CoinChapter dwells into some of the most popular crypto and blockchain projects and their journey so far in this new Sunday weekly. This week, we discuss Ethereum and why it has taken the decentralized computing world by strorm.
Ethereum is a smart contract-enabling decentralized blockchain network. Ether is the internal currency of the its ecosystem. It is the second most popular digital currency after Bitcoin. Its market capitalization, which presently stands at $385 billion is a testimony to the utility of the blockchain.
The development of Ethereum followed a proposal made by Vitalik Buterin, a Russian Canadian programmer in 2013. Other co-founders that initially worked on the project were Gavin Woods, Joseph Lubin, Charles Hoskinson and Anthony Di Iorio. The initial crop of developers met for the first time in Zug, Switzerland in June, 2014.
Later that year, a crowdfunding raised $18.3 million in BTC, the fund needed for the development of the blockchain. The Ethereum blockchain’s launch was on July 30, 2015. It features among others, the ability to host decentralized applications (dApps). Since its launch, it has become the most popular distributed ledger technology (DLT) for developers to deploy dApps. It is also the most popular platform for decentralized finance (DeFi), enabling user interaction with smart contracts that effectively eliminates the need for intermediaries.
The Programming Language of Ethereum
Solidity is the language of the Ethereum code. Its development for the Ethereum blockchain forms the backbone of the Ethereum Virtual Machine (EVM). Solidity is an object-oriented language which is responsible for driving smart contracts on the ETH blockchain. Gavin Woods, the Ethereum co-founder who was the initiator and instrumental in the technical implementation of C++ on the Ethereum code base.
Design And Consensus Mechanism
Ethereum is a peer-to-peer network consisting of a collection of nodes that are non-hierarchical. These computer nodes essentially secure the network. This is done by reaching consensus on parameter that must be fulfilled by each data set (block), before it is added to the chain. All the nodes in the network contain a full copy of the blockchain. They also must agree to the validity of the block before it is added to the chain.
Consensus among the nodes implied that they had agreed that the new block was valid because it aligned with the network’s expectations. Blocks that do not pass this are rejected as invalid transactions on the network. This method used in adding block to the network is called proof-of-work system.
Miners are nodes that record all new transactions and use them to create blocks. As new blocks are added to the chain, the miners are rewarded with ether, the internal currency of the ecosystem. The smallest unit of ether is called Wei. Transaction fees (gas cost) on the Ethereum blockchain are calculated in Gwei. The ether generated by the Ethereum blockchain protocol is the incentive for the participation of the miners in the network. Also, transaction fees generated by activities on the Ethereum blockchain adds to the benefits of miners who in reality, secure the network.
Popular Uses of Ethereum Blockchain
As the first smart contract enabled blockchain, Ethereum has found use in the minting of fungible (ERC20) tokens. This is instrumental in the propagation of initial coin offerings (ICOs). This token standard proposed in 2015 enables developers to deploy tokens similar to bitcoin and ether on the Ethereum blockchain.
They can also designate smart contracts with the total supply and current balance. Other use cases for the blockchain include non-fungible tokens (NFTs) built on its ERC721 standard and crowdfunding. Furthermore, there are decentralized exchanges (DEXes), decentralized finance (DeFi), gaming, gambling, decentralized autonomous organizations (DAO), etc.
Non-Fungible Token Standard
The non-fungible token standard of the Ethereum blockchain enables developers to deploy unique tokens via smart contracts.
These tokens have been used to represent collectibles such as artworks, files, music, virtual real estates, games, etc. In addition, they drive metaverse projects that enable humans to interact virtually.
Some of the initial NFT projects on Ethereum are Etheria, launched in 2015 and the popular CryptoKitties, launched in 2017. Unfortunately, CryptoKitties also caused the first serious network clog of the network.
Another important use case for the Ethereum blockchain is in decentralized finance. This deploys traditional financial services such as banking and lending on a decentralized architecture. Fulfilling preset conditions automatically activate the smart contracts. This effectively eliminates the need for intermediation and third-party7 activities in such services.
DeFi plays a role in eliminating the control of central authorities — such as governments — through the deployment of independent, censor resistant contracts. Its applications are usually accessed through compliant web interfaces such as web 3.0 enabled browser extensions. In addition, browser dApps such as Metamask can also act as connection channels.
Some of the popular DeFi projects that launched on Ethereum are DAOMaker and Uniswap. The latter is a four-year-old DEX that grew its liquidity to $6.7 billion by Q1 of 2022. According to data available on Coinmarketcap, DeFi market has a market capitalization of $150.7 billion.
Network Upgrades And Challenges
Since its launch in 2015, the Ethereum network has gone through several upgrades. The essence of these upgrades is to drive the network towards meeting the demands and aspirations of users. Some of these are “Constantinople” on February 28, 2019, “Istanbul” on December 8, 2019, “Muir Glacier” on January 2, 2020, “Berlin” on April 14, 2021, and the most recent upgrade activated on August 5, 2021, called the “London” hard fork.
Perhaps the most anticipated upgrade to the Ethereum network is Ethereum 2.0. This upgrade would see the Ethereum blockchain move from proof-of-work to a proof-of-stake consensus system. In addition, it will make use of the sharding technology to split the network’s workload along the so-called parallel chains. The effect will be increase in transactions throughput that has limited the network.
According to an April 2 blog post by the Ethereum development team, the Beacon Chain, one of the scaling protocols will run independently after deployment. The Beacon Chain is the precursor of the proof-of-stake system to which the mainnet will migrate to to form Ethereum 2.0. This will enable Ethereum to scale from 15 transactions per second to tens of thousands per second.
Layer 2 Protocols On The Ethereum Blockchain
What is L2?
The original concept behind Ethereum as a peer-to-peer network was to enable people to send money cheaply and without intermediaries. However, with the growth of the blockchain, users have reported a slower and more expensive network. With the purpose of the blockchain challenged, Ethereum developers started working on second layer solutions that would make transactions on the network scalable.
The essence of a scalable Ethereum blockchain is to make the network cheaper and faster to use. A solution people use in the meantime is the second layer blockchains. These are built on Ethereum’s L1 for the purpose of effecting enterprise solutions. They accomplish this without passing through the primary (L1) blockchain.
Final Thoughts On Ethereum
According to Cryptofees, the 7-day average fees paid on the Ethereum network is $24.7 million. This makes Ethereum the most in-demand blockchain. Developers are building real use case applications that meet everyday needs on it. People are also paying to use the blockchain, more than any other.