Ethereum, the brainchild of programmer Vitalik Buterin, was launched to the public in 2015. Today, its founder is the world’s youngest crypto billionaire, while ETH is the second largest cryptocurrency. In this article, we will take a deep dive into the inner workings of the Ethereum blockchain as the home of smart contracts and Dapps.
What makes Ethereum network special?
The Ethereum platform has been dubbed the global supercomputer. By bringing their operations onto this blockchain, businesses and governments achieve higher efficiency and transparency. Here are its main defining characteristics.
- Open-source ecosystem. Anyone can use this blockchain technology or develop solutions running on it.
- No sensitive information is stored by the protocol. Counterparties to any transaction remain fully anonymous even though the transaction ledger is public.
- Resistance to censorship. Transactions on the Ethereum network may not be authorized or denied by any central entity. It is completely decentralized.
The Ethereum network positions itself as an agile and secure environment for smart contracts and decentralized applications. Nearly 3,000 Dapps cover a wide spectrum of industries, and almost half a million self-executing contracts are deployed per month. The Total Value Locked exceeds $75 billion.
Ethereum vs. Bitcoin
The Ethereum platform has many infrastructural similarities to Bitcoin. First, it is a blockchain network with its own native currency called Ether (ETH). Secondly, both ecosystems currently use the same consensus mechanism – Proof-of-Work (PoW) – to facilitate transactions. Thirdly, all transactions are recorded in a distributed ledger.
Key differences
- Bitcoin is used as digital money in P2P transactions. Smart contract capability adds a new layer of functionality, making Ethereum a more multifunctional protocol.
- Ethereum-based contracts underlie Dapps of different complexity. Today, these applications can support an almost infinite range of use cases. Members of the Ethereum community can create, interact with, and modify them.
- In 2023, Ethereum is due to abandon Proof-of-Work in favor of Proof-of-Stake to become faster and more flexible.
What is Ethereum Virtual Machine?
Every Ethereum account and smart contract is hosted on EVM. This software platform also underlies Dapps, so developers do not need powerful hardware. This environment is beginner-friendly – even rookies feel comfortable using it.
EVM defines the state of Ethereum for each block in the blockchain. Here, the word state refers to a massive database of all accounts and balances on the network. It changes according to a set of predetermined rules for code execution.
Functions of Ether (ETH)
The second biggest digital currency boasts over $361 billion in market cap. As of this writing, you can buy ETH for around $3,000, while its original price was merely $2.77.
Ether is mined through the PoW algorithm. It is more than a store of value and a popular trading asset. This native cryptocurrency fuels the Ethereum blockchain network, as users pay gas fees for any transaction on it.
Lately, this gas price has been growing due to network congestion. High transaction fees and execution delays have given rise to so-called Ethereum killers – rival blockchain networks like Cardano and Polkadot.
Types of Ethereum account
Network participants include individuals and entities. Each of them has an ETH balance stored on a specific account address. This ecosystem includes externally owned accounts (controlled via a private key) and contract accounts (controlled via smart contract code). Both types enable users to manage ETH and compatible tokens (send, receive, and hold) and interact with self-executing contracts.
Smart contracts on Ethereum platform
So, how do automatic contracts on Ethereum work? Self-executing agreements are based on hard code. They enable, verify, and enforce particular functions on the blockchain when predetermined conditions are met.
Ethereum-based contracts take different forms, from basic exchanges between two users to entire networks of interconnected transactions. Such operational platforms may constitute separate DAOs (decentralized autonomous organizations) or Dapps. Smart contracts bring three major benefits:
- automation (execution happens only when pre-agreed conditions are met)
- transparency (Ethereum transactions are public)
- immutability (conditions may not be altered or reversed)
Using smart contract code, users can also create new digital assets and program them to execute specific functions. All these advantages make the Ethereum blockchain attractive for businesses of any size, from innovative startups to legacy enterprises.
Uses of smart contracts
Ethereum transactions can enhance transparency in virtually any industry. They speed up and simplify the transfer of funds and data, ensuring that all counterparts fulfill their obligations. Here are some of the most notable use cases. Check out our guide to smart contracts for more.
- finance and banking
- insurance
- voting
- prediction markets
- alternative to escrow
- safe digital identity management
Dapps on Ethereum platform
At first glance, some of these applications look like conventional web apps. What truly sets them apart is decentralization. Transactions through Dapps occur as P2P operations without a central authority.
Ethereum introduced DeFi applications running on smart contracts. Rival blockchain projects that borrowed this concept have failed to outshine ETH. Currently, it is more attractive for developers.
Most popular Dapps in 2022
Decentralized applications are used in a wide range of sectors, from e-commerce to healthcare to transportation. According to DappRadar, the following products have the most users as of April 22, 2022.
- OpenSea – an online marketplace where users create NFTs and offer them to buyers or auctions.
- Uniswap (V2 and V3) – a decentralized crypto exchange supporting automated trading between Ethereum-based tokens through smart contracts.
- Metamask – a popular software crypto wallet working via a browser extension and mobile app. Its users can store and manage account keys, send and receive crypto assets, and connect to other Dapps securely.
- 1inch Network – a distributed network for DeFi protocols on Ethereum and BSC (Binance Smart Chain).
Tokens on Ethereum blockchain
Ethereum has its own system of token standards – Ethereum Request for Comments (ERC). Most smart contracts rely on fungible (mutually interchangeable) assets compliant with ERC-20, the first popular specification.
Every standard determines the nature of specific tokens and the range of compatible networks. It is an interface that shows that a token contract reacts to commands within a particular smart contract.
Functions of tokens
All tokens in this ecosystem function as smart contracts executed on the EVM in a decentralized way. They have a wide range of functions:
- representing digital and physical assets
- network governance
- staking
- reputation building
- transaction settlement between multiple parties
Popular token standards
Virtual currencies, staking tokens, and voting tokens all fall into the fungible category supported by ERC-20. At one point, 94 of the top 100 cryptocurrencies by market cap were based on it. Here are some other popular Ethereum token standards.
- ERC-721 is a standard interface for non-fungible tokens (NFTs) like a song, collectible, or piece of digital art. NFTs are unique and may not be replaced by other tokens. They are used in contexts where provable asset ownership is crucial.
- ERC-777 enables expansion of functionality – for example, creation of mixer contracts for higher privacy or an emergency recovery function.
- ERC-1155 supports both utility tokens and non-fungible tokens. It raises trade efficiency and enables bundling of transactions to lower costs.
- ERC-621, an extension of ETC-20, allows modification of token supply via minting and burning of tokens.
- ERC-1155 enables smart contracts based on several token types, including fungible, non-fungible, and mixed combinations.
ETH2: faster transaction execution, lower fees
ETH 2.0, or Serenity, is a fundamental update to the Ethereum blockchain that is being rolled out. Since January 2022, it has been referred to as the consensus layer, or Eth2. The existing infrastructure will become the execution layer of the revamped network (Eth1).
This makeover is designed to solve security and scalability problems via infrastructural changes. At the moment, during peak times, users may have to pay a transaction fee of several hundred US dollars. Delays are also common as Ethereum can handle up to 15 TPS.
The biggest change is the switch from PoW to PoS. The network is expected to become more efficient and flexible, with a speed reaching 100,000 TPS. Here is a glimpse into this enhanced environment for decentralized finance.
All network rules and smart contracts will still reside on Eth1. The second layer will ensure that all devices connected to blockchain comply with its rules. The Ethereum Foundation has split its major upgrade into four stages:
- Beacon Chain, a separate blockchain that went live on December 1, 2020, introduced staking as the first step towards PoS.
- The Merge upgrade will connect the Beacon Chain with the Ethereum mainnet by the end of 2022. It will represent the official switch to PoS.
- Shard Chains will add cheaper data storage layers for Dapps and roll-ups. The network load will be split horizontally into 64 shards to help nodes validate transactions. Each validator will only store data for one shard at a time, not the entire network. This upgrade is now scheduled for 2023.
Proof-of-Stake vs. Proof-of-Work
Both consensus mechanisms allow blockchains to validate transactions in a decentralized fashion. However, PoW requires the miners’ computer processing power, while PoS is more lightweight and sustainable.
How PoW works
In the older model, computers solve mathematical puzzles to verify transactions and add them to the ledger. In return for their efforts, they get the native currency of the blockchain. Only the first miner who finds a solution is rewarded. This method of validating transactions is the most energy-intensive.
PoS: more sustainable future for Ethereum
The PoS concept lets users become validators by staking the native crypto. Like miners, they verify transactions to prevent fraud. A node whose block proposal is accepted gets a reward. This process is referred to as forging or minting.
When a certain number of nodes attest to seeing a new block, it is added to the blockchain. Whether a node can propose a block or not depends on two factors:
- how much crypto they have staked
- how long they have staked it for
The new system will solve the sustainability problem by enabling consensus without laborious processing. The blockchain will require less computing power to stay secure. According to Ethereum co-founder Joe Lubin, the upgrade will ”lay to rest Ethereum’s carbon or energy footprint problem,“ as it is ”orders of magnitude less expensive, energetically.“
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