Cryptocurrency Intermediates: Understanding Ethereum
Learning Objectives
The primary goals of the content are to provide an understanding of Ethereum and its key
components. It covers the distinction between Ethereum and Ether, the technical
differences between Proof of Work (PoW) and Proof of Stake (PoS), the role of Ethereum in
decentralized finance (DeFi), and the mechanisms behind smart contracts and gas fees.
Review of Blockchain and Cryptography
Cryptography plays a central role in blockchain technology, allowing the transfer of digital
assets in a secure, trustless environment. A distributed ledger ensures transparency and
minimizes the risk of centralized failures or censorship. This innovation began with Bitcoin,
the first successful cryptocurrency, and paved the way for more advanced systems like
Ethereum.
Ethereum and Its Ecosystem
Ethereum expands upon Bitcoin’s capabilities by introducing smart contracts and
decentralized applications (Dapps). Unlike Bitcoin, which focuses primarily on digital
currency transactions, Ethereum serves as a platform for building decentralized financial
systems, automated contracts, and more. It removes the need for intermediaries in
financial and other transactions, making processes faster and more efficient.
Ethereum vs. Ether
Ethereum is often misunderstood as a cryptocurrency, but it’s actually a decentralized
platform. The cryptocurrency associated with Ethereum is called Ether (ETH). Ether serves
as a utility token, used to pay transaction fees and interact with applications on the
Ethereum network. Ethereum itself is a global ecosystem for decentralized computing.
Origins of Ethereum
Vitalik Buterin, a young programmer, introduced Ethereum in 2013. He envisioned a
blockchain that could go beyond Bitcoin’s simple ledger and allow developers to build their
own applications. Ethereum officially launched in 2015 and has since become a leading
platform for blockchain innovation. Alan Turing's influence on Ethereum lies in the concept
of a Turing-complete system. Ethereum, unlike Bitcoin, is Turing-complete, meaning it can
execute complex computations and loops, making it possible to run smart contracts and
decentralized applications (Dapps). Turing's foundational work on computational theory
inspired the development of Ethereum's programmable blockchain, allowing for advanced
functionalities.
Smart Contracts
Smart contracts are a groundbreaking feature of Ethereum. These are self-executing
contracts with predefined rules and conditions coded directly into the blockchain. Once
the conditions are met, the contract executes automatically, ensuring transparency and
eliminating the need for intermediaries. For example, a smart contract could release funds
when a service is completed, without requiring manual approval.
Decentralized Applications (Dapps)
Dapps are applications built on the Ethereum platform that operate without a central
authority. Unlike traditional apps, which rely on centralized servers, Dapps run on a peer-
to-peer network. This structure ensures greater security, privacy, and resistance to
censorship. Dapps are used in various fields, including gaming, finance, and even supply
chain management.
Gas and Transaction Fees
Gas refers to the computational cost required to execute operations on the Ethereum
network. Every transaction or contract execution consumes gas, and users must pay for
this in Ether. Gas fees depend on the complexity of the operation and network demand. A
major update in 2021 (EIP-1559) introduced a base fee system to make transaction costs
more predictable, with users optionally adding tips to prioritize their transactions.
Ethereum 2.0 and Proof of Stake
Ethereum 2.0 marked a significant upgrade to the Ethereum network by transitioning from
Proof of Work (PoW) to Proof of Stake (PoS). In PoW, miners solve complex mathematical
puzzles to validate transactions, which is energy-intensive. PoS replaces miners with
validators, who stake Ether to propose and validate blocks. This system reduces energy
consumption and enhances scalability.
Sharding for Scalability
To address network congestion and scalability issues, Ethereum 2.0 introduced sharding.
Sharding divides the blockchain into smaller parts, called shards, allowing multiple
transactions to be processed simultaneously. This innovation increases the network's
capacity and makes Ethereum more accessible for devices with lower computational
power.
Use Cases and Benefits
Ethereum's ecosystem supports a wide range of applications, from financial services to
gaming and digital art. Smart contracts and Dapps offer significant advantages, including:
Censorship resistance: No single entity controls the system.
Improved privacy: Personal data remains secure.
Zero downtime: Applications are always accessible.
Reduced failure points: Decentralization minimizes risks.
However, there are challenges, such as scalability, maintenance, and potential network
congestion.
Energy Efficiency and Environmental Impact
Under the old PoW system, Ethereum required significant energy to operate, comparable to
the electricity consumption of some countries. With the shift to PoS, energy usage has
dropped dramatically, addressing environmental concerns and making Ethereum more
sustainable
