chapter
Ethereum Basics
Where does Ether come from?
Getting Started with Ethereum
Scalability, Ethereum 2.0, and the Future of Ethereum
Ethereum and Decentralized Finance (DeFi)
Entering the Ethereum Network
Chapter 1 - Ethereum Basics
Table of contents
What is Ethereum?
What is the difference between Ethereum and Ether (ETH)?
Where does the value of Ethereum come from?
What is blockchain?
How is Ethereum different from Bitcoin?
How does Ethereum work?
What are smart contracts?
Who created Ethereum?
How is Ether distributed?
What is “The DAO” and “Ethereum Classic”?
What is Ethereum?
Ethereum is a decentralized computing platform. We can think of it as a computer that does not run on a single device. That is, it can run on thousands of devices around the world at the same time, that is, there is no specific owner.
Like Bitcoin and other digital currencies, Ethereum also supports the transfer of digital assets. But it has more functions, allowing users to configure their own code and interact with applications developed by other users. Ethereum is extremely flexible, and all kinds of complex programs can be built on the Ethereum platform.
In short, the core idea behind Ethereum is that developers can create and run code in a distributed network without the use of a central server, so these applications are theoretically invulnerable to being shut down or censored.
What is the difference between Ethereum and Ether (ETH)?
It may sound a bit confusing: the unit used by Ethereum is not called Ethereum, nor is it called Ethereums. Ethereum refers to the protocol itself, and the token that powers it is called Ether (abbreviated as "ETH").
Where does the value of Ethereum come from?
As we mentioned earlier, Ethereum's code runs in a distributed system. Therefore, the programs cannot be tampered with by outsiders. Once they enter the Ethereum database (i.e., the blockchain), they can be programmed so that others cannot modify the code. In addition, the database is visible to everyone, and users can review the code before interacting with it.
These characteristics determine that anyone can launch an application that cannot be taken offline at any time and anywhere. More interestingly, Ethereum's native unit, Ether, can store value, creating conditions for these applications to implement value transfer. We call the programs that make up the application smart contracts. In most cases, they can run without human intervention.
There is no doubt that the concept of "programmable currency" has attracted many users, developers and businesses.
Check the latest price of Ethereum now.
What is blockchain?
The blockchain is the heart of Ethereum and the database that stores the information used by the protocol. If you have read our article What is Bitcoin?, you will know the basics of how the blockchain works. The Ethereum blockchain is similar to the Bitcoin blockchain, but the difference is how the data is stored and what data is stored.
The Ethereum blockchain is like a book that can have new pages added to it over time. Each page in the book is called a block, which stores transaction information. When a new page needs to be added, a special value is added to the top of the page. This value indicates that the new page is added sequentially after the previous page, rather than being randomly inserted into the book.
Essentially, this is like a page number that references the previous page's information and helps tell if new pages (blocks) were added in sequence. We do this using hashing.
The hashing operation takes a piece of data (in this case, all the data in the block) and returns a unique identifier (our hash value). The probability of two pieces of data outputting the same hash value is very low, and the process is also one-way. Therefore, you can easily calculate the hash value, but you cannot reverse the information that created the hash value. In the following chapters, we will analyze why this is a key factor affecting mining.
Now we have found a mechanism to connect all the pages in the correct order. Any attempt to change the order or remove pages will reveal that our book has been tampered with.
Want to learn more about blockchain? Read our beginner’s guide to blockchain technology.
How is Ethereum different from Bitcoin?
Bitcoin builds a global digital cash system through blockchain technology and financial incentives. It introduces several key innovations to help global users coordinate work without central institutions. Bitcoin supports all participants running programs on their personal computers, allowing users to reach consensus on the state of financial databases in a trustless, decentralized environment.
Bitcoin is often considered the first generation of blockchain. Developers were reluctant to make Bitcoin an overly complex system, which gave it a unique advantage in terms of security. Its design is inflexible in order to prioritize security at the base layer. The language of Bitcoin smart contracts is indeed extremely limited and does not adapt well to applications other than transactions.
In contrast, second-generation blockchains are more versatile. In addition to financial transactions, such platforms also achieve a higher degree of programmability. Ethereum gives developers a higher degree of freedom, allowing them to experiment with personal codes and create a variety of decentralized applications (DApps).
Ethereum is a pioneer of the second-generation blockchain wave and still dominates today. It has many similarities with Bitcoin and can perform many of the same functions. However, the core principles of the two are very different and each has its own advantages.
How does Ethereum work?
We can define Ethereum as a state machine. That is, at any given point in time, a snapshot is available that shows account balances and the current state of smart contracts. Certain actions cause the state to be updated, meaning all nodes update the snapshot to reflect the change.
State transitions in Ethereum.
Smart contracts running in Ethereum are triggered by transactions (from users or other contracts). When a user sends a transaction to a contract, all nodes in the network run the contract code and record the output. This process is achieved through the Ethereum Virtual Machine, which converts smart contracts into instructions that can be read by computers.
To update the state, the system uses a special mechanism called mining. Similar to Bitcoin, mining is done through proof of work. We will explore this in depth later.
What are smart contracts?
The essence of a smart contract is code. But it is neither smart nor a contract in the traditional sense. The reason why it is called a "smart contract" is that it can automatically execute ("intelligently") the agreement ("contract") reached between two parties under certain conditions.
In the late 1990s, computer scientist Nick Szabo first proposed smart contracts. He used the example of a vending machine to explain the concept, which he considered to be a precursor to modern smart contracts. A vending machine executes a simple contract. The user inserts a coin and the machine delivers the product of their choice.
Smart contracts apply this logic to a digital environment. You can specify something simple in your code, such as returning "Hello, World!" when the contract receives two ether coins.
In Ethereum, developers encode it so that the EVM can read it. Then, the developer sends it to a special address where the contract is registered. At that point, the contract is available to everyone. The contract cannot be deleted unless the developer sets conditions when writing the contract.
Now that the contract has an address, all a user has to do to interact with it is send 2 ether to that address. This triggers the contract code - all computers on the network run this action, witnessing that the user has paid the contract and recording its output ("Hello, World!").
This is probably one of the most basic examples of Ethereum’s functionality. As the technology continues to improve, people will be able to create more sophisticated applications that connect a large number of contracts, and such applications are already available.
Who created Ethereum?
In 2008, a developer (or group of developers) who goes by the pseudonym Satoshi Nakamoto published the Bitcoin white paper, revolutionizing the digital currency landscape. A few years later, a young programmer named Vitalik Buterin wanted to take the idea a step further and apply it to a variety of applications. Eventually, the concept was transformed into Ethereum.
Buterin first proposed Ethereum in a 2013 blog post titled “Ethereum: The Ultimate Smart Contract and Decentralized Application Platform.” In it, he introduced the idea of a “Turing-complete blockchain” — a decentralized computer with enough time and resources to run any application.
As technology advances, more types of applications that can be deployed in blockchain will emerge in the market, as long as developers can think of it. Ethereum hopes to break the design limitations deliberately imposed by Bitcoin and find more uses for blockchain technology.
How is Ether distributed?
Ethereum was launched in 2015 with an initial supply of 72 million ether. More than 50 million of these tokens were publicly sold through a token sale called an Initial Coin Offering (ICO). Participants can buy ether using fiat currency or Bitcoin on the exchange.
What is “The DAO” and “Ethereum Classic”?
With Ethereum, open collaboration on the Internet has found new forms. DAOs (decentralized autonomous organizations) are a typical example. These entities are similar to computer programs and are completely controlled by computer code.
The organization's earliest and most ambitious project was "The DAO". It consisted of a number of complex smart contracts running on Ethereum and operated as an independent venture fund. DAO tokens were distributed in the form of an ICO, and token holders had both equity and voting rights.
However, the project was attacked by a vulnerability shortly after it went online, and nearly one-third of the DAO funds were stolen by criminals. To make matters worse, 14% of the total supply of Ether was locked in the DAO at the time. There is no doubt that the fledgling Ethereum network suffered a catastrophic blow.
After negotiations, the entire blockchain was split into two chains via a hard fork. The malicious transactions in one of the forks were reversed and the funds were recovered successfully - this is now the "Ethereum blockchain". In contrast, the transactions in the original chain were not reversed and remained immutable, and is now called Ethereum Classic.
This painful lesson warns us that we must take the risks of this technology seriously and that entrusting large amounts of wealth to autonomous code may backfire. This particular example also illustrates the huge challenges of making collective decisions in an open environment. Security vulnerabilities aside, The DAO does perfectly illustrate the potential of smart contracts to enable large-scale trustless collaboration over the Internet.
Chapter 2 - Where does Ether come from?
Table of contents
How are new Ether coins created?
What is the total amount of Ether?
How does Ethereum mining work?
What is Ethereum gas fee?
Fuel Fees and Fuel Fee Limits
How long does it take to mine an Ethereum block?
What are Ethereum tokens?
How are new Ether coins created?
We briefly mentioned “mining” before. If you are familiar with Bitcoin, you know that the mining process is key to protecting and updating the blockchain. Ethereum mining works in the same way, where the protocol rewards participants with Ether for mining (which is time-consuming, labor-intensive, and costly).
What is the total amount of Ether?
As of February 2020, the total supply of Ethereum is approximately 110 million.
Unlike Bitcoin, Ethereum did not have a dedicated token issuance plan when it was launched. Bitcoin maintains its value by limiting its supply and gradually reducing the production of new coins. Ethereum uses tokens to lay the foundation for decentralized applications (DApps). The question remains unresolved because the most suitable type of token issuance plan has not yet been found.
How does Ethereum mining work?
Mining is critical to network security. It ensures that the blockchain can be updated fairly and equitably, and supports the normal operation of the network without a single decision-maker. In mining operations, a subset of nodes (the so-called "miners") contribute computing power to solve cryptographic puzzles.
What it actually does is hash a set of pending transactions and their data. In order for a block to be valid, the hash value must be lower than the value set by the protocol. If the operation fails, the miner can modify some data and try again.
Because of the competition, miners must complete hash operations as quickly as possible - the hash rate is therefore a measure of the miner's computing power. The higher the hash rate in the network, the harder it is to crack the cryptographic puzzle. Only miners need to find a valid answer, which is broadcasted in the network and can be easily verified by other participants.
As you might expect, non-stop high-speed hashing is expensive. As an incentive to secure the network, miners are rewarded. This reward is derived from all transaction fees in the block. They also receive freshly minted ether, which is 2 ether at the time of writing.
What is Ethereum gas fee?
Remember the “Hello, World!” contract mentioned earlier? It’s a program that’s easy to run and inexpensive to compute. However, you’re not just running it on your computer as an individual; you’re asking everyone in the Ethereum ecosystem to run it together.
This raises the following question: What happens when tens of thousands of people are running a complex contract at the same time? If someone sets up a contract to run the same set of code in a loop, each node will need to run indefinitely. These processes will take up a lot of resources and may cause the entire system to crash.
Fortunately, Ethereum introduces the concept of gas fees to avoid this risk. Just as a car cannot run when it runs out of gas, a contract cannot run without gas fees. In order to ensure the normal operation of the contract, users must pay a certain amount of gas fees. If the gas fee is insufficient, the contract will terminate.
Essentially, this is a fee mechanism. We extend the concept to transactions, where miners are primarily motivated by profit and may ignore transactions with lower fees.
Please note that ether is not the same as gas. The average price of gas fluctuates greatly depending on the miners. When you make a transaction, you need to pay the gas fee in ether. The fee mechanism is similar to Bitcoin: if the network is congested and many users are participating in transactions, the average price of gas will increase. On the contrary, if there is little activity in the network, the price will decrease.
Although the price of gas fees is constantly changing, the gas fees required for each operation are fixed. That is, the gas fees consumed by executing complex contracts are higher than simple transactions. Therefore, gas fees become a measure of computing power. It ensures that the system charges corresponding fees according to the user's Ethereum resource utilization.
Gas fees usually consume only a small portion of ether, so we set a smaller unit for it called "gwei". 1 gwei is equivalent to one billionth of an ether.
In short, you can run a program that loops for a long time, but this operation quickly becomes very expensive. Therefore, nodes in the Ethereum network have the advantage of reducing spam.
Average gas price over time (in gwei). Source: etherscan.io
Fuel Fees and Fuel Fee Limits
Suppose Alice is making a contract transaction. She calculates the gas fee she needs to pay (e.g., via ETH Gas Station). Perhaps she sets a higher price to incentivize miners to process the transaction as quickly as possible.
She also sets a gas limit for self-protection. When a problem occurs in the contract, the gas consumed will be higher than the planned value. The purpose of the gas limit is to ensure that the operation stops when the set gas fee x is exhausted. The corresponding contract will then become invalid, and the amount Alice will eventually pay will not exceed the initial setting.
At first glance, this concept may seem confusing. In fact, it means that the gas fee (and its limit) can be set manually, and most wallets will set it for the user. In short, the gas fee determines how fast miners can process transactions, while the gas limit determines the maximum amount of gas you are willing to pay for this transaction.
How long does it take to mine an Ethereum block?
The average time it takes to add a new block to the Ethereum blockchain is 12 to 19 seconds. This is likely to change if the network switches to proof-of-stake, which is primarily designed to reduce block times. For more information, read Ethereum Casper Explained.
What are Ethereum tokens?
The biggest attraction of Ethereum is that it allows users to create personal assets on the chain, which can be stored and transferred like Ether. The governance rules of the above assets are stipulated in the smart contract, allowing developers to set the parameters of the tokens themselves. These include many characteristics such as the amount of tokens issued, the issuance mechanism, divisibility and interchangeability. There are many technical standards that can be followed when creating tokens in Ethereum, the most prominent of which is called ERC-20 - therefore, these tokens are often called "ERC 20 tokens".
The token is a powerful tool that provides a broad experimental platform for innovators to experiment with cutting-edge fields such as finance and technology. It is designed to be flexible, from issuing a unified token as an in-app currency to producing unique tokens based on real assets. There are probably many excellent and streamlined use cases for token creation that are yet to be discovered.
Chapter 3 - Getting Started with Ethereum
Table of contents
How to buy Ethereum?
How to buy Ethereum with a credit/debit card
How to buy Ethereum on the P2P market
What can I buy with Ether (ETH)?
What are the uses of Ethereum?
What should I do if I accidentally lose my Ethereum?
Can Ethereum transactions be restored?
Are Ethereum transactions private?
Can Ethereum generate revenue?
How to store Ether?
How to deposit ETH into Binance
How to store Ethereum on Binance
How to withdraw ETH from Binance
How to store Ether in Ethereum Wallet
Hot Wallet
Cold wallet
What is Ethereum's logo and symbol?
How to buy Ethereum?
How to buy Ethereum with a credit/debit card
Binance allows users to buy Ethereum seamlessly through their browser. Steps:
Log in to the digital currency trading portal.
Select the cryptocurrency you want to purchase (ETH) and the currency you want to pay with.
Log in to your Binance account. New users please register first.
Select Payment Method.
Follow the prompts to enter your card details and complete identity verification.
Done! The purchased ETH will be deposited into your Binance account.
How to buy Ethereum on the P2P market
The P2P market is also a platform for buying and selling Ethereum. Through the Binance mobile app, you can buy tokens directly from other users.
Open the app and log in or register an account.
Select One-click Buy and Sell, and then click the Buy tab in the upper left corner of the interface.
Select a transaction type from the pop-up window and click Buy.
You can pay using other digital currencies (Digital Currency Payments tab) or fiat currency (Fiat Currency Payments tab).
Next, the system will ask you to select a payment method. You can choose flexibly according to your needs.
Select Buy Ether.
At this point, you need to complete your payment. Once you've done that, click Mark as paid and then Confirm.
Once the seller delivers the tokens as scheduled, the transaction is completed.
What can I buy with Ether (ETH)?
Unlike Bitcoin, Ethereum’s application environment is not limited to the digital currency network. It can build a development platform for decentralized applications, and Ether, as a tradable token, becomes the “fuel” of this ecosystem. Therefore, the main role of Ether is to provide utility for Ethereum.
However, Ether can also be used to purchase goods and services, playing a similar role to other traditional currencies.
Heatmap of retailers accepting Ethereum payments. Source: cryptwerk.com/coinmap
What are the uses of Ethereum?
Ethereum's native currency, Ether, can be used as digital currency or collateral. It is also seen by many as a store of value similar to Bitcoin. However, Ether is different from Bitcoin because the high programmability of the Ethereum blockchain gives it more utility. As a result, Ether has become the lifeblood of many applications such as decentralized financial applications, decentralized markets, trading platforms, and games.
What should I do if I accidentally lose my Ethereum?
Ethereum trading does not involve any bank and users are responsible for their own funds. Tokens can be deposited on the exchange platform or stored in a personal wallet. Please note that when using a personal wallet to store funds, it is important to keep the mnemonic phrase safe so that funds can be recovered in the event that the wallet is lost.
Can Ethereum transactions be restored?
Once data is added to the Ethereum blockchain, it is virtually impossible to change or delete it. This means that when conducting transactions, it can be treated as if it is set in stone. Therefore, it is important to double-check that the address you are sending funds to is the correct one. When transferring large amounts, it is best to first send a small amount of funds to the receiving address to verify its authenticity.
Due to a hacker attack on its smart contracts, Ethereum was forced to perform a hard fork in 2016, effectively reversing the malicious transactions. However, this is an extreme measure for abnormal events, not the norm.
Are Ethereum transactions private?
All transactions added to the Ethereum blockchain are publicly visible, and even if Ethereum addresses do not reveal real names, observers can determine the identities of participants through other methods.
Can Ethereum generate revenue?
Ethereum is a volatile asset with both opportunities for gain and risks of loss. Some people choose to hold Ethereum for the long term, betting that the network will become a global programmable settlement layer in the future. Others choose to use Ethereum to trade with other altcoins. Of course, both strategies also have corresponding financial risks.
As the mainstay of decentralized finance (DeFi), Ether can also be used for lending, loan collateral, minting synthetic assets, or staking in the future.
Some investors may choose to invest in Bitcoin for the long term and use it as the only digital asset in their portfolio. On the contrary, other investors are more flexible and build a diversified portfolio through Ethereum and other altcoins, or allocate a certain proportion of funds for short-term trading (such as day trading or swing trading). There is no universal way to make profits in the market. Each investor should act within their means and choose the most appropriate strategy according to their actual situation.
How to store Ether?
There are many ways to store your tokens, each with its own pros and cons. As with anything that is risky, the best solution is to have a diversified portfolio of options.
Generally speaking, storage solutions are divided into two types: custodial and non-custodial. Custodial solutions mean that funds can be entrusted to a third party for safekeeping (such as an exchange platform). In this case, you must log in to the custodian platform to trade digital currency assets.
Non-custodial solutions are the opposite, where users use digital currency wallets to control their own funds. These wallets do not hold coins like physical wallets, but store access credentials to assets within the blockchain - encryption keys. Remember: when using non-custodial wallets, be sure to back up your mnemonics!
How to deposit ETH into Binance
To deposit your ETH to Binance, please follow these steps:
Log in to your Binance account. New users please register first.
Go to the spot wallet and click Deposit.
Check "ETH" in the token list.
Select a network and send ether to the corresponding address.
Done! Once the transaction is confirmed, the purchased ETH will be deposited into your Binance account.
How to store Ethereum on Binance
To actively participate in Ether trading, you need to deposit it into your Binance account. Storing Ether on Binance is simple and secure. With Ether, users can also enjoy various benefits of the Binance ecosystem through loans, staking, airdrop promotions, and lucky draws.
How to withdraw ETH from Binance
To withdraw Ether deposited in your Binance account, please follow these steps:
Log in to your Binance account.
Enter the spot wallet and click withdraw.
Check "ETH" in the token list.
Select Network
Enter the recipient address and amount.
Authenticate via email.
Done! Once the transaction is confirmed, the ether will be deposited to the address you provided.
How to store Ether in Ethereum Wallet
If you want to deposit Ethereum into a personal wallet, you can choose a hot wallet or a cold wallet.
Hot Wallet
A digital currency wallet that is connected to the Internet in some way is called a "hot wallet". It is usually a mobile or desktop application that allows users to check balances or send/receive tokens. Hot wallets are connected to the Internet and are extremely vulnerable to attacks, but they are more popular for daily payments. Trust Wallet is a convenient and fast mobile wallet that supports multiple currencies.
Cold wallet
A cold wallet is a digital currency wallet that works offline. Such wallets are far away from online attack vectors, significantly reducing the probability of being attacked. However, cold wallets are generally not as convenient as hot wallets. Both hardware wallets and paper wallets are cold wallets. The latter technology is outdated and extremely risky, and has gradually faded out of users’ horizons.
Please read "Analysis of Digital Currency Wallet Types" to learn more about wallet classification.
What is Ethereum's logo and symbol?
Vitalik Buterin designed the original Ethereum logo. It consisted of two rotated summation symbols, "Σ" (Sigma in Greek). The final design was based on this pattern and consists of a diamond shape called an "octahedron" surrounded by four triangles. Similar to other digital currencies, Ethereum has its own standard Unicode symbol so that apps and websites can easily display its value. Just as the US dollar is represented by the "$" symbol, the symbol used for Ethereum is "Ξ".
Chapter 4 - Scalability, Ethereum 2.0, and the Future of Ethereum
Table of contents
What is scalability?
Why does Ethereum need to scale?
The blockchain scalability trilemma
How many transactions can Ethereum handle?
What is Ethereum 2.0?
What is Ethereum Sharding?
What is Ethereum Plasma?
What are Ethereum Rollups?
What is Ethereum Proof of Stake (PoS)?
What is Ethereum Staking?
How much ether do I need to stake in Ethereum?
How much ETH can you earn by staking in Ethereum?
How long is the lock-up period for pledged ETH?
Is there any risk in staking Ethereum?
What is scalability?
In simple terms, scalability is a measure of a system's ability to grow. For example, a network or server in a computing application can be expanded in different ways to handle more demand.
Scalability in cryptocurrency refers to the continuous growth of a blockchain to accommodate more users. More users means more competition for operations and transactions on the blockchain.
Why does Ethereum need to scale?
Ethereum advocates believe that the next iteration of the Internet will be based on the Ethereum platform. The so-called Web 3.0 will bring a decentralized topology that can directly skip intermediaries, pay more attention to privacy, and truly own your own data. These basic properties will be built through distributed computing and distributed storage/communication protocols in the form of smart contracts.
In order to achieve its goal, Ethereum must massively increase its transaction processing capacity while avoiding a decrease in the decentralization of the network. Currently, Ethereum does not limit the transaction volume by limiting the block size like Bitcoin does, but only sets a fuel fee limit for the block, that is, the upper limit of the fuel fee that a single block can accommodate.
For example, a block has a gas limit of 100,000 Gwei. You can submit 10 transactions with a gas limit of 10,000 Gwei, or 2 transactions with a gas limit of 50,000 Gwei to the block. Any other transactions submitted at the same time must wait for the next block.
This situation is not ideal for a system that is widely used by everyone. If there are more pending transactions than block space, a backlog will quickly form. In addition, rising gas fees mean that users must pay a higher amount to have their individual transactions prioritized. In other words, a busy network will make it very expensive to process specific use cases.
The once-popular CryptoKitties game is a prime example of the limitations of the Ethereum network. In 2017, the Ethereum-based game CryptoKitties attracted a large number of users. They traded on the network and raised their own digital cats (represented by non-fungible tokens). As the game quickly became popular, the number of pending transactions skyrocketed, eventually causing extreme congestion on the network.
The blockchain scalability trilemma
On the surface, it would seem that all scalability issues would be alleviated by simply increasing the gas limit for blocks. In other words, the higher the limit, the more transactions the network can process in a fixed amount of time, right?
Unfortunately, this is not feasible without sacrificing some of Ethereum’s key features. Vitalik Buterin proposed the blockchain trilemma (as shown in the figure below) to explain the delicate balance that blockchains must achieve.
The blockchain trilemma: (1) scalability, (2) security, and (3) decentralization.
Only two of the three characteristics can be optimized, not all. Blockchains such as Ethereum and Bitcoin prioritize security and decentralization. Their consensus algorithms guarantee network security. However, their networks consist of thousands of nodes, resulting in poor scalability. The receipt and verification of transactions are completed by many nodes, which is much slower than centralized solutions.
Another scenario is to cancel the block gas fee limit. The network can achieve both security and scalability, but the degree of decentralization will be severely reduced.
The reason is that a single block will include more transactions, eventually forming a larger block. However, nodes in the network still need to download and broadcast blocks regularly, which places very stringent requirements on hardware. When the block fuel fee limit is increased, it will be more difficult for nodes to verify, store and broadcast blocks.
Eventually, the nodes that fall behind will be removed from the network. If it continues to operate in this way, only a few powerful nodes will survive, further centralizing the system. Ultimately, the blockchain will have both security and scalability, but no longer be decentralized.
In the last case, blockchain focuses on decentralization and scalability. The network improves speed and decentralization by deprecating the consensus algorithm, at the cost of significantly reduced security.
How many transactions can Ethereum handle?
In recent years, Ethereum’s transactions per second (TPS) have rarely exceeded 10, a disappointing number for a platform that aspires to be the “world computer.”
Scaling solutions have always been an important part of Ethereum’s roadmap. Plasma is a typical example of a scaling solution. The solution aims to improve the efficiency of Ethereum, and its technology is also applicable to other blockchain networks.
What is Ethereum 2.0?
Although Ethereum has great potential, it currently has limitations. Above, we have discussed the issue of scalability. In short, if Ethereum hopes to become the mainstay of the new financial system, it must significantly increase the total number of transactions processed per second. This problem is difficult to solve given the distributed nature of the network. Ethereum developers have also been looking for a solution for years.
On the one hand, some restrictions must be implemented to ensure the decentralization of the network. The more stringent the requirements for running a node, the fewer participants there will be, and the network will tend to be centralized. Therefore, increasing Ethereum's transaction processing capacity will increase the burden on nodes and ultimately threaten the integrity of the system.
Another drawback of Ethereum (and other proof-of-work cryptocurrencies) is that they are very resource intensive. In order to successfully add a block to the blockchain, mining is required. However, this method of block creation requires calculations to be performed quickly, which consumes a lot of electricity.
In order to overcome these limitations, developers have proposed a series of upgrade plans, collectively referred to as "Ethereum 2.0" (or ETH 2.0). Once fully implemented, ETH 2.0 will effectively improve the performance of the network.
What is Ethereum Sharding?
As mentioned above, each node stores a copy of the entire blockchain. These nodes will also be updated as the blockchain changes, taking up huge bandwidth and memory.
This process can be avoided by using a method called sharding. As the name implies, this process divides the network into different subsets of nodes, called shards. Each shard handles its own transactions and contracts, while still being able to communicate with other shard networks as required. Each shard verifies independently, so there is no need to store data from other shards.
Comparison of the network in March 2020 and the network with sharding implemented
Sharding is a complex way to expand capacity, requiring a lot of design and implementation work. However, if successfully applied, it will become one of the most effective methods to increase the network's throughput by several orders of magnitude.
What is Ethereum Plasma?
Ethereum Plasma is an off-chain scalability solution that aims to increase transaction throughput by taking transactions off the blockchain. In this respect, it has some similarities to sidechains and payment channels.
Through Plasma, secondary chains can be anchored to the main chain of the Ethereum blockchain while maintaining minimal communication. Although users rely on the main chain to resolve disputes and "complete" personal activities on the secondary chain, the two operate largely independently.
The key to Ethereum's successful expansion is to reduce the amount of data that nodes must store. The Plasma solution allows developers to specify some rules for "child chains" in the smart contract of the main chain. After that, applications whose information or processes are too expensive to store/run in the main chain can be freely transferred to the "child chain" for creation.
For a detailed introduction to Plasma, please read What is Ethereum Plasma?
What are Ethereum Rollups?
Similar to Plasma, Rollup is also designed to separate transactions from the main chain and achieve Ethereum expansion. So, how does the latter work?
The answer is that a single contract in the main chain holds all the funds on the secondary chain and stores cryptographic proof of the current state of that chain. Secondary chain operators deposit a security deposit into the mainnet contract and only submit valid state transitions to it. The idea behind this is that the state is maintained off-chain, so there is no need to store the data on the blockchain. However, the main difference between Rollup and Plasma is the way transactions are submitted to the main chain. This method can "roll up" a large number of transactions through special transaction types and bundle them together into special blocks called rollup blocks.
There are two different types of rollups: Optimistic Rollup and Zero-Knowledge Rollup. Both ensure the correctness of state transitions in different ways.
Zero-knowledge rollup (ZK Rollup) uses a cryptographic verification method called zero-knowledge proof to submit transactions. Specifically, it uses a method called zk-SNARK. This article does not introduce the specific operation details, but we can describe its application in rollup as follows: In this way, different participants can prove to each other that they have specific information without revealing the specific content.
In the case of ZK Rollup, this information is the state transitions that are committed to the main chain. A big advantage of this process is that it can happen almost instantly while minimizing the probability of committing corrupted state.
Optimistic Rollup improves flexibility by sacrificing some scalability. Through the "Optimistic Virtual Machine (OVM)", smart contracts can run in the secondary chain. On the other hand, there is no cryptographic proof to prove that the state transition submitted to the main chain is correct. To alleviate this problem, a short delay is set in the process to allow users to question and deny invalid blocks submitted to the main chain.
What is Ethereum Proof of Stake (PoS)?
Proof of Stake (PoS) is another block verification scheme besides Proof of Work. In the Proof of Stake system, the way to obtain new blocks is not mining, but casting (sometimes also called forging). Unlike miners competing through computing power, candidate blocks are now verified by nodes (or validators) randomly selected at regular intervals. If the operation is correct, it will receive all transaction fees of the block and may also receive block rewards according to the protocol.
Proof of Stake is considered more environmentally friendly because it does not involve mining. Validators consume less energy than miners, so blocks can be minted on consumer-grade hardware.
As part of Ethereum 2.0, Ethereum plans to transition from PoW to PoS through an upgrade operation called Casper. Although the specific date has not been officially determined, the first iteration may be launched in 2020.
What is Ethereum Staking?
In a proof-of-work protocol, miners are responsible for securing the network. They cannot cheat because doing so wastes electricity and causes them to lose all potential rewards. This game theory does not exist in proof-of-stake, and the network is secured through other cryptoeconomic measures.
Dishonest behavior is deterred not because users are worried about wasting energy, but because they are worried about losing money. Validators must stake a certain amount of tokens (become token holders) to obtain the right to verify. If a node attempts to cheat, its staked tokens (a certain amount of ether) will be lost; if the node is unresponsive or offline, these tokens will gradually be depleted. However, if a validator runs more nodes, he will receive more rewards.
How much ether do I need to stake in Ethereum?
The estimated minimum stake per validator in Ethereum is 32 ETH. This value is set so high that it is very expensive to carry out a 51% attack.
How much ETH can you earn by staking in Ethereum?
This is a complex question. This metric depends not only on the number of tokens staked, but also on the total amount of ether staked in the network and the inflation rate. A rough estimate is that the project currently has an annual yield of about 6%. Keep in mind that this number is only an estimate and may change in the future.
How long is the lock-up period for pledged ETH?
If you need to withdraw Ether from a validator, you must join the withdrawal queue. If you do not queue, the shortest withdrawal time is 18 hours. The specific time will be dynamically adjusted according to the number of validators who withdraw in a specific period of time.
Is there any risk in staking Ethereum?
As a validator responsible for maintaining the security of the network, you must take various risks into account. If the validator node is offline for a long time, a significant portion of the deposit will be lost. In addition, if the deposit balance falls below 16 ETH, you will be removed from the validator set.
Another systemic risk factor should not be ignored. Proof of Stake has never been used on such a large scale, and failures may occur during operation. Software is bound to have defects and vulnerabilities, which can even cause devastating blows - when the stake value is as high as billions of dollars, there is a significant risk.
Chapter 5 - Ethereum and Decentralized Finance (DeFi)
Table of contents
What is Decentralized Finance (DeFi)?
Uses of Decentralized Finance (DeFi)
Can decentralized finance (DeFi) go mainstream?
What are the decentralized finance (DeFi) applications?
Decentralized Exchange (DEX) in Ethereum
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is the activity of decentralizing financial applications. DeFi is built on public, open-source blockchains that are freely accessible to all users on the Internet (i.e. permissionless). This key feature has the potential to attract billions of people to this new global financial system.
In the increasingly mature DeFi ecosystem, users can interact with other users and smart contracts through peer-to-peer (P2P) networks and decentralized applications (DApps). The biggest advantage of DeFi is that it makes all this possible, but users still have ownership of their funds.
In short, decentralized finance (DeFi) activities aim to build a new financial system that gradually breaks the limitations of the current system. DeFi has a relatively high degree of decentralization and a large developer base, so most DeFi is currently built on Ethereum.
Uses of Decentralized Finance (DeFi)
You may have learned that the biggest advantage of Bitcoin is that it does not require any central authority to coordinate the operation of the network. What if we use this as a core concept to develop programmable applications? This is the potential of DeFi applications: getting rid of central "coordinators" or middlemen, and no single point of failure.
As mentioned above, “open access” is the biggest advantage of DeFi. Billions of people around the world do not have access to any type of financial services. How can we manage our daily lives without all financial security? This is not a fantasy, but a real portrayal of the lives of billions of people - DeFi serves these people.
Can decentralized finance (DeFi) go mainstream?
These advantages seem very attractive, but why has DeFi not yet taken over the mainstream market? Currently, most DeFi applications are still in the experimental stage, with urgent need for improvement in convenience and flexibility and frequent crashes. It turns out that the architectural design of this ecosystem is very difficult, and the distributed development environment makes it even more difficult.
For developers such as software engineers, game theorists, and mechanism designers, building a DeFi ecosystem is a long and arduous task. Therefore, it remains unknown whether DeFi applications can enter the mainstream.
What are the decentralized finance (DeFi) applications?
The hottest decentralized finance (DeFi) use case right now is stablecoins. Essentially, a stablecoin is a blockchain token whose value is pegged to a real-world asset, such as a fiat currency. For example, the value of BUSD is pegged to the U.S. dollar (USD). These tokens are all used in the blockchain, making them very easy to store and transfer.
Another popular application is lending. There are many peer-to-peer (P2P) services where users lend their funds to others and earn interest. In fact, Binance Lending is one of the most convenient platforms. The operation is very simple, just deposit funds into the lending wallet and start earning interest the next day!
However, what is most exciting is that DeFi can be applied to almost any field. It can be integrated into various peer-to-peer (P2P) and decentralized markets to create platforms for trading unique digital currency collectibles and other digital items. Such applications can also create synthetic assets, and anyone can create a market for any item with value. Other uses include prediction markets and derivatives.
Decentralized Exchange (DEX) in Ethereum
Decentralized exchanges (DEX) allow different user wallets to trade directly. When trading on centralized trading platforms such as Binance, users first need to transfer funds to the platform and then trade through the internal system.
Decentralized trading platforms are different. Through the magic of smart contracts, you can use your digital currency wallet to complete transactions directly, avoiding the risk of hacker attacks on the trading platform.
Binance DEX is a typical representative of decentralized trading platforms. Uniswap, Kyber Network, and IDEX are the best built on Ethereum. In order to maximize the security of funds, some trading platforms even allow transactions to be completed through hardware wallets.
Comparison between centralized and decentralized trading platforms.
We compare the differences between centralized and decentralized exchanges in the above figure. In the left figure, we can see that Binance is between the two parties in the transaction. Therefore, when Alice wants to exchange token A for Bob's token B, both of them must deposit their assets into the exchange. After the transaction is completed, Binance will redistribute the account balances of the two parties according to the proportion of funds.
On the right is a decentralized trading platform. We noticed that there is no third party involved in the entire transaction. Alice's tokens are directly converted to Bob's tokens through smart contracts. In this way, the contract reached by both parties will be automatically executed without relying on any intermediary agency.
As of February 2020, DEX has been the most used application on the Ethereum blockchain. However, its trading volume is far behind that of centralized exchanges. Nevertheless, if developers and designers continue to optimize the user experience, DEX will gradually win the favor of more users. One day, it will definitely compete with centralized exchanges.
Chapter 6 - Entering the Ethereum Network
Table of contents
What is an Ethereum Node?
How does an Ethereum node work?
Ethereum Full Node
Ethereum Light Node
Ethereum mining node
How to run an Ethereum node
How to Mine Ethereum
What is Ethereum ProgPoW?
Who are the developers of the Ethereum software?
What is Solidity?
What is an Ethereum Node?
The term "Ethereum node" refers to a program that interacts with the Ethereum network in some way. Any device can act as an Ethereum node, from a simple mobile wallet application to a computer that stores a copy of the entire blockchain.
All nodes act as communication points in some way, but there are many types of nodes in the Ethereum network.
How does an Ethereum node work?
Unlike Bitcoin, there is no program for Ethereum as a reference implementation. In the Bitcoin ecosystem, Bitcoin Core is the main node software, while the Ethereum Yellow Paper proposes a series of independent (but compatible) programs. The most popular ones are Geth and Parity.
Ethereum Full Node
To connect to the Ethereum network in a way that allows independent verification of blockchain data, you should run a full node using the previously mentioned software.
The software will download blocks from other nodes and verify the correctness of the transactions they contain. The software will also run any smart contracts that are called to ensure that the information received is the same as other nodes. If everything works as planned, we can assume that all node devices store the same copy of the blockchain.
Full nodes are essential to the operation of Ethereum. Without many nodes spread across the world, the network will lose its censorship resistance and decentralization characteristics.
Ethereum Light Node
By running a full node, you can directly contribute to the health and security of the network. However, full nodes usually require a separate machine to run and maintain. For users who are unable (or simply unwilling) to run a full node, a light node is a better choice.
As the name suggests, light nodes are lightweight devices that can significantly reduce resource and space usage. Portable devices such as mobile phones or laptops can serve as light nodes. However, lowering overhead comes at a cost: light nodes cannot be fully self-sufficient. They cannot be synchronized with the entire blockchain and require full nodes to provide relevant information.
Light nodes are favored by merchants, service providers, and users. They are widely used for payment and receipt when full nodes are unnecessary and too expensive to run.
Ethereum mining node
A mining node can be either a full node client or a light node client. The term "mining node" is used differently in the Bitcoin ecosystem, but should still be used to identify participants.
To participate in Ethereum mining, you must use some additional hardware. The most common way is to build a mining machine. Users use mining machines to connect multiple GPUs (graphics processing units) to calculate hash data at high speed.
Miners can choose between two mining options: solo mining or joining a mining pool. Solo mining means that the miner creates blocks on his own. If successful, he gets the mining reward alone. If he joins a mining pool, the hash power of many miners is combined. The block generation speed is increased, but the mining reward will be shared by many miners.
How to run an Ethereum node
One of the most important features of blockchain is “open access”. This means that anyone can run an Ethereum node and strengthen the network by validating transactions and blocks.
Similar to Bitcoin, many companies offer plug-and-play Ethereum nodes. If you just want to get a single node up and running, this is the best option, but the downside is that you have to pay extra for the convenience.
As mentioned above, there are many different types of node software implementations in Ethereum, such as Geth and Parity. If you want to run your own node, you must understand the installation process of your chosen implementation.
Unless you are running a special node called an archive node, a consumer-grade laptop is sufficient to run an Ethereum full node, but it is best not to use your everyday work machine as the node will be severely slowed down.
When running a personal node, it is recommended that the device is always online. If the node is offline, it may take a long time to synchronize with the network again. Therefore, it is best to choose a device that is cheap and easy to maintain. You can even run a light node with a Raspberry Pi.
How to Mine Ethereum
As the network is about to transition to the proof-of-stake mechanism, Ethereum mining is no longer the safest long-term investment. After the transition is successful, Ethereum miners can only transfer their mining equipment to other networks or sell them directly.
Since the transition is not yet complete, Ethereum mining still requires special hardware (such as GPUs or ASICs). To make a decent profit, you must customize your mining machines and find mining farms with cheap electricity. In addition, you need to create an Ethereum wallet and configure the corresponding mining software. All of this will take a lot of time and money. Before participating in mining, please seriously consider whether you can handle the various challenges.
What is Ethereum ProgPoW?
ProgPow stands for Programmatic Proof of Work. It is an extension of the Ethereum mining algorithm Ethash that aims to make GPUs more competitive than ASICs.
ASIC resistance has been a controversial topic in the Bitcoin and Ethereum communities for many years. In the Bitcoin network, ASICs have become the main mining force.
In Ethereum, ASICs are not mainstream, and a considerable portion of miners still use GPUs. However, this situation will soon change as more and more companies introduce Ethereum ASIC miners to the market. However, what exactly is the problem with ASICs?
On the one hand, ASICs significantly weaken the decentralization of the network. If GPU miners cannot make a profit and have to stop mining, the hash rate will eventually be concentrated in the hands of a few miners. In addition, the development cost of ASIC chips is quite expensive, and there are only a handful of companies with the development capabilities and resources. This situation may lead to the concentration of the Ethereum mining industry in the hands of a few companies, forming a certain degree of industry monopoly.
The integration of ProgPoW has been controversial since 2018. Some believe that it is beneficial to the healthy development of the Ethereum ecosystem. Others are opposed to it, believing that it may lead to a hard fork. With the advent of the Proof of Stake mechanism, it remains to be seen whether ProgPoW can be applied to the network.
Who are the developers of the Ethereum software?
Ethereum is the same as Bitcoin, both are open source platforms. Everyone can participate in protocol development or build applications based on the protocol. In fact, Ethereum is also the largest developer community in the blockchain field.
Mastering Ethereum by Andreas Antonopoulos and Gavin Wood, as well as the developer resources offered by Ethereum.org are ideal starting points for new developers.
What is Solidity?
The concept of smart contracts was first proposed in the 1990s. Its application in blockchain has brought a series of new challenges. Solidity, proposed by Gavin Wood in 2014, has become the main programming language for developing Ethereum smart contracts, and its syntax is similar to Java, JavaScript, and C++.
Essentially, using the Solidity language, developers can write instructions that, when broken down, can be parsed by the Ethereum Virtual Machine (EVM). You can learn more about how this works via the Solidity GitHub.
In fact, Solidity is not the only choice for Ethereum developers. Vyper is also a popular development language, and its syntax is closer to Python.
