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What is Ethereum? The Most Comprehensive Guide for Beginners

Ethereum is a technological platform to revolutionize the digital world. Ethereum aims to transform the workings of the internet entirely. If fully actualized, it will change the course of many events – including the ways to handle finances, store data, make contracts and establish trust.

In this article, we would attempt to answer the following questions –

Hopefully, you would know all about Ethereum and its prospects by the end of this article.

But before diving into the details of Ethereum, let us first understand its predecessor – Bitcoin, and the technology it functions on – Blockchain.
You would develop a better understanding of Ethereum and its functions by learning about Bitcoin and Blockchain.

Bitcoin – the predecessor

In 2008, Satoshi Nakamoto created a lot of rumbles when he announced Bitcoin. For the first time, the programming of currency was possible. Transactions could be made on a peer-to-peer network, ruling out the need for ‘intermediaries,’ trusted or otherwise. Bitcoin showed the world that mathematics could assume the role of a “trusted intermediary.”

But is Bitcoin just another digital version of traditional currency? Definitely not!

How is Bitcoin different?

  • It is decentralized.
  • It has a limited supply.
  • It allows anonymous identities through pseudonyms.
  • It is immutable.
  • It is highly divisible. (Satoshi, the smallest unit, is one-millionth of a Bitcoin and roughly equals to USD 0.0000896749).

Bitcoin was initially used as an umbrella term to refer to the following two aspects:-

  1. The cryptocurrency – A piece of code representing some digital assets.
  2. The Blockchain – The underlying framework upon which the currency functions.

The Bitcoin blockchain was limited to financial transactions only. Hence, it compromised the prospects of blockchain technology.

But what is Blockchain Technology? Let us understand it first.

The blockchain

By definition, a Blockchain is a ‘shared ledger’ or a ‘distributed database’ containing the data in the form of ‘blocks.’ Each ‘block’ includes information on the previous and the following block, creating an immutable chain of blocks.

A crucial aspect of this technology is that it allows you to add only newer data. A piece of information cannot be removed after it is tapped into the chain.

Unlike traditional databases, a blockchain is not ‘stored’ on a single computer. Instead, it works with a peer-to-peer network where each computer functions as a ‘node.’ Each node executes and records anything that happens on the Blockchain, making Blockchain a ‘shared ledger.’

Consequently, there is no single entity that controls the processes. The entire network of voluntary participants is in charge, making it ‘decentralized.’

The process is automated. It functions solely based on mathematical conditions agreed upon by the participants.

What is Ethereum?

The official website’s definition of Ethereum is as follows:

“Ethereum is 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”.

One significance of Ethereum is that it liberated the blockchain technology from the financial limits of Bitcoin and expanded its scope. It showed the world how other industries could benefit from its application.

So, Ethereum is a one-of-its-kind programmable blockchain.

For example, Imagine that a skeleton is given to you and is modifiable. You have to tweak the bones, layer the muscles, place the organs, and put in the finishing touches. In the end, you have an all-new human to yourself, made to your choice and requirements.

The implication of the example mentioned above is real and is indeed the fundamental function of the Ethereum. It allows you to create your own blockchain-based applications that can run on the Ethereum network.

Like Bitcoin, the Ethereum architecture also has two aspects:

  • The cryptocurrency
  • The Ethereum blockchain.

The ‘native’ cryptocurrency of Ethereum is named Ether.

Ether was created to financially support the Ethereum project and not the other way around. This feature is an essential difference between Ethereum and its predecessor, Bitcoin.

The importance of this technology is not in what it is. It is in what it can do in the avenues that it opens up to the digital world.

What is the vision of Ethereum?

We can list some of the mainstream uses of the internet as follows –

  • Browsing
  • Uploading/ downloading
  • Watching videos
  • Playing games
  • Preparing documents
  • Storing/ retrieving files
  • Sending emails
  • Chatting, and many more.

For all of our everyday usage, we are dependent upon a client-server network. The data is stored in a central computer or ‘server’ that your computer can access. All the personal information you provide on the internet (card details, DOB, and more) is stored on some server.

The servers themselves are computers and cannot ‘make sense’ of your data. However, the human owners of these servers can.

Most of these servers are either owned by government agencies or by private corporations.

It is quite evident that such data can be misused. Like Brian Behlendorf, some have regarded this centralized structure as the internet’s ‘original sin.’

The blockchain technology (in general) and mainly the Ethereum exist to remedy this.

Ethereum’s vision is to build a ‘new internet.’ One that would be decentralized as it was always meant to be. An internet where,

  • Peer-to-peer networks would replace the client-server model.
  • Any data would be owned only by its creator.
  • There would be no monopoly of data.
  • Applications won’t steal data in the name of ‘tailor-made’ services.

Ethereum strives to ‘democratize’ the internet and wants to build a ‘world computer.’

At this point, some of the obvious questions that come to mind are:-
  • How?
  • What tools does Ethereum have?
  • What benefits does Ethereum bring to the table?
  • How does Ethereum plan to overcome the inevitable obstacles?

So now, let us try and find the answers to these.

What are various aspects of Ethereum?

You must have realized by now that Ethereum is a multifaceted domain. It has many aspects to it and it is through these aspects that the technology functions.

For our purpose, we must consider them individually.

1.Ethereum smart contracts

Smart contracts are a crucial element of some of the blockchain platforms, including Ethereum.

The National Institute of Standards and Technology (NIST) of the United States of America defines smart contracts as –

“A collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network.”

Smart contracts utilize mathematical algorithms, hence they eliminate the requirement of middle-men to uphold their sanctity and ensure enforcement.

To comprehend how it works, consider the following example.

Imagine a newspaper vending machine. You have to put a coin in to get a newspaper.

Suppose you put in a coin, and you still don’t get a newspaper. What should happen next?

This is a kind of scenario where a smart contract can help.

Trust builds through smart contracts in any blockchain-based transaction. It is a code that automatically performs a predefined function on meeting the pre-set conditions. Ethereum smart contracts have extensive functionality as compared to many other blockchain-based smart contracts.

Ethereum’s programmability enables developers to use it in unique ways. Thus, they can include many variations to suit the requirements.

This was made possible by the Ethereum Virtual Machine or EVM.

2. Ethereum virtual machine (EVM)

It was EVM innovation which made Ethereum what it is today. The much-honored ‘programmability’ of Ethereum is due to the EVM.

Before Ethereum, blockchain-based application developers had to perform tedious and time-consuming tasks like the following–

  • Modify Bitcoin’s functionality
  • Expand Bitcoin’s functionality
  • Alternatively, build a new blockchain from scratch.

Then came the Ethereum Virtual Machine with a wholly different and more adaptable approach. Among other things, it allowed developers the liberty to use any/every programming language available.

Consequently, developers could create a variety of specialized “decentralized applications” or dApps with unprecedented levels of ease and efficiency. It is through these dApps that the practical applications of any blockchain (including Ethereum) occur.

The dApps are decentralized and mostly open-source with no central governing authority. They are reward oriented and protocol-based.

To learn more about dApps, read our in-depth Insights on “What are dApps.”

3. Blockchain validation

Ethereum (and blockchain) rules out the need for trusted intermediaries such as banks. However, how do we know that a transaction is valid if not by intermediaries?

Blockchain technology answers this question in the form of ‘validation.’

Validation is the process by which the nodes verify the legitimacy of any new transaction. A new block is added after it is validated. In this way, the transaction is verified and ensured that the nodes are all on the same page.

A transaction is validated with some standard and predefined criteria, and the blockchain developer defines these criteria.

Although every node can validate a transaction upon meeting specific criteria, not every node participates actively. Those who validate the transaction are known as validators.

The process of validation or the consensus mechanism in Ethereum was Proof-of-Work. In this, the validators are miners who solve complicated mathematical puzzles and equations to validate the blocks. Proof-of-Work was the consensus mechanism of Ethereum until September 15, 2022, after which it was replaced with the Proof-of-Stake consensus mechanism due to the high computation power it needed.

 

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What is Proof-of-Stake?

Proof-of-stake is an energy-efficient consensus mechanism to validate transactions and create new blocks in the blockchain. It was introduced as a substitute for PoW, which requires heavy and expensive equipment, resulting in large energy costs. PoS is, however, used widely by many blockchain networks owing to its least energy requirement, security and other benefits.

In PoS, the Ether owners lock up their Ether as collateral, also known as staking, to become validators. Anyone can stake their Ether, who are then selected randomly. The selected validators are then responsible for checking that all the transactions and the newly created blocks are valid. Anyone willing to become a validator must deposit 32 ETH into the deposit smart contract and run three different software, an execution client, a consensus client and a validator. The selected validators receive block rewards once a block gets validated. If any validator tries to act maliciously or lazily, their staked Ether can be destroyed. It is, thus, safer than PoW.

What are the use cases of Ethereum?

Ethereum has not only transformed the blockchain world but has also helped the evolution of many other industries. For instance,

  • Santander Bank, in collaboration with ConsenSys, has developed a cash tokenization utility system. It enables the user to make domestic or international within seconds using the Ethereum platform.
  • uPort is building a universal ID which could be used to log into various platforms. The ID would be an address on Ethereum.
  • GridPlus is using Ethereum to digitize the power grid to reduce the cost of electricity.

Now that we have discussed almost every aspect of Ethereum, let us also take a look at some issues that it faces at present.

What is the prominent issue faced by Ethereum?

Scalability – A Hindrance to Commercial Adoption

On the point of scalability, the Ethereum blockchain is still suffering like all others. Primarily, this issue can be understood in terms of the blockchain’s capacity to support transactions per second.

On the one hand, giants like PayPal, MasterCard, and others are handling huge numbers of transactions per second (TPS). VISA, the benchmark in this regard, handles around 1,700 TPS.

On the other hand, Bitcoin has an average TPS of 4.6 while Ethereum’s maximum capacity is 15 TPS at present.

Also, reaching peak capacity does cause the network to slow down. This was seen in 2017 when participants on the Ethereum network were given the scope to “buy and breed crypto-pets.” The hype was immense, and this led to a slowdown of transaction speed on the network.

So, does this mean that this is somewhat the end of the road for Ethereum? Well, not really.

Ethereum Merge

When Ethereum was launched, it utilized the same consensus mechanism of Bitcoin blockchain, proof-of-Work, to validate transactions. Although it worked fine in the initial era of Ethereum development, as more and more applications and solutions started building on Ethereum, it fell behind in providing the required scalability. Moreover, the mining process in PoW needed heavy equipment and consumed energy massively. As such, the team behind Ethereum worked to introduce a sustainable consensus mechanism that posed the least threat to the environment.

On September 15, 2022, the Ethereum merge occurred wherein the PoW mechanism was upgraded to PoS. In this, the Ethereum mainnet that used PoW was merged with a separate Beacon chain that utilized PoS consensus. The Beacon chain, created on December 1, 2020, ran parallel with the mainnet. It did not process any mainnet transactions and underwent extensive testing when finally the time came for the Beacon chain to achieve consensus on real-world data. Until then, the Beacon chain reached a consensus on its own state by approving active validators and their account balances.

Once the mainnet merged with the Beacon chain, the entire transactional history of Ethereum was also merged. Mining is not anymore the process of validating blocks but PoS. Moreover, the Beacon chain became the consensus engine for each network data. It also reduced energy consumption by ~99.95%, making it a green blockchain.

With this upgradation in the Ethereum ecosystem, Ethereum hopes to achieve its vision of scalability, security and sustainability that the users need, which was not possible in the previous version. It hopes to preserve its core value of decentralization while achieving this vision.

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Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the founder and CEO at LeewayHertz. The experience of building over 100+ platforms for startups and enterprises allows Akash to rapidly architect and design solutions that are scalable and beautiful.
Akash's ability to build enterprise-grade technology solutions has attracted over 30 Fortune 500 companies, including Siemens, 3M, P&G and Hershey’s. Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.

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