Ethereum: Decentralized, Open-Source Blockchain and Smart Contract Platform
Ethereum Review:
Introduction
Ethereum is one of the most powerful networks in the cryptocurrency world. To put it simply, Ethereum is a software that is running on a distributed network of computers which ensures that smaller programs are replicated and executed across the network in a safe but trustless manner. Bitcoin, its predecessor, is notably referred to as “digital gold” and serves mainly as a store of value or simply a virtual form of currency. If Bitcoin is the gold of the cryptocurrency world, Ethereum is the oil that machines are powered on. This is what makes Ethereum such an important development in the cryptocurrency ecosystem. It is a platform instead of just a currency. This model has allowed countless applications and cryptocurrencies to be built upon the Ethereum network. Ethereum is the most popular ecosystem for decentralized applications. Built on Smart Contracts that allow these decentralized apps to function in a trustless manner, it is more than just a cryptocurrency it is a thriving network that encompasses much of cryptocurrency ecosystem.
Background
Ethereum first came into the public eye with Vitalik Buterin released the Ethereum Whitepaper, detailing his vision for Ethereum as an evolution of Bitcoin in 2013. In 2014 at the North American Bitcoin Conference in Miami, the future founders of Ethereum would come together with Buterin to further debate what Ethereum would become. Many notable players in the space, such as Charles Hoskinson of Cardano and Gavin Wood of Polkadot, were cofounders of the project that helped Vitalik Buterin bring the vision of Ethereum to life. Ethereum was first launched in July of 2015. In 2016 there was the infamous DOA hack that resulted in a hard fork which split the network into Ethereum and Ethereum Classic. Since then, Ethereum has seen massive adoption due to its Smart Contracts that have allowed countless Decentralized Finance (DeFi), cryptocurrency tokens, and countless other projects to develop on this ecosystem at an unprecedented rate. The DeFi boom in the summer of 2020 saw the largest growth in users flocking onto the Ethereum network to interact with these dApps, and currently greater than 60% of the tens of billions of financial capital locked into DeFi contracts are based on the Ethereum. Ethereum is supported by the Ethereum Foundation, but it aims to create one large decentralized virtual machine, running the internet of blockchains.
Consensus Method
Ethereum currently utilizes the Proof of Work (PoW) consensus method. This method uses miners to add new blocks to the blockchain and allows nodes to come to consensus on the state of all information of the blockchain. In PoW consensus method, miners solve complex computational algorithms for the “right” to produce the next block and earn a reward for mining the block, to incentivize them to do the “work” and keep the network secure. Security is done through a decentralized pool of miners, that are always competing to solve the next block and thus would be less able to add an invalid block to the chain reliability without another miner beating you out. This competition over a decentralized pool of miners is what helps keep the network secure. Roughly every 15 second a new block is added to the blockchain via this PoW method. To consistently create malicious, yet valid, blocks, you would need over 51% of the network mining power to beat everyone else. You would need a lot of computing power to be able to do this amount of "work". And the energy spend might even outweigh the gains you would make in an attack. This consensus method is shared by Bitcoin and has lead to a whole industry surrounding cryptocurrency mining, a very profitable one at that (Interested in Mining your own Ethereum?). While PoW is the current model used by Ethereum, there is a proposed upgrade in the works to migrate Ethereum over to the Proof of Stake (PoS) model in the near future. This will eliminate mining, which has been seen as an issue due to its high energy use and its relation to global warming. Instead, Validators will secure the network by staking their Ethereum for a chance to create the next block and earn that block reward. But this upgrade was first proposed in 2017 but has yet to see implementation, so Ethereum remains a Proof of Work network.
Tokenomics
Ethereum (ETH) is the native token for the Ethereum ecosystem. It is used to pay fees for transacting on the Ethereum network, deploying smart contracts or minting NFTs. Wei is the base unit of Ether. 1 ETH is equivalent to 10^18 wei. Wei is normally referenced in its larger unit gigawei (Gwei), which is 10^9 wei. Gwei is the more commonly used denotation of wei and is referred to as “gas.” Fees on Ethereum are normally quoted in their Gwei value, because it makes it easier to denote the smaller transactions correctly when translating them to fiat currency. ETH and wei follow a similar principle to the relation of BTC and satoshi. Ethereum is an inflationary currency as it does not have a fixed supply. Every time a miner adds a block to the chain they are rewarded with ETH and have minimal incentive to hold the coin compared to a validator in a PoS network. Thus many speculators of ETH are excited for the switch to Ethereum 2.0 as Validators will have an incentive to hold their ETH, which many believe will help the price of ETH increase to higher levels. With the new EIP-1559 proposal the ETH might start to be a somewhat deflationary currency. While there still is no fixed supply, this proposal implements burning some of the transaction fees. And if the laws of supply and demand hold true the speculators of ETH could be very happy with the price action of ETH.
Ethereum 2.0
Ethereum has a proposed upgrade to Proof of Stake (PoS) consensus methodology. This was first proposed in 2017, its implementation has been pushed back consistently, now due for late 2021. PoS methodology relies on Validators to stake that networks token to secure the network. These Validators must stake a minimum amount of Ethereum to become validators and based on their amount staked they have a respective chance to earn the right to produce the next block and earn the blocks reward. This incentive is what helps secure the network, plus the slashing penalties to Validators staked assets if they try to manipulate the blockchain. The switch from PoW to PoS for Ethereum is proposed to happen in 4 Phases. In Phase 0 is when the Beacon Chain will be implemented. The Beacon Chain will introduce the PoS system to Ethereum as well as lay the foundation for sharding to be implemented. The first block of the Beacon Chain occurred on November 4th, 2020. In Phase 1 is where sharding will be implemented on the Beacon Chain. Sharding is the process of splitting a database horizontally to spread the load of the network with aims to reduce network congestion and increase transaction speed. There will be 64 shard chains that are proposed, and this is the main way Ethereum plans to scale its Mainnet in the near future. Phase 1.5 is an intermediary phase where Ethereum 1.0 (PoW Mainnet) will merge with the Beacon Chain as a shard. Phase 1.5 will effectively move Ethereum 1.0 to PoS and will bridge Ethereum 1.0 and 2.0, allowing all of the smart contracts deployed on Ethereum 1.0 to migrate to the new system. The Ethereum 1.0 shard will provide the history and current state of the Ethereum network to the Beacon Chain. Once the merge is deemed stable and fully functional, Phase 2 will begin. Phase 2 will initiate cross shard inoperability and native dApp development across the Ethereum 2.0 system. This will give all the shard chains the ability to handle transactions and smart contracts, which will essentially transform each shard into their own respective Mainnet. The Ethereum Foundation has said that this shift will be seamless for end users and dApps. This means that you should not need to do anything with your existing ETH or Ethereum-based assets to accommodate the change. Phase 3 is the last defined phase of the Ethereum 2.0 upgrade and consists mostly of stability testing and improvements to ensure Ethereum 2.0 successful implementation. The completion date of Phase 3 is set for some time in 2023.
Ethereum switching over to PoS vs PoW will be great for the long-term stability and health of the network. The scaling provided by Ethereum 2.0 is something that is very much needed due to increasing congestion of the network, recently Ethereum gas prices hit highs of over 200 Gwei which prices many retail traders and investors out of the market. The ability to process transactions across 64 shards in parallel will significantly enhance Ethereum’s throughput. Vitalik Buterin has estimated that with the Ethereum 2.0 upgrade, the network could scale to around 100,000 transactions per second (TPS) by the implementation of phase 2. Currently Ethereum TPS sits around 3,000 transactions per second. Another pro is that Ethereum will become a lot more environmentally friendly. It is estimated that Ethereum miners consume roughly 45 TWh of electricity per year, similar to the state of Colorado’s yearly electricity footprint. Ethereum 2.0 is theorized by be 2000x more energy efficient, which would be amazing for Ethereum carbon footprint. So, what does all this mean for ether prices? It could be too early to tell. However, we have seen the value of ETH significantly climb this summer, along with the value of the DeFi markets. This movement indicates that if demand for Ethereum dApps increases correspondingly with the scalability of the platform, the long-term outlook for ether could be bullish. Furthermore, prices jumped around 18% in the days immediately following the news that the Ethereum Foundation had opened the staking deposits contracts on Ethereum 2.0 Beacon Chain. Whether or not ETH prices continue to climb as the Ethereum 2.0 implementation proceeds remains to be seen. However, it is safe to say that a scalable platform creates a far brighter long-term outlook for the overall Ethereum ecosystem.
Conclusion
Ethereum is a very exciting platform with a lot of adoption and great potential in the future. It does have some competitors close behind it, like Cardano and their up and coming release of Smart Contracts on their blockchain. But at present Ethereum is the second largest cryptocurrency and the largest player in the Decentralized Finance world. I don't think it will be ecplised soon, but that remains to be seen. As the first Smart Contract platform it has done amazing working bringing the blockchain world foward. I cannot wait to see what is next for this network!