. While ASICs have been able to adapt partially to the Ethash protocol, even a small reduction in ASIC usage can increase decentralization and improve overall network security. The planned transition to proof-of-stake in January 2020 would eliminate any ASIC advantage on the ethereum platform, as well as drastically improve transaction speeds while maintaining overall ethereum blockchain decentralization and security.
The Ethereum Blockchain
The Ethereum blockchain currently handles about 2x more transactions than Bitcoin, and Ethereum confirms blocks to the blockchain about 40x faster than Bitcoin. What this means in practicality is that not only is sending Ethereum faster than sending Bitcoin but that transactions on the Ethereum network happen more often than Bitcoin transactions. Ethereum accomplishes faster block times due to the manner in which block sizes are determined. Ethereum allows for miners to collectively and autonomously set the block size to ensure that transaction speeds are maintained. As the transaction volume on the ethereum network fluctuates, the overall block size of each block in the chain dynamically changes. New blocks can only be larger or smaller than the previous block by roughly 0.01% (technically block size change is limited to growth/decay amount of the size of the last block divided by 1024). In other words, the block size is locked to set exponential growth and decay. The result of this is an adaptive blockchain that adjusts to network traffic in a predictable manner.
Ether Transactions Versus Smart Contracts.
While the ethereum platform can be used to send a value, it can also be used to execute smart contracts and dApps on the Ethereum Virtual Machine (part of the ethereum blockchain, the layer that handles smart contracts). Smart contracts could be likened to decentralized cloud computing — they allow for code to be run on the ethereum blockchain that allows for immutability and the removal of any middle-man. The ethereum blockchain ledger thus logs both traditional ether transactions as well as any code run on the platform in tandem. These smart contracts can be publicly verified and trusted due to their inclusion on the blockchain.
The Dual Economy Of Ether.
The word Ethereum is used to describe the ethereum platform and blockchain, while the currency is technically called Ether (calling Ether “Ethereum” is also fine in my book but for the purposes of discussion the distinction matters). Ether serves a dual purpose on the ethereum platform and represents two distinct but intrinsically tied economies: internal and external. The external economy of Ethereum is similar to other cryptocurrencies such as Bitcoin. Ether can be bought and used just like any other cryptocurrency and is exceedingly good at use in this manner. However, Ether is also used internally in the form of “gas”. Gas is one manner (in addition to the creation of Ether to be given to miners for block rewards) in which the miners of Ethereum are rewarded for their verification of the ethereum blockchain. Although Gas fluctuates and serves a separate function to Ether, it is defined in units of Ether. This means that when you send a value or interact with a smart contract on the ethereum network, you pay in Ether (the current gas with a base price in units of Ether).
The ethereum yellow paper gets into more technicalities of how gas amount is decided.
Ether, Gas, And The Interaction Of Supply And Demand
Gas on the Ethereum blockchain fluctuates with demand for the network. In a simple interaction between supply and demand, the amount of Ether needed (the “gas price") goes up or down depending on a current ethereum network volume. The amount of gas used is also different for different kinds of transactions. For example, simply sending Ether takes far less gas than executing a smart contract. This is because the amount of gas used is tied to how much work miners have to do in order to complete the requested function. Gas price for smart contracts is charged based on the number of lines of code to be run in the smart contract. Using an analogy, driving a car quickly around the block takes much less gas than driving around town to run errands.
The Inherent Value Of Ether
Ethereum’s dual economy gives Ether inherent value, as ether is both a cryptocurrency with a thriving external economy and one that has a thriving internal economy as well. The price of ether could thus never truly be said to be based on “thin air”, as the value of Ether is based not only on the length and adoption of the ethereum blockchain itself but also on the use of smart contracts and the plethora of smart contracting platforms that actively rely on Ether for gas. Similarly, tokens or other cryptocurrency runs on the ethereum platform do not detract from the value of Ether but instead, add to it. This construction precludes any competition of Ether with ethereum based tokens and helps foster an inclusive platform for all kinds of blockchain technology.
Decentralized Applications And The Future Of Blockchain Technology.
The terms smart contracts and dApps are thrown around often, but not often fully explained. At the core, a smart contract is a codified interaction that is logged and stored on the blockchain. For example, anyone can write a smart contract on the ethereum platform that issues ERC-20 tokens (one of many standardized token protocols) to themselves. This hypothetical contract would then exist in its own separate smart contract account on the ethereum blockchain, similar to how a traditional crypto wallet address functions. However, due to the way that these contract accounts are differentiated from traditional wallet style accounts, it can perform fully automated functions depending on the code used to create it. As a further example, anyone can thus make a smart contract ERC-20 token that automatically creates and sends these tokens to anyone who sends the smart contract address Ether, with no interaction needed from the creator of the smart contract. This is just one of the endless possibilities, and the complexities of the smart contracts used are limited only by gas and necessity.
Ethereum Token Protocols, ERC-20s, ERC 721s, And More.
The Ethereum Foundation is a collective of programmers, developers, and supporters of the ethereum blockchain. While it is separate from the decentralized ethereum platform, it acts to help support development and growth and is headed by the original founders and developers of Ethereum. The Ethereum Foundation provides a forum for existing developers to submit proposals (EIPs) for different templates and guidelines to help facilitate the use of ethereum smart contracts. These templates can then be commented on and improved by the ethereum community as a whole. Once they have been sufficiently peer-reviewed and developed, they are released as ERC technical standards for anyone to use. While the most commonly used is the ERC-20 standard (used by Maker/Dai, Chainlink, Omisego, and tons more), there are dozens of others. Many of the others provide non-financial blockchain protocols that allow for things such as digital property ownership.
Beyond Cryptocurrency: Non-Financial Uses Of dApps.
Smart contracts don’t have to be used to make cryptocurrency tokens. Smart contracts can be dApps that create non-fungible tokens (or NFT’s) that can, for example, create and allocate digital assets immutably (for example, see how companies such as CryptoKitties and Gods Unchained are using NFTs to create immutable digital ownership and publicly demonstrate scarcity of digital assets). Smart contracts can also be used for things such as domain name services (DNS) or implementation of decentralized web protocols.
Notably, smart contracts don’t have to be used to provide any tokens at all. Instead, you can use them to immutably store data of any kind on the blockchain, or execute coded governance (or really anything that would benefit from being executed on the blockchain). Storing data on a decentralized platform such as Ethereum ensures that no trusted custodian for the data is needed. Instead, the blockchain cryptographically ensures that the data cannot be compromised or changed by anyone. As a law student, I see immediate uses for the legal field. For example, opposing counsel could log a timestamp of a hashed contract and then have both parties sign with their respective private keys and log this on the blockchain. This would provide immutable proof that both parties assented to the contract in the verbiage logged, at the time stated. The same could be used to immutably log the chain of custody for evidence or any form of communications between counsel. The beauty of this is that no liability would exist to a centralized third party to maintain and prevent tampering of the data — the decentralized nature of the ethereum blockchain would itself provide certainty of the immutability of the contractual terms stated.
A future is foreseeable where legal contracts could be placed and executed on the blockchain as self-executing smart contracts, for example. Broad societal implications could arise as well, such as protection from voter fraud by logging votes encrypted with individual voter’s private keys on the blockchain. This sort of decentralized blockchain technology is still early in development but provides an exciting avenue for broad sweeping societal and technological changes.
Proof of Stake, Blockchain Sharding, And The Future Of The Ethereum Platform.
While Ethereum currently uses a proof-of-work consensus method, there is a clear roadmap (and time constraint) to enable an advanced form of consensus called proof-of-stake. Where proof-of-work requires mining nodes to win a mini-lottery based on computing power (by plugging random numbers as a nonce on the block header to achieve a hashed output beginning with a certain number of zeroes), proof-of-stake only requires validation nodes to lock away a certain amount of ether in order to participate and have a chance at earning ether through block verification (technically not mining, but the same result). This new method of consensus will drastically reduce the amount of electricity, time, and computing power needed to “mine” on the ethereum blockchain. This solves a lot of problems at once: (1) it drastically increases the transaction speed, allowing transactions and smart contracts to be executed much much faster; (2) it eliminates the ASIC problem (as you are no longer reliant on powerful computing hardware to complete proof of work but are instead reliant on larger amounts of ether); and (3) eventually, it curbs the need for mining pools due to verification of “shards” that are then verified into the traditional blocks in the chain.
While Ethereum currently has only a single blockchain layer, future implementations will create multiple layers that work in tandem to generate more rapid consensus. In essence, there will eventually be four layers: (1) the core ethereum blockchain trie; (2) the beacon chain that acts to signal the core chain of shard validation; (3) the shard chain (that acts to compartmentalize and thus accelerate the validation of “shards” of a block into the main blockchain); and (4) the Ethereum virtual machine layer that is communicated and verified on the shards and thus the main platform.
This is an exceedingly elegant solution. The solution can be boiled down to a meta-application of the blockchain structure itself. Just as the blockchain itself is used to support every block before it in a “Russian nesting doll” style structure, the layered ethereum blockchain of the future relies on nested and verifiable blockchains that themselves contain nested and verifiable blocks.
The Ethereum Serenity hardfork will be the first step in implementing proof-of-stake on the ethereum blockchain. the Ethereum Serenity hard fork is informally planned to occur around January of 2020.
More on that later…
Disclaimer: The views expressed by the author above do not necessarily represent the views of the Ethereum Foundation.
