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16.7. Ethereum

16.7.1. Introduction

Ethereum is an open-source public service that utilizes blockchain technology to enable smart contracts and cryptocurrency trading without the involvement of a middleman. Regarded as the second most popular crypto currency after Bitcoin, it is home to digital money, global payments, and applications. It is a decentralized blockchain network powered by the Ether token that enables users to make transactions, earn interest on their holdings through staking, use and store non fungible tokens (NFTs), trade cryptocurrencies, play games, and use social media. It is meant to be more than just a cryptocurrency, providing an ecosystem for blockchain applications, and a sophisticated Smart Contracts virtual machine.

Like all cryptocurrencies, Ethereum works on the basis of a blockchain network. Let’s understand what a blockchain network is. A blockchain network is a technical infrastructure that provides ledger and smart contract (chaincode) services to applications. Smart contracts are used mainly to generate transactions which are subsequently distributed to every peer node in the network. This is where they are immutably recorded on their copy of the ledger. The users of applications might be end users using client applications or blockchain network administrators. Ethereum hosts a notable amount of functionality for developers building solutions on Ethereum as a base. For example, in order for a software application to interact with the Ethereum blockchain, it must connect to an Ethereum node. If someone wants to utilize certain programming language to connect with an Ethereum node, there are many convenience libraries within the ecosystem that make this much easier. With these libraries, developers can write intuitive, one-line methods to initialize JSON-RPC requests (under the hood) that interact with Ethereum. Moreover, Ethereum has a native coin that is known as Ether (ETH), which is used to pay for activity on the Ethereum blockchain. The coin also trades on crypto exchanges and fluctuates in value. Separate from its use within the community to motivate community activities, it is also a cryptocurrency in the normal way. The Ethereum ecosystem is written in the Solidity programming language. Solidity is an object-oriented, high-level programming language used to create smart contracts that automate transactions on the blockchain. It was developed by contributors to the Ethereum project. This language is primarily used to create smart contracts on the Ethereum blockchain and create smart contracts on other blockchains. It’s currently a proof-of-work (PoW) blockchain, but is making the move to proof-of-stake (PoS) with Ethereum 2.0 by 2022.

16.7.2. Problems to Solve

Bitcoin as a cryptocurrency has a major problem. It is based on Proof of Work as the heart of its consensus algorithm. This has the unfortunate consequence of causing miners to waste a lot of electricity simply to add blocks to a blockchain. This is unnecesary… at least in theory. The problem is that coming up with a reliable and secure consensus algorithm for a public, distributed ledger is quite difficult. Bitcoin was such a revolution for both blockchain technology and cryptocurrency technology because it was the first proposed solution to managing a secure public distributed ledger. Finding alternatives to the Proof of Work consensus algoorithm has proved to be difficult.

[What are other motivations for creating Ethereum as compared to Bitcoin or other cryptocurrencies?]

16.7.3. History of Ethereum

Vitalik Buterin is considered the creator of Ethereum, as he published the original Ethereum concept whitepaper. Buterin presented his concepts at a Bitcoin conference in Florida in early 2014. Following his initial work, others joined to help bring the project to fruition. His project raised capital through initial coin offering later the same year, selling millions of dollars worth of ETH coins in exchange for funds to use for the development of the project. Ethereum went live officially in July 2015 even though ETH coins were purchasable the year before. Buyers had to wait for its launch before they were able to move between accounts or use their ETH.

The first iteration of the Ethereum blockchain was called the Frontier, and it hosted smart contracts and used a proof of work consensus algorithm. This provided opportunities for people to set up their mining apparatuses since Ethereum was originally Proof of Work and start building on the network. After the initial launch, Ethereum saw many other updates such as Byzantium, Constantinople, and the Beacon Chain, where each of the updates changed certain aspects of the blockchain. Beacon Chain provided a shift from a proof-of-work to a proof-of-stake consensus mechanism. One of the most substantial change to the Ethereum blockchain is the transitioning over to PoS initiated to scale the blockchain. Many projects have built applications on the Ethereum blockchain over the years. Still, the network struggled when traffic notably increased. During the years 2020 and 2021, decentralized finance projects built on Ethereum gained substantial attention, which brought Ethereum’s scalability issues to the forefront as high network fees plagued participants. Ethereum’s transition to Eth2 and PoS aims to bring scalability to the blockchain, although the shift took place in various stages.

16.7.4. Key Differences Between Bitcoin and Ethereum

Bitcoin and Ethereum networks are based on the concept of distributed ledgers and encryption; however, there are differences in terms of technical specifications. To illustrate, Bitcoin is seen as a digital equivalent of gold used to store value. Contrastingly, Ether is used to power the Ethereum network and its applications. Also, Bitcoin serves as a credible alternative to traditional fiat currencies, whereas Ethereum is a platform to run programmatic contracts and applications via Ether. Another one of the key differences is that Bitcoin transactions are monetary, but they can have notes and messages attached to them by encoding them into data fields in the transactions. On the other hand, Ethereum transactions encompass executable code to create smart contracts or interact with self-executing contracts and applications built using them. Furthermore, Bitcoin utilizes a Proof-of-Work consensus algorithm, whereas Ethereum is transitioning to Proof-of-Stake. Another one of the key differences between the two networks is in their Hashing Algorithms, which are essentially how these systems maintain their privacy and ensure security. Bitcoin utilizes a hashing algorithm called SHA-256, whereas Ethereum uses Keccak-256 algorithm. Other differences include the time for new blocks of data to be added, which determines the time it takes to confirm transactions. The average block time on the Bitcoin network is 10 minutes, while the time is 10 to 15 seconds for Ethereum.

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