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🤔 What is Etherium ?

Etherium is a network of computers running Etherium blockchain. Developers can use these computing resources to build decentralized applications(dapps).

Bitcoin was the first cryptocurrency created in 2009. It introduced the concept of blockchain for the first time. However, Bitcoin functionality was limited to just financial transactions.

Etherium extends the functionality of Bitcoin. Etherium blockchain allows developers to create smart contracts.

💡 What role does ETH token play ?

ETH is the native cryptocurrency of Etherium. It is used for:

  • Gas fees: Developers pay ETH as fees to execute code on Etherium network. They can also pay tips to miners to include their transactions in the next block.
  • Minner reward: Nodes running Etherium network get ETH as block reward. This incentivizes them to maintain the Etherium network.
  • Staking: Etherium is migrating from proof of work to proof of stake. Miners will have to stake ETH to participate in the minning process, once Etherium migrates to Etherium 2.0. Stake of miners will be slashed as penalty if they are found to be dishonest.

📝 Origin of Etherium

  • 2013: Idea for Etherium was conceived by Vitalik Buterin. He also published Etherium white paper in 2013.
  • 2014:
    • Etherium initial coin offering was held( 2,000 ether for 1 bitcoin).
    • Dr. Gavin Wood( co-founder of Etherium) published the Ethereum Yellow Paper that would serve as the technical specification for the Ethereum Virtual Machine (EVM).
  • 2015: Etherium blockchain was launched.
  • 2016: The decentralized autonomous organization (DAO) hack leads to a disagreement about whether people should get back the money they lost. The resulting DAO fork leads to the creation of Ethereum Classic – a continuation of the original blockchain – and Ethereum.
  • 2021: EIP 1559 was implemented(discussed subsequently).

👴🏻 Founders

Vitalik Buterin

  • 1994: He was born on January 31, 1994, in Kolomna, Moscow Oblast, Russia, to Dmitry Buterin, a computer scientist
  • 2000: His parents emigrated to Canada in search of better employment opportunities when he was 6.
  • 2011:
    • Buterin learned about Bitcoin, from his father, at age 17.
    • He met a person on a bitcoin chat forum trying to start a bitcoin blog. The owner offered five bitcoin (about $3.50) to anyone who would write an article for him. Buterin wrote for the site until its website shut down due to lack of mainstream attention.
    • In September 2011, another person reached out to Buterin about a new publication called Bitcoin Magazine, a position which Buterin would accept as the first co-founder, and contribute as a leading writer.
  • 2012 – 2014:
    • In addition, Buterin wrote about bitcoin-related topics for other publications, including Bitcoin Weekly. Bitcoin Magazine in 2012 later began publishing a print edition and has been referred to as the first serious publication dedicated to cryptocurrencies. Bitcoin Magazine was then purchased by BTC Media, where Buterin continued to write until mid-2014.
    • He attended the University of Waterloo but dropped out in 2014, when he received the Thiel Fellowship amount of $100,000, and went to work on Ethereum full-time.
  • 2018:
    • Vitalik Buterin received Honorary Doctorate from the Faculty of Business and Economics of the University of Basel on the occasion of the Dies Academicus.
    • Donated:
      • $2.4 million worth of Ether to the SENS Research Foundation, for the research on rejuvenation biotechnologies and human life extension.
      • $1 million worth of Ether in conjunction with the Ethereum-based OmiseGO open payment platform to the GiveDirectly organization aimed at helping the poorest of poor refugees in Africa.
      • $93,469 worth of Ether, matched by the Pineapple Fund, to the Internet Archive in 2018.
  • 2021: Donated:
    • $1.14 billion USD worth of 50,693,552,078,053 SHIBA coins to India’s Crypto Covid relief fund.
    • $336 million worth of 430 trillion Dogelon Mars ($ELON) to the Methuselah Foundation, which focuses on extending human lifespan.

Gavin Wood

  • He was born in April 1980 in Lancaster, England, United Kingdom.
  • Gavin Wood attended Lancaster Royal Grammar School in Lancaster, Lancashire, England.
  • He did his doctoral degree, in music visualization for human-computer interfacing (HCI) at the University of York.
  • After completing his Ph.D., he worked on a cross-platform game engine for Frontier Developments.
  • 2007: He started Quid Pro Code, a software shop where he designed and implemented the first C++ language workbench, Martta.
  • 2011: As the Technical Director at the Lancaster Logic Response, Gavin Wood developed a system for creating real-time light shows for music, which were later used in London’s top nightclubs.
  •  2013: Gavin Wood was building OxLegal, a smart text contract-editor when he met Vitalik Buterin through a mutual friend, and it wasn’t long before they came up with the idea of Ethereum.
  • 2014: Gavin moved in with Vitalik Buterin, Charles Hoskinson, Anthony Di Iorio, Wendell Davies and others in a beach house in Miami.
  • Over the next two years, Dr. Wood solely focused on the development of Ethereum, which included general platform architecture, the majority of the C++ Ethereum client, and the initial design of Solidity, an object-oriented programming language for writing smart contracts used by Ethereum.
  • 2016: Dr. Wood left Etherium and founded EthCore, promptly raising pre-seed funding. With over sixty developers across fifteen countries, EthCore later became Parity Technologies.
  • 2017: Dr. Wood founded Web3 Foundation, a nonprofit organization focusing on decentralized internet infrastructure and technology, and started Polkadot network.

😌 What problems does it solve ?

  • Censorship resistant: Centralization of internet presents a standing target that enables bad governments to censor the internet eg China, Venezuela etc.​ However, no one can censor Etherium.
  • Open source code: Etherium code is open to public. Anyone can see how the protocol operates. Everyone is welcome to share their contribution as well as learn from the existing codebase.
  • No downtime: Thousands of node operators running 24 X 7 ensure there is never a time when the network is down.
  • No trusted third party: Users are in control of their funds and decisions. The exchange does not involve any middleman or central authority.
  • Governments cannot regulate Etherium.
  • Efficiency gains: Projects building on Etherium do not have to run servers and hire an army of developers.

🤖 How does it work ?

Bitcoin was the first cryptocurrency to introduce blockchain in 2009. However, Bitcoin’s blockchain can only be used for recording financial transactions.

Etherium extends the functionality of Bitcoin blockchain by making it programmable. It introduces the concept of smart contracts for the first time. Developers can use smart contracts to build decentralized applications.

Smart contract

Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified.

These actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed.

Smart contracts permit trusted transactions and agreements to be carried out among anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.

Vending machines are the oldest piece of technology equivalent to smart contract implementation. It dispenses the product as soon as the buyers inserts the money, irrespective of time, place, and identity of user.

Smart contracts on a blockchain can store states, execute computations, interact with other smart contracts. Even the developer himself does not control/ make changes to the smart contract once it has been deployed on the blockchain.

Etherium virtual machine

Ethereum Virtual Machine (EVM) is a computation engine that acts as a decentralized computer. It exists as one single entity maintained by thousands of connected computers running an Ethereum client. The Ethereum protocol itself exists solely for the purpose of keeping the continuous, uninterrupted, and immutable operation of this special state machine.

It’s the environment in which all Ethereum accounts and smart contracts live. At any given block in the chain, Ethereum has one and only one ‘canonical’ state, and the EVM is what defines the rules for computing a new valid state from block to block.

Etherium virtual machine creates a level of abstraction between the executing code(smart contract) and the executing machine(nodes/miners).

Etherium improvement proposal(EIP) 1559

  • EIP 1559 was one of the most important upgrades to Etherium. It established baseline payment, known as a “base fee”, which is the bare minimum fee that has to be paid by a user for his transaction to be included in the blockchain.
  • Base fee is reduced if the network utilization is less than 50% and increased if the network utilization is more than 50%. The base fee can only be increased/ decreased by 12.5% per block.
  • The users can also pay an additional tip to miners for including their transactions in the blocks.
  • The miner earns tip and block rewards. However, the entire base fee is burned.

Solidity

Solidity is an object-oriented, high-level language for implementing smart contracts on Etherium virtual machine

Etherium 2.0

It is an upgrade to Etherium that aims to solve Etherium’s high gas fees and limited transaction throughput without compromising on security and decentralization(the scalability trilemma).

Etherium 2.0 is not a single upgrade, rather a set of upgrades that will be implemented in phases:

Proof of work to proof of stake

Etherium will migrate from proof-of-work to proof-of-stake consensus mechanism in Etherium 2.0:

  • Proof-of-stake is a type of consensus mechanism used by blockchain networks to achieve distributed consensus.
  • It requires users to stake their ETH to become a validator in the network. Validators are responsible for the same thing as miners in proof-of-work: ordering transactions and creating new blocks so that all nodes can agree on the state of the network.
  • A user’s stake is also used as a way to incentivize good validator behavior. For example, a user can lose a portion of their stake for going offline (failing to validate) or their entire stake for deliberate collusion.
  • Unlike proof-of-work, validators don’t need to use significant amounts of computational power because they’re selected at random and aren’t competing. They don’t need to mine blocks; they just need to create blocks when chosen and validate proposed blocks when they’re not. This validation is known as attesting. You can think of attesting as saying “this block looks good to me.” Validators get rewards for proposing new blocks and for attesting to ones they’ve seen.
  • Advantages of proof-of-stake over proof-of-work are:
    • Better energy efficiency: Miners are not competing to mine the next block, rather they are randomly selected.
    • Lower barriers to entry reduced hardware requirements.
    • Stronger immunity to centralization: proof-of-stake should lead to more nodes in the network.

Beacon chain

  • The Beacon Chain lies at the core of Ethereum 2.0; it stores and manages the registry of validators and coordinates the shard chains. The Beacon Chain went live on Dec. 1, 2020, at noon UTC.
  • The Beacon Chain is a brand-new, proof-of-stake blockchain that runs in parallel to the current Etherium chain. It’s constantly scanning, validating, collecting votes, and rewarding validators that correctly attest blocks, deducting rewards from those not online, and slashing the ETH rewards from malicious actors. 
  • Beacon chain cannot run smart contracts, that’s what the shard chains will be for.
  • With the Beacon Chain and proof-of-stake system in place, the next stage of Ethereum 2.0 is establishing shard chains, which will upgrade Ethereum’s data capacity, making the network faster and more scalable. Ethereum 2.0 will spread the network load across 64 separate shards, with one Beacon Chain to rule them all.

Sharding

  • Ethereum’s “Serenity” upgrade will split the Ethereum network into 64 shard chains, which will be coordinated by the Ethereum 2.0 Beacon Chain.
  • Sharding is the process of splitting a database horizontally to spread the load – it’s a common concept in computer science. In an Ethereum context, sharding will reduce network congestion and increase transactions per second by creating new chains, known as “shards”.
  • When the first shard chains are shipped they will just provide extra data to the network. They won’t handle transactions or smart contracts. But they’ll still offer incredible improvements to transactions per second when combined with rollups.
  • Rollups are a “layer 2” technology that allow dapps to bundle or “roll-up” transactions into a single transaction off-chain, generate a cryptographic proof, and then submit it to the chain. This reduces the data needed for a transaction. Combine this with all the extra data availability provided by shards and Etherium will reach throughput of 100,000 transactions per second.

Docking

Eventually, the current Ethereum Mainnet will “merge” with the beacon chain proof-of-stake system. This upgrade represents the official switch to proof-of-stake consensus. This eliminates the need for energy-intensive mining and instead secures the network using staked ether.

Mainnet will bring the ability to run smart contracts into the proof-of-stake system, plus full history and current state of Ethereum, to ensure that the transition is smooth for all ETH holders and users.

Imagine Ethereum is a spaceship that isn’t quite ready for an interstellar voyage. With the Beacon Chain, the community has built a new engine and a hardened hull. When it’s time, the current ship will dock with this new system, merging into one ship, ready to put in some serious lightyears and take on the universe.

Phases

🏛️ Governance model

  • Anyone can propose updates to Etherium in form of Etherium improvement proposal(EIP). EIPs are design documents covering technical specifications of the proposed change and rationale behind it.
  • The community and developers discuss the upgrade in various forums and channels. They either:
    • Agree with the upgrade.
    • Disagree with the upgrade.
    • Proposal is modified and the community agrees with the upgrade.
  • Core developers code the upgrade if the community agrees.
  • Miners and users are free to upgrade to the new changes or not. The Etherium blockchain forks into two if all the miners and users do not agree to upgrade to the new changes. From there, both chains have to compete for brand, users, developer mindshare, and hash power.
  • The ability to fork in the face of significant political, philosophical, or economic differences plays a large part in the success of Ethereum governance. Without the ability to fork the alternative was ongoing in-fighting, forced reluctant participation for those who eventually formed Ethereum Classic and an increasingly differing vision of how success for Ethereum looks.

😨 Competitors

  • Solana
  • Avalanche
  • Polkadot
  • Tezos

And many more

👍 Tailwinds

  • First mover advantage: Etherium was the second cryptocurrency after Bitcoin. It was the first crypto project to offer smart contract functionality.
  • Large number of useful projects have already been built on Etherium.
  • Etherium community consists of hundreds of thousands of hardcore developers, technologists, designers, users, HODLers, and enthusiasts.
  • Switching cost: It is very difficult for apps built on Etherium to migrate to other blockchain solutions with their community and ecosystem built on Etherium.
  • Network effects:
    • New apps can use the functionality of existing apps to build new features.
    • More apps will attract more users. As more users interact with apps built on Etherium: new apps will decide to build on Etherium.
    • Number of developers who can code on Etherium will increase as more users and apps join Etherium ecosystem. As more developers learn to code on Etherium: more apps will be built on Etherium.

History of hacks

  • DAO hack:
    • Launched in 2016, The DAO was an early decentralized autonomous organization (DAO) intended to act as an investor-directed venture capital firm.
    • The DAO raised $150 million USD worth of ether (ETH) and was one of the earliest crowdfunding efforts. The DAO had become such a heavily invested project that its contracts contained approximately 14% of all ether (ETH) in circulation at the time.
    • Less than three months after its launch, The DAO was hacked and $60 million of ether was stolen.
    • At only one year old, the promising Ethereum technology and community was faced with a genuine existential threat.
    • A hard fork was proposed and eventually executed after much debate. The hard fork effectively rolled back the Ethereum network’s history to before The DAO attack and reallocated The DAO’s ether to a different smart contract so that investors could withdraw their funds. This was extremely controversial — after all, blockchains are supposed to be immutable and censorship-resistant.
    • As a result, the hard fork resulted in two competing — and now separate — Ethereum blockchains. Those who refused to accept the hard fork that rolled back the blockchain’s history supported the pre-forked version — now known as Ethereum Classic (ETC).

😨 Risks and challenges

  • Code of Etherium and projects built on it are open-source. This makes it very easy for malicious actors to copy the code and launch a fraudulent cryptocurrency.
  • Code is law: Smart contracts are uncompromisingly strict. Even the developers cannot go back and change what has been recorded on the blockchain. This is an advantage and disadvantage at the same time.
  • Etherium and projects built on it are a direct threat to the current banking, government and legal system. Governments will resist and  fight the change
  • Competition: There are many crypto projects that are in direct competition with Etherium.

💰 Tokenomics

  • 60 Million ether was created for the presale in 2014. 80% was available for purchase with 20% (or 12 Million) being retained by the Ethereum Foundations ‘development fund’ which consisted of early contributors to the project and developers.
  • The presale ended with ~31,000 BTC (equivalent to ~$18.3 million) being raised by the Ethereum Foundation over the 42 days.

Token Inflation

Etherium does not have fixed max supply. The amount of Etherium issued in a block depends on:

  • Block reward(inflationary)
  • Base fee burned(deflationary)

ETH can even become deflationary if the base fee burned > block reward ie. more the network demand more the deflationary pressure.

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on ETH will come from:

  • Staking: Validators will acquire and stake ETH to participate in the block validation.
  • Lock: There are many projects that allow users to lock their ETH and generate yield.
  • Gas fees: Users will acquire ETH to pay for gas fees – to execute their transactions.
  • Base fee burn: Base fee is burned, reducing the supply
  • Speculators: They will but ETH for future price appreciation.

Supply pressure

Supply pressure on a token decreases its price.

Supply pressure on ETH will come from:

  • Block reward: Some validators will sell their block rewards.
  • Early investors: They have made huge profits on their initial investment. Some of them will sell part of their holdings to realize gains.

🧐 Indicators to watch out for

  • Google trends: “Solidity”(Etherium programming language) is becoming more popular.
  • YouTube channel is growing:
  • Twitter account is growing:
  • Total value locked in projects built on Etherium is growing:
  • Unique Etherium addresses are growing:
  • Number of miners is growing: increase in hash rate

👋Final remarks

What internet is to communication – Etherium is to agreements.

What smartphone is to calculator – Etherium is to Bitcoin.

Etherium was the first project to offer programmable smart contracts. It had its ups and downs, but it has come out from every problem much stronger.

Etherium 2.0 upgrades will make Etherium scalable without compromising on security and decentralization. It will be very difficult for other projects to compete once Etherium 2.0 is launched.

Recent upgrades like:

  • EIP 1559: Burning of base fee
  • Proof of stake

have completely changes tokenomics of Etherium, making it a much better investment for the long term.

😊 Do further research

You can continue your research by using following resources:

Further reading