Ethereum Blockchain Explained

If Bitcoin is the first born child who got everything going, Ethereum is the prodigy sibling who knows it all – and wants to overachieve. Right now, if Bitcoin ($29K) is dominating the cryptocurrency market, Ethereum ($1.8K) comes up right after it. For years now, Bitcoin and Ethereum are put head-to-head. But let me tell you, that’s absurd. These two despite being based on blockchain technology, have very different long-term visions. So, in case you need to understand the Ethereum Blockchain better, this article is for you. However, I strongly advise you to read up on Bitcoin first.

What Is the Ethereum Blockchain?

Many consider Ethereum to be the internet’s next step. Ethereum is designed to be scalable, programmable, secure, and decentralized. 

Need for Ethereum:

• Extend blockchain technology beyond simple transactions (as in Bitcoin).
• Enable decentralized applications (DApps) and smart contracts.
• Address limitations in Bitcoin’s scripting language and offer greater flexibility.

Features:

• Smart Contracts: Self-executing contracts with predefined rules and conditions.
• Decentralized Applications (DApps): Applications that run on the Ethereum blockchain.
• EVM (Ethereum Virtual Machine): A runtime environment for executing smart contracts.
• Ether (ETH): Ethereum’s native cryptocurrency used for transactions and fees.
• Decentralization: Distributed network of nodes, reducing central control.
• Token Standardization: ERC-20, ERC-721, and others enable creation of fungible and non-fungible tokens (NFTs).

Ethereum Blockchain History Recap

The founders of the Ethereum blockchain were the first who acknowledged the full potential of blockchain technology beyond just secure virtual payment methods.

1. Vitalik Buterin co-created Ethereum to answer for Bitcoin’s shortcomings. He published the “Ethereum Whitepaper” in 2014.
   
2. Ethereum went live on July 30, 2015, with the release of its first version, called “Frontier” by Buterin and Joe Lubin – founder of the blockchain software company ConsenSys.
   1. They also founded the “Ethereum Foundation” in Switzerland with a mission to maintain and develop the network. 
   2. After Buterin declared this foundation will run as a nonprofit, some co-founders left.
   3. Over time, developers came to Ethereum with their own decentralized ideas.
      
3. In 2016, Ethereum users founded The DAO, a democratic group that voted on network changes and proposals. Thus, eliminating the need for a CEO.
   1. Then, an unknown hacker stole $40 million in funds from The DAO’s holdings due to a security exploit. 
   2. To reverse the theft, The DAO voted to “hard fork” Ethereum, to diverge from the old network and upgrade to a new protocol. 
      1. Here Ethereum went through a major software update. 
      2. This new fork retained the name Ethereum, while the original network exists as Ethereum Classic.

How Does Ethereum Work?

Ethereum works the same way any blockchain works. Like Bitcoin, the Ethereum peer-to-peer network exists on thousands of computers worldwide, thanks to users participating as “nodes,” rather than a centralized server. Cryptographic tokens, p2p networks, consensus mechanisms are all familiar in a blockchain. What makes Ethereum superior is the Ethereum Virtual machine that made D-apps, DEX, and smart contracts possible.

Ethereum Supply: There is no cap on ETH supply. Currently it’s 120.15 M. A new Ethereum block is added every 12- 15 seconds. 

Block size: 15 million gas but the size of blocks will increase or decrease in accordance with network demands, up until the block limit of 30 million gas (2x target block size).

Ethereum Virtual Machine Explained

The Ethereum Virtual Machine (EVM) is a runtime environment that executes smart contracts and decentralized applications (DApps) on the Ethereum blockchain. It provides a sandboxed and isolated environment for executing code without affecting the rest of the blockchain.

Key Features:

• Turing Complete: The EVM is Turing complete, meaning it can simulate any computational process and execute complex logic.
• Deterministic Execution: The same input will always produce the same output, ensuring consistency and predictability of smart contract execution.
• Gas Mechanism: EVM transactions require gas, which is a unit of computation that measures the computational effort required to execute a smart contract. Gas fees are paid in Ether and help prevent abuse of the network.
• State Transition: EVM execution leads to changes in the global state of the Ethereum blockchain, including updates to account balances and contract storage.

Components and Architecture:

• Code and Data: The EVM processes two types of information—transaction data and contract bytecode.
• Stack: EVM uses a stack-based architecture to manage data and computation. Instructions push and pop data onto/from the stack.
• Memory: The EVM has a limited amount of memory for temporary storage during contract execution.
• Storage: Smart contracts can store data on the blockchain using the EVM’s storage system. Storage changes are more expensive in terms of gas.

Smart Contract Execution:

1. A transaction is initiated by an external actor and contains a payload of data, including instructions for the EVM.
2. The EVM processes the transaction’s bytecode in a step-by-step manner, executing the corresponding operations and manipulating the stack, memory, and storage.
3. If the transaction modifies the contract’s state, the EVM updates the global state of the blockchain.

Limitations and Considerations:

• Gas Limit: Each block in the Ethereum blockchain has a gas limit, which restricts the amount of computation that can be done in a block. Transactions exceeding this limit will fail.
• Gas Costs: Complex computations or storage operations consume more gas and, therefore, require higher fees.
• Security Risks: Vulnerabilities in smart contracts can lead to unintended behavior or exploits, as the EVM faithfully executes code regardless of its purpose.

Advantages:

• EVM enables trustless execution of smart contracts, allowing parties to interact without intermediaries.
• It allows for a wide range of applications, from financial services to supply chain management, gaming, and more.

Evolution and Upgrades:

The EVM has undergone several upgrades and improvements over time to enhance security, efficiency, and capabilities. Ethereum’s merge improved the EVM’s scalability and performance through the implementation of shard chains and other enhancements.

Ethereum Improvement Proposals (EIPs) 

These are design documents that propose new features, standards, or changes to the Ethereum blockchain’s protocol. They include the EVM and smart contract functionality. EIPs serve as a means for Ethereum community members to discuss and collaborate on proposed improvements.

EIPs are categorized into three types:

• EIP-1: Standards Track – Proposes changes to the Ethereum protocol, including new features or improvements.
• EIP-2: Informational – Provides information or guidelines but does not propose changes to the protocol.
• EIP-3: Meta – Describes processes and guidelines for EIPs.

EIP Process:

1. Authors submit a draft EIP for community review and feedback.
2. Discussions take place on platforms like GitHub and Ethereum forums.
3. The EIP goes through iterations, revisions, and improvements based on feedback.
4. Core developers and the Ethereum community review and decide whether to accept or reject the proposal.
5. If accepted, the EIP enters the implementation phase.

Benefits:

• EIPs formalize the proposal process, making it transparent and open to the community.
• They enable collaboration and coordination among developers, stakeholders, and users.
• EIPs help maintain the integrity and evolution of the Ethereum network.

Ethereum Blockchain Major Updates 

The following Infographic highlights the major updates that Ethereum’s blockchain went through since its implementation in 2015. You can know the detailed history of Ethereum updates on their website. Let’s cover two of the most important updates that took place in recent years.

Sep 15, 2022 – The Merge 

The Ethereum mainnet and Beacon Chain finally got together in a “Merge” upgrade that shifted Ethereum’s PoW consensus to PoS. The network started using validators instead of miners to verify blocks on the blockchain. Validators must stake 32 ETH in order to participate in the validation process. The more ETH a validator stakes, the bigger their chance is to be the next validator.  However, ever since the Merge, the staked ETH provided by validators was not redeemable, which made the Ethereum network not a fully operating PoS blockchain, that is until the Shanghai upgrade came along. 

Apr 12, 2023 – Shanghai

The Shanghai Upgrade is a series of upgrades for the Ethereum network, with EIP-4895 being the most notable one. This proposal allows stakers to finally have control over their funds, which means the approximately $16 million in ETH will be unlocked for validators to claim.

Effect on Ethereum’s Price

You can tell that after the hack and Ethereum’s hard fork in 2016, and Byzantine update in 2017 that reduced miners’ fees, Ethereum witnessed a spike in its price in 2018. Obviously with the NFT boom between 2021 and 2022, Ethereum soared to unforeseen heights. Then came the first May market crash followed by the November market crash at the end of 2022 which took ETH’s price back to 2018, before NFTs hype existed. Despite everything,  ever since 2021 Ethereum’s price hasn’t dropped below $1,000. Even now during the most brutal crypto winter it stands tall at $1.8K.

Pros & Cons Of the Ethereum Blockchain

Advantages of Ethereum:

1. Smart Contracts: Ethereum introduced the concept of smart contracts, enabling self-executing, tamper-resistant agreements without intermediaries.
2. Decentralized Applications (DApps): Developers can build and deploy DApps on Ethereum, fostering innovation across various industries.
3. Flexibility: Ethereum’s Turing-complete scripting language allows complex logic and a wide range of applications beyond simple transactions.
4. Token Standardization: Ethereum’s ERC-20 and ERC-721 standards have facilitated the creation of fungible and non-fungible tokens, driving tokenization and token economies.
5. Interoperability: Ethereum’s compatibility with other blockchain networks allows for cross-chain interactions and broader use cases.
6. Ethereum Improvement Proposals (EIPs): provide a formal process for proposing and discussing changes, fostering transparency and inclusiveness.

Disadvantages of Ethereum:

1. Scalability: Scalability is part of a trilemma that faces all blockchains.
2. Security Risks: Smart contracts can be vulnerable to bugs and exploits, leading to potential financial losses if not thoroughly audited and tested.
3. Complexity: Ethereum’s features and capabilities have led to a complex ecosystem, which can be challenging for new users and developers to navigate.
4. Network Upgrades: Implementing major upgrades (e.g., Ethereum 2.0) can be time-consuming and introduce uncertainties, potentially disrupting the ecosystem.
5. Regulatory Uncertainty: As with all cryptocurrencies, Ethereum’s regulatory environment is subject to change and could impact its adoption and use cases.
6. Mass Adoption: Interacting with Ethereum and DApps can involve a learning curve and technical barriers, limiting mainstream adoption.

Future of Ethereum

To address scalability, Ethereum is continuing development of sharding. It will divide the Ethereum database amongst its network. This idea is similar to cloud computing, where many computers handle the workload to reduce computational time. These smaller database sections will be called shards, and shards will be worked on by those who have staked ETH. Shards will allow more validators to work at the same time, reducing the amount of time needed to reach consensus through a process called sharding consensus.

Updated roadmap diagram! pic.twitter.com/MT9BKgYcJH

— vitalik.eth (@VitalikButerin) November 4, 2022

The platform does have some well-written documentation on the matter — another key way to bring in more users. But the act of actually using Ethereum needs streamlining. Learning about blockchain is very different from using it. Therefore, mass adoption remains one of the biggest barriers to overcome. Vitalik has the Ethereum roadmap up for anyone to look at, and you may want to check his blog where he shares some interesting ideas. So, where do you think we should build web3 , on Bitcoin or Ethereum? Read this to find out.