EVG101 Part 6: Introduction to Ethereum
Welcome to Part 6 of Everest’s crypto and blockchain guide! In this article, we finally move on from Bitcoin and onto its spiritual successor: Ethereum.
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Table of Contents
- What is Ethereum?
- What is ether, and what is gas?
- How does Ethereum differ from Bitcoin?
TLDR;
1. What is Ethereum?
Ethereum is a decentralized computing platform which allows anyone to build applications for any purpose, functioning like a truly decentralized Internet. Its utility thus far outstrips that of Bitcoin, which functions purely as a currency. Ethereum was founded in 2014 by a team led by Vitalik Buterin and is an open-source project contributed to by developers all around the world.
Ethereum is powered by the Ethereum Virtual Machine (EVM), a virtual machine which interprets and runs the code for apps on the Ethereum network. The EVM allows for transactions more complicated than simple currency transfers to be executed on the blockchain, while guaranteeing a deterministic execution of the code. Every full node and miner in the Ethereum network runs the EVM to validate every transaction on the Ethereum blockchain. That is to say, every action made on the Ethereum blockchain is executed by every participant anchoring the decentralized network, which is guaranteed to return the same outcome due to the deterministic execution by the EVM. This is a means of enforcing consensus of the Ethereum blockchain.
2. What is ether, and what is gas?
It is useful to think of ether as the currency of Ethereum, or ETH, and gas as the fuel used to run the network. One can use the analogy of a car to explain the roles of ether, gas, and the code being run on the Ethereum network. Just as one needs to spend money to buy fuel for a car to run on, one needs to convert ether into gas which is used to run the code on the EVM.
Ether can be converted to gas at a user-defined gas price, which is currently 0.02µ ETH per gas (or 0.00000002 ETH per gas). However, unlike money and fuel, gas does not exist as a separate token as that would introduce inefficiencies in swapping the two currencies everytime you need to pay gas to run transactions. Instead, one converts ether into gas as and when it’s needed.
Operations in Ethereum are powered by the Ethereum Virtual Machine. Unlike in Bitcoin where transactions fees are dependent on the size of the transaction in bytes, in Ethereum, transaction fees are paid in gas and are dependent on the computational power required to complete a transaction. However, some gas needs to be used to cover the size of the data of the transaction. This is known as intrinsic gas; if the gas offered is less than the intrinsic gas of the transaction, miners will not perform the computation.
The fee paid to the miner is equal to the total gas offered multiplied by the gas price chosen by the transaction maker. To recap, the total gas offered must cover both the intrinsic gas and the cost of all the calculations required to execute the transaction.
Each type of computation requires a certain amount of gas pre-defined in the Ethereum Yellow Paper. For example, an addition operation costs 3 gas, a multiplication costs 5, etc. Miners are incentivized to pick up transactions with higher gas prices as they receive a higher transaction fee the higher the gas price set by the user.
If the gas provided by the user making the transaction is insufficient to cover its entire computation, the transaction is reverted but the miner is still paid the provided gas to cover the use of their computational resources. If the gas provided is in excess of what’s required, the remaining gas is returned at the same price set by the user. Finally, a block gas limit is imposed to limit the the number of computations that can be done per block. This prevents attackers from crippling the nodes running the EVM with infinite loops in the transaction code.
Overall, this system of ether and gas incentivizes miners to validate transactions while ensuring that they get a fair return for the computational resources they commit to the network.
3. How does Ethereum differ from Bitcoin?
From our point of view, there are 3 main ways in which Ethereum differs from Bitcoin.
1. Purpose
Both Bitcoin and Ethereum are powered by cryptography and DLT (distributed ledger technology) in the form of blockchains. However, that is where the similarity ends. Bitcoin is primarily a virtual currency which is used for one purpose only; payments and P2P transactions. However, Ethereum has a lot more potential as a platform for decentralized, P2P applications and smart contracts which can serve any function or purpose. Ethereum is Turing-complete and thus its scripting language, Solidity, is a lot more expressive than Bitcoin’s, allowing it to program a larger variety of applications.
2. UTXO vs Account/balance
Bitcoin uses a UTXO model as explained above, whereas Ethereum uses an account/balance model. This means that Ethereum tracks the balances and states of each individual account (user or smart contract), and thus is stateful: at any point in time, the network can be summarized by the collection of balances and states of the accounts in the network. The entire Ethereum blockchain provides transparency at the blockchain level, allowing one to easily see the state of the network at any point in the past.
However, Bitcoin, being built on UTXO, only tracks past transactions which have already occurred. The lack of ability to track states in Bitcoin hinders its ability to build useful apps for Bitcoin, unlike Ethereum.
Take for example, a decentralized social media app. Each user account has many different attributes, such as profile picture, interests, and shared posts etc. With Ethereum, we are able to track the state and changes of state to these attributes, like if someone changed their profile picture from an orange to an apple. However, this is not possible in Bitcoin because state is not recorded on the Bitcoin blockchain.
3. Founders
The original creator of Bitcoin, Satoshi, is no longer around to help with Bitcoin’s development. This allows for a truly decentralized, open-source governance of the Bitcoin project and the direction it takes.
However, the main person responsible for creating Ethereum, Vitalik Buterin, is still active and spearheading development directions for the project. Despite Vitalik’s claims that the project is decreasing in reliance on him, many people still look to Vitalik for solutions, which makes him a unique point of weakness for Ethereum.
Concluding Remarks
In this article, we have covered basic elements of Ethereum and explained how it offers something different to Bitcoin. With Ethereum, we have a platform for decentralized apps which returns power from large internet corporations to the individual user. Smart contract are key elements of Ethereum which allows these decentralized apps to be created. We will talk more about smart contracts and real-life use cases of Ethereum in the next section.
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