Ethereum: 5 Key Reasons to Embrace

 Ethereum’s vision is to develop an unstoppable, decentralized “world computer” that is self-sustaining, resistant to censorship, and capable of processing data and logic in a distributed, trustless manner. Building upon the principles established by Bitcoin, Ethereum expands upon the concepts of trustless validation and distributed storage to include the processing of data and logic. Essentially, Ethereum seeks to create a decentralized platform for building and running unstoppable applications that operate autonomously, without the need for intermediaries or centralized authorities.

Ethereum
Photo by Zoltan Tasi on Unsplash

Empowering Decentralized Applications and Finance

The vision of Ethereum is to create a decentralized, open-source platform for building decentralized applications (dApps) and smart contracts. it aims to enable developers to create a wide range of applications that operate autonomously, securely, and without downtime.

Ethereum also seeks to democratize access to financial services by providing a platform for creating decentralized finance (DeFi) applications that allow users to interact with financial instruments without intermediaries. The platform uses a native cryptocurrency called Ether (ETH) to power its network, pay transaction fees, and incentivize miners who process transactions and secure the network.

Overall, Ethereum aims to empower developers to build decentralized applications that can enable new types of economic, social, and political systems that are more transparent, equitable, and accessible to everyone.

Ethereum has a public blockchain running on 15,000 computers and the token on the blockchain is called Ether, currently the second most popular cryptocurrency.

A bunch of protocols

Like Bitcoin, Ethereum is also a bunch of protocols written out as code which is run as Ethereum software which creates the transactions containing data about Ether coins (ETH) recorded on Ethereum’s blockchain. In contrast with Bitcoin, Ethereum transactions can contain more than just payment data, and the nodes in Ethereum are capable of validating and processing much more than simple payments.

On Ethereum, you can submit transactions that create smart contracts— small bits of general purpose logic that are stored on Ethereum’s blockchain on all of the Ethereum nodes. These smart contracts can be invoked by sending Ether to them. This is a bit like deploying a juke machine, then putting coins in to play music. When a smart contract is invoked, all the nodes run the code and update their ledgers with the results. These transactions and smart contracts are run by all participants using a sort of operating system called a ‘Ethereum Virtual Machine’.

Ethereum’s blockchain can be interrogated using websites like etherscan.io. As with Bitcoin, there are also forks of the main Ethereum, such as Ethereum Classic, which is also a public blockchain. Each fork has a separate coin (Ethereum’s coin is denoted ETH whereas Ethereum Classic’s coin is denoted ETC). The forks have a shared history with Ethereum up to a certain point in time, after which the blockchains differ (we will discuss forks later).

Ethereum’s code can also be run as a private network, starting a new blockchain with limited participants.

How Do You Run Ethereum?

To participate, you can download some software called an Ethereum client, or you can write some yourself if you have the patience. Just like BitTorrent or Bitcoin, the Ethereum client will connect over the internet to other people’s computers running similar client software and start downloading the Ethereum blockchain from them to catch up with the latest state of the blockchain. It will also independently validate that each block conforms to the Ethereum protocol rules.

What does the Ethereum client software do? You can use it to:

  • Connect to the network
  • Validate transactions and blocks
  • Create new transactions and smart contracts
  • Run smart contracts
  • Mine for new blocks

Your computer becomes a ‘node’ on the network, running an Ethereum Virtual Machine, and behaves equivalently to all the other nodes.
Remember in a peer-to-peer network there is no ‘master’ server and eachcomputer is equivalent in status to any other.

How Is Ethereum Similar to Bitcoin?

Ethereum Has an Inbuilt Cryptocurrency

Ethereum’s token is called Ether, shortened to ETH. This is a cryptocurrency that can be traded for other cryptocurrencies or other sovereign currencies, just like BTC. ETH ownership is tracked on the Ethereum blockchain, just like BTC ownership is tracked on Bitcoin’s blockchain.

Ethereum Has a Blockchain

Like Bitcoin, Ethereum has a blockchain, which contains blocks of data (Pure ETH payments as well as smart contracts). The blocks are mined by some participants and distributed to other participants who validate them. You can explore this blockchain on etherscan.io.

Like Bitcoin, Ethereum blocks form a chain by referring to the hash of the previous block.

Ethereum is Public and Permissionless

Like Bitcoin, the main Ethereum network is a public, permissionless network. Anyone can download or write some software to connect to the network and start creating transactions and smart contracts, validating them, and mining blocks without needing to log in or sign up with any other organisation.

When people talk about Ethereum they usually mean the main public permissionless version of the network. However, like Bitcoin, you can take the software, modify it slightly, and create private networks that are not connected to the main public network. The private tokensthat are not connected to the main public network. The private tokens and smart contracts won’t be compatible with the public tokens though, just like private Bitcoin networks.

Proof-of-Work (PoW) Mining

Like Bitcoin, mining participants create valid blocks by spending electricity to find solutions to a mathematical challenge. Ethereum’s PoW maths challenge, called Ethash, works slightly differently from Bitcoin’s, and allows more common hardware to be used. It is deliberately designed to reduce the efficiency edge of specialised chips called ASICs, which are common in Bitcoin mining. Commodity hardware is allowed to compete efficiently, and this allows for a greater decentralisation of miners. In practice though, specialised hardware has been created and so most blocks are created by one of a small group of miners.

Ethereum Mining
Source: https://etherscan.io/

On Ethereum’s roadmap there is a plan to move from electricity expensive, proof-of-work mining, to a more energy efficient, proof-of stake mining protocol called Casper in a future release of the software called Serenity. Proof-of-stake is a mining protocol in which your chance of creating a valid block is proportional to the number of
coins (ETH) in your mining wallet—contrast this to proof-of-work, wherecoins (ETH) in your mining wallet—contrast this to proof-of-work, where your chance of creating a valid block is proportional to the amount of computational cycles your hardware can crunch through.

The impact the community

How might this impact the community? For starters, this would dramatically reduce the energy footprint of the cryptocurrency. Miners will no longer need to consume electricity competitively in order to win blocks. On the other hand, some people think that proof-of-stake is less democratic, because those who already have accumulated a lot of ETH will have a higher chance of winning more blocks. So, the argument goes, new money will flow towards the wealthy, increasing the Gini coefficient of the holders.

There are flaws in the ‘less democratic’ argument. With proof-of-work the high capital costs and expertise required mean that only a very small minority of people can actually make money mining, so it is not actually that democratic. Whereas with proof-of-stake, every ETH has an identical chance of winning a block, so you can get started with much less capital. Think of it as an interest rate: If you have more money you get more interest, but at least those with small amounts of money can still get interest. I also think that reducing the negative externalities of pollution caused by proof-of-work is a decent and honourable goal.

How Is Ethereum Different from Bitcoin?

This is where it gets more technical, and in many ways more complex.

The Virtual Machine can run smart contracts

When you download and run the Ethereum software, it creates and starts a segregated virtual computer on your machine called an ‘Ethereum Virtual Machine’ (EVM). This EVM processes all the transactions and blocks, and keeps track of all the account balances andresults of the smart contracts. Each node on the Ethereum network runs the same EVM and processes the same data, resulting in them all having the same view of the world. Ethereum can be described as a replicated state machine because all of the nodes running it are coming to consensus about the state of the Ethereum Virtual Machine.

Compared with Bitcoin’s primitive scripting language, the code that can be deployed in Ethereum and run as smart contracts is more advanced and approachable for developers. We will describe smart contracts in more detail later, but for now you can think of smart contracts as pieces of code run by all the nodes in Ethereum’s Virtual Machine.

Gas

In Bitcoin, you can add a small amount of BTC as a transaction fee that goes to the miner who successfully mines the block. This compensates the miner for checking the validity of the transaction and including it in the block they are mining. Likewise, you can add a small amount of ETH as a mining fee which goes to the miner who successfully mines the block.

The complication with Ethereum is that there are more types of transactions. Different transaction types have different computational complexities. For example, a transaction performing a simple ETH payment is less complex than a transaction to upload or run a smart contract. Therefore, it has a concept of ‘gas’ which is a sort of price list, based on the computational complexity of the different types of operation you are instructing the miners to make in your transaction. Operations include searching for data, retrieving it, making calculations, storing data, and making changes to the ledger. Here is the price list from the ethdocs.org website, but it can change over time if the majority of the network agrees:

Source:https://ethdocs.org/en/latest/ether.html

A basic transfer of ETH from one account to another uses 21,000 gas. Uploading and running smart contracts uses more gas depending on their complexity. When you submit an transaction, you specify a gas price (how much ETH you are willing to pay per gas used) and a gas limit (the maximum amount of gas you will let the transaction use).

Mining fee (in ETH) = gas price (in ETH per gas) x gas consumed (in gas)

Gas price

The gas price is the amount of ETH you are prepared to pay per unit of gas for the transaction to be processed. As with Bitcoin transaction fees, this is a competitive market, and in general the busier the network the higher the gas price people are willing to pay. In times of great demand gas, prices spike.

Source: https://etherscan.io/chart/gasprice

Peaks are usually related to popular ICOs where many people are attempting to send ETH to ICO smart contracts. The peak in December 2017 is related to the popular CryptoKitties Ethereum game. In 2018, the normal range for gas prices is between 0.000000005 ETH (5 Gwei) and 0.000000020 ETH (20 Gwei) per gas.

Gas limit

The gas limit you set provides a ceiling for how much gas you are prepared for a transaction to consume. This limit protects you from overspending on mining fees and you know that the maximum mining fee will be gas limit x gas price. This stops you over-paying if you accidentally submitted a very complex transaction that you thought was simple.

Analogy time: Driving your car 10km will use up a certain amount of fuel. If you run out of fuel, your car will stop before reaching the destination. The price of fuel is dependent on market conditions and can go up and down, but the price of fuel bears no relation to how far you may drive your car with it. Gas in Ethereum is similar. When you submit an Ethereum transaction, you specify how much gas you’re prepared to spend on making the transaction ‘work’ (this is the gas limit), and how much ETH you are prepared to pay the miner per unit of gas (this is the gas price). This results in a total amount of ETH you’re prepared to pay for the transaction to be processed.

Gas Math

The miner will execute the transaction and will charge you the amount of gas taken, multiplied by the gas price you specified. As with Bitcoin, the mining fee is up to you, and you need to bear in mind that you’re competing with other transactions which may have set a higher gas price.

For example, a basic transaction of a transfer of ETH from one account to another uses 21,000 gas, so you can set the gas limit for this kind of transaction to 21,000, or higher; but it will only use 21,000 gas. If you set the gas limit below the amount of gas it takes to process the transaction, the transaction will fail and you will not be refunded your mining fee. This is like trying to make a journey with insufficient fuel in your tank; the fuel will be used, but you will not get to your destination.

Ethereum Units

Just like one dollar can be split into 100 cents, 1 BTC can be split into 100,000,000 Satoshi, and Ethereum too has its own unit naming convention.

The smallest unit is a Wei and there are 1,000,000,000,000,000,000 of them per ETH. There are also some other intermediate names: Finney, Szabo, Shannon, Lovelace, Babbage, Ada—all named after people who made significant contributions to fields related to cryptocurrencies or networks.

Wei and Ether are the two most common denominations. Wei is usually used for gas price (a gas price of 2-50 Giga Wei per gas is common, where 1 GWei is 1,000,000,000 Wei).

Ethereum Units
Source: https://ethdocs.org/en/latest/ether.html

Ethereum’s block time is shorter

In Ethereum the time between blocks is around 14 seconds, compared with Bitcoin’s ~10 minutes. This means that, on average, if you made a Bitcoin transaction and an Ethereum transaction, the Ethereum transaction would be recorded into Ethereum’s blockchain faster than the Bitcoin transaction into Bitcoin’s blockchain. You could say Bitcoin writes to its database roughly every 10 minutes, whereas Ethereum writes to its database roughly every 14 seconds. The history of Ethereum’s block times has been quite interesting, as you can see on bitinfocharts.com:

Ethereum
Source: https://etherscan.io/chart/blocktime

Compare this with Bitcoin’s relatively stable block time (note the time scale, as Bitcoin is much older than Ethereum):

Source: https://ycharts.com/indicators/bitcoin_average_confirmation_time

Ethereum has smaller blocks

Currently, Bitcoin’s blocks are a little under 1MB in size whereas most Ethereum blocks are about 15-20kb in size. However, we should not compare blocks by the amount of data in them: While Bitcoin’s maximum block size is specified in bytes, Ethereum’s block size is based on complexity of contracts being run. It is known as a gas limit per block, and the maximum is allowed to vary slightly from block to block. So whereas Bitcoin’s block size limit is based on amount of data, Ethereum’s block size limit is based on computational complexity.

Ethereum
Source: https://ycharts.com/

Currently, the maximum block size in Ethereum is around 8 million gas. Basic transactions, or payments of ETH from one account to another (i.e., uploading or invoking a smart contract), have a complexity of 21,000 gas; so you can fit around 380 of those basic transactions into a block (8,000,000 / 21,000). In Bitcoin, you currently get around 1,500 2,000 basic transactions in a 1MB block.

Uncles: blocks that don’t quite make it

Because the rate of block generation is much higher than Bitcoin’s (250 blocks per hour vs six blocks per hour on Bitcoin), the rate of ‘block clashes’ increases. Multiple valid blocks can get created at almost the same time, but only one of them can make it into the main chain. The other one ‘loses,’ and the data in them is not considered part of the main ledger, even if the transactions are technically valid.

In Bitcoin, these non-mainchain blocks are called orphans, or orphaned blocks, and they do not form part of the main chain in any way and are never referenced again by any subsequent blocks. In Ethereum they are called uncles. Uncles can be referenced by a few of the subsequent blocks and although the data in them is not used, the slightly smaller reward for mining them is still valid.mining them is still valid.

This achieves two important things:

  1. It incentivises miners to mine even though there is a high chance of creating a non-mainchain block (the high speed of block creation results in more orphans or uncles)
  2. It increases the security of the blockchain by acknowledging the energy spent creating the uncle blocks

Transactions that end up in orphaned blocks simply end up being remined on the main chain. They don’t cost the user any more gas, because the transaction in the orphaned block is treated as if it was never processed.

Accounts

Bitcoin uses the word address to describe accounts. its uses the word account but technically they are also addresses. The words seem to be more interchangeable. Maybe you can say, ‘What’s the address of your Ethereum account?’ It doesn’t seem to matter.

Ethereum
Source: https://ethereum.org/en/developers/docs/accounts/

There are two types of Ethereum accounts:

  1. Accounts that only store ETH
  2. Accounts that contain smart contracts

Accounts that only store ETH are similar to Bitcoin addresses and are sometimes known as Externally Owned Accounts. You make paymentsfrom these accounts by signing transactions with the appropriate private key. An example of an account that stores ETH is: 0x2d7c76202834a11a99576acf2ca95a7e66928ba0

Accounts that contain smart contracts are activated by a transaction sending ETH into it. Once the smart contract has been uploaded it sits there at an address, waiting to be used. An example of an account that has a smart contract is
0xcbe1060ee68bc0fed3c00f13d6f110b7eb6434f6

CONCLUSION

Ethereum’s vision of creating a decentralized platform for building applications and enabling decentralized finance has the potential to revolutionize the way we interact with technology and financial services. As a leading player in the blockchain industry, its continues to innovate and evolve, offering developers new opportunities to create innovative solutions that can transform the way we live and work. By staying up-to-date with the latest developments in Ethereum and blockchain technology, businesses and individuals can tap into the power of this decentralized platform to create new value and drive growth in the digital economy.

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