Blockchain technology has revolutionized the way we perceive and transact value in the digital age. That technology can also be difficult to understand and some of the terms can sound like foreign languages.
Below, I’ll attempt to explain some complex concepts about Ethereum ETH). I’ll explore its structure, functionality, and significance in the cryptocurrency landscape.
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II. What Is The Ethereum Blockchain?
The Ethereum blockchain serves as a decentralized platform for executing smart contracts, which are self-executing contracts with the terms of the agreement directly written in code.
Unlike Bitcoin (BTC), which primarily functions as a digital currency for peer-to-peer transactions, Ethereum enables developers to build decentralized applications (DApps) and deploy smart contracts on its blockchain. This programmable functionality, DApps, and smart contracts all combine to give Ethereum a massive scope of capabilities.
III. The Structure of The Ethereum Blockchain
The Ethereum blockchain is structured similarly to Bitcoin’s, with blocks containing transactions linked together in a chronological chain. That’s where we get the name “blockchain.”
However, Ethereum’s blockchain is more versatile, supporting not only transactions but also smart contracts and decentralized applications (DApps). Each block in the Ethereum blockchain contains a list of transactions and a reference to the previous block, forming a secure and immutable ledger of all network activity.
Ethereum started off as a Proof-of-Work blockchain similar to Bitcoin, but has since pivoted to Proof-of-Stake. I could write another entire essay explaining those two consensus mechanisms and the differences between them. Let’s save that for another day.
IV. Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine (EVM) is a decentralized runtime environment that enables the execution of smart contracts on the Ethereum blockchain. It functions as a sandboxed environment where smart contracts written in Solidity or other compatible programming languages can be deployed and run.
What sets Ethereum apart from other protocols is the EVM’s ability to execute code autonomously without the need for intermediaries, allowing for the creation of decentralized applications (DApps) and the automation of trustless transactions. This feature enables developers to build a wide range of applications, from decentralized finance (DeFi) platforms to non-fungible token (NFT) marketplaces, all within the Ethereum ecosystem.
Unless you’re a programming developer that probably sounded like a bunch of nonsense. Simply put, the Ethereum Virtual Machine is the special sauce that allows developers to build out amazing things on the Ethereum network.
V. Ether (ETH) and Gas
Ether is the native cryptocurrency of the Ethereum blockchain. It serves as the fuel for executing transactions and deploying smart contracts on the network. It functions similarly to Bitcoin in that it can be used as a medium of exchange and store of value. ETH is the token that you can trade on exchanges and what most people think of when they see Ethereum.
However, its primary purpose within the Ethereum ecosystem is to pay for computational services and transaction fees. These fees, known as gas fees, are denominated in small units of ether called “gas” and are paid by users to compensate miners for processing and validating transactions.
Gas fees vary depending on the complexity and computational resources required to execute a transaction or smart contract. They serve as an incentive mechanism to prioritize and allocate network resources efficiently.
You’ll hear many people complain about the gas fees being too high at times. When gas fees get high it makes it very expensive to transact on the Ethereum blockchain.
One of the main goals as Ethereum continues to evolve is to make it cheaper to transact on the network. In recent years, people have moved over to “layer-2s” or other blockchains built on top of Ethereum. These layer-2s inherit some of Ethereum’s reliability while offering cheaper gas fees and faster transactions.
VI. Smart Contracts on Ethereum
Smart contracts are self-executing agreements with terms encoded in code, facilitating automation without intermediaries. They streamline processes such as token issuance, voting, and decentralized finance, enhancing efficiency and transparency.
By removing the need for third-party involvement, smart contracts ensure trustless transactions and enable secure, tamper-proof execution of agreements. Use cases span various industries, from supply chain management to insurance and gaming, revolutionizing traditional contract-based interactions.
We’ve barely scratched the surface of the many use cases for smart contracts. They are an improvement on just about every existing contract-based application in the world today.
Imagine the transfer of ownership of real estate done on a blockchain through a smart contract as opposed to third-party intermediaries. Then imagine the ownership records for that piece of real estate stored on the blockchain. There will never be another land ownership dispute again after blockchain is utilized for those types of contract transactions.
VII. Decentralized Applications (DApps)
The Ethereum ecosystem would be nothing without its DApps. Decentralized Applications like the loan protocol AAVE and the decentralized exchange Uniswap build out Ethereum’s Decentralized Financial system.
DApps run on smart contracts and operate without centralized governing bodies. The difference between an on-chain exchange like Uniswap and a centralized exchange like Coinbase is that nobody controls Uniswap. You buy, sell, loan, borrow, etc. with a third party through a smart contract that handles everything. There is no centralized point of failure.
Right now there are already a ton of things you can use the Ethereum protocol for. You can buy, sell, loan, and borrow tokens through DeFi. You can buy, sell, and create NFT images. You can use smart contracts to create trading bots. However, the current state of DApps could appear prehistoric in a few years as more developers begin building on the Ethereum ecosystem.
I hope you become half as excited as I am about what Ethereum could become in the years that come.
VIII. Ethereum Improvement Proposals (EIPs)
Ethereum Improvement Proposals (EIPs) are design documents that propose changes to the Ethereum protocol. These changes can include enhancements, optimizations, and new features to improve the functionality and efficiency of the Ethereum network. You’ll see EIPs discussed online every few months, as the developers behind Ethereum are constantly improving the protocol.
Once proposed, EIPs undergo community review and consensus before being implemented through network upgrades. These upgrades, known as hard forks, are coordinated events where all network participants upgrade their software to the latest version of the blockchain.
Conclusion
The Ethereum blockchain can be very complicated as there is a whole heck of a lot of stuff going on. Smart Contracts plus DApps and the EVM combine to give Ethereum its massive potential.
There are endless possibilities about what can be built on Ethereum and the network is currently still in its infancy stages. Just think about how much the Internet has changed in the last decade and you’ll realize how fast technology can grow.
Give yourself a pat on the back for reading all the way through this article. You now know the basics of Ethereum and how it works. In future issues, we’ll get into the real fun about what’s being done on this blockchain.
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