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Ethereum — The Blockchain that Changed it All

Aug 6 2021
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The revolutionary blockchain that pushes the technology forward.

Ethereum was introduced to the world of blockchain and cryptocurrencies back in 2014. What was born out of a nineteen-year-old visionary’s mind soon became one of the most meaningful projects and raised over $18.4M in its ICO. That was in 2014. Today, its market capitalization stands at ~$300B.

In this blog, we explore the reasons behind its creation and trace its remarkable history through the years.

Ethereum’s Evolution

A quick overview

Ethereum pioneered the creation of smart contracts. It was founded in July 2015 and had eight members as co-founders — Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Jeffrey Wilcke, Joseph Lubin, Gavin Wood. Charles and Gavin left Ethereum to start their projects Cardano and Polkadot, respectively. Anthony Di Lorio is quitting the world of cryptocurrency due to personal safety concerns.

Over the years, Ethereum has been an instrumental force in shaping the decentralized finance (DeFi) system.

Here is a quick rundown.

  • Technology: Ethereum runs on Solidity, the programming language used for developing smart contracts on the Ethereum Virtual Machine (EVM). Smart contracts are programs that execute upon the fulfillment of specific conditions. One of their many applications is the creation of decentralized finance applications (dApps).
  • Decentralization: True to its founder’s beliefs, Ethereum is a non-profit organization that is now known as the Ethereum Foundation. The foundation is not responsible for controlling the blockchain but only for supporting it. The executive board comprises Aya Miyaguchi, Vitalik Buterin, and Patrick Storcheneger. The team has relentlessly focused on keeping the network wholly decentralized even though, at times, this has resulted in the delay of the project and its widespread adoption.
  • Testnests: Ethereum network has three testnets to enable testing of applications before they get launched on the mainnet. The three testnets are Ropsten (a proof-of-work blockchain that most closely resembles Ethereum); Kovan (a proof-of-authority blockchain, started by the Parity team); Rinkeby (a proof-of-authority blockchain, started by the Geth team). Note that testnets only provide a simulation of the main blockchain and thus do not facilitate any “real” transactions.

Identifying gaps in technology

Removing the Script and adopting Turing-completeness set Ethereum apart at a fundamental technical level during the ICO.

The purpose of bitcoin was (and has been) to create a trustless, decentralized system where users could execute transactions without relying on an intermediary. However, the blockchain was limited to this overtly popularized function while being elusive to creating specialized applications on the blockchain. This meant that programs like decentralized exchanges (which at the time required either creating a specialized blockchain or an entirely new meta-protocol layer) were harder to build.

Ethereum utilizes a Turing-complete scripting language, which helps it analyze and implement any specialized agreement on a smart contract, even those that have not yet been formulated. It was this technology (smart contracts) that helped the blockchain differentiate itself during its launch.

The team building the blockchain had very clearly outlined this gap in the industry way back in November 2013 and had offered to take the technology to its next necessary level.

Releasing their yellowpaper a few months later, in Apr 2014, the team explored the two possible solutions of creating complex applications. While creating an entirely new network makes possible the creation of customized applications that fulfill a specified purpose, the process of creating the network and consistently testing the necessary “state transition” and “networking code” can prove to be tedious. Moreover, the resources required to create a new blockchain network for a tiny application far outweigh the application’s usability itself.

The second approach is to build applications on bitcoin’s blockchain, limited by its inability to implement Simple Payment Verification (SPV) for protocols built on it. The SPV works fine for bitcoin, and as the volume of transactions rises, their legitimacy gets strengthened. However, because this implementation is not valid for meta-protocols, there arises the necessity to backward scan all the transactions to look for similar ones to those being implemented by the protocol.

These major limitations were the primary reasons why an entirely new blockchain network was formulated, which would then prove to be the base for all other protocols which could be built on it.

We’re not on the same page

In a book titled, Out of the Ether, Charles Hoskinson was described as “a pathological liar, a sociopath, and someone to not trust in the company of your girlfriend.”

In April 2013, when Charles Hoskinson had just launched the Bitcoin Education Project, he was — for the least — considered “crazy.” Nevertheless, he decided to go forth with a strong conviction and started educating people about cryptocurrencies online. On a fine day, he happened to meet Vitalik Buterin, one thing led to another, and the two became co-founders of Ethereum.

As the project started growing, the two had several disagreements on how it should be structured. The bone of contention between Charles Hoskinson and Vitalik Buterin was that the former wanted it to be a for-profit venture, while the latter wanted it decentralized. This divergence in objective forced Vitalik to decide who amongst all the founders would stay on the team and who wouldn’t. While Amir Chetrit had soon become elusive of the project and lost interest, Gavin Wood decided to stick around with programmers and had not an ounce of respect for anyone else. Eventually, on the fated night of the first transaction on the Ethereum network, it was decided by Vitalik, in a room full of left-over pizza, beer, and abated breaths, that Charles and Amir were to be let go immediately.

To this day, the tension between Vitalik and Charles is quite palpable. In fact, Charles has his version of the story and claims that Vitalik abhorrently controls Ethereum. Despite the differences, the two have managed their projects well (Ethereum and Cardano) and have garnered a massive community.

But Ethereum’s journey wasn’t as straightforward and sweet.

Two steps forward, one step back

Despite the internal turmoil, the team managed to raise $18.4m in their ICO in 2014. But, the promising project had to deal with a tortuous challenge.

The year 2014 was an exciting one for the team behind Ethereum. After several rounds of back and forth with the legal authorities in the United States and Switzerland, they had finally set up the sale of their native token, ETH. The sale was to last 42 days and could be bought with Bitcoin at 2,000 ETH/1 BTC for the first few days, after which the amount of ETH gained would reduce to 1,337. The sale was overwhelmingly successful, with the team being able to raise around $18.4M with interest from individual investors from all over the world.

The following two years were instrumental in the ground implementation of the project. The Frontier thawing was the “barebone” implementation of the project to bring developers together and lay the foundation for a rich ecosystem. It was a historical event because the launch of the network took place without any lags or issues. The newly established ecosystem successfully started fixing bugs within the network. The incredible initial growth of the network necessitated the upgrade to Homestead that promised many protocol and network-level upgrades. Meanwhile, the price of Ethereum rose from $1.24 to $12.4 between the two upgrades.

The project was racing forward, and it was visible in the sudden rise in the number of active addresses on the network.

Active Addresses on Ethereum

The uptick in growth was destined to burst, albeit for a short while.

After the ICO was over, funds were collected and locked in a DAO. The funds could only be used based on proposals submitted by the community. A few days after the DAO launch, one of the DAO creators quickly discovered a “recursive call bug” within the software.

However, on Saturday, June 18, while fixing the vulnerabilities, the attacker exploited that vulnerability and started robbing the DAO off its funds. The leak turned into a stream of funds routed off into a “child” DAO while the community struggled to decide on a split. The DAO hack led to a loss of $50m, which formed about 15% of all ETHER.

The birth of Ethereum Classic

Following the attack, Ethereum released a post on Jul 15, 2016, proposing a hard fork to the existing blockchain by setting up a carbonvote system (a “community-initiated” project dedicated to being a quantitate reference for the development of Ethereum). Over 85% of the participants decided to vote in favor of the fork. The remaining miners who voted against the hard-fork continued on the “original” un-forked blockchain, eventually becoming Ethereum Classic. It exists to this day.

A few months after the initial hard fork, the Byzantium hard fork reduced the block reward from five to three ETH as part of the Metropolis upgrade. It helped in scaling the blockchain via layer 2 rollups leading to an uptick in Ethereum’s growth.

Source

But that wasn’t the only reason behind the uptick.

Cryptokitties — And the rest is history

A blockchain-based game that pushed Ethereum to its limits.

Experimenting with the applicability of Ethereum, Cryptokitties soon rose to fame as a decentralized NFT game that offered its users to unleash their creativity by breeding kittens and then trading them on the market for ETHER. The token standard used for these virtual assets was the ERC-721, one of its initial applications. During December 2017 alone (a month after their release), Cryptokitties transactions amounted to over 10% of the total transactions on the network, thereby leading the entire network to a halt. The total number of pending transactions too hit an all-time high just within one month of its release.

The rise in transactions on Ethereum after the launch of cryptokitties.

While some pointed out the non-essential hype around it, some took the time to understand the potential that this application had just revealed. The fact that the game offered the ability to “breed” (read: create) different variations of the same asset meant that there was monetizable creative freedom of a financial asset (albeit a nascent one). It would be remiss not to add that they spurred a sudden interest in Ethereum, evident in the incremental rise in the number of wallets on Ethereum post the launch of Cryptokitties.

The number of active addresses increased soon after the launch of Cryptokitties.

The DeFi Revolution

The TVL in DeFi has seen a considerable (69x) growth between May 2020 and June 2021.
Total Value Locked in Ethereum between 2020 and 2021.

While Maker DAO stands as the oldest DeFi protocol on Ethereum, the ICOs of 2017 was a turning point in creating several protocols that have today blossomed into the significance and are considered an integral part of the ecosystem. Some of those protocols include Aave, Synthetix, REN, and Kyber Network, among others. Compound is famous for boosting lending and borrowing in DeFi and was introduced in May 2020. It was responsible for stimulating the famed DeFi Summer in 2020. The COMP liquidity mining program was a unique way for users to maximize their yield.

Rising TVL on Compound

Uniswap, launched in 2018 on the Ethereum mainnet, was another breakthrough product that boosted the DeFi summer, causing total value locked (TVL) and the tractions to skyrocket.

Rising TVL on Uniswap

Along with an increase in the number of transactions and the gas price.

Rising Transactions on Ethereum

Albeit at a slower pace, Ethereum has been doing its best in solving scalability issues. Presently, it supports a plethora of dApps and protocols and facilitates billions of transactions on the network. While some projects have switched to other chains to ease the users (Sushiswap on Avalanche, 1Inch has moved to BSC), others have searched for Ethereum scalability solutions (AAVE with Polygon and Uniswap with Optimism).

Several solutions help scale the Ethereum network and are broadly categorized into Layer 1 and Layer 2 solutions.

  • Layer 2: This is off-chain scaling. Here all transactions happen outside the Ethereum mainnet. The different approaches to the off-chain scaling solutions are state channels (Raiden Network), Sidechains (xDAI), Plasma (Matic), Validium (Starkware), and Rollups (Optimism).
  • Layer 1: This is on-chain scaling. They help keep the majority of transactions on Ethereum. This is included in the Ethereum 2.0 roadmap.

While projects like Matic and Binance Smart Chain have offered viable alternative solutions, the TVL on Ethereum outweighs that on both, reinforcing the need to improve the project to support the growing ecosystem of DeFi.

The road to Ethereum 2.0

Ethereum 2.0 builds upon Ethereum 1.0 and makes the network secure, sustainable, and scalable.

As the number of dApps increases on the Ethereum network, so does the gas fee required to pay for those transactions.

Mean transaction gas price on Ethereum

While the decision to solve gas fees was made earlier than 2020, several events, including the March 2020 price crash, the May 2020 liquidity mining program launched by Compound, and an insatiable rise in NFTs in late 2020 and early 2021 re-emphasized the need.

A 2015 blog post on Ethereum outlined the need to transition to the Proof-of-Stake (PoS) consensus mechanism because of its ability to significantly reduce the amount of computational power required to be a miner.

The objective of Ethereum 2.0 is to scale the network while keeping it secure (through staking) and sustainable (reducing the overall computational power required to run the network). The “set” of upgrades required before the transition are called Serenity and have been under constant research and development since 2014.

The upgrades have been categorized into several phases.

The phases in the upgrade path before PoS transition

The Beacon Chain Upgrade (Phase 0)

Launched on December 1, 2020, Its primary objective was to introduce staking within the network with (694,368 ETH worth $422M staked) on day one. It was the necessary next step in staking post the deployment of the staking contract introduced in October 2020.

Moreover, it aims to coordinate between the 64 sharded chains network — but a key difference is that, unlike the Ethereum mainnet, it cannot handle smart contracts or even accounts. While it exists separately from the mainnet today (it is presently connected to the Eth 1.0 network), the plan is to merge the two so the remaining 64 chains can help scale the mainnet.

How the Beacon chain works alongside Ethereum 1.0

In Ethereum 2.0, blocks are created every 16 seconds, which are known as slots. Each slot is 12 seconds long. A total of 32 slots form an epoch. Thus an epoch is formed every 6.4 minutes. The validator is rewarded every 6.4 minutes when it attests and a bit more if it got selected to produce a block.

Epochs and slots on Ethereum 2.0

The merge

The crucial merging of the Beacon chain with the Ethereum mainnet. Currently, the Ethereum mainnet is secured by PoW, while the Beacon chain handles staking and validators (as it is a PoS chain). When the merge does happen, the ability to manage smart contracts will be introduced to the PoS system. The merge will be the end of the PoW on Ethereum. The estimated date for the merge has not been announced yet, with foreseeable plans for sometime in “early 2022”.

Shard chains

The crucial next step, which has been planned some time in 2022, is the shard chains. A shard (64 shards in phase 1) is essentially a horizontal data partition that contains a subset of the overall Ethereum database and hence is responsible for serving a portion of the overall workload. The shard chains will redistribute the network load across 64 different chains known as “shards.” All shards connect to the beacon chain to ensure consensus.

The primary objective of sharding is to improve scalability and reinforce user accessibility to the network making more users participate within the network, using our laptop or mobile, removing the need to rely on a third party for running Ethereum.

Beacon chain and their connectivity with shards

The shard chains are further divided into two versions.

  • Version 1: The first shard chains are only responsible for providing additional data to the network. These chains won’t handle smart contracts but will be instrumental in enhancing the transactions/second for the network — made possible with rollups.
  • Version 2: This is the “code execution” version and is being debated if and how it should be introduced.

These have been further subdivided as per the relevant upgrades into Phase 0 (completed), Phase 1, Phase 1.5, and Phase 2.

The upgrade phases on Ethereum 2.0.

Validators on Ethereum

Several validators have joined the network to reap transactional rewards and further keep the network secure. In fact, the number has been steadily rising over the past several weeks.

Rising validators on Ethereum

The relation between APRs on staking and the amount of value staked is an inverse one, however, implying that as the latter increases, the former must decrease.

An inverse relation between APR and total ETH staked

Currently, the total ETH staked is 6.6M with an APR of 6.1%, with the total validators reaching 201,926. Becoming a validator requires the initial 32 ETH as a deposit in a stake pool. When a validator deposits the amount, it first goes to a contract on the PoW chain, which further reads on the PoS chain, and the validator is confirmed. Thus, the validators’ blocks are added to the beacon chain and are not processing mainnet transactions. Users will not be able to un-stake their ETH until Phase 1.5 is launched.

If you are interested in staking your ETH but do not wish to run a validator node, there are several staking service solutions.

Staking solutions on Ethereum 2.0

Not only does staking the Ethereum offer you rewards, but it also keeps the overall ecosystem secure.

Ready to stake your ETH?

Upcoming Upgrades

Two upcoming upgrades are scheduled in August 2021 and beyond.

  • London hard fork: It consists of five EIPs, the most talked-about and controversial being the EIP 1559, which aims to reduce transactional costs by burning a part of the gas fee. We have covered this EIP in detail. You can read it here. It is set to go live on block 12,965,000 (August 3–5, 2021).
  • Altair upgrade: It is the first upgrade for the Beacon Chain. It aims to increase the fine for inactive validators from the current 11.8% to 15.4%. This will ensure increased participation amongst validators.

Conclusion

Ethereum was born to not only push the boundaries that bitcoin was operating within but also to create an ecosystem that would facilitate broader user participation. While it has been successful in doing that over the past few years, it is not the only revolutionary network out there.

Solana attempts at solving scalability issues by running a PoS consensus mechanism and offering over 65,000 TPS. Matic, a layer 2 solution, also aims to solve the problem using its Block Producer layer, responsible for producing blocks quickly.

Over the years, the team behind Ethereum has valued decentralization over everything else. They have unflinchingly talked about the scalability trilemma and have suggested ways to solve scalability that avoids the centralization of power. This attitude is explicitly reflected in their vision for Ethereum 2.0.

Eth 2.0 Scalability Trilemma

A crucial step in this direction is to avoid increasing the node’s size, rather focus on increasing its numbers. The 64 new shard chains do precisely that and take the load off of the mainnet, thereby increasing the overall throughput. When it comes to security, the introduction of the Beacon chain and staking ensures that if a malicious node attempts an attack on the network, its stake is slashed. As the network moves to staking — overusing computational power in PoW — it requires lesser energy-intensive resources, reducing its overall impact on the environment. These and other major implementations could see Ethereum processing over 100,000 transactions/second while keeping the entire network completely decentralized.

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