Ethereum Whitepaper Explained!
The main purpose of Ethereum is to create a substitute protocol for building decentralised applications and providing an alternative set of tradeoffs that would be very useful for a large class of decentralised applications. Its particular emphasis is on situations where security for small and rarely used applications, rapid development time, and the ability of various applications to very efficiently interact, are important.
Ethereum does this by creating a blockchain with a built-in programming language, allowing anyone to write decentralised applications and smart contracts where they can create their own arbitrary rules for state transition functions, ownership, and transaction formats.
Smart contracts, “a computer program or a transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement”, can also be built on top of the platform, with vastly more power than that offered by Bitcoin scripting.
EMERGENCE OF ETHEREUM (ETH)
The crypto world, which started with the introduction of Bitcoin in 2009, is a young sector. Bitcoin came into play as it offered two prominent components — underlying blockchain technology on which that asset runs and an internet-based asset.
People then used the online currency and blockchain concepts to come up with other projects and assets. Ethereum as a blockchain hosts a considerable amount of functionality for developers building solutions on Ethereum as a base. Ether (ETH) is the native coin of the Ethereum blockchain, which is used to pay for activity on the Ethereum blockchain.
The Ethereum blockchain allows for versatility in terms of coding and building on the blockchain and the surrounding ecosystem. Ethereum gained awareness in early 2014 when Vitalik Buterin brought the concept of the blockchain project into the public eye at a Bitcoin conference in Miami Florida.
Later the same year, the project raised capital via an initial coin offering (ICO). They sold millions of dollars worth of ETH coins in exchange for funds to use for the development of the project. The asset sale sold over $18 million worth of ETH, paid for in Bitcoin, between July 22 and September 2, 2014.
Additional Read: Ethereum 2.0
Ethereum presently works on proof-of-work mechanism, which makes decentralised Ethereum to agree on things like account balances and the order of transactions. This makes Ethereum blockchain extremely difficult to attack or manipulate. Here, miners are doing the ‘work’, which means adding valid blocks to the chain.
Thus, greater the work done, greater the number of blocks added, longer the chain length, and hence, more certain the network is about the state of things. While this protocol is easy to implement and doesn’t require any ETH to start with, it takes up a lot of energy which makes it harmful for the environment.
The basic architecture of Ethereum suggests that every client communicates with its own instance of the application. The idea is to not rely on a single/centralised server. Very soon, Ethereum plans to shift to proof-of-stake mechanism. This mechanism requires validators to stake their Ethereum to create new blocks.
There is no competition to create new blocks, which was a cause of concern with POW mechanism. The finality is also more clear than POW. The blockchain has two main components:
- Database: Everything that a person does on network is stored in the blockchain. All the actions are considered as a transaction and these transactions are visible to public and no one can make any changes in them.
- Code: The logic for all the transactions is stored in the form of code. The code and contracts are usually written in Solidity language, and then they are compiled and deployed to the Ethereum blockchain.
Additional Read: Ethereum Merge Update
APPLICATIONS OF ETHEREUM BLOCKCHAIN NETWORK
As per the Ethereum Whitepaper, it has got various applications, be it financial, semi-financial, or decentralised governance. Some of them are:-
- Token Systems:
It is very easy to implement token systems in Ethereum. Ethereum-based token systems can include a distinct feature too, i.e., to pay transaction fees in that currency. It uses a smart contract to do the same.
- Financial Derivatives and Stable-value currencies:
Financial derivatives provide a decentralised market of speculators, betting that crypto asset’s price will go up, which plays the role of issuers. Benefits are that they do not default, which reduces the potential of fraud.
- Identity and Reputation Systems:
Users can register their names in public database systems. It is basically a database that can be added to, but cannot be modified and removed from.
- Decentralised File Storage:
There are contracts that allow people to rent out free space on their hard drives to other people in exchange for small fees, making it a decentralised file storage system.
- Decentralised Autonomous Organisations (DAO):
A DAO is basically a virtual body with members, which, with 67% majority, have a right to spend the body’s funds and modify its code.
Presently, Ethereum is second in market capitalization. Current market capitalization is close to $150 billion with ETH currently trading at $1250. It is interesting to note that it is down nearly 75% from its all time high.
To understand the tokenomics, first we need to review the factors that affect supply-demand dynamics of Ethereum. Till now, Ethereum was using Proof-of-Work mechanism, where miners receive two kinds of fees in order to validate the transactions and keep the network secure.
The fees is given in the form of a block subsidy of 2ETH which is paid out at the protocol level which in turn increases the supply of ETH, and priority fees from users which they pay to increase the speeds of transactions. Users pay two kinds of fees, one is base fees which gets burned in order to reduce the supply.
Second is priority fees which goes directly to the miners, hence it doesn’t affect the supply of ETH. Current supply of ETH is 121.2 million. After considering the increase and decease of supply, there is a net increase of around 2.7% per year. There have been instances where increase in supply was negative too, hence indicating potential deflationary nature of Ethereum.
To consider what all factors determine the demand of ETH, we see the number of active addresses holding ETH and number of transactions, as well as the performance of DeFi and NFT ecosystem. There also might be some short term selling pressure when the miners who receive their rewards in ETH try to trade.
As soon as Ethereum shifts to proof-of-stake mechanism, ETH holders would be able to stake their ETH to earn rewards and help validate and secure the network. People with 32ETH can buy a node, and stake their ETH. Stakers can receive rewards in the form of issuance of new tokens and tipping rewards. All these affects in supply side indicate that ETH could in fact become a deflationary asset, if the transaction volume moves up.
Additional Read: How Ethereum Works?
ETHEREUM’S (ETH Price) PERFORMANCE OVER THE YEARS
Additional Read: Ethereum Price Prediction
STIFF COMPETITION for Ethereum IN THE CRYPTO SPACE
Ethereum faces a fierce competition in the cryptocurrency market. Its competitors include Solana, Cardano, Polkadot and many more.
This blockchain operates at lightning speeds, and it’s fees equate to a fraction of a cent per transaction. It has experienced strong adoption and settled more than 50 billion transactions since its adoption in 2020.
This blockchain network is a for a more environmentally sustainable alternative to Ethereum. Its native currency, ADA, had about a $16.78 billion market cap at the time of this writing. Cardano has performed modestly because of the recent release of Cardano’s first decentralised finance (DeFi) exchange, SundaeSwap.
This token is popularly known for one of its features called “interoperability.” Its infrastructure connects various blockchains together into one network. It enables them to exchange data without compromising their security. Interoperability is essential for the future of Web 3, in which products, currency and services will move throughout what many hope will be a decentralised digital ecosystem.
Ethereum still occupies the hearts of Web3 veterans among smart contract blockchains. It poses a strong possibility for widespread adoption. As the demand for new DeFi protocols and dApps increases, everyone will be looking for the right infrastructure to use to build the future of Web3.
ETHEREUM Whitepaper Summary (Roadmap & Vision)
Ethereum 2.0 which is also known as ETH2 is an upgrade to the Ethereum blockchain. It aims to enhance the efficiency, scalability, and the speed of the Ethereum network so that it can process more transactions avoid bottlenecks simultaneously.
This upgrade aims to improve the Ethereum network’s through several changes to the network’s infrastructure, that is, the switch from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model.
PoW model means that it uses a competitive validation process to confirm the transactions and then add new blocks to the blockchain. In POS, the blocks are verified by the machines of coin owners where the owners keep their coins as collateral to validate blocks. This reduces the amount of computational work, compared to the POW model, needed to process transactions and verify blocks in the blockchain.
Ethereum blockchain was initially built to provide more and better features to users as compared to Bitcoin. But the major point is that Ethereum goes way beyond that just a crypto.
It provides for many use cases that are already discussed above. It further means that there is an increasing efficiency of this logic-based industry. With the ever-increasing demand and hype of NFTs and DeFi apps, we can surely say that the future of crypto assets is very bright.
Especially for Ethereum, as it is basically one of the first blockchains to support such a technology. One of the major drawbacks of using Ethereum is high transaction fees. With the merge and emergence of ETH 2.0, we can expect the transaction costs to reduce a lot, and ETH becoming a deflationary asset, thus making it more valuable. All these factors suggest that Ethereum would not lose its charm, at least for quite some time.
HOW TO INVEST IN ETHEREUM (ETH)
Use this three-step process to buy your first ETH token using the CoinDCX, crypto investment app.
- Sign Up for the CoinDCX account: Enter a valid email address and a user name on the sign-up page. Once the Email Id has been verified, set a strong password to secure your account.
- Verify the account: You need to complete your KYC, to buy ETH token on the CoinDCX platform. All you need to do is upload the documents and your account will be set up in 15 minutes.
- Buy ETH: After the account has been verified, you can deposit any amount of fiat currency you are comfortable with and start your crypto journey!
Disclaimer: User Generated Content – Original Content created by a member of BITS Pilani, under the consultation of Dr. Amit Dua, Assistant Professor, Computer Science Department, BITS Pilani, Pilani Campus in association with CoinDCX. The views and opinions expressed within this post belong solely to the author.
Author: Saatvik Mittal, Vipul Walunj