Table of contents
Ethereum Basics
How did the broadcast appear?
How to start using Ethereum
Scalability, ETH 2.0 and the future of Ethereum
Ethereum and Decentralized Finance (DeFi)
Participation in the Ethereum network
Chapter 1 - Ethereum Basics
Content
What is Ethereum?
What is the difference between Ethereum and Ether?
What makes Ethereum valuable?
What is blockchain?
Ethereum and Bitcoin - what are their differences?
How does Ethereum work?
What is a smart contract?
Who created Ethereum?
How did the distribution of ether happen?
What is a DAO and how did Ethereum Classic come about?
What is Ethereum?
Ethereum (from the English. Ethereum) is a decentralized computing platform. You can think of it as a kind of laptop or PC, but with the caveat that this system cannot function on just one device. Ethereum simultaneously runs on thousands of computers around the world, meaning it does not have one single owner.
Ethereum, like Bitcoin and other cryptocurrencies, serves to transfer digital money. However, the capabilities of this network are much broader - you can use your own code and interact with applications created by other users. Due to its flexibility, Ethereum allows you to run many programs of varying complexity.
In simple terms, the idea is that developers can create and run code on a distributed network instead of a centralized server. This means that, theoretically, the work of such applications cannot be simply stopped or censored.
What is the difference between Ethereum and Ether?
It may seem counterintuitive, but the units of exchange used in Ethereum are not called Ethereum or Ethereum. Ethereum is the protocol itself, and the currency it works with is called ether (or ETH).
What makes Ethereum valuable?
We said earlier that Ethereum allows you to run code on a distributed system. This prevents unauthorized persons from making changes to the program. The code is added to the Ethereum database (i.e. the blockchain) and can be configured to prevent further editing. In addition, the database is visible to all users, so they can review the code before working with it.
This means that any user anywhere in the world can run an application that cannot be taken offline. Additionally, since the network's own unit of ether has value, these apps can set the terms for cryptocurrency transfers. Programs for creating applications are called smart contracts, and they can often be configured to run independently without human intervention.
Obviously, this idea of “programmable money” could not help but captivate many users, developers and companies around the world.
Check out the latest Ethereum (ETH) quotes
What is blockchain?
Ethereum is based on the blockchain. This is the database that stores the information used by the protocol. If you are familiar with our article What is Bitcoin?, you have a basic understanding of how the blockchain works. Ethereum and Bitcoin blockchains are similar, although the information and methods of storing it are different.
The Ethereum blockchain can be thought of as a book to which you add new pages. Each of them is a block containing information about transactions. When we add a new page, a special value needs to be inserted at the top. This indicates that pages are being added sequentially and not in random order.
This value is a kind of page number, which is determined by the previous number. Looking at the new page, we immediately understand that it follows the previous one. This is done using a process called hashing.
During hashing, a piece of data is taken (in our case, information from the page) and a unique identifier (hash) is created. The likelihood that different pieces of data will yield the same hash is extremely low. Moreover, it is a one-way process: it is very easy to create a hash from information, but it is almost impossible to obtain information from an existing hash. In the next chapter we will look at why this is important for mining.
Based on the above components, we have a mechanism for linking our pages in the correct order. Any attempt to change the established order or remove one page will mean that the entire book has been tampered with by tampering with each of the previous pages.
Want to learn more about blockchain? Check out our guide to blockchain technology for beginners.
Ethereum and Bitcoin - what are their differences?
Bitcoin uses blockchain technology and financial incentives to create a global payment system. It introduced several innovations to coordinate users around the world without the need for a centralized system. Due to the fact that each user runs the program on his own computer, he has the opportunity to work in a decentralized environment where there is no risk of being deceived by other participants in the process.
Bitcoin is often called the first generation blockchain. It was not designed to be an overly complex system, and this became its advantage in terms of safety. Bitcoin's lack of flexibility is a conscious decision to ensure greater reliability. Bitcoin's smart contract language is extremely limited and poorly suited for non-transactional applications.
The second generation of blockchains, on the contrary, is capable of more. In addition to facilitating financial transactions, these platforms provide a greater degree of programmability. Ethereum gives developers much more flexibility to experiment with their code and create what we call decentralized applications (DApps).
Ethereum was the pioneer of second-generation blockchains and today is still the most prominent representative of this segment. Ethereum has many similarities with Bitcoin and can perform most of the same functions. However, in essence they are very different, and each has its own advantages over the other.
How does Ethereum work?
Ethereum can be called a state machine. This means that at any time you can take a snapshot of the file system and view information about all account balances and smart contracts in their current form. Certain actions cause the system state to update, meaning that all nodes also update their snapshots to reflect the change.
Ethereum transition to another state
Smart contracts running on Ethereum are initiated by transactions (from users or other contracts). When a user submits a transaction to a contract, each node on the network runs the contract code and records the output. This is done using the Ethereum Virtual Machine (EVM), which converts smart contracts into machine-readable instructions.
To update the state (for now), a special mechanism called mining is used. It is performed using the Proof of Work algorithm, very similar to the Bitcoin algorithm. We'll look at this in more detail next.
What is a smart contract?
A smart contract is nothing more than code. The code itself is not associated with either “mind” or a contract in the literal sense of the word. And yet we call it “smart” because it executes under certain conditions. It can be considered a contract because it ensures the fulfillment of agreements between the parties.
Computer scientist Nick Szabo takes particular credit for an idea he proposed back in the late 1990s. Using a food vending machine as an example, Nick explained the concept of a smart contract and stated that a similar machine could be considered the predecessor of a modern smart contract. In the case of a vending machine, a simple contract is executed. Users insert their coins into it, and in return the machine dispenses a product.
A smart contract applies similar logic in a digital environment. You can specify something simple in your code. For example: reply “Hello, world!” when two ethers are sent to this contract.
On Ethereum, a developer creates code that can then be read by the EVM. The programmer then publishes it by sending it to a special address that registers the contract. At this stage, everyone can use it, and the contract cannot be deleted if the developer did not indicate this condition when writing it.
The contract also has an address. To interact with this address, users need to send 2 ETH to it. This will activate the contract code. All computers on the network will run it, see that the payment has been made, and record its output (“Hello, world!”).
All of the above is one of the simplest examples of using Ethereum. There are also more complex applications that establish relationships for many contracts at once. Such codes already exist, and in the future there will only be more of them.
Who created Ethereum?
In 2008, an unknown developer (or group of developers) under the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper. This forever changed the way people think about digital money. A few years later, a young programmer named Vitalik Buterin was able to develop this idea and come up with a way to apply it to any type of application. The concept was eventually implemented in Ethereum.
In 2013, Buterin created a blog post entitled Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In it, he described the idea of creating a blockchain network in accordance with Turing completeness in the form of a decentralized computer that, given the time and resources, could run any application.
In the future, the types of applications that can be run on the blockchain will be limited only by the imagination of developers. Ethereum is looking to see if blockchain technology has the potential to be used beyond the original limitations of the Bitcoin system.
How did the distribution of ether happen?
Ethereum was launched in 2015 with an initial capital of 72 million ether. More than 50 million of these units were distributed in a public token sale called an initial coin offering (ICO), where anyone could buy Ether tokens in exchange for Bitcoin or fiat currency.
What is a DAO and how did Ethereum Classic come about?
With the advent of Ethereum, completely new ways of open collaboration over the Internet became possible. One such example is DAOs (decentralized autonomous organizations), which are run by code similar to a computer program.
The DAO was one of the first and most ambitious attempts to create such a system. It would consist of complex smart contracts running on top of Ethereum, which would act as an autonomous venture fund. DAO tokens were distributed through an ICO and gave token holders an ownership stake along with voting rights.
However, soon after its launch, attackers took advantage of a vulnerability in the project’s open source code and stole almost a third of The DAO’s funds. It should be noted that at that time, The DAO held 14% of the total supply of ethers and such an event was in fact very destructive for the still developing Ethereum network.
After some discussions, the chain underwent a split (hard fork) into two chains. In the new chain, malicious transactions were effectively reversed and funds were “unwound” and returned to the owner. Today this chain is known as the Ethereum blockchain. The original chain, which maintained the irreversibility of transactions, is now called Ethereum Classic.
The DAO attack served as a reminder of the risks associated with this technology and the dire consequences that can result from trusting large sums of money to autonomous code. It was also an instructive example of how collective decision-making in an open environment can create serious problems. However, despite their security vulnerabilities, DAOs perfectly illustrate the potential of smart contracts to enable secure, trustless, large-scale collaboration over the Internet.
Chapter 2 – How did ether appear?
Content
How are new ethers created?
How many broadcasts are there in total?
How does mining work on Ethereum?
What is gas in Ethereum?
Gas and gas limit
How long does it take to mine a block on the Ethereum network?
What are Ethereum tokens?
How are new ethers created?
Earlier we talked briefly about mining. If you know what Bitcoin is, then you most likely know that mining is an integral part of protecting and updating the blockchain. Ethereum operates on the same principle: to reward users who mine (which is expensive), the system rewards them with Ether.
How many broadcasts are there in total?
As of February 2020, the total number of Ether units in circulation was approximately 110 million.
Unlike Bitcoin, the emission schedule for Ethereum tokens was not determined at the time of the platform's launch. Bitcoin has attempted to maintain its value by limiting the number of Bitcoin units and gradually reducing the number of coins produced. Ethereum, on the other hand, aims to provide the foundation for decentralized applications (DApps). And since it is unclear which token emission schedule is best suited for this, the question remains open.
How does mining work on Ethereum?
Mining is the most important factor in network security. It ensures that the blockchain is updated correctly and allows the network to function independently. During the mining process, many nodes (the name was invented by miners) allocate computing power to solve crypto puzzles.
These nodes hash a number of pending transactions along with some other data. For a block to be considered valid, the hash must be below a certain numeric value set by the protocol. If the work to solve a computational problem is unsuccessful, the nodes can change some data and try to find a solution again.
Therefore, to be competitive, miners must hash information as quickly as possible - power is measured in hashrate. The higher the hashrate on the network, the more difficult it becomes to solve the problem. Only miners have the right to find the solution to a block. Once it is known, it will be easy for all other participants to check its validity.
Of course, continuous hashing at high speeds comes at a cost. To motivate miners to secure the network, they are offered a reward that includes all transaction fees in the block. In addition, miners receive newly generated ether – 2 ETH at the time of writing.
What is gas in Ethereum?
Remember when we mentioned the Hello World contract? It was a simple program with fairly low computational effort. But you're not the only one who runs it on your PC. You are also asking this of everyone in the Ethereum ecosystem.
This brings us to the next question: what happens when thousands of people run complex contracts? If someone configured their contract to repeat the same code, each node would have to run it indefinitely. This will create a huge load and the system will likely collapse.
Fortunately, the Ethereum network introduced the concept of gas to mitigate this risk. Just as a car cannot run without fuel, contracts cannot run without gas. For the contract to work successfully, users must pay a certain amount of gas. If there is not enough, the contract will stop working.
In essence, this is a mechanism for additional fees, similar to regular transactions: since miners make decisions based on the potential profit of their work, they can ignore transactions with lower fees.
Please note: ether and gas are different things. The average price of gas fluctuates and is largely dependent on miners. To make a transaction, you pay for gas in ETH. This is similar to Bitcoin fees: if the network is congested and a large number of users are trying to make transactions, the average price of gas will likely increase. And vice versa: if there is not much activity, the price will drop.
Although the price of gas can vary, each transaction requires a fixed minimum amount of gas, meaning complex contracts will require much more gas than a simple transaction. Thus, gas acts as a measure of computing power. This ensures that the system charges users a fair price for using Ethereum resources.
Gas typically costs a small fraction of ether. To denote it, a smaller unit (gwei) is used. One gwei corresponds to one billionth of an ether.
Simply put, you could run a looped program for a long time, but such a contract will quickly become more expensive. Thanks to this, nodes on the Ethereum network successfully filter spam.
Average gas price in Guei over time. Source: etherscan.io
Gas and gas limit
Let's assume that Alice executes a contract transaction. She calculated how much she was willing to spend on gas (for example, using the ETH Gas Station). She may set a higher price to incentivize miners to start her transaction faster.
But it will also be necessary to establish a gas limit, which serves to ensure its protection. If something goes wrong with the contract, it could result in more gas consumption than she expected. The gas limit is set to ensure that operation stops once x amount of gas has been consumed. The contract won't work, but Alice won't have to pay more than she originally expected.
These concepts may be a little confusing at first, but don't worry. Yes, you can always set the price you are willing to pay for gas (and gas limit) manually, but most wallets will help you with this. In simple terms, the gas price determines how quickly miners will process your transaction, and the gas limit determines the maximum amount you are willing to pay them.
How long does it take to mine a block on the Ethereum network?
It typically takes 12–19 seconds to add a new block to the chain. However, this time may be reduced when the network switches to the Proof of Stake method, one of the goals of which is to speed up the creation of blocks. If you want to learn more, check out the Ethereum Casper section.
What are Ethereum tokens?
Ethereum owes much of its appeal to the fact that users can add their own assets to the chain, store and transfer them as ether. They are regulated by smart contracts, which allows developers to set certain parameters for their tokens. The smart contract determines how many there are, how to run them, whether they are divisible, fungible or not, and much more. The most well-known technical standard for creating tokens in Ethereum is ERC-20, which is why they are most often referred to as ERC-20 tokens.
The functional potential of such tokens opens up a huge experimental platform for innovators with the most modern applications at the intersection of finance and technology - be it the issuance of homogeneous tokens that act as currency in the application, or the issuance of unique tokens backed by physical assets. The platform demonstrates a huge range of capabilities and exceptional design flexibility. That being said, it is likely that the best options for a simple, streamlined token development process are yet to come.
Chapter 3 – How to start using Ethereum
Content
How to buy ETH?
How to buy ETH with a credit/debit card
How to Buy ETH on P2P Markets
What can I buy with Ethereum (ETH)?
For what purposes can Ethereum be used?
What happens if I lose my ETH?
Can I cancel Ethereum transactions?
Are Ethereum transactions private?
Can I make money on Ethereum?
How to properly store ETH?
How to Deposit ETH on Binance
How to Store ETH on Binance
How to withdraw ETH from Binance
How to store ETH on an Ethereum wallet
Hot wallets
Cold wallets
What does the Ethereum logo and symbol mean?
How to buy ETH?
How to buy ETH with a credit/debit card
Binance allows you to purchase ETH seamlessly through your browser. To do this you need to do the following:
Go to the cryptocurrency buying and selling portal.
Select the cryptocurrency you want to buy (ETH) and the currency in which you will make the payment.
Go to Binance or register if you don't already have an account.
Select a Payment Method.
If necessary, enter your card details and verify your identity.
That's all! Your ETH will soon be credited to your Binance account.
How to Buy ETH on P2P Markets
ETH can be bought and sold on P2P markets. In other words, you can purchase coins from other users directly from the Binance mobile app. To do this you need:
Launch the application, go through the registration process if you do not have your own account, and log in.
Click Buy and Sell in one click and go to the Buy tab in the upper left corner of the screen.
You will be offered several options: select the one you need and click Buy.
Payment is also possible with cryptocurrency or fiat currency on the corresponding tabs.
Below you will be asked to indicate your payment method. Choose the one that suits you best.
Click Buy ETH.
Next you need to make payment. After that, click Mark as paid and Confirm.
The transaction is completed when the seller sends you the coins.
What can I buy with Ethereum (ETH)?
Unlike Bitcoin, Ethereum is not just a cryptocurrency platform. It serves to create decentralized applications, and Ether, as an exchange token, acts as the fuel of this ecosystem. Thus, the main value of ether lies in its versatility in the Ethereum network.
At the same time, ether can also be used as a traditional currency, i.e. you can pay for goods and services with ETH, just like with any other currency.
Heat map of retailers that accept Ether as payment. Source: cryptwerk.com/coinmap
For what purposes can Ethereum be used?
Ethereum's native currency ETH can be used as digital money or collateral. In addition, many people use this asset for long-term investments (just like Bitcoin). However, unlike Bitcoin, the Ethereum blockchain is more programmable, so you have more options to work with with ETH. It can serve as the lifeblood of decentralized financial applications and markets, exchanges, games, and more.
What happens if I lose my ETH?
Since banking organizations are not involved in this process, users are responsible for their own funds. You can store coins on an exchange or in your wallet. It is important to note that if you are using a wallet, you need to be careful about your seed phrase. Do not trust it to strangers, since if you lose access to your wallet, only with its help will it be possible to restore your funds.
Can I cancel Ethereum transactions?
Once data is added to the Ethereum blockchain, it is almost impossible to change or delete it. In other words, you will no longer be able to do anything with a confirmed transaction. Therefore, always carefully check the information provided and especially the address to which you are sending funds. If you need to send a large amount, it is safer to send a portion first to ensure the address is correct.
However, one case of smart contract hacking pushed Ethereum to make drastic changes in its operation, namely a hard fork in 2016 in order to combat malicious transactions. This, however, can be considered the exception and not the norm. And serious measures have been taken to prevent this from happening in the future.
Are Ethereum transactions private?
Short answer: No. All transactions added to the Ethereum blockchain are publicly available. Even if your real name is not listed on your Ethereum address, an outside observer can identify you through various methods.
Can I make money on Ethereum?
Since the asset is volatile, you can make or lose money with ETH. Some people hold ether for a long time, hoping that one day the network will become a global programmable settlement system. Some, on the contrary, prefer to exchange it for other altcoins. In any case, neither one nor the other strategy can protect you from financial risks.
As the foundation of the development of decentralized finance (DeFi), ETH can also be used for borrowing, as collateral for loans, the creation of synthetic assets, and – one day in the future – for staking.
Some investors work exclusively with bitcoins and do not accept other digital assets. Some, on the contrary, choose to work with ETH and other altcoins or allocate a certain percentage for short-term trading (for example, day trading or swing trading). There is no universal approach to making money in the markets - each investor chooses the optimal strategy taking into account the characteristics of his portfolio and circumstances.
How to properly store ETH?
There are many options for storing coins, each with their own pros and cons. If there is at least some risk, it is better to choose diversification, which involves a combination of different solutions.
In general, storage options are divided into custodial and non-custodial. Custodial means that you entrust your coins to a third party (such as an exchange). In this case, you will have to log into the custodian platform to make transactions.
The non-custodial method, on the other hand, allows you to maintain control of your funds by using a cryptocurrency wallet. The wallet doesn't literally store your coins like a physical wallet does. It contains cryptographic keys that give you access to your assets on the blockchain. It's important to note again: make sure you back up your seed phrase when using a non-custodial wallet!
How to Deposit ETH on Binance
If you already have Ether and want to list it on Binance, you can do so quickly and easily by following these steps:
Go to Binance or register if you don't already have an account.
Go to wallet and select Enter.
Select ETH from the list of all available coins.
Select a network and send your ETH to the appropriate address.
That's all! After a certain number of online confirmations, Ethereum will be credited to your Binance account.
How to Store ETH on Binance
If you intend to actively trade Ether, you will need to store it in your Binance account. Storing ETH on Binance is easy and secure, and gives you the opportunity to take advantage of the Binance ecosystem through lending, staking, airdrops, and giveaways.
How to withdraw ETH from Binance
If you already have Ether that you want to withdraw from Binance, you can do so quickly and easily by following these steps:
Login to Binance.
Go to your wallet and select Withdraw.
Select ETH from the list of all available coins.
Select a network.
Paste the recipient's address and enter the required amount.
Confirm this operation in your email.
That's all! After a certain number of confirmations on the network, ETH will be credited to the address you provided.
How to store ETH on an Ethereum wallet
If you want to store ETH in your own wallet, you can choose from two main options: a hot wallet or a cold wallet.
Hot wallets
A cryptocurrency wallet connected to the internet is called a hot wallet. Typically, this is a mobile or desktop application that allows you to check your balance and send and receive tokens. Because hot wallets are online, they are more vulnerable to attacks, but are also more convenient for daily payments. Trust Wallet is an example of a simple and convenient mobile wallet that supports many different coins.
Cold wallets
A cold wallet is a crypto wallet that is not connected to the Internet. Since there is no threat of an online attack, the risks are generally lower. At the same time, cold wallets are usually not as convenient to use as hot ones. Examples of cold wallets could be hardware wallets or paper wallets, however paper wallets are now considered an outdated and even dangerous option and therefore their use is not recommended.
To learn more about wallets, check out the article Types of Cryptocurrency Wallets.
What does the Ethereum logo and symbol mean?
Vitalik Buterin designed the very first Ethereum logo. It consisted of two rotated sum symbols Σ (sigma from the Greek alphabet). The final logo design (based on this emblem) is a diamond shape - an octagon surrounded by four triangles. Like other currencies, Ether requires a standard Unicode character for apps and websites to display the currency. The most commonly used symbol for Ether is Ξ, although it is not as common as, for example, $ for the US dollar.
Chapter 4 – Scalability, ETH 2.0 and the Future of Ethereum
Content
What is scalability?
Why does Ethereum need scalability?
The Blockchain Scalability Trilemma
How many transactions can be processed on the Ethereum network?
What is Ethereum 2.0?
What is Ethereum sharding?
What is Ethereum Plasma?
What is Ethereum roll-up?
What is proof of stake (PoS) of Ethereum?
What is Ethereum staking?
How much ETH is one stake in Ethereum?
How much ETH can I earn by staking Ethereum?
How long will my ETH be locked into staking?
What are the risks associated with staking ETH?
What is scalability?
In simple terms, scalability is the ability of a system to grow. For example, in computer systems, a network or server can be scaled to increase the total number of transactions processed by implementing various techniques.
In cryptocurrency, scalability means the ability to expand the blockchain network to serve more users. The more users there are, the more operations and transactions “compete” with each other to be included in the blockchain.
Why does Ethereum need scalability?
Ethereum fans believe that the next iteration of the Internet will be built on this platform. The so-called Web 3.0 will create a decentralized topology characterized by the absence of intermediaries, an emphasis on privacy and a shift towards true ownership of one's data. Its basis will be based on the use of distributed computing in the form of smart contracts and distributed storage/communication protocols.
However, for this, Ethereum needs to significantly increase the possible number of processed transactions without compromising the decentralization of the network. Currently, Ethereum does not limit the volume of transactions through block size, as Bitcoin does. Instead, gas is limited so that only a certain amount of gas can fit into the block.
For example, the gas limit in the block is 100,000 Gwei. You want to include ten transactions with 10,000 Gwei for each, in which case the system will process the transaction. The same will happen for two Gwei 50,000 transactions, but any additional transactions submitted with them will wait to be included in the next block.
However, such a mechanism is not suitable for a system that everyone will use. If there are more pending transactions than there is available space in the block, a log of remaining work, known as a backlog, will soon form. The price of gas will rise, and users will need to outbid other bidders to ensure that the network processes their transactions first. Depending on network congestion, operations may become prohibitively expensive for certain use cases.
The surge in popularity of CryptoKitties was a great example of Ethereum's limitations in this area. In 2017, the Ethereum-based game prompted scores of users to make transactions to participate in breeding their own digital cats (represented as non-fungible tokens). It turned out to be so popular that the number of pending transactions increased sharply, even causing the network to slow down.
The Blockchain Scalability Trilemma
It might seem that simply raising the block gas limit would help solve scalability issues, since the higher the limit, the more transactions can be processed in a given time, right?
Unfortunately, this is impossible without compromising the key properties of Ethereum. Vitalik Buterin proposed the blockchain trilemma (presented below) to illustrate the delicate balance in the chain.
The blockchain trilemma: scalability (1), security (2) and decentralization (3).
When optimizing the above characteristics, one of the three will have to be sacrificed. Blockchains such as Ethereum and Bitcoin prioritize security and decentralization. Their consensus algorithms ensure the security of networks consisting of thousands of nodes, which, unfortunately, leads to low scalability. With so many nodes accepting and validating transactions, a decentralized system is slower than centralized alternatives.
There is also the option of removing the gas limit so that the network achieves security and scalability, but in this case it will no longer be as decentralized.
This is due to the fact that a large number of transactions in a block directly affects its size. However, nodes on the network must still periodically download and distribute them to other nodes, maintaining the intensity of their equipment. When the block gas limit increases, it becomes more difficult for nodes to verify, store, and broadcast blocks to the network.
As a result, nodes that cannot withstand such a load will begin to shut down. Only a few of them will be able to stay and continue to compete with each other, which will lead to greater centralization. As a result, we will get a secure and scalable blockchain that lacks one of its main properties – decentralization.
Finally, let's imagine a blockchain whose main priorities are decentralization and scalability. To be fast and decentralized at the same time, you have to make compromises in the use of the consensus algorithm, which in turn leads to weakened security.
How many transactions can be processed on the Ethereum network?
In recent years, Ethereum has rarely exceeded ten transactions per second (TPS). For a platform that aims to become the "global computer", this figure is surprisingly low.
However, increasing scalability has long been a goal of Ethereum. Plasma is one of the possible measures to solve this issue. It is aimed at improving the efficiency of Ethereum, but can also be applied to other blockchain networks.
What is Ethereum 2.0?
For all its potential, Ethereum – in its current state – is associated with significant limitations and disadvantages, one of which we discussed above. Simply put, if Ethereum aims to become the basis for a new financial system, it must be able to process many more transactions per second. Given the distributed nature of the network, this problem will be very difficult to solve, or at least Ethereum developers have been dealing with this for many years.
On the one hand, in order for the network to be sufficiently decentralized, some restrictions still need to be applied. The higher the requirements for running a node, the fewer participants there are and the more centralized the network becomes. Thus, increasing the number of transactions that Ethereum is capable of processing could jeopardize the entire integrity of the system, since it would also increase the load on each node.
Another disadvantage of Ethereum (and other Proof of Work cryptocurrencies) is that it is very resource intensive. To successfully add a block to the blockchain, you need to mine, which requires fast calculations, which consumes a huge amount of electricity.
To address the above limitations, a core set of updates has been proposed, collectively known as Ethereum 2.0 (or ETH 2.0). Once fully deployed, ETH 2.0 will significantly improve the performance of the entire network.
What is Ethereum sharding?
As already noted, all nodes store a copy of the blockchain. As the network expands, each node must upgrade, which in turn consumes their bandwidth and available hard drive memory.
However, when using sharding this is no longer necessary. The name refers to the process of dividing the network into a subset of nodes - shards. Each of these shards handles its own transactions and contracts, but can communicate with a wider network of shards as needed. Since each shard is independently verified, there is no need to store data from other shards.
Network in March 2020 compared to a similar network with sharding implemented.
Sharding is one of the most complex approaches to scaling, which requires a lot of development and further implementation. But if successfully implemented, this will also be one of the most effective ways to increase network capacity several times.
What is Ethereum Plasma?
Ethereum Plasma is an off-chain scalability solution, meaning it seeks to increase throughput by conducting off-chain transactions. In this respect, it resembles sidechains and payment channels.
In plasma, secondary chains are tied to the main Ethereum blockchain, maintaining communication between themselves at a minimal level. They operate more or less independently, but users still have to rely on the main chain to resolve disputes or “complete” their activities on secondary chains.
Reducing the amount of data that must be stored on nodes is vital to successfully scaling Ethereum. The plasma approach allows developers to define the functioning of “child” chains in a smart contract created on the main chain. Applications or processes that would be too expensive to run or store on the main chain could then be freely built on these chains.
To get a complete understanding of Plasma, check out the article “What is Ethereum Plasma?”
What is Ethereum roll-up?
Rollups is similar to Plasma in that it also seeks to scale Ethereum by moving transactions off the main chain. How is it structured?
One contract on the main chain contains all the funds and cryptographic proof of the current state of the second chain. Second chain operators, who link the main chain contracts, ensure that only valid changes are recorded in the contract. Since this state is maintained off-chain, there is no need to store information on the blockchain. However, the key difference between rollups and Plasma is that all transactions are transferred to the main chain. Using a special type of transaction, a large number of them can be “rolled up” into a special block called a rollup block.
There are two types of rollups: optimistic and ZK rollups. Both, in their own way, guarantee the correct transitions between network states.
ZK rollup sends transactions using a cryptographic verification called zero-knowledge proof. A more precise name for this approach is zk-SNARK. We will omit the details of its operation, but we will explain why it is useful for rollups. It allows different parties to prove to each other that they have certain information without revealing it.
In the case of ZK rollups, this information represents state transitions of the secondary circuit, which are translated to the main circuit. The great advantage of this solution is that this process can occur almost instantly, and the likelihood of distorted ideas about the state is extremely low.
An optimistic rollup sacrifices scalability for greater flexibility. Using a virtual machine called Optimistic Virtual Machine (OVM), it can run smart contracts on secondary chains. On the other hand, there is no cryptographic proof that the state transition passed to the main chain will be valid. To mitigate this issue, there is a small delay that allows users to challenge and reject invalid blocks sent to the main chain.
What is proof of stake (PoS) of Ethereum?
Proof of Stake (PoS) is an alternative to the Proof of Work method for validating blocks. In a Proof of Stake system, blocks are not mined as such, but instead minting (also sometimes called forging) is used. Instead of miners competing for hashrate, a node (or validator) is periodically selected at random to validate a candidate block. If everything is done correctly, the validator will receive all transaction fees for that block, and depending on the protocol, possibly the block reward.
Due to the lack of mining, Proof of Stake is considered less harmful to the environment. PoS validators do not consume a lot of electricity and also have the ability to mint blocks on consumer-grade equipment.
Ethereum plans to switch from PoW to PoS in Ethereum 2.0, an update called Casper. While the exact date is not yet known, the first iteration is likely to launch soon.
What is Ethereum staking?
Under Proof of Work protocols, network security is ensured by miners. Miners are not interested in cheating the network, as this will waste electricity and lose potential rewards. In Proof of Stake, there is no such game theory, but instead, network security is ensured by various cryptoeconomic measures.
Dishonest behavior is prevented not by the risk of potential losses, but by the risk of losing one's own funds. Validators must provide their stake (i.e. offer tokens) to be eligible for validation. If a node tries to cheat, this exact amount of ether will be withdrawn from it, or will be gradually written off if the validator does not respond or is offline. However, if a validator runs additional nodes, it can receive more rewards.
How much ETH is one stake in Ethereum?
The minimum stake for Ethereum is 32 ETH per validator. This threshold is so high that an attack attempt of 51% would cost the attackers enormous amounts of money.
How much ETH can I earn by staking Ethereum?
This is a pretty specific question. Overall, it all depends on your stake, the total amount of ETH allocated on the network, and the inflation rate. As a very rough estimate, current calculations would be 6% income per year. Please keep in mind that this is just an estimate and the total may change in the future.
How long will my ETH be locked into staking?
In order to receive your ETH withdrawal from the validator, your transaction will have to wait in a queue. If there is no queue, the minimum withdrawal time is 18 hours, but this is a dynamic indicator that is adjusted depending on how many validators are making withdrawals at the moment.
What are the risks associated with staking ETH?
Since you are a validator whose responsibility is to maintain the security of the network, you need to be aware of the risks involved. If your validator node goes down for an extended period, you could lose a significant portion of your deposit. Additionally, if at any time your deposit falls below 16 ETH, you will be disqualified from validation.
It is also important to consider a more systemic risk factor. Proof of Stake has not been implemented on this scale before, so we cannot be completely confident in the reliability of such a system. Software always contains bugs and vulnerabilities, which can have a devastating effect, especially when billions of dollars are at stake.
Chapter 5 – Ethereum and Decentralized Finance (DeFi)
Content
What is decentralized finance (DeFi)?
What can decentralized finance (DeFi) be used for?
Will decentralized finance (DeFi) ever go mainstream?
What applications are there related to decentralized finance (DeFi)?
Decentralized Exchanges (DEX) on Ethereum
What is decentralized finance (DeFi)?
Decentralized finance (or simply DeFi) is a movement aimed at decentralizing financial applications. DeFi is based on public, open-source blockchains that can be accessed by anyone with an internet connection (public). This is a critical element for the transition of billions of people into this new global financial system.
In the growing DeFi ecosystem, users interact with smart contracts and each other through P2P networks and decentralized applications (DApps). An important advantage of DeFi is that users always retain ownership of their funds.
In simple terms, the decentralized finance (DeFi) movement aims to create a new financial system free from current restrictions. Due to its relatively high degree of decentralization and large developer base, the bulk of DeFi is currently built on Ethereum.
What can decentralized finance (DeFi) be used for?
As you may know, one of the most important advantages of Bitcoin is that the network operates independently, without the need for central control. But what if we use this as a basic idea to create programmable applications? This is where the potential of DeFi applications lies. There is no central control or intermediaries in this system, which means there are no flaws.
We have already said that the advantage of DeFi is open access. There are more than a billion people in the world who do not have access to any financial services. Try to imagine how you would manage your daily life without any confidence in your finances? Meanwhile, billions of people live this way, and ultimately this is the audience DeFi is trying to serve.
Will decentralized finance (DeFi) ever go mainstream?
But if everything is so great, then why hasn't DeFi taken over the world yet? Currently, most decentralized finance applications are difficult to use: they are quite clunky, break frequently, and have a very experimental look. Developing even frameworks for such an ecosystem is extremely difficult, especially in a distributed environment.
Building a DeFi ecosystem poses many challenges and obstacles for software engineers, game theorists, mechanism designers, and many others. Therefore, the question of widespread adoption of DeFi remains open.
What applications are there related to decentralized finance (DeFi)?
One of the most popular use cases for decentralized finance (DeFi) is stablecoins. Essentially, these are tokens on the blockchain whose value is tied to a real-world asset, such as fiat currency. For example, BUSD is pegged to the value of the US dollar. The convenience of these tokens is that they are very easy to store and transfer as they exist on the blockchain.
Another popular type of application is landing page applications. There are many P2P services that allow you to lend your funds and receive interest payments in return. One of the most convenient services is Binance Lending. Simply transfer funds to your wallet and you can start earning interest the very next day!
One of the most interesting aspects of DeFi is the variety of applications that are difficult to categorize. These include all kinds of decentralized P2P marketplaces, where users can exchange unique crypto-collectibles and other digital things. They could also include the creation of synthetic assets, where anyone can open up a market for any valuable item. Additionally, DeFi can power prediction markets, derivatives, and more.
Decentralized Exchanges (DEX) on Ethereum
A decentralized exchange (DEX) is a platform where you can make transactions directly between user wallets. When you trade on the Binance centralized exchange, you send your funds to it and trade through its internal systems.
Decentralized exchanges are structured differently. Thanks to the amazing capabilities of smart contracts, they make it possible to trade directly from your crypto wallet, eliminating the possibility of exchange hacking and other risks.
A great example of a decentralized exchange is Binance DEX. In addition to it, there are also Uniswap, Kyber Network and IDEX. Many of them even give you the option to trade from a hardware wallet for maximum security.
Centralized and decentralized exchanges.
Above we looked at the differences between centralized and decentralized exchanges. On the left we see that Binance acts as an intermediary in transactions between users. For example, if Alice wants to exchange her token A for Boris's token B, they both must first deposit their assets on the exchange. After the transaction, Binance will distribute the funds to their balances accordingly.
On the right is an option using a decentralized exchange. You may notice that there is no third party involved in such an operation. Instead, Alice's tokens are directly exchanged for Bob's tokens using a smart contract. Thus, the parties involved do not need to trust the intermediary, since the terms of their contract are automatically executed by the system.
As of February 2020, DEXs are the most commonly used applications running on the Ethereum blockchain. Although, compared to centralized exchanges, trading volume is still small. However, if DEX developers and designers make the user experience more engaging, DEXs could compete with many centralized exchanges in the future.
Chapter 6 – Participation in the Ethereum Network
Content
What is an Ethereum node?
How does an Ethereum node work?
Full Ethereum node
Simplified Ethereum nodes
Mining Ethereum node
Launching a node on the Ethereum network
How to mine Ethereum
What is Ethereum ProgPow?
How is Ethereum software developed?
What is scalability?
What is an Ethereum node?
An Ethereum node is a term that can be used to describe a program that interacts with its network in some way. An Ethereum node can be anything from a simple mobile wallet to a computer that stores a complete copy of the blockchain network.
All nodes work as return communication points; there are several types of such points in the Ethereum network.
How does an Ethereum node work?
Unlike Bitcoin, Ethereum does not have a single reference program. While the Bitcoin ecosystem uses Bitcoin Core as its main node software, Ethereum has a number of independent (but compatible) programs based on its Yellow Paper. The most popular of them are Geth and Parity.
Full Ethereum node
In order to interact with the Ethereum network and be able to independently verify data on the blockchain, you will need to run a full node using software similar to the one described above.
This software downloads all blocks from other nodes to your device and verifies that they are included correctly in transactions. Based on this program, it is also possible to run all the smart contracts that were called to ensure that all participants in the network (you and all other peers) receive the same information. If all goes according to plan, each node will have an identical and complete copy of the blockchain on their computing devices.
Full nodes are vital to the functioning of Ethereum. If all these nodes did not distribute all the information received throughout the globe, the network would lose its main properties: censorship resistance and decentralization.
Simplified Ethereum nodes
Running a full node directly contributes to the health and safety of the network, but such a node requires a separate device to operate, which in turn requires periodic maintenance. Simplified nodes may be the best option for users who can't run a full node (or for those who simply prefer not to).
As the name suggests, lightweight nodes consume less resources and hard drive space. This way, they can run on devices with lower specifications such as phones or laptops. In turn, this low overhead is due to the fact that lightweight nodes are not entirely self-sufficient. They are not fully synchronized with the blockchain and therefore require full nodes to feed them the relevant information.
Lightweight nodes are popular among merchants, service providers, and users. They are widely used to make and receive payments in cases where running and maintaining a full node is not a suitable solution.
Mining Ethereum node
A mining node can be either a full or simplified client. In reality, the term "mining node" is not used as it is in the Bitcoin ecosystem; however, it is still worth identifying these network participants.
To mine Ethereum, users need additional equipment. This usually involves creating a mining farm. It combines several video cards, which provides high hashing speed.
Miners have two options: solo mining and mining pool. In solo mining, the user works alone to create blocks, and if successful, all the rewards go to him. If he joins a mining pool, he combines his power with that of other users. This increases the likelihood that they will find a block together, but they will have to split the rewards among themselves.
Launching a node on the Ethereum network
One of the main advantages of blockchains is their open access. This means that anyone can run a node and strengthen the Ethereum network by validating transactions and blocks.
As with Bitcoin, there are a number of companies offering plug-n-play connections to Ethereum nodes. This will be convenient for those who just want to have a working node, but you will have to pay extra for this convenience.
We have already said that Ethereum has a number of programs for running nodes, including Geth and Parity. If you want to run your own node, you will need to familiarize yourself with the installation process for the option you need.
If you do not plan to run a special archive node, then the power of a regular consumer-grade laptop should be enough. However, it is better not to use a computer that you need for everyday work, as this can significantly slow down its processes.
Running your own node works best on devices that remain online at all times. If your node goes offline, it may take a significant amount of time to synchronize with the network before it comes online again. Thus, the best solution for this would be devices that are cheap to assemble and easy to maintain. For example, you can even run a simplified node on a Raspberry Pi.
How to mine Ethereum
Since the network plans to switch to Proof of Stake, mining on Ethereum is not the safest or long-term option. After the transition, miners will most likely switch to another network or sell their equipment altogether.
However, if you intend to participate in Ethereum mining, you will need special hardware such as graphics cards or ASICs. If you expect to make a decent profit, you will most likely need a mining rig and access to cheap electricity. Additionally, you will need to set up an Ethereum wallet and farm software. All this requires a lot of money and time, so think carefully about whether you are ready to do it.
What is Ethereum ProgPow?
ProgPoW stands for Programmatic Proof of Work and stands for “programmable proof of work.” This extension of the Ethereum mining algorithm is called Ethash. Its goal is to make GPUs more competitive with ASICs.
ASIC resistance has been a hotly debated topic in both the Bitcoin and Ethereum communities for years. In the case of Bitcoin, ASICs have become the dominant mining hardware on the network.
ASICs are also present in the Ethereum network, but in much smaller quantities; Most miners still use video cards. However, this situation may soon change as more and more companies introduce ASIC equipment into the Ethereum mining market. But why can ASICs become a problem?
First, ASIC machines can significantly reduce the decentralization of the network. If GPU miners are unable to make a profit and are forced to stop their operations, the hashrate will be concentrated in the hands of a few miners. Moreover, the development of ASIC chips is very expensive: not many companies have sufficient capabilities and resources for it. All this poses a threat of monopolization of production, potentially centralizing the Ethereum mining industry in the hands of a few corporations.
ProgPow integration has been the subject of controversy and debate since 2018. And while some believe this could be beneficial to the Ethereum ecosystem, many are against it for fear of causing a hard fork. With the transition to Proof of Stake approaching, the implementation of ProgPow is still in question.
How is Ethereum software developed?
Like Bitcoin, Ethereum is open source. Anyone can freely participate in the development of the protocol itself or create applications based on it. In fact, Ethereum has the largest community of blockchain developers today.
Resources like Mastering Ethereum by Andreas Antonopoulos and Gavin Wood and Developer Resources from Ethereum.org are great starting points for developers who want to get involved in the ecosystem in the future.
What is scalability?
Smart contracts were originally described in the 1990s, but their subsequent use on top of blockchains has defined an entirely new set of tasks that can be performed with them. Solidity, proposed by Gavin Wood in 2014, became the main programming language for developing smart contracts on Ethereum. It is syntactically similar to Java, JavaScript and C++.
Essentially, Solidity allows developers to write code that can be broken down into instructions that can be understood by the Ethereum Virtual Machine (EVM). If you want to understand this better, start with Solidity GitHub.
It is important to note that Solidity is not the only language available to Ethereum developers. Another popular option is Vyper, which is more similar in syntax to Python.
