Ethereum: A Blockchain-Based System
Ethereum is a blockchain-based system where anyone can build and securely deploy any digital service without going through a formal, centralised approval process.
It is the brainchild of Vitalik Buterin, a Russian born computer programmer, who was an early Bitcoin advocate, but thought it lacked a scripting language to enable connected applications.
Ethereum has been dubbed the ‘world computer’ as it enables permissionless access to a Turing Complete system that can process any request expressed in its bespoke programming language.
It uses a set of standards for creating tokens that allow value to be transferred within, and between, applications built on Ethereum, creating a vast interoperable ecosystem.
Applications built on Ethereum don’t need to trust a third party like a bank or the Google Play Store. These fundamental features have enabled Ethereum-based applications to quickly disrupt those industries which are hard for the average person to access, in the shape of:
- Decentralised Finance (Defi) - disrupting financial services & investment
- NFTs - disrupting the market for art and collectibles
- Metaverse - Enabling the creation of virtual economies
Overview of Ethereum
Ethereum is a distributed computing network that rents out its processing power through something called the Ethereum Virtual Machine (often abbreviated to EVM).
Given the analogy of Ethereum as a world computer, the EVM is the processor, providing a runtime environment for the execution of Smart Contracts, code based instructions called by digital applications - dApps - which pay for the service using the native currency of the Ethereum Network, Ether. The computational effort required is measured in something called Gas.
The Ethereum network consists of Nodes following a set of rules, the Ethereum Protocol, with the sole purpose of maintaining the correct state of the EVM, which includes Accounts holding Ether and Smart Contracts.
The Ethereum Virtual Machine
The EVM isn’t part of a network or filesystem, it simply receives and executes Smart Contracts requests updating its state. That state is recorded in each block of the Ethereum blockchain, along with any changes to balances of Accounts holding Ether (ETH).
It is crucial that Ethereum has only one 'canonical' state, and the EVM provides the rules for computing a valid state for each new block depending on what Smart Contract changes, or Account transactions have been requested.
The EVM state is stored in blocks that are chained together using cryptography into a blockchain maintained by the Network of Nodes running the rules through an Ethereum Client.
Ethereum Clients are specific pieces of software that implement the instructions set out in the original blueprint written by Vitalik Biterin, known as the Ethereum paper.
The Ethereum Blockchain
Agreement on the accuracy of transactions stored in the blockchain is reached through a consensus mechanism called Proof of Work, copying the general approach taken by Bitcoin, but with specific adaptations that make a significant difference to Ethereum’s tokenomics - how ETH is created, distributed and incentivises owners.
Mining Nodes run a specific algorithm called EthHash, an arbitrary mathematical calculation that produces new blocks of the state changes every fifteen seconds, giving a reward of two Ethereum to the Miner that produces a ‘certificate of legitimacy’ proving the required work has been completed, along with the fees paid by Accounts and dApps for transactions and Smart Contract execution.
The new block will be broadcast to the rest of the Network, and once other Miners see the certificate of legitimacy they must accept it as being the latest block in the chain.
The timing of blocks is set by the Protocol and the difficulty adjusted programmatically to keep block production time consistent.
Blocks are limited in size based on the amount Gas required to execute all transactions. The upper limit is set at 30 million Gas, but block size will vary depending on demand.
Ethereum’s use of Proof of Work is planned to end in 2022, changing to Proof of Stake, in order to improve scalability and to address concerns around the environmental impact of Proof of Work mining.