Ethereum: All You Need To Know About The First Programmable Blockchain

Ethereum, launched in 2015, is the second-largest cryptocurrency by market capitalization and popularity after Bitcoin as of February 2022. Unlike Bitcoin, created initially as a peer-to-peer decentralized cash system, Ethereum was designed to become the first programmable Blockchain. Alternatively, Ethereum is also called a Smart Contract platform, as underneath Ethereum’s programmable capabilities are based on Smart Contracts. Ethereum is also considered a second-generation blockchain platform. So, what is Ethereum? In this article, you will find all you need to know about Ethereum, the first programmable Blockchain platform.

What is Ethereum?

For someone to understand Ethereum, first needs to understand the underlying technology made popular by the Bitcoin network. Bitcoin created a network that guarantees anonymity and censorship resistance, which means that no company or government controls the network. In short, Bitcoin developed a decentralized monetary system that allowed two people to transact without any intermediary. Decentralization makes it nearly impossible for someone to stop you from receiving or sending any funds.

Ethereum was born based on the realization that the ideas and qualities that made up the Bitcoin network apply to many other systems and processes beyond the use in a monetary system. Let’s take the example of voting and elections. When we participate in such events, we transact with the system by giving our votes. However, we also rely on intermediaries, a government, or any other institution to provide reliable results to the election or voting. Alternatively, someone can run elections with much more reliability and transparency on the Blockchain. Participants can vote on a blockchain-based network; all the transactions are recorded on the ledger and are immutable (no one can change them). The blockchain network will calculate the result in no time at the end of the process.

There are many other processes and systems that we are involved in our daily lives that are suitable to run in a decentralized environment. Vitalik Buterin, the founder of Ethereum, thought instead of building a separate network for each different use-case, to create one general-purpose, use-case agnostic, and programmable Blockchain. This will allow anyone to develop various applications and focus on their use-case instead of building a decentralized infrastructure. Hence, Ethereum was born, the first programmable blockchain network.

As an analogy, Ethereum can be seen as a general-purpose operating system like the one you have on your smartphone. Android and iOS are the operating systems that are running on our phones. They provide some foundational features, provide security, and allow developers to build the different applications for you and me to use. Similarly, someone can characterize Ethereum as a decentralized operating system. Ethereum provides the foundational compute engine, a decentralized network, and security while allowing anyone to build dApps (Decentralized Applications) for everyone to use. The most significant difference in this analogy is that iOS and Android are centralized. Apple and Google own and control them; Ethereum is not owned nor controlled by anyone. For any significant changes to the network, the community decides via decentralized governance.

A Brief History of Ethereum

Vitalik Buterin is the man who is credited with conceiving the idea of the original Ethereum concept and published the associated whitepaper in 2013. Although Vitalik is usually the main face of Ethereum, there are 8 people who are considered Ethereum co-founders. This long list of co-founders includes Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood, and Jeffrey Wilcke. Some of them later left Ethereum to create other successful Blockchain-based projects such as Polkadot and Cardano. The development started in 2014 and the platform went live in 2015.

The most notable event in the history of Ethereum is the hard fork that happened in 2016 as a result of the DAO hack incident. A Decentralized Autonomous Organization named “The DAO” launched a crowdfunding campaign on the Ethereum network in May 2016. The DAO managed to raise over 100m dollars, which was the greatest crowdfunding campaign of its time. However, a hacker found a vulnerability in the DAO’s smart contract and managed to drain an amount of about 50 million dollars.

Following this incident, the Ethereum community faced a big dilemma. Should they reverse the hacker’s actions and return the amount stolen back to the DAO, or should they leave the state of the Blockchain as-is with the funds in the hands of the hacker?. Up to that point, the idea “code is the law” was very popular among the Ethereum community. Following this incident, the community was divided. Some community members were in favor of reversing the state of the network and returning the funds while some others were against this action. This disagreement led to Ethereum Blockchain having a hard fork, splitting Ethereum in two. The Ethereum as we know it today with reversed state and Ethereum Classic. Ethereum Classic is the original Ethereum without reversed state associated with DAO.

In the summer of 2020, Ethereum’s popularity grew dramatically due to the DeFi summer. During this period, many DeFi protocols were launched on Ethereum giving investors alternative opportunities in investing their money compared to the traditional financial services. DeFi stands for Decentralized Finance and refers to decentralized applications running on the Blockchain that provide similar financial services to those found in the traditional financial sector. After this point, we’ve seen massive growth in the DeFi space. The total value locked (TVL), according to DeFi Lamma, has grown from about 1 billion dollars in February 2020 to over 200 billion dollars in February 2022.

Since late 2020, Ethereum has been going through a major upgrade to transition from Proof-of-Work (PoW) to the more sustainable Proof-of-Stake (PoS) consensus mechanism. This upgrade is usually called “Ethereum 2.0” and it was recently rebranded as “Consensus Layer.”

How does Ethereum Work?

Ethereum, as we mentioned above, is powered by Blockchain Technology and at its most fundamental level, it works like any other Blockchain. The Ethereum Blockchain, from a data perspective, has three main elements, transactions, blocks, and the Blockchain. The transactions are grouped into blocks, and blocks subsequently are linked together one after the other creating the Blockchain.

You have two main actors interacting with the Ethereum Blockchain from a network perspective. The first one is the user, any user who wants to use the services of the blockchain network, like you and me. The second actor interacting with the network is the validator (aka node or miner). The validators are the machines run by individuals (or entities) that form the blockchain network and are responsible for securing the network and making any changes to the Blockchain. However, for Ethereum, we can also add one additional actor, the developer which is also a user.

Considering that Ethereum is a programmable Blockchain and not all users have the skills to write Smart Contracts, developers are the ones who have the programming skills, to write Smart Contracts and create dApps that users can later use them. These Smart Contracts are then executed into what is called Ethereum Virtual Machine (EVM). EVM runs on the validators’ machines. You can see EVM as the operating system that understands Smart Contracts, executes them, and makes corresponding changes to the Ethereum Blockchain.

Whenever someone wants to use the network, including both normal Users and Developers, they have to use Ether ($ETH) to pay for fees (gas fees) with every interaction they have with the network. These fees are paid to the Validators who do all the work securing the network and executing your transactions. Otherwise, there wouldn’t be any incentive for someone to become a validator.

Let’s take a relatively simple example to showcase how Ethereum works. In the most basic use, someone can use Ethereum as any other payment system to send and receive funds. For this example, consider Bob, Alice, and Aris, the three actors. Alice has 10 $ETH in this scenario and sends Bob, her friend, 2 $ETH. Bob issues a new token or cryptocurrency on Ethereum with the name SpongeBob Coin with the ticker $BOB and creates a Smart contract to sell $BOB for 1 ETH each. Aris is the Validator running the network.

  1. Initially the Ethereum Blockchain shows the balances: Alice (10 $ETH), Bob (0 $ETH) and Aris (0 $ETH).
  2. Alice initiates the transaction and send 2 $ETH to Bob. The transaction is created and it costs 2.2 $ETH. 2 $ETH for Bob and 0.2 $ETH are the fees for this transaction.
  3. Aris takes Alice transaction and validates it, and make the corresponding changes to the Ethereum Blochchain.
  4. Bob receives the 2 $ETH from Alice and Aris is rewarded with 0.2 $ETH for his services.
  5. The Blockchain now shows the balances: Alice (7.8 $ETH), Bob (2 $ETH) and Aris (0.2 $ETH).
  6. Bob then writes a Smart Contract that issues a new token $BOB and another Smart Contract that sells 1 $BOB for 1 $ETH and Bob deposits 10 $BOB into the contract for sale. Overall Bob issued 20 $BOB tokens. To deploy all these Smart contracts he had to also pay gas fees of about 0.5 $ETH.
  7. Aris who runs the network in our scenario, gets all the fees from Bob’s actions on the network.
  8. The state of the Ethereum Blockchain now shows: Alice (7.8 $ETH), Bob (1.5 $ETH, 10 $BOB), Aris (0.7 $ETH) and Bob’s token sale contract (10 $BOB).
  9. Alice goes ahead and buys 2 $BOB tokens from the Smart contract and pays again 0.2 $ETH fees for her transactions.
  10. Aris who runs the Smart contracts as the validator gets the fees from Alice.
  11. After this final transaction of our scenario the Blockchain shows the following balances: Alice (5.6 $ETH, 2 $BOB), Bob (1.5 $ETH, 10 $BOB), Aris (0.9 $ETH) and Bob’s token sale contract (2 $ETH, 8 $BOB)

Just as a side note, the numbers used in this scenario are theoretical. You don’t pay 0.2 $ETH for fees. Ethereum fees are quite expensive at the point of writing but not 0.2 $ETH per transaction.

Someone might ask what will happen to the $ETH in Bob’s Smart Contract. The Smart Contract behaves as Bob designed it to behave. Bob could have added some conditions that allowed only him to get the $ETH from the contract. In that case, at any point, he can go and retrieve those $ETH from the contract.

Ethereum vs Bitcoin

There’s usually a big misconception that Ethereum is competing with Bitcoin, but that’s not entirely correct. Both Bitcoin and Ethereum are powered by blockchain technology, they use the Proof-of-Work consensus mechanism and they are both perceived as highly speculative investments. However, they serve two completely different purposes.

Bitcoin, on the one hand, was created as a peer-to-peer cash system, or simply a decentralized currency. It has a max circulating supply of 21 million. This means that no more than 21 million Bitcoin will ever be created. Due to the limited supply, Bitcoin is perceived as a store of value and is referred to by many as Digital Gold.

On the other hand, Ethereum was built to provide a decentralized programmable platform, where anyone can create and deploy dApps. Instead of targetting one single use case, Ethereum is trying to become the world’s decentralized computer. A general-purpose platform that anyone can build and use dApps in a decentralized environment. As a result, Ethereum has become a foundational component of Web 3.0. Unlike Bitcoin, Ethereum has, in theory, an infinite supply of Ether, however, there’s a limited amount of Ether created per block. When someone uses the Ethereum network, it pays the fees (gas) in Ether or $ETH.

Ethereum Use-Cases

Decentralized Finance

DeFi is a collective term for financial products and services that are accessible to anyone who can use Ethereum – anyone with an internet connection. With DeFi, the markets are always open, and there are no centralized authorities who can block payments or deny you access to anything. Services that were previously slow and at risk of human error are automatic and safer now that they’re handled by code that anyone can inspect and scrutinize.

There’s a booming crypto-economy out there, where you can lend, borrow, long/short, earn interest, and more. Many DeFi platforms build decentralized versions of products equivalent to existing products found in the traditional financial sector, while others are creating new innovative products that were not possible before.

Non-Fungible Tokens

NFTs are tokens that we can use to represent ownership of unique items. They let us tokenize things like art, collectibles, and even real estate. They can only have one official owner at a time and they’re secured by the Ethereum blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.

NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like a painting, a digital book, or anything unique of value. These things are not interchangeable with other items because they have unique properties.

Fungible items, on the other hand, can be exchanged because their value defines them rather than their unique properties. For example, Ether or euros are fungible because 1 Ether is exchangeable with 1 Ether, and 1 Euro can be exchanged with another 1 Euro.

Decentralized Autonomous Organizations

DAOs are an effective and safe way to work with like-minded folks around the globe.

Think of them like an internet-native business that’s collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice.

There’s no CEO who can authorize spending based on their own whims and no chance of a dodgy CFO manipulating the books. Everything is out in the open and the rules around spending are baked into the DAO via its code.

How to Buy Ethereum ($ETH) ?

Investors who wish to buy Ether ($ETH) either as a form of investment, send funds, or use any of the dApps built on Ethereum, can buy or sell $ETH on one of the many cryptocurrencies exchange platforms. Some popular cryptocurrency exchange platforms you can use to buy Ether ($ETH) are Coinbase, Binance, and Kucoin.

Final Thoughts

Ethereum is definitely one of the most prominent innovations of the previous decade. The decentralized nature and openness of the network allowed innovation in Web 3.0 to flourish; however, it is not perfect. There are some difficulties for the network to scale and sustain all user transactions in time and at a reasonable price. The more congested the network becomes the higher the gas fees, making the network unusable for even simple cases.

The Ethereum community is working towards a better, more sustainable, and scalable model with Ethereum 2.0. Ethereum 2.0 will introduce sharding technology to the network that will allow it to scale much better, sustain a higher workload in reduced time, and at the same time reduce the associated transaction fees. With Ethereum 2.0, the network will also transition from the Proof-Of-Work consensus mechanism to the more sustainable and environment-friendly Prood-Of-Stake consensus mechanism.

Ethereum was the first Programmable Blockchain powered by Smart Contract. After the success of Ethereum, many other programmable blockchains have been created trying to solve the shortcomings of Ethereum. Some notable names include Polkadot, Avalance, Near Protocol, and Cosmos. Each one is trying a slightly different approach.

Over the past 2-3 years, many additional programmable blockchain networks have been deployed, coined as Ethereum Killers. Unfortunately for them, Ethereum keeps thriving. Even the so-called Ethereum killers are using Ethereum Technology, the Ethereum Virtual Machine. At the point of speaking, there are more than 80 programmable blockchains out there, according to DeFi Lamma; 75% of them are powered by Ethereum Virtual Machine.

Even though there’s a lot of competition in the space right now, Ethereum continues to be the leader in innovation. Most innovative decentralized Apps are deployed on Ethereum first. Some other networks are also getting some traction, and they started attracting some innovation. However, it is very unlikely that another programmable blockchain will dethrone Ethereum from its position any time soon.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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