All about Ethereum

Ethereum is neither a blockchain nor a cryptocurrency. It's actually a protocol.

Ethereum is not a blockchain. It's not a cryptocurrency either. It's actually a protocol (a set of rules or procedures).

There are multiple independent "networks" that conform to the Ethereum protocol. These networks do not interact with each other.

1. The networks

When most people talk about Ethereum, they are talking about Mainnet - the primary public Ethereum production blockchain. This is where actual-value transactions occur on the blockchain.

Anyone can access, read, create and validate transactions on the Ethereum Public Networks. There are 5 public networks:

  1. Mainnet,

  2. Görli,

  3. Kovan,

  4. Rinkeby, and

  5. Ropsten.

Görli, Kovan, Rinkeby, and Ropsten are testnets used for testing protocol upgrades and potential smart contracts before deployment to mainnet.

Mainnet and Ropsten use proof-of-work. Görli, Kovan, and Rinkeby use proof-of-authority.

An Ethereum account works across different networks but the account balance and transaction history do not.

2. ETH & tokens

Ether (ETH) is Ethereum's native cryptocurrency.

Some ETH metrics as on 3 August 2021:

  • Circulating Supply: 116,955,983

  • Total Supply: 116,955,983

  • Maximum Supply: Unlimited

  • Volume (24h): $ 23,476,023,897

  • Market Cap: $ 291,124,038,614

  • V.M.R.: 0.0806392492

  • Velocity: 200.7252919596

Note: VMR is [24-hour volume / Marketcap] while Velocity is [24-hour volume / Circulating supply]. The average velocity of ETH based on data from 7-Aug-2015 through 27-Jul-2021 is 64.

Gas is the fee, measured in Gwei (0.000000001 ETH), that is required to successfully conduct a transaction on Ethereum.

Wei is the smallest fraction of an Ether. One ETH equals 1000000000000000000 Wei.

The graph below depicts the ETH prices through the years:

The graph below depicts the ETH market cap through the years:

ETH started the year at $735. It peaked at $4,362.35 on May 12, 2021, and then raced down below $2,000.

ETH is the fuel for the execution of decentralized smart contracts on the Ethereum blockchain. What happens when fuel prices go up too much? We look for alternatives.

In the real world, when oil prices shoot up, we reduce consumption and actively explore alternate energy sources. In the blockchain world, we already have a ton of alternate blockchains - Algorand, Binance Smart Chain, Cardano, Polkadot, Solana, etc.

ETH has become an instrument of mass gambling by speculators looking to “moon” and “lambo”.

ETH is not a store of value. It's not an investment. It's a cryptocurrency that is meant to keep the Ethereum blockchain running smoothly and securely. And to do that, its price has to be low and non-volatile.

Ethereum enables the creation & trading of unlimited assets (called tokens).

The most popular Ethereum tokens are:

  • Stablecoins, which mirror the value of fiat currencies like INR or USD.

  • Governance tokens, which represent voting power in decentralized organizations.

  • Collectible tokens / non-fungible tokens (NFTs) that represent a collectible, piece of digital art, etc.

Uniswap (depicted below) is an automated liquidity protocol. Each liquidity pool has a smart contract to enable swapping Ethereum tokens and adding liquidity.

3. Nodes, services & entities

An Ethereum node is an implementation of Ethereum client software (such as Geth, OpenEthereum, Nethermind, Besu, or Trinity) that verifies all transactions in each block. A node can be of 3 types:

  • full node,

  • light node and

  • archive node.

An Ethereum Wallet is a tool to manage an Ethereum account, see balances & transaction history, and send & receive funds.

Ethereum dApps are products and services that run on Ethereum.

An Oracle is a data feed connecting Ethereum to off-chain, real-world information for querying data in smart contracts.

Decentralized Autonomous Organizations (DAOs) leverage Ethereum technology for collaboration such as controlling membership, voting on proposals, managing pooled assets, etc.

Layer 2 solutions enable scaling of applications by handling transactions off the main Ethereum chain (Layer 1). Some examples are:

  • Rollups: They bundle sidechain transactions into a single transaction and generate cryptographic proof that is submitted to the main chain.

  • Channels: Participants open a channel by locking an ETH deposit into a multi-sig contract. They transact quickly and freely off-chain and submit a final on-chain transaction unlocking the state.

  • Plasma: Separate blockchain anchored to the main Ethereum chain.

  • Validium: Doesn't store data on the main chain.

  • Sidechains: Separate blockchains running parallel to mainnet and operating independently with their own consensus algorithms.

4. Standards & stack

Ethereum standards include:

  • Ethereum Improvement Proposals (EIPs)

  • Ethereum Requests for Comment (ERC)

  • ERC-20 standard interface for tokens

  • ERC-721 standard interface for non-fungible tokens

The Ethereum stack comprises 5 levels:

Level 1: Ethereum Virtual Machine (EVM) is the runtime environment for smart contracts in Ethereum.

Level 2: Smart contracts are programs that run on the Ethereum blockchain.

Level 3: Ethereum nodes are computers running Ethereum client software.

Level 4: Ethereum client APIs enable end-user applications to connect to the Ethereum blockchain.

Level 5: End-user apps are web and mobile applications.

5. Challenges to Ethereum

Ethereum has had more than its share of problems, including the 2016 DAO hack that split it into 2 blockchains.

Ethereum's biggest problems include:

  1. Buggy smart contracts get hacked on a regular basis. A research paper identified 3 types of Ethereum smart contracts that are easy hacking targets - Greedy (which lock funds indefinitely), Prodigal (which leak funds to arbitrary users), and Suicidal (which can be killed by any user).

  2. Slow transaction speed and high gas fees have forced the development of L2 solutions.

  3. Over-dependence on Infura, a centralized entity for tools and infrastructure.

  4. The use of developer backdoors in decentralized and trustless projects.

  5. The Ponzi-type economics of many ERC-20 tokens.

  6. DeFi governance tokens are being centralized with a few entities.

  7. Increasing competition from blockchains like Algorand, Binance Smart Chain, Cardano, Polkadot, Solana, etc.

6. eth2

eth2 is a set of interconnected upgrades to make Ethereum more scalable, secure, and sustainable.

  • The Beacon Chain brings staking to Ethereum (It is live).

  • 64 Shard chains will expand Ethereum's capacity to process transactions and store data (in 2021).

  • The Mainnet Ethereum will dock/merge with the Beacon Chain by 2022.

Ethereum's long-awaited move to ETH2 is expected to improve security and scalability. But no one can be sure of when this will become a reality and how successful it will be.