Ethereum is a decentralized computing platform similar in some ways to a laptop or PC, but with the caveat that it cannot operate on just one device. Ethereum runs simultaneously on thousands of computing machines around the world, which means it is truly decentralized.
Ethereum is very popular among application developers because of its flexibility, which allows running many programs of varying complexity. In simple words, the point is that developers can create and run code on a distributed network instead of a centralized server. This means that such applications cannot be simply stopped or censored, which is why most DeFi projects are built on the Ethereum network.
How does Ethereum work?
All the computers in the Ethereum network are interconnected and represent a distributed virtual machine that performs the actions embedded in the smart contracts. Ethereum was the first to make it possible to implement thousands of projects within a single platform, without having to create a new blockchain for each application.
To run a decentralized application, a programmer only needs to write the program code, put the necessary actions into it, and upload everything to the ethereum blockchain. And once launched, the program will execute automatically on various remote nodes.
Smart contracts executed on Ethereum are initiated by transactions (from users or other contracts). When a user sends a transaction to a contract, each of the nodes on the network runs the contract code and writes the output. The Ethereum Virtual Machine (EVM) is used for this, which converts smart contracts into computer-understandable instructions. And for scalability, Ethereum uses its ZK-Rollups and Optimistic Rollups technologies.
It uses mining to update information and status (still) using the Proof of Work algorithm, very similar to Bitcoin's algorithm.
The Ethereum network uses the Solidity language, which has the ability to use loops, conditional branching (fork), variables, and many other things needed to create blockchain applications.
What is gas in Ethereum?
Gas is a contract startup fee on the network, it is needed so that people can't just overload the Ethereum network by duplicating the same complex code. If someone sets up their contract to repeat the same code, every node will have to run it endlessly. This would create a huge load, and the system would probably crash.
Just as a car cannot drive without fuel, contracts cannot run without gas. Users must pay some amount of gas in order for the contract to work successfully. If there isn't enough, the contract will stop working.
Simply put, you could run a looped program for an extended period of time, but such a contract would quickly become expensive. Because of this, nodes on the Ethereum network successfully filter out spam.
Typically, gas costs a small fraction of ETH. A smaller unit (gwei) is used to denote it. One gwei corresponds to one billionth of ether. The price of gas directly depends on how busy the network is at the moment and usually ranges from $10-$250.
Although the price of gas can vary, each transaction requires a fixed minimum amount of gas, meaning that complex contracts will require much more gas than a simple transaction. Thus, gas acts as a measure of computing power. This ensures that the system assigns users a fair fee for using Ethereum resources.
How does mining in Ethereum work?
Mining is the most important factor in network security. It ensures that the blockchain update is true and allows the network to function independently. In the process of mining, multiple nodes allocate computing power to solve crypto tasks.
In order to be competitive with each other, miners must process (hash) information as quickly as possible - power is measured in hashrate.
The higher the hash rate in the network, the harder it becomes to solve the problem. Only miners have the right to find a solution to the block, but anyone with enough computing power can become one. Once it is known, it will be easy for all other participants to check its validity (authenticity and capability).
Of course, continuous hashing at high speeds is expensive. To motivate miners to protect the network, they are offered a reward, which includes all transaction fees in a block and a reward in ETH.
Major disadvantages and problems
Ethereum, for all its potential, currently has a number of limitations and drawbacks, the most important of which is the high cost and scalability of the network.
Ethereum aims to become the backbone of a new financial system, for that it must be able to process many times more transactions per second than it does now. Given the distributed nature of the network, this problem is very difficult to solve, at least the Ethereum developers have been doing this for years.
The blockchain scalability trilemma
It might seem that simply raising the gas limit on a block can help with scalability issues, because the higher the limit, the more transactions can be processed in a certain amount of time, right?
Unfortunately, this is not possible without compromising Ethereum's key properties. Vitalik Buterin proposed a blockchain trilemma (presented below) to illustrate the fragile balance in the chain.
The blockchain trilemma: scalability (1), security (2), and decentralization (3).
When optimizing the above characteristics, one of the three will have to be sacrificed. Blockchains such as Ethereum and Bitcoin prioritize security and decentralization. Their consensus algorithms secure networks of thousands of nodes, which unfortunately leads to low scalability. With so many nodes accepting and validating transactions, a decentralized system is slower than centralized alternatives.
There is also the option of removing the gas constraint so that the network achieves security and scalability, but in this case it will no longer be as decentralized.
This is due to the fact that the large number of transactions in a block directly affects its size. Nevertheless, nodes in the network still need to periodically download and distribute them to other nodes, maintaining the intensity of their hardware. When the gas limit in blocks increases, it becomes more difficult for nodes to check, store and broadcast blocks to the network.
As a result, nodes that cannot handle such a load will start to shut down. Only a few of them will be able to stay and continue to compete with each other, leading to more centralization. As a result, we will have a secure and scalable blockchain that lacks one of its basic properties: decentralization.
Finally, let's imagine a blockchain whose main priorities are decentralization and scalability. To be fast and decentralized at the same time, we have to make compromises in the use of the consensus algorithm, which in turn leads to weakened security.
Another drawback of Ethereum (and other Proof of Work consensus cryptocurrencies) is that it is very resource intensive. To successfully add a block to the blockchain, you have to mine it, and to do that you have to perform calculations quickly, which consumes a huge amount of electricity.
To address the above limitations, a major set of updates known collectively as Ethereum 2.0 has been proposed.
What is Ethereum 2.0?
Ethereum 2.0 is a solution that will scale the original blockchain and make it more user-friendly. The main feature of the update is the network's transition to the Proof-of-Stake (PoS) consensus, it will replace the Proof-of-Work (PoW) consensus on which the blockchain currently operates.
The main difference between PoS and PoW is that you no longer need miners to generate processing power to keep the network running. It is the holders of the digital coins who keep the blockchain running and are paid for doing so. This process is called staking.
Development is well underway, as Ethereum has already completed its test network Kiln. Kiln was Merge's last test network before the public test network update, and it quietly switched from Proof-of-Work to Proof-of-Stake last week.
Ethereum still dominates the Layer 1 landscape even after the SOLUNAVAX rally, so the significance of such a move should not be underestimated. It is believed that Proof-of-Stake will make Ethereum 99.95% more energy efficient, which in turn will make NFT even more widespread and popular.
Just as crucially, Ethereum's emissions will drop dramatically once the transition is complete. With Proof-of-Stake, emissions will be closer to 1% of current levels.
Are Ethereum transactions private?
Definitely not.
All transactions added to the etherium blockchain are public. Even if your real name is not listed in the etherium address, a third-party observer can identify your identity by various methods.
How are new ethers created?
New Ethers are created through mining, just like Bitcoin. Mining is integral to protecting and updating the Ethereum blockchain, as well as encouraging holders of nodes that secure it.
Who created the etherium?
In 2008, an unknown developer (or group of developers) under the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper. It changed the way people thought about digital money forever. A few years later, a young programmer named Vitalik Buterin was able to develop the idea and figured out a way to apply it to any type of application. The concept was eventually embodied in Ethereum.
In 2013, Buterin created a post on his blog called Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In it, he described the idea of creating a blockchain network according to Turing completeness in the form of a decentralized computer that, given time and resources, could run any application.
In the future, the types of applications that could run on a blockchain would be limited only by the imagination of the developers.
It's a long article, but also very informative ;)
Thanks for your attention and see you soon!
Always yours C.J.
