Ethereum

Sunny Dasgupta
April 06, 2022

Introduction

The timeline for Blockchain technology that led to the creation of Ethereum looks something like this:

I'll explain. 

Blockchains

To understand the Ethereum network, you need to know the basics about Blockchains in general. I recommend you read this post if you haven't already. To summarise very, very quickly: blockchains are public ledgers (think of them as a spreadsheet) that are decentralised, distributed and secured with cryptography. 

Single Purpose

This was the first iteration of blockchain technology. Bitcoin is a great example of a single-purpose blockchain. The Bitcoin ecosystem was designed to do one thing very well - to facilitate the movement of Bitcoins. 

Swiss Army Knives

Vitalik, Ethereum's creator, coined the term "Swiss army knife" protocols to describe the next evolution in blockchain networks. 

"Basically, come up with a list of ten or twenty features he wants to have. Make a little, tiny thing for each one of them. Stick them together into a knife. And there you go - that's your product. In this case - that's your blockchain."

The problem with this approach was that if you found another feature or use case you wanted to support after building your blockchain, there was no way to shoehorn it in. 

Ethereum

Ethereum's aim was to be a blockchain that you can build on top of. Just like the internet, or the app store for mobiles, the idea was that you could go wherever your imagination takes you and just build this functionality on top of the Ethereum blockchain. 

Ethereum has a built-in programming language called solidity. If you have an idea for a new application or a new feature you want to see in the Ethereum network, you can write the rules of this application in a piece of solidity code (called a smart contract) and upload it to the Ethereum network. 

Smart Contracts

So, as we said, a smart contract is a computer program stored inside of a blockchain. Smart contracts are immutable. Once a smart contract has been created, it can never be changed again. They are also distributed, which means that the output of the contract is validated by the nodes in the network, which makes them very difficult to tamper with. 

DApps

D'App is just the cool kids' way of saying decentralised application. These are the apps that are being built on the app store that is the Ethereum network. They use smart contracts in the background to work but combine this with front end user interfaces that make it easy for users to use them. 

It's important to emphasise the decentralised part of decentralised app. These apps are not like your online banking app or your favourite meditation app, because they are not controlled by a centralised authority. In the case of a normal app, a company is storing your Data. With D'Apps, the nodes on the Ethereum network are used to verify any exchange of information (for example, if you make a transaction on a D'App, the nodes on the Ethereum network will verify this). 

The most famous example of a D'App is probably Uniswap. It's an exchange that allows users to swap and trade tokens with people across the internet easily. Aave is a decentralised money market that allows users to borrow and lend tonnes of different cryptocurrencies and is another example of a very popular D'App. And to prove how broad the uses of D'Apps are, we can take the example of Axie Infinity. Axie Infinity is a D'App, but it's not an online exchange or money market - it's a very popular online game built on the blockchain. 

Gas

When code is executed on the Ethereum network, the number of computational steps that the code takes is counted. Gas is the unit of measurement for this count. The amount of Gas you need depends on how large the contract you are trying to execute is (i.e. how many computational steps there are in that code). And also how fast you want to execute. If you are happy for the execution to be slower, you can expect to pay less in Gas fees. Or if you want to speed up execution, you can do so by paying higher gas fees. Gas on Ethereum has a market price determined by the amount of demand there is on the network currently. That's why when there is a big NFT drop on the network, gas fees are incredibly high. 

Ether

Ether (ETH) is the cryptocurrency that fuels the Ethereum network. It is used to pay for code execution via smart contracts (gas fees). So when you send ETH or use a D'App, you pay a small fee in ETH to use the Ethereum network. This fee that you're paying is used as an incentive for miners to process and verify your transaction. 

Issues with Ethereum today

High gas fees - When gas fees are really high on the Ethereum network, you can spend up to $150 just on transaction fees alone. This is a big issue and it means it's just not worth paying those fees for smaller transactions. It makes no sense to pay $150 in gas fees to receive $100 worth of ETH. There are many new networks that claim they will be the "ETH Killer", and most of them cite high gas fees as the reason why the Ethereum network will be superseded. 

Power Usage - Currently, the Ethereum network, like the Bitcoin network, is secured using Proof of Work. This means that computers have to solve a set of cryptographic puzzles before they can add a block to the Ethereum blockchain.  This process uses a lot of electricity, and as the Ethereum network grows, this electricity consumption just increases. 

Network Congestion - This is an example of Ethereum being a victim of its own success. When there is too much congestion on the Ethereum network, this can lead to a slowdown in the time it takes to execute smart contracts and causes issues for apps running on Ethereum. 

Upgrades to Ethereum

Ethereum is being moved from being a Proof of Work blockchain to a Proof of Stake blockchain network. You can read more about the difference between those two things here

  • Scalability - Currently, the Ethereum network can just process 15 transactions per second. Given how big the network has got, Ethereum needs to support 1000s of transactions per second, and improvements to scalability aim to make this value a reality.
  • More Sustainable - The current Proof of Work system uses a lot of energy and computing power, which is terrible for the environment. Switching to Proof of Stake will mean that the Ethereum network will use far less power and be much more sustainable
  • More Secure - As the Ethereum network grows in importance, security is one of the biggest concerns, and a lot is being done on this front to improve security on the network.

These upgrades have been given the cool name of "The Merge". If all goes to plan, this will all be ready by the end of Q2 2022. So as you can tell, there are a very important few months coming up for the Ethereum network. Watch this space. 

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