Ethereum

Main concepts

Smart contracts

Smart contracts are digital agreements that automatically enforce the rules when certain conditions are met. In the real world, if two people make a deal, they might need lawyers, paperwork, and a lot of time and money to make sure the deal is followed. With smart contracts, all of this can be done automatically. The code ensures that everyone sticks to the agreement, and if the conditions aren’t met, the contract doesn’t go through.

Smart contracts are simply computer programs that once deployed, the code of a smart contract cannot change. Unlike with traditional software, the only way to modify a smart contract is to deploy a new instance. The outcome of the execution of a smart contract is the same for everyone who runs it, given the context of the transaction that initiated its execution and the state of the Ethereum blockchain at the moment of execution. Since the rules are written in code on the blockchain, everyone involved can see exactly what the contract says, and no one can change it without everyone knowing. This makes smart contracts much cheaper, faster, and more secure than traditional legal contracts.

Smart contracts don’t operate on their own or run in the background; they stay inactive until a transaction activates them.

Decentralized Apps (DApps)

A DApp, or decentralized application, operates primarily or entirely on a decentralized network. Its business logic is governed by smart contracts, making its backend fully distributed and managed on a blockchain platform. To simplify, we can think of a smart contract as replacing the server-side (or “backend”) component in a regular application. Unlike traditional applications hosted on centralized servers, DApps have no downtime and remain available as long as the underlying blockchain is operational.

The on-chain nature of a DApp allows anyone to inspect its code, ensuring transparency and trust in its functionality. All interactions with the DApp are permanently recorded on the blockchain. As long as users have access to an Ethereum node (which they can run themselves if necessary), they can interact with a DApp without any interference from centralized entities. Once deployed, the smart contract code is immutable, meaning neither service providers nor the contract owner can alter it.

Ethereum Virtual Machine (EVM)

The EVM is the part of Ethereum that handles smart contract deployment and execution. Like an operating system manages applications on a computer, the EVM manages and executes smart contracts on the Ethereum blockchain. The EVM runs as a local instance on every Ethereum node, but because all instances of the EVM operate on the same initial state and produce the same final state, the system as a whole operates as a single “world computer.

Gas

Gas is Ethereum’s unit for measuring the computational and storage resources required to perform actions on the Ethereum blockchain, akin to transaction fees. Each operation performed by a transaction or contract costs a fixed amount of gas. Gas serves as the reward to validators for the work they do, and discourages attackers from sending spam transactions, as they must pay for the resources they use.

From Proof-of-Work to Proof-of-Stake

Ethereum was launched at the time when Proof-of-stake (PoS) required significant research and development to be reliable enough to secure the network. In contrast, Proof-of-Work (PoW) was a proven mechanism used by Bitcoin, allowing core developers to implement it immediately and launch Ethereum. It took another eight years of development before PoS was ready for implementation.

In PoS, validators must stake 32 ETH in a smart contract, which can be destroyed (or “slashed”) if they act dishonestly. To attack the Ethereum network, someone would need to stake more than 33% of the total staked ETH, costing billions of dollars for each singular attempt for a virtually impossible chance of success. In comparison, an attack in PoW would require owning more than 50% of the network’s mining power, which involves significant hardware and energy costs but is still cheaper than a PoS attack.

PoS is also much more energy-efficient than PoW. While PoW required significant energy consumption, PoS reduced Ethereum’s energy use by 99.98%, making it more sustainable and environmentally friendly.

How are transactions processed?

An Ethereum transaction is a message sent over the network that includes details like the sender, recipient, amount of ETH, and additional data. These transactions are signed by the sender’s private key and then broadcasted to the network, where they get recorded on the blockchain. Validators are network participants who validate transactions and add them to the blockchain. They ensure the transactions are truthful and follow the POS consensus rules. If they validate blocks honestly, they earn rewards. If they act dishonestly, they risk losing their staked ETH. This system incentivizes validators to act correctly and maintain the network’s integrity.

Ethereum transactions can be sending Ether from an externally owned account to another (simply put, an account owned by a human), interacting with a smart contract account (that is, an account not owned by human, governed solely by the logic of its code), or deploying a new smart contract.

Tokenomics

Staking

Staking requires validators to lock up their ETH, reducing the amount of ETH in circulation. This decrease in supply can create upward pressure on the price if demand remains constant or increases. Validators earn rewards in the form of newly issued ETH for securing the network. Additionally, staking pools and services allow smaller holders of 32 ETHs or less to participate in staking by pooling their ETH with others and manage the technical aspects of staking on behalf of these users. These services make it easier for ETH holders to earn yield without needing technical expertise. Read more about Staking as a concept in our article.

Supply

ETH was initially distributed through a public sale, with a maximum supply of 18 million ETH per year. ETH has no fixed maximum supply but instead has an issuance rate that adjusts dynamically based on network activity.

New ETH is created as staking rewards for validators in return for securing the network. Originally, Ethereum was inflationary due to this mechanism. However, Ethereum can now be either inflationary or deflationary depending on network activity, thanks to an Ethereum upgrade that introduced a mechanism where a portion of transaction fees, instead of being awarded to validators, is “burned” or permanently removed from circulation. This burning mechanism has the potential to reduce the overall supply of ETH, especially during periods of high network activity when more transactions are processed and, consequently, more ETH is burned. During low network activity, less ETH is burned, and the supply can increase due to block rewards, making Ethereum inflationary. Recently, as Ethereum network activity has shifted to Layer 2s (or “L2s”, Ethereum’s scaling solutions) fee revenue on the Ethereum mainnet has declined, and ETH supply has started increasing again. To reverse this trend and restore the deflationary status of ETH, a significant increase in activity on L2s is required.

Governance

Governance plays a role in shaping the long-term economic incentives of the network, allowing decisions to be made within the Ethereum community. Ethereum’s decentralized governance is how changes to the core protocol are proposed and implemented. Making changes to the protocol itself requires a high level of coordination. This process involves both social and technical discussions to ensure that any changes are secure and widely supported by the community.

– On-Chain Governance: This method involves voting directly on the blockchain, usually by those holding governance tokens. If approved, changes are automatically implemented.

– Off-Chain Governance: This is the method Ethereum uses, where decisions are made through discussions among stakeholders and then implemented in code if there is enough support.

Ethereum’s governance directly influences the network’s economic model, affecting everything from supply and demand dynamics to fee structure, all of which are critical components of Ethereum’s tokenomics. Decentralized governance ensures that changes to the Ethereum protocol are made through a broad consensus process, involving various stakeholders such as developers, miners, stakers, and users.

Wallets

A crypto wallet is a digital tool that allows you to securely store, manage, and transact with your cryptocurrency holdings.

Hot Wallets: Hot wallets are connected to the internet, making them convenient for everyday use.

– MetaMask: A widely-used wallet that lets you interact with Ethereum dApps directly from your browser.

– Coinbase Wallet: An easy-to-use wallet that integrates with the Coinbase exchange, making it great for beginners.

– Rainbow Wallet: A user-friendly wallet designed for managing Ethereum assets and exploring the world of decentralized finance (DeFi).

Gnosis Safe: This is a multi-signature wallet, which means it requires multiple private key approvals before any transaction is completed. This feature adds an extra layer of security, especially useful for managing large amounts of crypto or for team-based projects.

Cold wallets, or hardware wallets, are not connected to the internet, which makes them a much safer option for long-term storage of assets. They are typically used to store large amounts of cryptocurrency securely.

– Ledger: A popular hardware wallet that supports Ethereum and many other cryptocurrencies, known for its robust security features.

– Trezor: Another leading hardware wallet, offering similar security benefits by keeping your private keys safe and offline.

Stay tuned for our comprehensive guide on crypto wallets, where we’ll dive deeper into these options to help you choose the right one for your needs.

Block Explorers and Analytics

Understanding what’s happening on the Ethereum blockchain can be made easier with the help of block explorers and analytics tools. Block explorers are web-based tools that allow users to view and search the transaction history, blocks, and other data on the TON blockchain. They are essential for tracking transactions, verifying addresses, and exploring blockchain activity. These tools allow you to see detailed information about transactions, smart contracts, and more. Notable tools in the Ethereum ecosystem include:

– Etherscan: Etherscan is the go-to tool for exploring the Ethereum blockchain. It allows you to look up transactions, wallet addresses, and smart contracts. You can see everything that’s happening on Ethereum in real-time, making it a valuable resource for tracking activity.

– Blockchair: Blockchair is another block explorer that supports Ethereum as well as other blockchains. It offers advanced features like filtering and sorting data, allowing you to dive deeper into blockchain activity and find specific information quickly.

– Dune Analytics: Dune Analytics lets users create custom charts and dashboards to analyze Ethereum data. Whether you’re interested in tracking trends in decentralized finance (DeFi) or monitoring specific transactions, Dune Analytics provides the tools to visualize and understand the data.

– The Graph: The Graph is like a search engine for blockchain data. It helps dApps (decentralized applications) efficiently find and display the information they need from the Ethereum blockchain, making the user experience smoother and more intuitive.

Development tools

If you’re new to crypto and want to understand how Ethereum applications are built, here are some key tools that developers use to create and manage smart contracts and decentralized apps (dApps):

– Truffle: Think of Truffle as a toolkit that helps developers build and test smart contracts, which are the self-executing agreements that run on Ethereum. It’s one of the most popular tools for this purpose.

– Hardhat: Hardhat is another toolkit for building Ethereum applications. It provides an environment where developers can write and test their code, including features like debugging (finding and fixing errors) and running simulations of the Ethereum blockchain to see how their code will work in real life.

– Ganache: Ganache creates a personal version of the Ethereum blockchain on your computer. This allows developers to run tests, execute commands, and see how their smart contracts behave without needing to use the real Ethereum network.

– Remix IDE: Remix is an online workshop for building Ethereum applications. Developers can write, test, and deploy their smart contracts directly from their web browser, making it a convenient tool for both beginners and experienced developers.

– Infura: Infura is a service that connects developers to the Ethereum network without requiring them to run their own Ethereum nodes (which are the computers that make up the network). This makes it easier and faster to build and scale dApps.

– Alchemy: Alchemy provides the infrastructure that developers need to build and grow their Ethereum-based apps. It offers tools and APIs (application programming interfaces) that simplify the process of interacting with the Ethereum blockchain.

– Geth: Geth is a program that allows developers to run a full Ethereum node on their computer. Running a full node means having a complete copy of the Ethereum blockchain and being able to interact directly with it, including deploying smart contracts and participating in the network.

Cross-chain infrastructure

Cross-chain infrastructure on Ethereum refers to the technology that allows Ethereum to interact and exchange information with other blockchains or between Ethereum’s side chains. Blockchains are built as independent ledgers, each with its distinct governance rules, security protocols, and data structures. While this autonomy ensures security and integrity within each network, it also creates an environment where interoperability is not natively built in. Cross-chain connectivity is crucial as it enables different blockchains to work together, creating a more integrated and versatile ecosystem.

– Bridges are tools that facilitate the transfer of assets and data between blockchains. For example, if you want to move tokens from Ethereum to a different blockchain, a bridge helps make that transfer possible. Bridges ensure that assets are securely and accurately moved between networks. Bridges often create wrapped tokens as part of the process of moving assets across blockchains. Wrapped tokens are versions of assets from one blockchain that can be used on another. For instance, Wrapped Bitcoin (WBTC) is a token on Ethereum that represents Bitcoin. This allows Bitcoin holders to use their assets in Ethereum-based applications, like DeFi platforms. Notable bridges include Wormhole, StarkGate and Polygon Bridge.

– Cross-Chain messaging technology allows different blockchains to communicate with each other. For example, it enables smart contracts on Ethereum to send messages or interact with smart contracts on another blockchain. This cross-chain messaging is crucial for creating complex applications that span multiple networks. Notable cross-chain messaging protocols include ChainLink’s CCIP, Axelar, LayerZero and OmniChain.

Notable innovations

The Ethereum ecosystem is a hub of innovation, featuring several groundbreaking developments that have significantly shaped the blockchain and cryptocurrency landscape. By offering a powerful platform for decentralized applications and smart contracts, Ethereum has revolutionized application development, paving the way for a diverse array of decentralized applications across various sectors.

DeFi

Decentralized, or DeFi, is one of the most impactful innovations on Ethereum, enabling financial services like lending, borrowing, trading, and earning interest on-chai without relying on traditional banks and intermediaries. Protocols like Uniswap (for decentralized trading), Aave (for lending and borrowing), and MakerDAO (for stablecoins) have made DeFi a multi-billion dollar industry. Check out our DeFi earning strategies article for more a in-depth overview.

NFTs

NFTs, or Non-Fungible Tokens, enable the digital ownership of both digital and physical items, including art, music, collectibles, and in-game assets. Before NFTs, proving ownership of digital items was challenging because digital files can be easily copied, making it difficult to distinguish originals from copies. NFTs address this issue by using blockchain technology to create a unique digital certificate of ownership. The blockchain records who owns each NFT and tracks its history, making it impossible to forge or counterfeit. This ensures that ownership is secure and verified. In the future, NFTs could also serve as certificates of ownership for real-world assets, as well as digital identification and personal credentials or achievements.

Explore Ethereum Ecosystem Map in depth for more details.