Introduction to Ethereum and How Ethereum Works

Now we will take a step further in the world of emerging technologies and learn about Ethereum. Here we will discuss an introduction to Ethereum technology. Additionally, we will also cover the following topics.

  • Introduction to Ethereum
  • Who Created Ethereum?
  • Bitcoin vs Ethereum
  • Benefits of Ethereum
  • Limitations of Ethereum
  • History of Ethereum
  • How Ethereum Works
  • Applications of Ethereum
  • Introduction to Ethers

Introduction to Ethereum

After Bitcoin, the next boom in the crypto world came with the introduction of Ethereum.

  • Ethereum, in a nutshell, is a decentralized platform established upon blockchain technology. It allows developers to build and deploy decentralized applications powered by smart contracts.
  • Moreover, it is an open-source, programmable blockchain network integrated with the Turing-complete programming language.
  • And this network is powered by the ‘ETHER‘ cryptocurrency, and it also utilizes Proof-of-Work consensus. However, Ethereum is planning to shift to the Proof-of-Stake consensus soon.
  • As of December 2021, Ethereum as a cryptocurrency is the second in market value, just after Bitcoin.
Introduction to Ethereum and how it works
Introduction to Ethereum and how it works

Who Created Ethereum?

  • A Russian-Canadian programmer, and entrepreneur from Toronto, Vitalik Buterin conceptualized Ethereum when he was 19 years old.
  • In 2011, Vitalik first became interested in Bitcoin, and he co-founded the online news website Bitcoin Magazine. After this, he moved on to work on Dark Wallet, a privacy-focused wallet.
  • In this process, Vitalik came up with the concept of Ethereum, a platform motivated by Bitcoin that could build potential applications outside finance.
  • And in 2013, he proposed a white paper outlining an alternative platform that allows developers to design their decentralized applications using an integrated programming language.
  • Finally, in the year 2015, the Ethereum platform was introduced by Vitalik Buterin and Joe Lubin, the founder of ConsenSys.

Also read, What is Ethereum Classic

Bitcoin vs Ethereum

  • Till now, we have discussed details of Ethereum and who created it. Now, many people consider Ethereum and Bitcoin to be the same. However, it is not correct.
  • Yes, Ethereum and Bitcoin indeed have some common properties and features.
  1. Participants connected in a peer-to-peer network.
  2. Use of Byzantine fault-tolerant consensus algorithm for synchronization of states.
  3. Both use the Proof-of-Work consensus algorithm.
  4. Using cryptographic techniques like digital signatures, hashes, etc.
Bitcoin vs Ethereum
Bitcoin vs Ethereum
  • However, in many aspects, Ethereum’s goal and design are very different from those of public distributed technologies, including Bitcoin.
  • Therefore, to understand Ethereum well, we need to understand the difference between Ethereum and Bitcoin.

Bitcoin vs Ethereum: Key Differences

1. Primary Goal

  • The primary goal of Bitcoin is to serve as a decentralized digital currency. Moreover, it doesn’t have a central authority, and a user can send digital currency in a peer-to-peer network.
  • On the other hand, Ethereum’s primary goal is not to serve as a payment network for digital currencies. Ethereum serves as cyptocurrency as well as a platform that eables developer to create Dapps.
  • However, Ethereum’s native currency, ETHER, is also essential and is used as a utility currency to pay for the usage of the Ethereum platform.

2. Scripting Language

  • Bitcoin has a fairly limited scripting language known as Bitcoin Script. And this language is purposely restricted to implement basic true-false validation of the conditions.
  • However, Ethereum has a Turing complete language named Solidity. Eventually, making Ethereum a programmable blockchain that runs a virtual machine capable of executing big and complex.

3. Transaction Speed

  • The average time to execute a transaction on the Bitcoin network is 10-12 minutes.
  • However, in Ethereun, the average transaction time is merely 12-15 seconds.

4. Hashing Algorithm

  • The privacy and security in Bitcoin are maintained using cryptography with hashing algorithm named SHA256.
  • On the other hand, the privacy and security in Ethereum are maintained using a cryptographic algorithm named Ethash.

Read Ethereum Ecosystem

Benifits of Ethereum

Now that we got a clear idea about Ethereum let’s, understand some of the essential benefits of Ethereum.

  • Open-Source:
    • The public network of Ethereum is an open-source system. It means that anyone can become a member and contribute in the growth and development.
    • Moreover, it’s a tremendous benefit since it allows everyone to grow and improve within the ecosystem.
  • Diverse Functionality:
    • Ethereum platform has a lot of potentials and usually has a wide range of functionality. Apart from being a digital currency, Ethereum can be used for a variety of functionality.
    • For example, executing smart contracts, creating DApps, storing data for third-party applications.
  • Huge Support:
    • Ethereum is known for having one of the largest developer groups working on the development of its decentralized platform.
    • Moreover, the platform has the support of both small and major businesses.
  • Programmable Blockchain:
    • Ethereum is a revolutionary technology that is programmable. Moreover, it has the inbuilt support of a Turing-complete language.
    • As a result, Ethereum includes the functionality for smooth smart contract execution.
  • Interoperability:
    • Organizations can use Ethereum’s plug-and-play capability to create private (permissioned) decentralized networks. Moreover, they can connect the private decentralized solution to Ethereum’s public network.
    • Ethereum’s interoperability essentially keeps organizations’ blockchains up to date.
    • Moreover, it facilitates worldwide expansion, a large user base, and DApps (Decentralized Applications), as well as ongoing development and improvements.

Read How to Setup Private Ethereum Blockchain on Windows

Limitations of Ethereum

Ethereum is a fantastic platform, but it is far from flawless. So, in this section, we will discuss some of the main limitations of Ethereum.

  • High Cost:
    • The increased popularity of Ethereum has resulted in higher transaction prices.
    • In 2021, Ethereum transaction costs, GAS reached a new high of $23 per transaction.
    • However, it is wonderful only for miners but not for the network user.
  • Slow Transaction Speed:
    • Decentralized protocols, such as Ethereum and Bitcoin, are notoriously slow.
    • The average transaction speed for Bitcoin is 7 TPS, while Ethereum is 15 TPS.
    • Even though Ethereum is faster than Bitcoin but, it’s not quite fast enough.
  • Learning Curve:
    • As a developer moving from centralized processing toward decentralized networks, Ethereum can be tough to grasp.
    • Moreover, developers need to use Solidity, a programming language used in Ethereum, to create apps and tokens.
    • And this brand-new programming language has several well-known flaws.

Read Introduction to Solidity

History of Ethereum

In this section, we will deep dive into the history of Ethereum and understand how this fantastic platform came into existence.

Ethereum White Paper

  • The history of Ethereum started with the introduction of the Ethereum white paper.
  • The foundation of Ethereum was laid in the year 2013. Vitalik Buterin, a Russian-Canadian programmer, came up with the idea of Ethereum.
  • Moreover, he proposed the first white paper on Ethereum. However, later that year, he also presented a prototype with an in-build programming language.

First Public Offering

  • Buterin publicized the notion of Ethereum in January 2014 at the North American Bitcoin Conference. He also mentioned Jeffrey Wilckle and Dr. Gavin Wood, two of Ethereum’s co-founders.
  • Later, he also presented the technical specification for Ethereum in the yellow paper in April. After this, the first sale for its cryptocurrency, Ether, happened in July of 2014.
  • This sale went live for 42 days and later, the Ether sale had brought in $14 million by August of that year.

Introduction of Ethereum Classic

  • Ethereum received the next significant improvement in its network in March 2016. Homestead, an enhancement protocol, was accountable for this improvement.
  • After this, Ethereum received a huge expansion from media coverage in May that year. As a result of the expanded coverage, a broad public auction was held to raise around $150 million.
Ethereum classic
Introduction of Ethereum Classic
  • Now here comes a primary change. Ethereum got hacked first time in june 2016. The hackers allegedly took over $50 million in Ether, and this resulted in a flurry of disagreements.
  • Due to the disagreements in June, the Ethereum network was shattered into two sections same month. Ethereum (ETH) and Ethereum Classic were the two sections (ETC).

Birth of Enterprise Ethereum Alliance

  • The Enterprise Ethereum Alliance (EEA) got established in February 2017.
  • Microsoft, in collaboration with renowned banks and technological experts, pushed Ethereum acceptance.
  • As the number of alliances grew, so did the number of high-profile organizations and enterprises.
  • These enterprises includes Microsoft, Intel, Cooley LLP, J. P. Morgan, and many more

Constantinople Update

  • The second part of Ethereum’s upgrade, Constantinople, was finished on February 28, 2019. The following year, another alteration was done, which included the Istanbul fork.
  • Now both upgrades focus on reducing the cost of Gas for EVMs and improving the system’s stability.

Introduction to Etereum 2.0

  • One major upgrade is yet to arrive for Ethereum, formally known as Ethereum 2.0. And the goal of the update is to boost the network’s transaction speed from around 15 transactions per second to tens of thousands.
ethereum 2.0
Ethereum 2.0

Ethereum 2.0, is planned to be released in three stages:

  • The Beacon Chain, also known as Phase 0, includes the creation of a proof-of-stake (PoS) system that will be a hub for Ethereum 2.0. And it was set up on December 1, 2020.
  • Phase 1 for this update formally known as “The Merge” includes the merge of Beacon Chain with current Ethereum network. And it is estimated to be done by 2022.
  • And the Phase 2 formally known as “Shard chains” is estamed to be done by 2023.

Read Enterprise Ethereum Alliance

Introduction to Ethers

We can consider ETHER as a fuel that powers the Ethereum Platform. Ether is a native cryptocurrency for Ethereum. It is a transferable token used to perform transactions on the Ethereum network.

What is ether
What is ether

All of the Ethereum network’s programs and services now require processing power. However, this computational processing is not free. As a result, Ether is a coin that network participants use to pay for the network to complete their tasks.

  • Ethereum aspires to form a system where users can store data that is less prone to hackers. And this is because Ethereum is a Blockchain-based technology.
  • Ether, like other cryptocurrencies, is a form of payment on the Ethereum network. Moreover, Ethers are employed for the computation of DApps based on Ethereum.
  • Now, we can exchange ether tokens with some other cryptocurrency. But, we can not use any other cryptocurrency to get computation on the Ethereum network.

Read What is Bitcoin and how does it work

How Ethereum Works

Now in this section, we will learn how Ethereum technology works.

Underlying Technology

First, we will overview how Ethereum utilizes Blockchain technology.

  1. Using Blockchain Technology
  • Ethereum is an open-source, decentralized platform based upon blockchain technology. Now, consider it as a long chain of blocks, and each participant has access to information related to each block.
  • Moreover, it operates just like an electronic ledger, and all the participants have the same information about the chain. And a consensus is generated to maintain the state of a chain.

2. Transaction Processing & Validation

  • In Ethereum, to process any Ethereum transaction, issue new Ether currencies, or execute smart contracts, new blocks are added to the lengthy Ethereum.
  • Now, Ethereum is slightly different from other decentralized technologies like Bitcoin. In Ethereum, nodes not only confirm or store transactions but also keep track of the state of the Ethereum network.
  • The current state of Ethereum includes the current state of all apps operating on top of it, including each user’s balance, any smart contract code.

Use of Consensus

  • The Ethereum network utilizes the decentralized nature of blockchain technology to make it more secure.
  • This Ethereum network is managed by a massive network of computers connected throughout the world.
  • And any changes to the main chain require consensus, i.e., majority agreement of participants.
  • Ethereum employs a Proof-of-Work consensus mechanism for validating data and adding it to the main chain.
  • Now, adding a new block to the Ethereum chain involves multiple nodes. These mining nodes compete with one another using energy-intensive devices for adding the block to the chain.

Using Smart contracts

  • A smart contract is just a blockchain-based programmable agreement. It allows users to digitize the terms that govern a transaction’s relationship and interactions between the two parties.
  • Now developers can create smart contracts using Ethereum Virtual Machine (EVM). EVM is Ethereum’s native processing technology that helps to create smart contracts. For this task, it utilizes Solidity, a programming language.

Read Ethereum Name Service – How it works

Applications of Ethereum

By using the Ethereum platform, we can decentralize almost any centralized system. So, let’s discuss some of the main applications of Ethereum.

1. Decentralized Applications

  • One of the main features of Ethereum is it allows to build decentralized applications on top of it.
  • Now, a decentralized application is a blockchain-based software application that runs on top of a peer-to-peer network of machines.
  • Moreover, these types of applications are not under the control or authority of any single organization.

2. Decentralized autonomous organizations (DAOs)

  • Ethereum can be employed to create Decentralized Autonomous Organizations (DAOs).
  • A Decentralized Autonomous Organization is a type of organization where there is no central authority. It is a completely self-contained, decentralized organization.
  • Moreover, DAOs are managed by programming code based upon Ethereum smart contracts.
  • Everyone who buys tokens owns a DAO. So, rather than getting equity shares or ownership, tokens act as a contribution that grants people voting rights.

3. Non-Fungible Tokens (NFTs)

  • NFTs are non-interchangeable tokens that can be connected to one-of-a-kind product. Its main aim is to assign monetary worth to works of art, music, and other media.
  • NFTs are stored on the Ethereum and can only be owned by one person at a time. Moreover, we cannot create a new NFT by copy-pasting, and no two NFTs can be identical. Still, we can buy or sell NFTs globally.

4. Decentralized Finance (Defi)

  • Ethereum can also help to biult decentralized finance.
  • The term “decentralized finance” refers to financial products and services that are open to anybody who can utilise Ethereum.
  • With the help of Defi, no government will hold any power to refuse a user access to anything or to restrict payments.
  • Moreover, it helps to make services automated that were formerly slow and vulnerable to human mistake.

So, in this tutorial, we have covered an introduction to Ethereum and how it works. Moreover, we have covered the following list of topics.

  • Introduction to Ethereum
  • Who Created Ethereum?
  • Bitcoin vs Ethereum
  • Benefits of Ethereum
  • Limitations of Ethereum
  • History of Ethereum
  • How Ethereum Works
  • Applications of Ethereum
  • Introduction to Ethers