What is Ethereum & Technical Foundation of Ethereum

Ethereum (ETH) is a global open-source platform for decentralized applications. On Ethereum, you can write code that controls digital value, runs exactly as programmed.

While both Bitcoin and Ethereum are powered by blockchain, they have similarities and differences. Technical differences arise between Bitcoin and Ethereum mainly because Bitcoin and Ethereum are designed for different purposes. Bitcoin was the first prominent application of blockchain, designed to be a digital currency that serves as a global, peer-to-peer payment system. The market currently positions Bitcoin as a medium of exchange and function for a store of value. By contrast, Ethereum is intended to be a decentralized global distributed supercomputer that allows developers to build applications on top.

Design vision:

Smart Contracts, decentralized application

Founders:

Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, & Amir Chetrit

Consensus:

Proof-of-Work, switching to Proof-of-Stake

Programming language:

General Purpose (Turing Complete), Smart Contracts

Smart Contracts and Decentralized Applications

Ethereum may be a digital currency, but it’s also a general implementation of blockchain because it facilitates peer-to-peer smart contracts and applications via its currency Ether. Smart contracts are programs that execute a set of instructions that can mirror simple operations like a vending machine to complex business logic that facilitates the buying and selling of renewable energy without a central intermediary. Ether serves as the underlying, programmable tokens that enable developers to program and run decentralized applications (i.e. Dapps).

Ethereum can support very complex smart contracts that serve as the building blocks of decentralized applications. Bitcoin, however, has a prescriptive language that restricts its ability to create extensive contracts. This design flexibility, coupled with a large developer community, helped Ethereum to emerge as a popular blockchain for writing smart contracts.

How Does Ethereum Measure Transaction Cost?

When a developer builds a decentralized application that runs on the Ethereum blockchain, there’s an assigned gas cost associated with smart contract execution. This cost is determined by computational power, storage amount, and complexity of the smart contracts. Therefore, Ethereum has a gas limit rather than a block size because gas is the measurement unit for computational effort with each instruction. Compare this with Bitcoin transactions that compete equally with each other; the cost of a Bitcoin transaction is driven by block size.

Ethereum and the Decentralized Web

Ethereum can be viewed as a backbone environment for the decentralized web (also referred to as Web 3.0). This new Internet architecture empowers users with more control over their data and how it’s used rather than being subject to censorship by centralized tech platforms. Since smart contracts facilitate peer-to-peer value transfers, that diffusion of power can introduce many new kinds of applications, business models, and ecosystems to be built. These applications also allow the creation of new digital tokens that are used to execute smart contracts of the apps

Consensus Mechanism

Since its implementation, Ethereum has relied on proof-of-work as the consensus algorithm that confirms transactions and adds new blocks to the chain. Similar to Bitcoin, this algorithm is an incentive mechanism to reward network participants (i.e miners) who race to complete transactions by expensing physical energy. This process, called mining, involves solving mathematical puzzles with hashing power, which increasingly requires a large sum of computational power and energy.

Several years into production, environmental and scalability concerns with the proof-of-work algorithm has prompted Ethereum to pivot towards the proof-of-stake model, which is less reliant on hardware power and miners. Rather, it requires users to virtually put up Ether as collateral to help validate transactions, and in exchange, receive rewards proportional to their collateral amount.

There are key differences between the proof of work and proof of stake consensus mechanism. In proof-of-work, the algorithm rewards miners who solve mathematical problems to validate transactions and create new blocks. In proof-of-stake, those chosen to create new blocks are based on the amount they stake upfront as a security margin. A proof of stake consensus mechanism enables holders of Ether to earn rewards for validating transactions without the need for the expensive hardware equipment. Unlike proof of work, there are no block rewards under PoS. Rather, the economic consensus system could be a security deposit protocol. This protocol would calculate the reward amounts based on the security deposit, which are then sent to validators.

Adopting proof-of-stake can yield benefits for the environment and network security. The first is energy savings and lower monetary costs by reducing the electricity required to reach an agreement on the state of transactions and smart contracts on the network. The second benefit is enhancing security protections for the network by making attacks more expensive. Since validators stake Ether security deposit, if the validator creates an invalid block, their security deposit will be eliminated, on top of barred participation in the network consensus.

Ethereum Virtual Machine

The Ethereum Virtual Machine (EVM) executes peer-to-peer smart contracts using Ether as its cost of a transaction. It uses Solidity programming language to smart contracts. The EVM is decentralized since all nodes on the Ethereum distributed network run the same smart contracts. For safety and soundness, the EVM is separate from the Ethereum mainnet, which prevents each project from interfering with each other. Therefore the EVM provides a testing ground to deploy experimental smart contracts, isolated from the main network. Because of its distributed properties, the EVM ensures security against denial of service attacks and prevents downtime. Because of the security, the EVM allows the execution of untrusted code without a middleman.

Several manufacturers have become dominant in supplying miners that rank high in those performance metrics above, including BitMain with AntMiners and Ebang with EBIT miners.

What is ERC-20?

ERC-20, or Ethereum Request for Comments, is a proposal by the Ethereum community to create a structure for tokens on the Ethereum blockchain. It provides a standard for token issuers by defining certain mandatory functions that smart contracts should implement. Specifically, the token must specify a name (symbol) and its divisibility. The token contract defines the total supply of tokens to be issued. The smart contract will no longer create new tokens once it hits that supply cap. The balance method returns how many tokens a given address has, while transfer methods transfer tokens from the token supply to the users and transfer tokens between users. The allowance method determines if a user has sufficient balance to send tokens to another user.

Why Create Token Standards?

Absent a standard, each token can be different from one another, undermining its ability to be tradeable on an exchange. A digital exchange would have to support hundreds of different tokens. Thanks to token standards, digital exchanges like EtherDelta/ForkDelta, IDEX, and 0x support the trading of hundreds of tokens, with services ranging from market making to order matching and on-chain settlement.

Ether is the native cryptocurrency of the Ethereum blockchain, but the network also supports token that can serve other purposes such as digital currency, shares of a company, loyalty points, as well as digital certificates of some other economic good or services. When a smart contract creates a token, these tokens exist on the Ethereum blockchain, not an independent blockchain. The contract can handle the token transactions and keep track of the token holder’s balance. For example, to retrieve tokens, the user sends Ether to the smart contracts, and in return receives a proportional amount of tokens. Once a smart contract is deployed, it cannot be changed. If it contains a bug, it can cause economic damage when user tokens are lost or stolen.

According to the Ethereum homepage, Ethereum is defined as: “a global, open-source platform for decentralized applications. On Ethereum, you can write code that controls digital value, runs exactly as programmed, and is accessible anywhere in the world.”

Originally published at https://overblock.io on August 19, 2019.