Introducing Ethereum & Ether
Bitcoin used to be the gateway currency for people new to the crypto ecosystem. However, with the most recent boom of decentralized Finance and NFTs, the picture might be changing. Ethereum is the backbone of most DeFi apps and NFT marketplaces which have seen trading volumes soar in recent weeks. Interestingly, even NFT projects created years ago benefit from the hype as the sale of ETH rocks vividly illustrated. If a pet rock really is worth 1000 ETH is beyond me, but the market seems to support the price. 🪨
In this blog post, we’d like to give an overview of the platform making smart contracts, DeFi, and much of the NFTs possible.
Overview of Ethereum
The person most famously associated with Ethereum is Vitalik Buterin, its founder. He got interested in 2012 at 17 in Bitcoin and started actively contributing to the Bitcoin community. Soon he began writing for the Bitcoin Magazine and made suggestions on how Bitcoin could furtherly improve the cryptocurrency. When the community didn’t implement his recommendations, he started working on his Blockchain platform Ethereum which launched in 2015.
Since 2015, Ethereum has increased to rank among the top 3 cryptocurrencies in market capitalization frequently.
Similar to Bitcoin, Ethereum is a decentralized ledger that verifies and records transactions publicly, transparent for anyone. Like other Blockchains, Ethereum is cryptographically secured by complex mathematical algorithms, making it nearly impossible to break or cheat the system. It’s also a “transactional singleton machine,” which means that all nodes on the network share one single, global truth — the ledger's state.
The machine keeping track of the state of the Ethereum network is the “Ethereum Virtual Machine.” It starts with one state and transitions whenever new transactions are verified and blocks added. Nodes only add blocks to the chain with the most Proof-of-Work going into it to ensure that only one state is shared across the network.
This isn’t much different from how the Bitcoin blockchain works by combining proof of work with a decentralized network of nodes that store copies of the ledger. But one key difference between Ethereum to Bitcoin is its support for smart contracts.
When Bitcoin launched in 2008, it signified a paradigm shift to transfer value without an intermediary party — secured by cryptography and Proof-of-Work. Ethereum added a whole new layer of functionality to decentralized networks by enabling smart contracts.
Smart contracts are computer code that facilitates agreements between two parties on blockchain. Usually, when individuals or businesses enter contracts in the real world, they often rely on a third party to ensure the terms of the contracts are adhered to. For example, prospective buyers will go through a real estate agent (intermediary) overseeing the transaction between them and the house owner when buying a house.
Smart contracts can replace these intermediaries as they execute code automatically as soon as the pre-specified conditions are met. In the example of a home purchase, a smart contract could include receiving a deposit payment before the code to a deposit box containing the key is released to the buyers.
Despite their name, though, smart contracts aren’t “smart.” They are nothing but code that relies on data fed to them when connecting with the real world. Additionally, like all computer code, they can contain bugs that often lead to exploits or hacks on Ethereum-based platforms.
The ability to quickly issue tokens using Ethereum smart contracts is arguably one of the factors behind the astonishing rise of Ethereum to be one of the platforms of choice for decentralized finance.
When creating a new token, developers use an Ethereum smart contract that mints this new token and oversees all transactions of this newly created token. When creating tokens, they can specify the maximum supply, inflation rate, and more. Initially, when Ethereum launched, everyone would create new tokens as they pleased, which quickly led to issues when interacting. Ethereum developers soon started introducing Ethereum Standards for tokens to alleviate these problems, with ERC-20 and ERC-721 being the most prominent.
- ERC-20: is the token standard for fungible tokens that can represent anything from reputation points on an online platform to financial assets or skills of a character in a game. As a fungible token, tokens of this type can be interchanged for each other; they all have the same value.
- ERC-721: introduced a standard for non-fungible tokens (NFTs). Unlike fungible tokens, every ERC-721 token has unique properties and can’t be exchanged with others.ERC-721 is the perfect choice to represent collectibles, access keys, lottery tickets, and other limited items.
Long before the most recent hype surrounding NFTs, Ethereum had its first NFts in the form of cryptokitties, which famously led to network congestion.
Use cases for Ethereum and smart contracts are wide and varied. Any industry that can benefit from removing intermediaries can eventually benefit from introducing decentralized technology. A few prominent use cases include:
- Gaming: Ethereum powers decentralized Apps that combine game elements, NFTs, and play to earn models. Examples include Axie Infinity, Illuvium, and Decentraland.
- Borrowing and Lending: Ethereum is also behind many DeFi services that enable traders to take out loans against their crypto holdings or earn returns on their stablecoin holdings. Compound and Maker fall under this category.
- Decentralized Exchanges: unlike centralized exchanges, decentralized exchanges (DEX) deploy smart contracts and liquidity pools to enable traders to swap and trade tokens in a trustless manner. Instead of waiting for orders to be matched, traders interact directly with the protocol to execute their trades. Famous DEX on Ethereum includes Uniswap, Bancor, and Sushiswap.
These are just a few use cases for smart contracts. Their potential reaches a lot farther, covering many possible implementations in the world of finance, e-commerce, advertising, ID systems, insurance even social media. If you’re interested in how much of DeFi is using Ethereum, check out DeFi Pulse.
DeFi Pulse | The DeFi Leaderboard | Stats, Charts, and Guides
Available from TokenSets Name Chain Category 1 Day % DeFi is an abbreviation of the phrase decentralized finance which…
Like every other blockchain platform, Ethereum has its own native token called Ether (ETH). While some people use both terms interchangeably, Ethereum refers to the underlying blockchain technology, while Ether stands for the platform token.
Ethereum users need Ether to pay for transfers on the platform, and developers have to pay in Ether for the computations they execute with their smart contracts.
Payments for transfers and computations are also called “gas fees” and are specified in “gwei.” Satoshi is the smallest unit of Bitcoin, and wei is the smallest unit of Ether. 1 Ether is 10¹⁸ wei. 1 gwei 1,000,000,000 wei or 10^-9 ETH.
The cost for transactions and computation depended on demand as miners decide which fees to include. Anyone who has used the Ethereum network before might remember having picked a certain gas amount to pay. It’s not uncommon for transactions to get stuck on the Ethereum blockchain during times of high network activity.
This brings us to some of the challenges Ethereum is facing. As more and more apps were built on the network, scalability and transaction cost imposed a challenge on users and developers.
Ethereum still relies on Proof-of-Work, which is highly secure but not as scalable as other consensus algorithms. This lack of scalability has led to ever-increasing gas costs, as users on Ethereum compete for space in the blocks, and miners could decide to pick just the most profitable transactions for inclusions in their blocks.
Not knowing what fee to pay for quick execution of trades is also negatively impacting the user experience of DeFi users. Wallets such as Meta Mask use Oracles to estimate appropriate fees for gas, but this doesn’t always work accurately when the network experiences volatile demand. It’s not uncommon for newbies to enter their transaction, send it and then see it pending for a long time. When refreshing the page, this history might disappear, which motivates users to repeat the same action. In the end, when transactions are finally validated, a user might find themselves having done the same trade 3 times.
For developers, increasing gas costs make running their blockchain project on Ethereum economically infeasible, while it also causes delays for users on their platform. Therefore, many have opted to implement Layer 2 scaling solutions such as Polygon or ImmutableX.
Since its inception, Ethereum has fostered an active development team that is constantly trying to address the existing pitfalls of the platform.
In 2016, they launched the first decentralized autonomous organization, an investor-directed VC that planned to invest in projects building on Ethereum. The DAO raised $150 million in ETH. However, a bug in the smart contract of the DAO led to an exploit, and hackers managed to steal $60 million in ETH.
As the community argued over how to address the hack, they couldn’t reach a consensus, leading to a network split and the creation of Ethereum classic.
The network continued growing and entered the Metropolis phase, throughout which scalability became more and more of an issue. The developers implemented upgrades to improve privacy, security, and scalability, delivered throughout the Byzantium and Constantinople hardfork.
In 2019 the Istanbul hardfork introduced new features to make the network more resilient against DDoS attacks and improve the performance of layer 2 scaling solutions. The hardfork also brought new interoperability between Zcahs and Ethereum.
The London Upgrade is a crucial point in the roadmap of Ethereum as the network tries to accommodate an increasing number of users and prepare for mass adoption of DeFi and cryptocurrencies. In my next post, I will dive into the details of the latest London Upgrade and how it prepares Ethereum to switch to Ethereum 2.0 soon.