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Ethereum

Ethereum is a decentralized open-source blockchain network powered by the Ether (ETH) token that enables users to make transactions, earn interest on their holdings through staking, use and store nonfungible tokens (NFTs), trade cryptocurrencies, play games, use social media, and more.^[1]

In late 2013, Vitalik Buterin published his whitepaper outlining the idea of Ethereum. In January 2014, Ethereum was first announced at The North American Bitcoin Conference in Miami. By the end of 2014, Ethereum had its first crowdfunding, raising more than $18 million by selling the native token, Ether.

Ethereum went live in 2015 and enabled the smart contracts and applications built on its blockchain to run without any third-party interference. Ethereum’s development was released in several main stages. Each stage represented a necessary system-wide upgrade of the network, at which point old versions were no longer supported. On September 15, 2022, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an upgrade process known as "the Merge". After the Merge, Ethereum's energy consumption rate was reduced by about 99.95% and the upgrade required no actions from Ethereum's users.

As of April 2022, ETH is among the most popular cryptocurrencies and ranks second only behind Bitcoin.

Overview

Ethereum was launched in 2015 by Vitalik Buterin, Gavin Wood, Charles Hoskinson, Amir Chetrit, Anthony Di Iorio, Jeffrey Wilcke, Joseph Lubin, and Mihai Alisie. Ethereum is not controlled by any one entity. It exists solely through the decentralized participation and cooperation of the community. Ethereum makes use of nodes (a computer with a copy of the Ethereum blockchain data) run by volunteers to replace individual servers and cloud systems owned by major internet providers and services. These distributed nodes, run by individuals and businesses all over the world, provide resiliency to the Ethereum network infrastructure. It is therefore much less vulnerable to hacks or shutdowns. Since its launch in 2015, Ethereum has never suffered downtime. There are thousands of individual nodes running the Ethereum network.^[2]

History

Early Beginnings (2014-2015)

Ethereum gained awareness in early 2014 when Buterin brought the concept of the blockchain project into the public eye at a Bitcoin conference in Miami Florida. The introductory paper was published in 2014, before the project's launch in 2015. In April 2014, The Yellow Paper, a technical definition of the Ethereum protocol, was released authored by Dr. Gavin Wood.^[3]

wiki The project raised capital via an initial coin offering (ICO) selling millions of dollars' worth of ETH coins in exchange for funds to use for the development of the project. Ether officially went on sale on July 22, 2014. The sale lasted for 42 days. The price of ether was initially set to a discounted price of 2000 ETH per BTC and stayed this way for 14 days before linearly declining to a final rate of 1337 ETH per BTC. In total, the asset sale sold over $18 million worth of ETH, paid for in Bitcoin.^[4]^[6]

Although ETH coins were purchasable in 2014, the Ethereum blockchain did not actually go live until July 30, 2015, meaning ETH buyers had to wait for the blockchain to launch before they could move or use their ETH. Frontier, a barebone implementation of the Ethereum project went live and followed the successful Olympic testing phase. It was intended for technical users, specifically developers. As of September 15, 2015, ETH price was $1.24 USD.^[6]

Further Development (2016-2021)

The DAO Hack

A project that launched in 2016, the DAO served as an Ethereum-based decentralized autonomous organization fund. Interested parties sent ETH to a pool of funds within the DAO and received DAO tokens in return. These tokens could, at the time, be used to vote on where the DAO would allocate its pool of capital. The DAO attracted about $150 million worth of ETH in 2016, given ETH’s United States dollar price at the time.^[7]

In 2016, however, the DAO suffered a hack that took over 3.6 million ETH from the DAO’s asset pool. The Ethereum community was then split into two parts. A majority of the Ethereum community agreed with the idea to alter the blockchain in response to the hack, leading to a hard fork of the network. The hard fork resulted in two separate blockchains and two separate native assets on those chains. The Ethereum blockchain forked off to regain the assets lost from the hack. The resulting forked asset and blockchain is the one that now holds the Ethereum name. What is now called Ethereum Classic (ETC) is the original version of the Ethereum blockchain.

Enterprise Ethereum Alliance

In February 2017, blockchain leaders, adopters, and innovators from all over the world formed an Enterprise Ethereum Alliance (EEA), the organization that supports and backs Ethereum and related developments and initiatives. The founding members of the Enterprise Ethereum Alliance rotating board included Accenture, Banco Santander, BlockApps, BNY Mellon, CME Group, ConsenSys, IC3, Intel, J.P. Morgan, Microsoft, and Nuco. Additional founding members included AMIS, Andui, BBVA, brainbot technologies, BP, Chronicled, Credit Suisse, Cryptape, Fubon Financial, ING, The Institutes, Monax, String Labs, Telindus, Tendermint, Thomson Reuters, UBS, VidRoll, and Wipro, among others. In July 2017, EEA added 34 new members and thus had over 150 members of the EEA.^[9]^[10]

In 2017, the Ethereum currency increased by more than 13,000 percent.^[8]

Since Ethereum’s initial launch, the blockchain has taken on many other updates as part of its progressions, such as updates called Byzantium, Constantinople, and the Beacon Chain. Each update has altered certain aspects of the blockchain. Beacon Chain, for example, launched the transition of the Ethereum blockchain to Ethereum 2.0 (Eth2), a shift from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. Byzantium and Constantinople each brought a number of changes to the Ethereum blockchain, including a mining payout reduction down to three ETH from five (after Byzantium and preparation for the PoS transition during Constantinople).^[7]

In March 2021, Visa started settling transactions with crypto partners in USDC on Ethereum. Visa is already partnering with 35 digital currency platforms, including Coinbase, Crypto.com, BlockFi, and Bitpanda.^[11]

In August 2021, the London update went live. It included Ethereum Improvement Proposal ("EIP") 1559, which aimed to change the way transaction fees, or “gas fees,” are estimated. Previously, users had to bid for how much they were willing to pay to have their ether transaction picked up by a miner, which could sometimes be costly. Under EIP-1559, this process is handled by an automated bidding system with a set fee amount that fluctuates based on how congested the network is. Another major change under EIP-1559 is that part of every transaction fee is burned, or removed from circulation, which reduces the supply of ether and can potentially boost its price.^[12]^[22]

In 2020 and 2021, Ethereum faced two main challenges: a congested network that could only handle a limited number of transactions per second with increased gas fees for faster transactions, and the large consumption of energy that comes with the proof-of-work mechanism. To increase the scalability of the chain, reduce its environmental impact, and introduce new features, the developers behind Ethereum started preparations for the Merge, a major upgrade to the Ethereum blockchain.^[7]^[23]

The Merge

Originally referred to as Ethereum 2.0, The Merge is an upgraded version of the Ethereum blockchain that uses a proof-of-stake consensus mechanism to verify transactions via staking. The staking mechanism Ethereum replaces the proof-of-work model where cryptocurrency miners use high-powered computers to complete complex mathematical functions known as hashes. The mining process requires an ever-increasing amount of electricity to verify Ethereum transactions before they are recorded on the public blockchain. With proof of work, Ethereum had an annual power consumption roughly equal to Finland, producing a carbon footprint similar to Switzerland. Post-merge, Ethereum reduced its carbon footprint by up to 99.95%, addressing one of the major criticisms of the cryptocurrency.^[13]

In December 2020, Ethereum began running on two parallel blockchains, a legacy one that operates using proof of work (Ethereum Mainnet) and a new chain for proof of stake (Beacon Chain). The merge combined Ethereum’s Mainnet and Beacon Chain into one unified blockchain operating on a proof of stake protocol. The Ethereum Mainnet and Beacon Chain were originally referred to as ETH1 and ETH2, respectively. Their eventual merge was expected to be called Ethereum 2.0.^[13]

In January 2022, the term Ethereum 2.0. was deprecated by the Ethereum Foundation. They believed Ethereum 2.0 sounded too much like a different operating system, which is not at all what the merge is intended to implement. The Merge took place on September 15, 2022, integrating the two existing independent chains in the Ethereum ecosystem: the execution layer and the consensus layer (Beacon Chain).^[14]

Shapella Upgrade

Ethereum’s Shapella upgrade is set to go live on mainnet for epoch 194048, scheduled for 22:27:35 UTC on Apr. 12, 2023. Shanghai upgrade combines changes to the execution layer (Shanghai), the consensus layer (Capella), and the Engine API.^[32]

Upgrades to the execution layer follow Devcon city names and those to the consensus layer follow star names. "Shapella" is the combination of Shanghai, the location of Devcon 2, and Capella, the brightest star in the northern constellation of Auriga.^[32]

Shanghai

The Shanghai hard fork will implement EIP-4895, which allows validators to withdraw ETH that has been staked since as long ago as December 2020. The fork notably does not include EIP-4844, which facilitates the “sharding” of the Ethereum blockchain into multiple chains in order to facilitate scalability.

The six proposals that make up the upgrade include:

EIP-3860: Limit and Meter Initcode – The proposal limits the maximum size of initcode to 49152 and applies an extra 2 gas for every 32-byte chunk of initcode. This essentially solves out-of-gas exceptions on Ethereum.
EIP-3855: PUSH0 Instruction – This EIP brings a new instruction for the EVM that helps shrink the size of smart contracts and optimizes the contract code.
EIP-3651: Warm COINBASE – Not to be confused with the similarly named centralized cryptocurrency exchange, this proposal makes block building cheaper and allows for builder-proposer separation. In doing so, gas fees will be cut for network participants and traders using builders to execute their complex trades will no longer have to pay for failed transactions.^[28]^[27]^[29]
EIP-6049: Aims to improve the security and reliability of smart contracts in Ethereum by deprecating the problematic self-destruct opcode and replacing it with a more secure and controlled function called "halt".
EIP-4895: Enables validators to withdraw their stake of 32 ETH from the staking contract on the Ethereum blockchain since the transition to Proof-of-Stake (PoS).
ERC-4337: The launch of the new ERC-4337 standard has enabled Ethereum to introduce Smart accounts, which are now accessible on Ethereum and aimed at promoting mainstream adoption by simplifying the use of cryptocurrencies.

Capella

As mentioned in the official blog post by the Ethereum Foundation, the Capella upgrade makes it possible for ETH that is “locked” on Ethereum’s consensus layer (i.e. validator balances) to be withdrawn, and credited to an Ethereum address on the execution layer.^[32]

Engine API

Changes to the Engine API that links the two layers include the introduction of the WithdrawalV1 structure and the additions to relevant structures and methods.^[32]

Smart Accounts Update

On March 1, 2023, during WalletCon in Denver, Yoav Weiss, a security researcher from the Ethereum Foundation, announced that the primary contracts for ERC-4337, commonly referred to as "account abstraction" by blockchain developers, had undergone an audit by Open Zeppelin and were approved for use on all Ethereum Virtual Machine (EVM) compatible networks, including Polygon, Optimism, Arbitrum, BNB Smart Chain, Avalanche, and Gnosis Chain. ^[30]

Account abstraction, also known as ERC-4337 (previously EIP-4337), serves as the foundation for several functionalities, such as account recovery and group-access wallets. Its potential applications include reduced transaction fees through bundled and sponsored transactions. ^[31]

Additionally, this also allows cryptographic keys to be stored on standard smartphone security modules, effectively turning them into hardware wallets. This enables platforms to offer cryptocurrency services without the need for users to create a conventional wallet and manually save their seed phrase or private key. With account abstraction, the keys are kept locally on the user's hardware security module (HSM), not with a service provider. As a result, it is just as secure as a self-custodied cryptocurrency wallet. ^[31]

“The next billion users are not going to write 12 words on a piece of paper. Normal people don’t do that,” he said. “We need to give them better usability, they shouldn’t need to think about cryptographic keys.” - Yoav Weiss, security researcher at the Ethereum Foundation

Finally, smart accounts also offer additional features such as two-factor authentication, monthly spending limits, session keys for blockchain games, and time-locked social recovery through trusted friends or commercial services. ^[31]

Dencun Upgrade

Dencun Upgrade is set to roll out on March 13, 2024 marking a significant hard fork update aimed at boosting the Ethereum network's scalability, security, and user-friendliness. As part of Ethereum's roadmap initiative, dubbed 'The Surge,' this upgrade is a pivotal step forward in scalability enhancements.
The Ethereum Dencun (Cancun-Deneb) Upgrade, with Cancun refining the Execution Layer (EL) and Deneb enhancing the Consensus Layer (CL), incorporates a suite of Ethereum Improvement Proposals (EIPs) vital for the network's advancement.

EIP-1153: Transient Storage opcodes
EIP-4788: Beacon block root in the EVM
EIP-4844: Shard Blob Transactions
EIP-5656: MCOPY - Memory copying instruction
EIP-6780: SELFDESTRUCT only in the same transaction
EIP-7044: Perpetually Valid Signed Voluntary Exits
EIP-7045: Increase max attestation inclusion slot
EIP-7514: Add Max Epoch Churn Limit

These EIPs are integral to the upgrade's objectives, such as improving data storage capabilities and reducing operational costs on the blockchain. ^[33]

Accounts

An Ethereum account is an entity with an ether (ETH) balance that can send transactions on Ethereum. Accounts can be user-controlled (controlled by anyone with private keys) or deployed as smart contracts (controlled by code). Both account types have the ability to receive, hold and send ETH and tokens, and interact with deployed smart contracts.^[17]

Blocks

Blocks are batches of transactions with a hash of the previous block in the chain. This links blocks together (in a chain) because hashes are cryptographically derived from the block data. This prevents fraud because one change in any block in history would invalidate all the following blocks as all subsequent hashes would change and everyone running the blockchain would notice.

To preserve the transaction history, blocks are strictly ordered (every new block created contains a reference to its parent block), and transactions within blocks are strictly ordered as well. Except in rare cases, at any given time, all participants on the network are in agreement on the exact number and history of blocks and are working to batch the current live transaction requests into the next block.

Once a block is put together by some validator on the network, it is propagated to the rest of the network; all nodes add this block to the end of their blockchain, and a new validator is selected to create the next block. The exact block-assembly process and commitment/consensus process is currently specified by Ethereum’s “proof-of-stake” protocol.^[18]

Gas & Fees

Gas is essential to the Ethereum network. It is the fuel that allows it to operate, in the same way that a car needs gasoline to run. Gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network. Since each Ethereum transaction requires computational resources to execute, each transaction requires a fee. Gas refers to the fee required to conduct a transaction on Ethereum successfully.^[19]

Gas fees are paid in Ethereum's native currency, ether (ETH). Gas prices are denoted in gwei, which itself is a denomination of ETH - each gwei is equal to 0.000000001 ETH (10-9 ETH). For example, instead of saying that gas costs 0.000000001 ether, one can say that gas costs 1 gwei. The word 'gwei' itself means 'giga-wei', which equals 1,000,000,000 wei. Wei itself is the smallest unit of ETH.^[19]

Apart from that, every block has a base fee which acts as a reserve price. To be eligible for inclusion in a block the offered price per gas must at least equal the base fee. The base fee is calculated independently of the current block and is instead determined by the blocks before it - making transaction fees more predictable for users. When the block is mined this base fee is "burned", removing it from circulation.

Nodes & Clients

Ethereum is a distributed network of computers (known as nodes) running software that can verify blocks and transaction data. A "node" is any instance of Ethereum client software that is connected to other computers also running Ethereum software, forming a network. A client is an implementation of Ethereum that verifies data against the protocol rules and keeps the network secure.

Post-Merge Ethereum consists of two parts: the execution layer and the consensus layer:

The execution client listens to new transactions broadcasted in the network, executes them in EVM, and holds the latest state and database of all current Ethereum data.
The consensus client implements the proof-of-stake consensus algorithm, which enables the network to achieve agreement based on validated data from the execution client.^[20]

Before The Merge, the consensus and execution layers were separate networks, with all transactions and user activity on Ethereum happening at what is now the execution layer. One client software provided both execution environment and consensus verification of blocks produced by miners. The consensus layer, the Beacon Chain, has been running separately since December 2020. It introduced proof-of-stake and coordinated the network of validators based on data from the Ethereum network. With the Merge, Ethereum transitions to proof-of-stake by connecting these networks. Execution and consensus clients work together to verify Ethereum's state.^[20]

Networks

Networks are different Ethereum environments one can access for development, testing, or production use cases. Since Ethereum is a protocol, there can be multiple independent "networks" that conform to the protocol without interacting with each other.

Public Networks

Public networks are accessible to anyone in the world with an internet connection. Anyone can read or create transactions on a public blockchain and validate the transactions being executed.

Ethereum Mainnet

Mainnet is the primary public Ethereum production blockchain, where actual-value transactions occur on the distributed ledger.

Ethereum Testnets

In addition to Mainnet, there are public testnets. These are networks used by protocol developers or smart contract developers to test both protocol upgrades as well as potential smart contracts in a production-like environment before deployment to Mainnet. The Ethereum testnets are now proof-of-stake, just like Ethereum Mainnet. ETH on testnets has no real value; therefore, there are no markets for testnet ETH. Since one needs ETH to actually interact with Ethereum, most people get testnet ETH from faucets. Most faucets are web apps where one can input an address to which one requests ETH to be sent to.^[21]

Goerli: a proof-of-stake testnet. It is expected to be maintained long-term as a stable testnet for application developers. Before its testnet merge, Goerli was a proof-of-authority testnet.
Sepolia: a proof-of-stake testnet. Although Sepolia is still running, it is not currently planned to be maintained long-term. Before undergoing The Merge in June 2022, Sepolia was a proof-of-work testnet.
Ropsten (deprecated): a proof-of-stake testnet. Ropsten will be deprecated in late 2022. Before undergoing The Merge in May 2022, Ropsten was a proof-of-work testnet.
Rinkeby (deprecated): a proof-of-authority testnet for those running old versions of the Geth client. The Rinkeby testnet is deprecated and will no longer receive protocol upgrades.
Kovan (deprecated): a very old proof-of-authority testnet for those still running OpenEthereum clients. The Kovan testnet is deprecated and will no longer receive protocol upgrades.

Layer 2 testnets

Layer 2 (L2) is a collective term to describe a specific set of Ethereum scaling solutions. Layer 2 is a separate blockchain that extends Ethereum and inherits the security guarantees of Ethereum. Layer 2 testnets are usually tightly coupled to public Ethereum testnets.

Arbitrum Rinkeby: testnet for Arbitrum.
Optimistic Kovan: testnet for Optimism.

Private Networks

An Ethereum network is a private network if its nodes are not connected to a public network (i.e. Mainnet or a testnet). In this context, private only means reserved or isolated, rather than protected or secure.

Development networks

To develop an Ethereum application, one will want to run it on a private network to see how it works before deploying it. This allows for much faster iteration than a public testnet.

Consortium networks

The consensus process is controlled by a pre-defined set of nodes that are trusted. For example, a private network of known academic institutions that each govern a single node, and blocks are validated by a threshold of signatories within the network. If a public Ethereum network is like the public internet, a consortium network is like a private internet.^[21]

Token Standards

ERC-20 (Fungible Tokens)

The ERC-20 introduces a standard for fungible tokens, in other words, they have a property that makes each token exactly the same in type and value as another token. For example, an ERC-20 token acts just like the ETH, meaning that 1 token is and will always be equal to all the other tokens.^[24]

The ERC-20 (Ethereum Request for Comments 20), proposed by Fabian Vogelsteller in November 2015, is a token standard that implements an API for tokens within smart contracts. ERC-20 functionalities include transferring tokens from one account to another, getting the current token balance of an account, getting the total supply of the token available on the network, and approving whether an amount of token from an account can be spent by a third-party account.^[24]

ERC-721 (Non-Fungible Tokens)

The ERC-721 introduces a standard for NFT (Non-Fungible Token). This type of token is unique and can have a different value than another token from the same smart contract, due to its age, rarity, visual characteristics, or any other features.

The ERC-721 (Ethereum Request for Comments 721) was proposed by William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs in January 2018. It provides functionalities like transferring tokens from one account to another, getting the current token balance of an account, getting the owner of a specific token, and also the total supply of the token available on the network. Besides these, it also has some other functionalities like approving that an amount of token from an account can be moved by a third party account.^[25]

Oracles

Oracles are data feeds that connect Ethereum to off-chain, real-world information so that a user can query data in their smart contracts. This could be anything from price information to weather reports. Oracles can also be bi-directional, used to "send" data out to the real world. An oracle is typically made up of a smart contract and some off-chain components that can query APIs, then periodically send transactions to update the smart contract's data.^[26]

Ethereum Governance

Stakeholders

There are various stakeholders in the Ethereum community, each playing a role in the governance process. They include:

Ether holders: these people hold an arbitrary amount of ETH.
Application Users: these people interact with applications on the Ethereum blockchain.
Application/Tooling Developers: these people write applications that are run on the Ethereum blockchain (e.g. DeFi, NFTs, etc.) or build tooling to interact with Ethereum (e.g. wallets, test suites, etc.).
Node Operators: these people run nodes that propagate blocks and transactions, rejecting any invalid transaction or block that they come across.
EIP Authors: these people propose changes to the Ethereum protocol, in the form of Ethereum Improvement Proposals (EIPs). Ethereum Improvement Proposals are standards specifying potential new features or processes for Ethereum.
Miners/Validators: these people run nodes that can add new blocks to the Ethereum blockchain.
Protocol Developers: these people maintain the various Ethereum implementations (e.g. go-ethereum, Nethermind, Besu, Erigon at the execution layer or Prysm, Lighthouse, Nimbus, Teku, Lodestar at the consensus layer).

Process for Introducing Changes

The formal process for introducing changes to the Ethereum protocol is as follows:

Proposing a Core EIP: the first step to formally proposing a change to Ethereum is to detail it in a Core EIP. This will act as the official specification for an EIP that Protocol Developers will implement if accepted.
Presenting the EIP to Protocol Developers: once one has a Core EIP for which they've gathered community input, they should present it to Protocol Developers.
Iteration towards a final proposal: after receiving feedback from all relevant stakeholders, one will likely need to make changes to the initial proposal to improve its security or better meet the needs of various users. Once the EIP has incorporated all the changes that are necessary, one will need to present it again to Protocol Developers. One will then move to the next step of this process, or new concerns will emerge, requiring another round of iterations on the proposal.
EIP Inclusion in Network Upgrade: assuming the EIP is approved, tested, and implemented, it gets scheduled as part of a network upgrade. Given the high coordination costs of network upgrades (everyone needs to upgrade simultaneously), EIPs are generally bundled together in upgrades.
Network Upgrade Activation: after the network upgrade is activated, the EIP will be live on the Ethereum network. Network upgrades are usually activated on testnets before being activated on the Ethereum Mainnet.^[15]