capítulo
Noções básicas de Ethereum
De onde vem o Ethereum?
Primeiros passos com Ethereum
Escalabilidade, Ethereum 2.0 e o futuro do Ethereum
Ethereum e finanças descentralizadas (DeFi)
Entrando na Rede Ethereum
Capítulo 1 - Fundamentos do Ethereum
Índice
O que é Ethereum?
Qual é a diferença entre Ethereum e Ethereum (ETH)?
De onde vem o valor do Ethereum?
O que é blockchain?
Como o Ethereum é diferente do Bitcoin?
Como funciona o Ethereum?
O que é um contrato inteligente?
Quem criou o Ethereum?
Como as moedas Ethereum são distribuídas?
O que é “The DAO” e “Ethereum Classic”?
What is Ethereum?
Ethereum is a decentralized computing platform. We can imagine it as a computer that does not run on a single device. In other words, it can run simultaneously on thousands of devices worldwide, with no specific owner.
Like Bitcoin and other digital currencies, Ethereum also supports the transfer of digital assets. However, it has more functionalities, allowing users to configure exclusive codes and interact with applications developed by other users. Ethereum is highly flexible, and various 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 using a central server. Therefore, these applications theoretically cannot be shut down or censored.
What is the difference between Ethereum and Ether (ETH)?
The following statement may sound a bit convoluted: the unit used by Ethereum is not called Ethereum, nor is it called Ethereums. Ethereum refers to the protocol itself, while the token that empowers it is called Ether (abbreviated as 'ETH').
Where does Ethereum's value come from?
As mentioned earlier, Ethereum's code runs in a distributed system. Therefore, the program cannot be tampered with by external parties. Once they enter the Ethereum database (i.e., the blockchain), they can be programmed in such a way that no one else can modify the code. Moreover, the database is visible to everyone, allowing users to review the code before interaction.
These features determine that everyone can launch applications that cannot be taken down anytime, anywhere. More interestingly, Ethereum's native unit, Ether, can store value, creating conditions for implementing value transfers for these applications. We refer to the programs that constitute applications as smart contracts. In most cases, they can operate without human intervention.
Without a doubt, the concept of 'programmable money' has attracted many users, developers, and enterprises.
Check the latest price of Ether immediately.
What is blockchain?
Blockchain is not only the core of Ethereum but also serves as the database for the information used in storage protocols. If you have read our article (What is Bitcoin?), you will understand the basic workings of blockchain. The Ethereum blockchain is similar to the Bitcoin blockchain, except for differences in how data is stored and the content of the data stored.
The Ethereum blockchain is like a book that can continuously add new pages. Each page in the book is called a block, which stores the transaction information. When a new page needs to be added, a special value must be recorded at the top of the page. This value indicates that the new page has been orderly added after the previous one, rather than randomly inserted into the book.
Essentially, this is akin to page numbers, which reference information from the previous page and help determine whether the new page (block) is added in order. We use hashing to accomplish this.
Hashing obtains 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 extremely low, and the process is also one-way. Therefore, you can easily calculate the hash value, but cannot reverse-engineer the information that created the hash value. In the following sections, we will analyze why this is a critical factor affecting mining.
Now we have found the mechanism to connect all pages in the correct order. Any attempt to change the order or remove pages will reveal the fact that 'our book has been tampered with.'
Want to learn more about blockchain? Please read our blockchain technology beginner's guide.
What are the differences between Ethereum and Bitcoin?
Bitcoin builds a global digital cash system through blockchain technology and financial incentives. It introduces several key innovations that help users coordinate their work without central authorities. Bitcoin allows all participants to run programs on personal computers, enabling users to reach consensus on the state of financial databases in a trustless, decentralized environment.
Bitcoin is generally seen as the first generation of blockchain. Developers were reluctant to make Bitcoin a too complex system, which gives it a unique advantage in security. Its design appears somewhat inflexible, which is intended to prioritize security at the foundational level. The language of Bitcoin smart contracts is indeed extremely limited and does not adapt well to applications beyond transactions.
In contrast, second-generation blockchains have more enriched functionalities. Beyond financial transactions, these platforms also achieve a higher degree of programmability. Ethereum grants developers greater freedom, allows them to experiment with personal code, and create various decentralized applications (DApps).
Ethereum is a pioneer of the second-generation blockchain wave and still holds a dominant position. It shares many similarities with Bitcoin and can perform many of the same functions. However, the core principles of the two differ greatly, each having its own advantages.
How does Ethereum work?
We can define Ethereum as a state machine. In other words, at any given point in time, a snapshot showing the account balances and the current state of smart contracts can be obtained. Certain operations will lead to state updates, meaning that all nodes will update the snapshot to reflect the changes.
State transitions in Ethereum.
Smart contracts running on 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 readable by computers.
To update the state, the system employs a special mechanism known as mining. Similar to Bitcoin, mining is also completed through Proof of Work. We will explore this in depth later.
What is a smart contract?
The essence of a smart contract is code. However, it is neither intelligent nor a contract in the traditional sense. It is called a 'smart contract' because it can automatically execute (the 'smart') the agreements reached by the two parties under certain conditions (the 'contract').
In the late 1990s, computer scientist Nick Szabo first proposed the concept of smart contracts. He illustrated this idea using vending machines as an example, believing they could be seen as the forerunners of modern smart contracts. A vending machine executes a simple contract. After a user inserts a coin, the machine delivers the product according to the user's selection.
Smart contracts apply this type of logic in a digital environment. You can specify something simple in the code, such as returning 'Hello, World!' when the contract receives two Ether.
In Ethereum, developers will encode it so that it can be read by the EVM. Subsequently, they send it to a special address to register the contract. At that point, anyone can use the contract. Unless the developer sets conditions to delete it while writing the contract, it cannot be removed.
Now the contract has an address. To interact with it, a user only needs to send 2 Ether to that address. This action will trigger the contract code—every computer in the network will execute this operation, witnessing that the user has paid the contract and recording its output ('Hello, World!').
The above may be one of the most basic examples of Ethereum functionality. As technology continues to advance, people can create more intricate applications that connect numerous contracts, and such programs have already emerged.
Who created Ethereum?
In 2008, a developer (or group of developers) under the pseudonym Satoshi Nakamoto released the Bitcoin white paper, fundamentally altering the landscape of digital currency. A few years later, a young programmer named Vitalik Buterin aimed to further promote this concept and apply it to various applications. Ultimately, this concept transformed into Ethereum.
In a blog post published in 2013 titled (Ethereum: The Ultimate Smart Contract and Decentralized Application Platform), Buterin first proposed 'Ethereum.' In the article, he introduced the idea of a 'Turing-complete blockchain'—a decentralized computer with ample time and resources capable of running any application.
As technology continues to progress, more types of applications that can be deployed on the blockchain will emerge, as long as developers can imagine them. Ethereum aims to break the design limitations intentionally imposed by Bitcoin, seeking more applications for blockchain technology.
How is Ether issued?
Ethereum was launched in 2015, with an initial supply of 72 million Ether. Over 50 million tokens were publicly sold through a token sale event known as the 'Initial Coin Offering (ICO).' Participants could purchase Ether using fiat currency or Bitcoin on trading platforms.
What are 'The DAO' and 'Ethereum Classic'?
With Ethereum, open collaboration on the internet has also found a new expression. The DAO (Decentralized Autonomous Organization) is a typical example. Such entities operate similarly to computer programs, entirely controlled by computer code.
The first and most ambitious project to implement this organization was 'The DAO.' It consisted of a series of complex smart contracts running on Ethereum, operating as an independent risk fund. DAO tokens were distributed via ICO, and token holders had both equity and voting rights.
However, shortly after the project went live, it was attacked through a vulnerability, resulting in nearly one-third of the DAO's funds being stolen by malicious actors. To make matters worse, at that time, 14% of the total supply of Ether was locked in the DAO. Undoubtedly, the nascent Ethereum network suffered a catastrophic blow as a result.
After discussions, the entire blockchain was split into two chains via a hard fork. One of the forks reversed the malicious transactions, successfully recovering the funds—that is now known as the 'Ethereum blockchain.' In contrast, transactions on the original chain remained unchanged and are referred to as Ethereum Classic.
The painful lesson warns us that we must take the risks of this technology seriously, and it also makes us realize that entrusting large amounts of wealth to autonomous code can be counterproductive. This special example also illustrates the significant challenges faced in making collective decisions in an open environment. Apart from security vulnerabilities, The DAO perfectly illustrates the potential of smart contracts to achieve large-scale trustless collaboration through the internet.
Chapter 2 - Where does Ether come from?
Table of Contents
How is new Ether produced?
What is the total amount of Ether?
How does Ethereum mining work?
What is Ethereum gas fee?
Gas fee and gas fee cap
How long does it take to mine an Ethereum block?
What is an Ethereum token?
How is new Ether produced?
Earlier, we briefly mentioned 'mining.' If you are familiar with Bitcoin, you know that the mining process is key to protecting and updating the blockchain. Ethereum's mining principle is the same, that is, to provide Ether rewards to mining participants (which is time-consuming, labor-intensive, and costly) according to the protocol.
What is the total amount of Ether?
As of February 2020, the total supply of Ether is approximately 110 million.
Unlike Bitcoin, Ethereum did not establish a dedicated token issuance plan upon launch. Bitcoin maintains its value by limiting supply and gradually decreasing new coin production. Ethereum lays the foundation for decentralized applications (DApps) through tokens. Since the most suitable type of token issuance plan has yet to be identified, this issue remains unresolved.
How does Ethereum mining work?
Mining is crucial for network security. It ensures that the blockchain can be updated fairly and reasonably and supports the network's normal operation without a single decision-maker. In the mining operation, a subset of nodes (the so-called 'miners') contributes computing power to solve cryptographic puzzles.
The actual operation hashes a set of pending transactions and their data. To make a block valid, the hash value must be lower than the threshold set by the protocol. If the operation fails, miners can modify some data and try again.
Due to competition, miners must complete the hashing process as quickly as possible—hash rate thus becomes the measure of miners' computing power. The higher the hash rate in the network, the more difficult it is to crack the cryptographic puzzle. Only miners need to find a valid answer, and once the answer is broadcasted in the network, other participants can easily verify its validity.
As you might expect, continuous high-speed hashing is costly. As an incentive to protect network security, miners can receive rewards. The rewards come from all transaction fees within the block. They also receive freshly minted Ether, which at the time of writing this article is 2 Ether.
What is Ethereum gas fee?
Do you remember the 'Hello, World!' contract mentioned earlier? This program is easy to run and incurs low calculation costs. However, you are not just running this program on your computer; you are requesting everyone in the Ethereum ecosystem to run it together.
This leads to the following question: what happens when tens of thousands of people run complex contracts simultaneously? If someone sets the contract to run the same code in a loop, each node would need to run indefinitely. These processes would consume a lot of resources and could crash the entire system.
Fortunately, Ethereum introduces the concept of gas fees to mitigate this risk. Just as a car cannot drive without fuel, contracts cannot run without gas fees. To ensure the contract runs smoothly, users must pay a certain amount of gas fees. If the gas fees are insufficient, the contract will terminate.
Essentially, this is a charging mechanism. We extend this concept to transactions, meaning that miners' main motivation is profit, and they may overlook transactions with lower fees.
Please note that Ether is different from gas fees. The average price of gas fees fluctuates greatly depending on miners. When conducting transactions, gas fees need to be paid using Ether. The charging mechanism is similar to Bitcoin: if the network is congested and many users are participating in transactions, the average gas fee will rise. Conversely, if there is little activity in the network, prices will drop.
Although the price of gas fees fluctuates, the gas fee required for each operation is fixed. In other words, executing a complex contract consumes more gas fees than a simple transaction. Therefore, gas fees serve as a measure of computing power. They ensure that the system charges users according to their consumption of Ethereum resources.
Gas fees typically consume only a small portion of Ether, and we set a smaller unit for it, '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 will quickly become very expensive. Therefore, nodes in the Ethereum network help reduce spam.
The average price of gas fees over time (unit: gwei). Source: etherscan.io
Gas fee and gas fee cap
Suppose Alice is conducting a contract transaction. She calculates the gas fee she needs to pay (for example, through ETH Gas Station). Perhaps she will set a higher price to incentivize miners to process the transaction quickly.
She will also set a gas fee cap for self-protection. If the contract encounters issues, the gas fee consumed will exceed the planned value. The purpose of the gas fee cap is to ensure that the operation stops when the set gas fee x is exhausted. The corresponding contract then becomes invalid, and the amount Alice ultimately pays will not exceed the initial set value.
At first glance, this concept may seem confusing. In fact, it indicates that gas fees (and their caps) can be manually set, and most wallets will complete the settings on behalf of users. In short, gas fees determine the speed at which miners process transactions, while the gas fee cap determines the maximum gas fee you are willing to pay for this transaction.
How long does it take to mine an Ethereum block?
The average time to add a new block to the Ethereum blockchain is 12 to 19 seconds. If the network transitions to Proof of Stake, which mainly aims to shorten block time, this situation is very likely to change. For more details, please read (Ethereum Casper Explained).
What is an Ethereum token?
The greatest charm of Ethereum lies in its support for users to create personal assets on-chain, which can be stored and transferred like Ether. The governance rules for these assets are stipulated in smart contracts, allowing developers to set token parameters themselves. These include token issuance volume, issuance mechanism, divisibility, interchangeability, and many other features. Multiple technical standards can be followed when creating tokens in Ethereum, with the most prominent being ERC-20—hence, these tokens are usually referred to as 'ERC 20 tokens.'
This token is highly functional, providing innovators with a broad testing platform to experiment in cutting-edge fields such as finance and technology. From issuing unified tokens as in-app currencies to producing unique tokens based on physical assets, its design is very flexible. It is likely that there are various simplified and easy-to-use token creation cases that are still unknown.
Chapter 3 - Getting Started with Ethereum
Table of Contents
How to buy Ether?
How to buy Ether using a credit/debit card
How to buy Ether on P2P markets
What can be purchased with Ether (ETH)?
What are the uses of Ethereum?
What should be done if Ether is accidentally lost?
Can Ethereum transactions be recovered?
Are Ethereum transactions private?
Can Ethereum generate profit?
How to store Ether?
How to deposit Ether into Binance
How to store Ether on Binance
How to withdraw Ether from Binance
How to store Ether in an Ethereum wallet
Hot Wallet
Cold Wallet
What is the logo and symbol of Ethereum?
How to buy Ether?
How to buy Ether using a credit/debit card
Binance allows users to purchase Ether smoothly via the browser. Steps to operate:
Log into the digital currency trading portal.
Select the digital currency (ETH) to be purchased and the currency to be used for payment.
Log into your Binance account. New users should register first.
Choose the payment method.
Follow the prompts to enter card details and complete verification.
Done! The purchased Ether will be deposited into your Binance account.
How to buy Ether on P2P markets
P2P markets are also platforms for buying and selling Ether. Through the Binance mobile app, you can purchase tokens directly from other users. Steps to operate:
Open the app and then log in or register an account.
Select 'Buy/Sell' and then click on the purchase tab in the upper left corner of the interface.
Choose one type of transaction from the pop-up options and then click 'Buy.'
You can pay using other digital currencies (digital currency payment tab) or fiat currencies (fiat payment tab).
Next, the system will require you to select a payment method. You can flexibly choose according to your needs.
Select to purchase Ether.
At this point, payment needs to be completed. After the operation is completed, click 'Mark as Paid' and then confirm.
The transaction is completed once the seller delivers the tokens as expected.
What can be purchased with Ether (ETH)?
Unlike Bitcoin, Ethereum's application environment is not limited to the digital currency network. It can provide a development platform for decentralized applications, with Ether serving as the 'fuel' of this ecosystem as a tradable token. 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 Ether payments. Source: cryptwerk.com/coinmap
What are the uses of Ethereum?
Ether, the native currency of Ethereum, can be used as digital currency or collateral. Many people also view it as a means of value storage similar to Bitcoin. However, Ether differs from Bitcoin as the high programmability of the Ethereum blockchain gives it more utility. Thus, Ether has become the lifeblood of numerous applications, including decentralized finance applications, decentralized markets, trading platforms, and games.
What should be done if Ether is accidentally lost?
Ether transactions do not involve any banks, and users must take responsibility for their own funds. Tokens can be stored on trading platforms or in personal wallets. Please note that when using personal wallets to store funds, it is essential to keep the mnemonic phrase safe to recover funds if access to the wallet is lost.
Can Ethereum transactions be recovered?
Once data is added to the Ethereum blockchain, it is nearly impossible to change or delete. This means that when conducting transactions, they can be viewed as immutable. Therefore, it is essential to double-check that the target address receiving the funds is correct. When transferring a large amount of funds, it is best to send a small amount first to verify its authenticity.
Due to a previous hack of smart contracts, Ethereum was forced to undergo a hard fork in 2016, effectively reversing malicious transactions. However, this was an extreme measure taken in response to an anomaly, not the norm.
Are Ethereum transactions private?
All transactions added to the Ethereum blockchain are publicly visible. Even if the Ethereum address does not display a real name, observers can identify participants through other means.
Can Ethereum generate profit?
Ether is a highly volatile asset, with profit opportunities coexisting with loss risks. Some choose to hold Ether long-term, confident that this network will become a global programmable settlement layer in the future. Others opt to trade Ether with other altcoins. Of course, both strategies come with corresponding financial risks.
As the cornerstone 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 consider it the only digital asset in their portfolio. In contrast, other investors are more flexible, building diversified portfolios through Ether and other altcoins, or allocating a certain proportion of funds for short-term trading (e.g., day trading or swing trading). There is fundamentally no universal method for making profits in the market, and each investor should act according to their ability and choose the most suitable strategy based on their actual situation.
How to store Ether?
There are many ways to store tokens, each with its pros and cons. As with other risk-prone things, the best solution is to build a diversified portfolio from numerous options.
Generally speaking, storage solutions are divided into custodial and non-custodial types. Custodial solutions mean that funds can be entrusted to a third party for safekeeping (e.g., trading platforms). In this case, you must log into the custodian's platform to trade digital currency assets.
Non-custodial solutions are the opposite, where users manage their funds using a digital currency wallet. These wallets do not hold coins like a physical wallet but store access credentials to assets on the blockchain—cryptographic keys. Please remember: when using a non-custodial wallet, it is essential to back up your mnemonic phrase properly!
How to deposit Ether into Binance
To deposit your Ether into Binance, please follow these steps:
Log into your Binance account. New users should register first.
Go to the spot wallet and click on deposit.
Select 'ETH' from the token list.
Choose the network and send Ether to the corresponding address.
Done! After the transaction is confirmed, the purchased Ether will be deposited into your Binance account.
How to store Ether on Binance
To actively participate in Ether trading, you need to deposit it into your Binance account. Storing Ether on Binance is both 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 Ether from Binance
To withdraw Ether stored in your Binance account, please follow these steps:
Log into your Binance account.
Go to the spot wallet and click on withdraw.
Select 'ETH' from the token list.
Choose the network
Enter the recipient's address and amount.
Authenticate via email.
Done! After the transaction is confirmed, the Ether will be sent to the address you provided.
How to store Ether in an Ethereum wallet
To deposit Ether into a personal wallet, you can choose between 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 typically a mobile or desktop application that allows users to check their balance or send/receive tokens. Hot wallets are connected to the network and are easily susceptible to attacks, but this convenient method is favored for daily payments. Trust Wallet is a convenient and fast mobile wallet that supports various currencies.
Cold Wallet
A cold wallet is a type of digital currency wallet that operates offline. These wallets are far removed from online attack vectors, significantly reducing the likelihood of being attacked. However, cold wallets are generally not as convenient as hot wallets. Hardware wallets and paper wallets are both considered cold wallets. The latter is outdated and highly risky, gradually fading out of users' sight.
Please read (Types of Digital Currency Wallets Explained) for detailed information on wallet classifications.
What is the logo and symbol of Ethereum?
Vitalik Buterin designed the original Ethereum logo. It consists of two rotating summation symbols 'Σ' (the Greek letter Sigma). The final design is based on this pattern, composed of a rhombus called an 'octahedron,' surrounded by four triangles. Like other digital currencies, Ether also has a dedicated standard Unicode symbol that apps and websites can easily display its value. Just as the dollar uses the '$' symbol, the symbol for Ether is 'Ξ'.
Chapter 4 - Scalability, Ethereum 2.0 and the Future of Ethereum
Table of Contents
What is scalability?
Why does Ethereum need scaling?
The trilemma of blockchain scalability
How many transactions can Ethereum handle?
What is Ethereum 2.0?
What is Ethereum sharding?
What is Ethereum Plasma?
What is Ethereum rollup?
What is Ethereum Proof of Stake (PoS)?
What is Ethereum staking?
How much Ether needs to be staked in Ethereum?
How much Ether can be earned through staking in Ethereum?
What is the lock-up period for staked Ether?
Is staking Ethereum risky?
What is scalability?
In short, scalability is an indicator of a system's ability to grow. For example, networks or servers used in computing can scale in different ways to handle more demand.
Scalability in cryptocurrencies refers to the continuous development of blockchains to accommodate more users. An increase in users means that the blockchain will participate in more operations and transaction competition.
Why does Ethereum need scaling?
Supporters of Ethereum 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 bypass intermediaries, focus more on privacy, and transform into truly owning one's data. These foundational attributes will be constructed through distributed computation in the form of smart contracts and distributed storage/communication protocols.
To achieve this goal, Ethereum must significantly enhance its transaction processing capacity while avoiding a decline in the network's degree of decentralization. Currently, Ethereum does not limit transaction volume by restricting block size like Bitcoin, but only sets a gas fee cap, which is the upper limit of gas fees that can be accommodated in a single block.
For example, a block has a gas fee cap of 100,000 Gwei. You can submit 10 transactions with a gas fee cap of 10,000 Gwei each to that block, or 2 transactions with a gas fee cap of 50,000 Gwei each. Any other transaction submitted simultaneously must wait for the next block.
This situation is not ideal for systems widely used by everyone. If pending transactions exceed block space, backlog will quickly occur. Additionally, rising gas fees mean that users must pay higher amounts to prioritize their transactions. In other words, a busy network will cause processing costs for specific use cases to be extremely high.
The once-popular game (CryptoKitties) is a typical example of the limitations of the Ethereum network. In 2017, the Ethereum-based game (CryptoKitties) attracted a large number of users. They conducted transactions in the network, breeding their digital cats (representing non-fungible tokens). Once the game became rapidly popular, the number of pending transactions saw a skyrocketing increase, ultimately leading to severe network congestion.
The trilemma of blockchain scalability
On the surface, simply raising the gas fee cap of blocks could alleviate all scalability issues. In other words, the higher the cap, the more transactions the network can handle in a fixed time, right?
Unfortunately, this is not feasible unless some key features of Ethereum are sacrificed. Vitalik Buterin proposed the blockchain trilemma (as shown in the figure below), explaining the delicate balance that blockchains must achieve.
The blockchain trilemma: (1) Scalability, (2) Security, and (3) Decentralization.
The three characteristics can only optimize two at a time, and cannot cover all aspects. Blockchains like Ethereum and Bitcoin prioritize security and decentralization. Their consensus algorithms ensure network security. However, their networks consist of thousands of nodes, leading to poor scalability. The reception and verification of transactions are completed by numerous nodes, which is far slower than centralized solutions.
Another scenario is to eliminate the gas fee cap on blocks, allowing the network to achieve both security and scalability, but with a severe decline in decentralization.
The reason is that a single block will include more transactions, ultimately forming larger blocks. The nodes in the network still need to regularly download and broadcast blocks, placing extremely stringent requirements on hardware. After the gas fee cap is raised, the difficulty for nodes to verify, store, and broadcast blocks will increase.
Ultimately, the outdated nodes will exit the network. If this continues, only a few high-performance nodes will survive, further deepening the system's degree of centralization. In the end, the blockchain will possess security and scalability but will no longer have the characteristic of decentralization.
The last scenario is that the blockchain focuses on decentralization and scalability. The network enhances speed and decentralization by abandoning consensus algorithms, at the cost of significantly reduced security.
How many transactions can Ethereum handle?
In recent years, Ethereum's transactions per second (TPS) rarely exceed 10. For a platform aspiring to become the 'world computer,' this number is disappointing.
Scaling solutions have always been an important part of Ethereum's roadmap. Plasma is a typical example of a scaling solution. This solution aims to enhance Ethereum's efficiency and its technology is also applicable to other blockchain networks.
What is Ethereum 2.0?
Although Ethereum is highly promising, it currently has limitations. In the previous sections, we have discussed scalability issues. In short, if Ethereum hopes to become the cornerstone of a new financial system, it must significantly increase the total number of transactions processed per second. Given the network's distributed nature, this issue is challenging to resolve. Over the years, Ethereum developers have been looking for solutions.
On one hand, to ensure the degree of decentralization of the network, certain limitations must be implemented. The more stringent the requirements for running nodes, the fewer participants there will be, leading to greater centralization of the network. Therefore, enhancing Ethereum's transaction processing capacity will increase the burden on nodes, ultimately threatening the integrity of the system.
Another drawback of Ethereum (and other proof-of-work cryptocurrencies) is the enormous resource consumption. Mining is essential to successfully add blocks to the blockchain. However, this method of block creation requires rapid computation, consuming a lot of electricity.
To break these limitations, developers have proposed a series of upgrade plans collectively known as 'Ethereum 2.0' (or ETH 2.0). Once fully implemented, ETH 2.0 will effectively enhance the network's performance.
What is Ethereum sharding?
As mentioned earlier, each node stores a copy of the entire blockchain. These nodes will also update with changes to the blockchain, consuming vast amounts of bandwidth and memory.
If a method called sharding is used, the above process can be avoided. As the name suggests, this process divides the network into different subsets of nodes, known as shards. Each shard processes its own transactions and contracts while still being able to communicate with other shard networks as required. Each shard independently verifies, so there is no need to store data from other shards.
Comparison of the network in March 2020 and the network implementing sharding
'Sharding' is a complex scaling method that requires a lot of design and implementation work. However, if applied successfully, it will become one of the most effective methods to significantly increase network throughput.
What is Ethereum Plasma?
Ethereum Plasma is an off-chain scalability solution aimed at removing transactions from the blockchain to enhance transaction throughput. In this regard, it is somewhat similar to sidechains and payment channels.
Through Plasma, secondary chains can anchor to the main Ethereum blockchain while maintaining minimal communication. Although users rely on the main chain to resolve disputes, while 'completing' personal activities on secondary chains, both largely operate independently.
The key to successful scaling of Ethereum lies in reducing the amount of data that nodes must store. The Plasma solution allows developers to specify some rules for 'child chains' in the smart contracts on the main chain. Subsequently, information or processes from applications that are too costly to store/run on the main chain can be freely moved to the 'child chain' for creation.
For a detailed introduction to Plasma, please read (What is Ethereum Plasma?).
What is Ethereum rollup?
Similar to Plasma, rollup is also aimed at removing transactions from the main chain to achieve Ethereum scaling. 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 proofs of that chain's current state. Secondary chain operators deposit collateral in the main net contract and only submit valid state transitions to it. The underlying idea is that this state is maintained off-chain, thus there is no need to store data on the blockchain. However, the main difference between rollup and Plasma is how transactions are submitted to the main chain. Through a special type of transaction, this method can 'roll up' massive transactions and bundle them into special blocks known as rollup blocks.
Rollups are divided into two different types: Optimistic Rollup and Zero-Knowledge Rollup (ZK Rollup). Both ensure that state transitions are correct through different means.
Zero-Knowledge Rollup (ZK Rollup) uses a cryptographic verification method called zero-knowledge proofs to submit transactions. Specifically, it uses a method called zk-SNARK. For details on how it operates, this article will not delve into it, but we can describe its application in rollups: through this method, different parties can prove they possess specific information without revealing the specific content.
In the case of Zero-Knowledge Rollup (ZK Rollup), that information is the state transition submitted to the main chain. One major advantage of this process is that it can happen almost instantaneously while minimizing the probability of submitting a corrupted state.
Optimistic Rollup enhances flexibility at the cost of sacrificing some scalability. Through the 'Optimistic Virtual Machine (OVM),' smart contracts can run on the secondary chain. On the other hand, there is no cryptographic proof to confirm that the state transitions submitted to the main chain are correct. To mitigate this issue, a brief delay is set up during which users can challenge and dispute invalid blocks submitted to the main chain.
What is Ethereum Proof of Stake (PoS)?
Proof of Stake (PoS) is another blockchain validation scheme besides Proof of Work. In a PoS system, the way to obtain new blocks is not through mining but through minting (sometimes referred to as forging). Unlike miners who compete through computing power, candidate blocks are now validated by nodes (or validators) randomly selected at intervals. If the operation is correct, they will earn all the transaction fees from the block and may also receive block rewards based on the protocol.
Proof of Stake does not involve mining, thus being considered more environmentally friendly. Validators consume less energy than miners, allowing them to mint blocks using consumer-grade hardware.
As part of Ethereum 2.0, Ethereum plans to transition from PoW to PoS through an upgrade operation called Casper. While the exact date has not been officially determined, the first iteration could start in 2020.
What is Ethereum staking?
In a Proof of Work protocol, miners are responsible for ensuring network security. They do not cheat because such behavior wastes energy and would lead to losing all potential rewards. In Proof of Stake, there is no such game theory, and network security is ensured through other cryptocurrency economic measures.
Dishonest behavior can be curtailed not because users fear wasting energy, but because they fear losing funds. Validators must stake a certain amount of tokens (becoming token holders) to gain validation rights. If a node attempts to cheat, its staked tokens (a certain amount of Ether) will be lost; if the node becomes unresponsive or offline, those tokens will also gradually diminish. However, if a validator runs more nodes, they will receive more rewards.
How much Ether needs to be staked in Ethereum?
The minimum estimated staking amount for each validator in Ethereum is 32 Ether. This value is set so high that the cost of executing a 51% attack would be enormous.
How much Ether can be earned through staking in Ethereum?
This question is relatively complex. This metric depends not only on the amount of tokens staked but also on the total amount of Ether staked in the network and the inflation rate. Rough estimates suggest that the current annual yield of the project is approximately 6%. Please remember that this number is only an estimate and may change in the future.
What is the lock-up period for staked Ether?
To withdraw Ether from validators, you must join the withdrawal queue. If you do not queue, the shortest withdrawal time is 18 hours. The specific time will dynamically adjust based on the number of validators withdrawing during a given period.
Is staking Ethereum risky?
As a validator responsible for maintaining network security, you must consider various risk factors. If a validator node is offline for an extended period, a significant portion of its deposit will be lost. Moreover, if the deposit balance falls below 16 Ether, you will be removed from the validator set.
Another systemic risk factor should not be overlooked. Proof of Stake has never been applied on such a large scale, and there may be failures during operation. Software inevitably has defects and vulnerabilities, and it could even lead to catastrophic impacts—especially when the staked value reaches billions of dollars.
Chapter 5 - Ethereum and Decentralized Finance (DeFi)
Table of Contents
What is Decentralized Finance (DeFi)?
Uses of Decentralized Finance (DeFi)
Can decentralized finance (DeFi) enter the mainstream?
What decentralized finance (DeFi) applications are there?
Decentralized trading platforms (DEX) in Ethereum
What is Decentralized Finance (DeFi)?
Decentralized finance (referred to as 'DeFi') is an activity to implement decentralization in financial applications. DeFi is built on public open-source blockchains, and all users on the internet can access it for free (i.e., permissionless). This key feature is expected to attract billions of people into 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 a reality while allowing users to retain ownership of their funds.
In short, decentralized finance (DeFi) activities aim to construct a new financial system, gradually breaking the limitations of the current system. DeFi has a relatively high degree of decentralization and a large developer base, so most DeFi applications are currently built on Ethereum.
Uses of Decentralized Finance (DeFi)
You may have already learned that Bitcoin's biggest advantage is that it does not require any central authority to coordinate the network's operation. If we take this as the core concept, what would it be like to develop programmable applications? This is the potential of DeFi applications: breaking free from central 'coordinators' or intermediaries to avoid single points of failure.
As mentioned earlier, 'open access' is the greatest advantage of DeFi. Billions of people around the world lack access to any type of financial services. If we are cut off from all financial security, how do we manage our daily lives? This is not an imaginary scenario, but a reality for billions of people—the target audience for DeFi services.
Can decentralized finance (DeFi) enter the mainstream?
These advantages seem highly attractive, but why has DeFi not yet occupied the mainstream market? Currently, most DeFi applications are still in the experimental stage, with convenience and flexibility needing improvement and often crashing. It has proven very difficult to design the architecture of such ecosystems, and the distributed development environment further increases the difficulty.
For developers such as software engineers, game theorists, and mechanism designers, building a DeFi ecosystem presents numerous challenges and heavy responsibilities. Therefore, whether DeFi applications can enter the mainstream remains uncertain.
What decentralized finance (DeFi) applications are there?
Currently, the most popular use case for decentralized finance (DeFi) is stablecoins. Essentially, a stablecoin is a blockchain token whose value is pegged to real assets (such as fiat currencies). For example, the value of BUSD is pegged to the US dollar (USD). Such tokens are used in the blockchain, making storage and transfer very convenient.
Another popular application is lending. There are many peer-to-peer (P2P) services where users lend their funds to others and earn interest in the process. In fact, Binance Lending is one of the most convenient platforms. The operation is very simple; just deposit your funds into the lending wallet, and you can earn interest the next day!
However, the most exciting aspect is that DeFi can be applied to virtually any domain. It can integrate various peer-to-peer (P2P) and decentralized markets to create platforms for trading unique digital currency collectibles and other digitized items. Such applications can also create synthetic assets, allowing everyone to create markets for any item that holds value. Other areas of application include prediction markets and derivatives.
Decentralized trading platforms (DEX) in Ethereum
Decentralized exchanges (DEX) allow different user wallets to trade directly with each other. When trading on centralized exchanges like Binance, users first need to transfer funds to the platform, and then trade through the internal system.
Decentralized trading platforms, however, are different. With the magic of smart contracts, you can complete transactions directly using digital currency wallets, avoiding risks such as trading platforms being hacked.
Binance DEX is a typical representative of decentralized trading platforms. Uniswap, Kyber Network, and IDEX are all leaders built on Ethereum. 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 have compared the differences between centralized and decentralized trading platforms in the above image. In the left image, we can see that Binance is between the two trading parties. Therefore, when Alice wants to swap token A for Bob's token B, both must deposit their assets into the trading platform. After the transaction is completed, Binance will reallocate their account balances based on the proportion of funds.
On the right is the decentralized trading platform. We note that the entire transaction has no third-party involvement. Alice's token is directly converted to Bob's token through smart contracts. In this way, the contract reached between the two parties will be executed automatically, without relying on any intermediary.
As of February 2020, DEX has been the most commonly used application on the Ethereum blockchain. However, its transaction volume is far lower compared to centralized trading platforms. Nevertheless, if developers and designers continue to optimize user experience, DEX will gradually win more users' favor. One day, it will definitely be able to compete with centralized trading platforms.
Chapter 6 - Entering the Ethereum Network
Table of Contents
What is an Ethereum node?
How do Ethereum nodes operate?
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 Ethereum software?
What is Solidity?
What is an Ethereum node?
The term 'Ethereum node' refers to programs that interact with the Ethereum network in some way. Any device, from simple mobile wallet applications to computers storing complete copies of the blockchain, can act as an Ethereum node.
All nodes serve as communication points in some manner, but nodes in the Ethereum network are divided into various types.
How do Ethereum nodes operate?
Unlike Bitcoin, Ethereum does not have any programs that serve 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. Currently, the most popular 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 software mentioned earlier.
This software will download blocks from other nodes and verify the correctness of the transactions it contains. The software will also run all the smart contracts called, ensuring that the received information matches that of other nodes. If everything runs as planned, we can assume that all node devices store the same copy of the blockchain.
Full nodes are crucial for the functioning of Ethereum. Without numerous nodes spread across the globe, the network would lose its censorship resistance and decentralization.
Ethereum Light Node
By running a full node, you can directly contribute to the healthy and secure development of the network. However, full nodes typically require running and maintaining on a separate machine. For users who cannot (or simply do not want to) run a full node, light nodes are a better option.
As the name suggests, light nodes are lightweight devices that can significantly reduce resource and space consumption. Portable devices such as smartphones or laptops can function as light nodes. However, reducing overhead comes at a cost: light nodes cannot be fully self-sufficient. They cannot sync 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 in payment receipt scenarios where there is no need to use full nodes and the operating costs are too high.
Ethereum Mining Node
Mining nodes can be either full node clients or light node clients. The term 'mining node' is used differently than in the Bitcoin ecosystem but still applies to identify participants.
To participate in Ethereum mining, certain additional hardware must be used. The most common practice is to build mining machines. Users connect multiple GPUs (graphics processing units) together to calculate hash data at high speeds.
Miners can choose between two mining schemes: solo mining or joining a mining pool. Solo mining means that miners create blocks on their own. If successful, they reap the mining rewards alone. If they join a mining pool, the hashing power of many miners is combined. The block creation speed is improved, but the mining rewards will be shared among many miners.
How to run an Ethereum node
One of the most important features of blockchain is 'open access.' This indicates 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 start and run a single node, this type of device is undoubtedly the best choice, but the downside is that you must pay extra for convenience.
As mentioned earlier, there are numerous different types of node software implementations in Ethereum, such as Geth and Parity. To run a personal node, you must master the installation process for the implementation you choose.
Unless running a special node called an archive node, a consumer-grade laptop is sufficient to support the normal operation of an Ethereum full node. However, it is best not to use your daily work device, as the node will severely slow down the operating speed.
When running a personal node, it is advisable to keep the device online at all times. If the node goes offline, it may take a long time to sync again when it reconnects. Therefore, it is best to choose a low-cost and easy-to-maintain device. You can even run a light node using a Raspberry Pi.
How to mine Ethereum
As the network is about to transition to a Proof of Stake mechanism, Ethereum mining is no longer the safest long-term investment option. After the transition is successful, Ethereum miners can only transfer their mining equipment to other networks or sell them directly.
Given that the transition is not yet complete, participating in Ethereum mining still requires special hardware (such as GPUs or ASICs). To achieve substantial revenue, mining machines must be customized, and low-cost mining farms must be found. Additionally, an Ethereum wallet must be created, and the corresponding mining software configured. All of this requires a significant amount of time and funds. Before participating in mining, please carefully consider whether you can cope with various challenges.
What is Ethereum ProgPoW?
ProgPow stands for Programmatic Proof of Work. It is an extension of Ethereum's mining algorithm Ethash, aimed at enhancing the competitiveness of GPUs over ASICs.
In both the Bitcoin and Ethereum communities, ASIC resistance has been a controversial topic for years. In the Bitcoin network, ASICs have become the dominant force in mining.
In Ethereum, ASICs are not mainstream, and a significant portion of miners still use GPUs. However, as more companies introduce Ethereum ASIC miners to the market, this situation will likely change. But what are the problems with ASICs?
On one hand, ASICs significantly undermine the decentralization of the network. If GPU miners cannot profit and have to stop mining, the hash rate will ultimately concentrate in a few miners. Moreover, the development costs for ASIC chips are quite expensive, and there are only a few companies with the capability and resources to develop them. This situation could lead to the Ethereum mining industry being concentrated in the hands of a few companies, creating a certain degree of industry monopoly.
Since 2018, the integration of ProgPow has been highly controversial. Some believe it is beneficial for the healthy development of the Ethereum ecosystem, while others oppose it, fearing it could lead to a hard fork. With the arrival of Proof of Stake, whether ProgPow can be applied to the network remains to be seen.
Who are the developers of Ethereum software?
Like Bitcoin, Ethereum is an open-source platform. Anyone can participate in protocol development or build applications based on the protocol. In fact, Ethereum also has the largest developer community in the blockchain space.
Mastering Ethereum, produced by Andreas Antonopoulos and Gavin Wood, and developer resources launched 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 presents a series of new challenges. Solidity, proposed by Gavin Wood in 2014, has become the primary programming language for developing Ethereum smart contracts, with syntax similar to Java, JavaScript, and C++.
Essentially, using the Solidity language, developers can write instructions that can be parsed by the Ethereum Virtual Machine (EVM) after decomposition. You can learn more about how it works through the Solidity GitHub.
In fact, Solidity is not the only choice for Ethereum developers. Vyper is also a popular development language, with syntax closer to Python.
