Overview
Ethereum is an open-source blockchain that enables decentralized applications and financial services by leveraging smart contract technology. The original vision behind Ethereum was to create “a platform for the deployment and execution of smart contracts” thereby enabling a decentralized value-settlement and computational layer. The goal was to extend beyond Bitcoin’s functionality to a decentralized Turing-complete computing platform for smart contracts, programmable money, and decentralized applications (dApps).
Ethereum Strengths
- Second largest and most liquid digital asset behind bitcoin
- Most developers, developer activity, dApps, node count, settlement value, and aggregate fees of any digital asset
- The flexibility of the scripting language allows for nearly any project to build on Ethereum and participate in “Web 3.0”
- Tremendous network effects and name recognition due to partnerships with prominent enterprises, the sheer volume of dApps built on platform, and market cap
Ethereum Weaknesses
- The project is still incomplete and is currently in the midst of a prodigious, multi-year upgrade that comes with substantial risk
- Current scaling issues limit the ability of dApps and other projects to grow and create satisfying user experiences
- Heavy competition from similar blockchains which could chip away or surpass Ethereum’s popularity if the upgrade takes too long to complete
Important Links
Use Case
Ethereum is an open-source public blockchain cryptocurrency network founded in 2015. The original vision behind Ethereum was to create “a platform for deploying and executing smart contracts” on a sort-of decentralized world computer capable of fostering a new parallel, permissionless digital economy. The goal was to extend beyond Bitcoin’s functionality to a decentralized Turing-complete computing platform for smart contracts, programmable money, decentralized applications (dApps). It is currently secured by Proof-of-Work (PoW), cryptography, and reaching consensus via Nakamoto Consensus but is working to transition to a Proof-of-Stake model with their ETH 2.0 upgrade.
Ethereum has an intriguing and polarizing history that has had a profound influence on the broader cryptocurrency space. In July 2016, Ethereum split into Ethereum and Ethereum Classic as a result of the intense debate following the infamous DAO incident. Since then, Ethereum has solidified its place in the cryptocurrency mainstream as the second largest cryptocurrency – behind Bitcoin – and retained a substantial portion of the developers in the space.
The possibilities as to what can be built upon Ethereum are nearly as limitless as the internet itself. To date, Ethereum’s biggest successes have arguably been developing open standards for tokens, the DeFi movement, and rapid dApp experimentation.
Open standards are the basis of the Internet and are proven to drive open-source success. Token standards from ERC-20 to ERC-1155 are built to facilitate a standardized interface for smart contracts to interact and exchange value. The ERC-20 standardization made running an Initial Coin Offering (ICO) on Ethereum so easy, which led to billions of dollars raised in 2017 and 2018 that helped to build out the ecosystem.
DeFi
One area of experimentation that so far has been a success for Ethereum is the emerging DeFi (Decentralized Finance) or Open Finance movement within the crypto ecosystem, enabling projects to build a stack of financial primitives in a decentralized and open-to-anyone fashion. While DeFi remains incredibly nascent, the promise of removing financial gatekeepers and middlemen gives the entire sector great promise. The first success case out of all of these projects was MakerDao, a financial system for decentralized, collateralized loans as well as the stablecoin, Dai. In Q2 2019, a little over 1% of all Ether was locked into loans on MakerDao, who in their first year issued $200 million in loans. Other notable Ethereum DeFi projects include money market protocols like Compound, lending tools like Dharma and Aave, decentralized exchanges like UNI and 1inch, prediction markets like Augur, and derivative products like dYdX. DeFi/Open Finance is still in its infancy, but the idea looks to be a solid use case for smart contract platforms, and is drawing a good deal of attention moving into 2019.
Technology
Ethereum utilizes an optimized version of Nakamoto Consensus coupled with Proof-of-Work to secure the network. It also employs the use of gas – a derivative of its native cryptocurrency Ether – for mitigating spam and allocating resources on the network. Ethereum’s network is known as the Ethereum Virtual Machine (EVM) which is a set of thousands of public nodes running the client software that execute the computations (i.e., programs or transactions) on the network.
Ethereum optimizes this consensus mechanism by using the Ethash mining algorithm rather than Bitcoin’s SHA-256, and aiming for a block time of ~12 seconds as opposed to 10 minutes in Bitcoin’s case. Shorter block times help with frequent state transitions on Ethereum’s blockchain and its account-based model, compared to Bitcoin’s UTXO model.
Eth 2.0
Eth 2 is the manifestation of the original Ethereum whitepaper combined with 4+ years of technical research and game theory design. It is designed, ultimately, for a simpler, more robust, stable, and secure base layer protocol with full lite client verifiability. After the full Eth 2 implementation is complete, the base layer can then “ossify” while leaving the flexibility for innovation on higher protocol levels like Layer 2. The Beacon Chain serves as the epicenter of Eth 2 architecture and has limited functionality beyond implementing Proof of Stake (PoS). PoS aims to lower the cost of participating in securing the network by allowing anyone with some ETH to stake rather than needing a giant million dollar mining farm as is the case in most PoW networks. With PoS and staking rewards, ETH becomes a productive capital asset with yield as well as a utility coin used for sending transactions and executing smart contracts.
Beacon Chain
Key takeaways from the Phase 0 – Beacon Chain are:
- Introducing the ETH 2.0 Proof of Stake consensus layer
- Tracks ETH 2.0 validators and balances
- One-way ETH deposit to stake on the Beacon Chain
- No state management (transactions, smart contracts)
The other Eth 2 phases will look to implement the following:
Phase 1 – Introduce Shard Chains:
Phase 1.5 – Migration of Eth1 to eth2
Phase 2 – State Execution:
Staking on Eth 2
Over $1.5b worth of ETH has now been staked! Some stats on network progress:
- ETH deposited to deposit contract: 1,600,000+ (~1.5% of all ETH)
- Current staking yield: 11.4%
- Active validators: 50,801
- Pending validators: ~20,000
- Network participation rate: 99.2%
Ethereum has several second layer solutions for scalability and privacy that are live, in development, or in the research phase. “Second layer” refers to technology built “on top of” the Ethereum base layer and does not interact with (and thus does not risk) the protocol layer. Bitcoin’s Lightning Network is Ethereum’s Raiden Network for bidirectional, off-chain payments. Raiden comes in several releases, with MicroRaiden and Raiden Network Red Eyes already live. Other layer two scaling solutions for Ethereum include Plasma and dappchains, which are childchains tethered to the Ethereum main chain.
Rollups improve scalability by combining or “rolling up” sidechain transactions into a single transaction, generating a cryptographic proof (called a SNARK), and then submitting only the proof to the base layer. This removes the burden of data on layer 1 while also allowing layer 2 transaction data to be available on Layer 1 for validation. Moving transactions on a rollup layer 2 solution guarantees that one could verify the integrity of the data if it’s actually present. Scalability is improved on the base layer due to the lack of reliance on Layer 1 storage.
Rollups can 100x Ethereum’s scaling without ETH 2. With ETH 2 + Rollups (years away), scaling should theoretically reach 25k-100k transactions per second (TPS). There is increasing competition among various flavors in the rollup space with the trend being towards EVM compatibility and catering towards various needs of dApps.
In late 2018, a new zero-knowledge privacy protocol entitled AZTEC was introduced on the Ethereum mainnet. The new privacy technique keeps the values in a transaction encrypted and private from outsiders while still allowing the logic and validity of the transaction to be validated by all. Private transactions on Ethereum look like they will become a reality in 2020 with the completion of AZTEC’s ceremony and full launch slated for January 2020, StarkDex expected in Q3 2020, and the proliferation of mixer options like Tornadocash.
Economics
Ethereum’s ICO took place in the summer of 2014, and the platform went live in July 2015 with 72 million ETH pre-mined and sold to early investors. While the premine turns some cryptocurrency purists off for ethical reasons or the centralizing nature of it, Ethereum’s wealth concentration and thus Gini Coefficient (~0.62) has been declining since launch. The top ~375 wallet addresses control about 33% of the money supply as opposed to about 15% in Bitcoin.
Ethereum, as of Q1 2020, has a market cap of roughly $100 billion and a circulating supply of about 113,500,000 ETH. In contrast to Bitcoin’s hard-cap approach, the Ethereum community supports a non-hard-cap supply in support of the smallest amount of inflation necessary to secure the chain in the future. The issuance rate once Ethereum transitions to PoS is not concrete, but rough consensus estimates it will be in the range of 0.5 - 2.0 percent. This inflation will accrue proportionally to the ETH holders participating in the PoS consensus. Conversations and research regarding Ethereum economics now and in the future are open to the community. Currently, the block reward for Ethereum is 2 ETH, issued on average every 12 seconds.
Ethereum is unique in its economics for a multitude of reasons: one being its status as the platform of choice for launching ICOs. ICOs raised $5.6 billion in 2017 and $11.4 billion in 2018 but their reduced prevalence throughout 2018 has had some well-documented effects on the larger cryptocurrency markets,including putting downward pressure on ETH’s price. In 2019, ICOs sold over 1.1 million ETH while continuing to hold ~1.9 million ETH on their books.
Another reason ether remains unique is that in the future, once ETH 2.0 is implemented, it will seemingly serve as three different sorts of assets: a capital, consumable, and store of value asset. Ether will work as a capital asset by earning a return during staking, a consumable asset when used as gas for executing transactions, and a store of value when used as collateral for financial instruments like Dai or Set Protocol.
Governance
Ethereum’s governance mechanism follows an off-chain model similar to Bitcoin since there is no direct on-chain voting baked into the protocol. The community is led by prominent developers, chief among them being creator Vitalik Buterin. The lead developers have the most influence in the governance structure of Ethereum and are primarily responsible for making decisions as to the future direction of the network.
Developers can submit improvement proposals off-chain in the form of Ethereum Improvement Proposals (EIPs) on GitHub. EIPs often entail detailed design documents that provide suggestions on improving the protocol by addressing certain existing services, adding new features, and by improving any discovered bugs. This process makes certain that all of the views are given a platform, taken into consideration based on merit, and then can be progressed with community votes, audits, etc.
The Ethereum Foundation – a Swiss non-profit – oversees the promotion and support of the platform in conjunction with organizations like Consensys, mining pools, developer teams, and other influential leaders.
The network hash rate as of Q1 2021 is at an all time high of ~300,000 GH/s, with roughly 10,000 active nodes on the network. This is even despite the network's commitment to transition to fully PoS over the coming years.
Out of those 10,00, approximately 82% run a Geth client with a majority of node operating systems running Linux. About 20% of all current nodes are based in the United States and in a September 2019 report it was revealed that, unfortunately, nearly ~25% of all Ethereum nodes run on Amazon Web Services (AWS). These metrics are subject to change and are rough estimates based on the available data.
Ethereum’s established network effects, and Ethash-based PoW consensus are large factors driving its decentralization. Its primary advantage over competing smart contracts platforms like EOS is its more robust decentralization and security; however, the eventual transition to PoS consensus creates some uncertainty about the future of the platform.
Vulnerabilities
Ethereum’s community is very transparent about developments, issues, and accomplishments. Moreover, Ethereum’s GitHub is the 5th fastest growing open-source project on GitHub. Solidity, Ethereum’s smart contract programming language, has helped launch the smart contracts craze, but has allowed some critical function issues that lead to contract exploits and several high-profile hacks. Other weaknesses stem from severe network congestion that occasionally has made the network functionally unusable due to high gas costs. In early 2018 a gas attack by FCoin caused gas prices across the network to spike drastically, rendering many dApps prohibitively expensive to use.
Like all PoW consensus blockchain networks, Ethereum is theoretically vulnerable to a 51% attack; however, this is highly unlikely, as the network is sufficiently decentralized to mitigate such an attack and make it cost-prohibitive to all but the most wealthy would-be attackers. Second in cost only to Bitcoin, the cost to launch a 51% attack on Ethereum is calculated to be about $1,00,000 per hour as of Q1 2020. This does not account for the tens of millions in cost theoretically needed to purchase the necessary ASIC mining hardware.
The migration of ETH 1.0 to ETH 2.0 is the biggest project overhaul the cryptocurrency industry has seen thus far in its early existence. The magnitude, both in scope and dollars, are incredibly daunting with much of the risk hiding in the unknown. Beyond technical risks within the code are the much less predictable actions of the humans interacting with the new chain while the old chain still still exists. All unforeseen manipulation, exploits, or simply market confusion among the users simply cannot be anticipated by a few project designers.
Network Effect
Ethereum has the most extensive network effects of any cryptocurrency except for Bitcoin. Additionally, Ethereum holds the market lead in active developers. The sheer size of the development community for Ethereum – many of which programmed their first smart contracts on the platform – should provide a pool of talent to help propel it into the next generation of cryptocurrencies.
Due to its popularity, liquidity, and compatibility with ERC-20 tokens, Ethereum is listed not only on the most well known exchanges like Coinbase, Binance, Bittrex, Kraken, Bitmex, Gemini, etc. but on nearly every exchange across the globe. Arguably the number one statistic that displays Ethereum’s popularity over its relatively short history is that typically 80+ of the top 100 tokens listed by market cap are built on the Ethereum network.
Ethereum transactions per day average ~600k, nearly twice as much as Bitcoin, and an order of magnitude ahead of any other altcoin. Much of the recent drive in daily transactions can be attributed to the rise of the DeFi (Decentralized Finance) movement on Ethereum. Total ETH held in DeFi currently is ~7 million (~5% of ETH supply) or nearly $20B and continues to grow quarter over quarter.
Aside from strictly crypto-centric companies utilizing the Ethereum blockchain, traditional mega-corporations are also building atop the protocol. Ethereum, and more precisely the Enterprise Ethereum Alliance, is home to some of the world’s biggest companies researching (and actively deploying) ways to implement the Ethereum blockchain into their existing business. Some of the most well-known names include Samsung, Ernst and Young, JP Morgan, Deloitte, Microsoft, CitiGroup, and Overstock.
Team
Ethereum’s team is an amalgamation of its lead developers, business leaders, researchers, and other influencers.
Vitalik Buterin is the primary creator of Ethereum and is widely considered one of the brightest minds in the industry. He leads development on numerous projects and actively participates in sharding and PoS research. His blog and Twitter are must-reads for anyone in the industry.
Joe Lubin co-founded EthSuisse which was a heavy early contributor to Ethereum. He also co-founded Consensys – which he now heads – which is one of the most influential companies in the Ethereum and blockchain space as a whole with over 50+ companies under its helm.
Joseph Poon proposed both the Lightning Network for Bitcoin and Plasma for Ethereum. Joseph is a leading researcher, developer, and innovator in the cryptocurrency field.
Vlad Zamfir proposed Casper and is leading its development. Vlad provides in-depth analysis of governance and other technical concepts in the industry through his blog.
The Enterprise Ethereum Alliance is also composed of some high-profile firms including Consensys, CME Group, Toyota Research Institute, Microsoft, Intel, J.P. Morgan, Deloitte, and Accenture. Additionally, there are at least nine funded independent development teams working on Ethereum 2.0.
User Experience
Ethereum is typically the next cryptocurrency that casual users discover and learn how to use after Bitcoin. The main driver of this is the availability and functionality of its wallet experience. The vast majority of altcoins are ICOs launched on Ethereum, and are compatible with the ERC-20 fungible standard and ERC-721 non-fungible standard that is implemented in nearly every wallet interface.
The variety of options to store ETH and associated altcoins is overwhelming; however, it is important to research each wallet you plan on using and make sure it fits your security and usability standards. Popular web wallets include MetaMask and MyEtherWallet, while Trezor and Ledger are the most popular hardware wallets. Other wallets of note are Argent, Jaxx, Balance Manager (Web Wallet MetaMask Extension), and Exodus.
Various blockchain and network metric tools such as Etherscan are useful for analyzing the network’s state, exploring different smart contracts, and tracking and verifying your on-chain transactions. Ethereum transactions are considered final after 12 confirmations and generally take less than 5 minutes. Other tools such as Dapp Radar and StateofThedApps provide insightful metrics on dApp user numbers and amounts transferred.
With the proliferation of the DeFi movement, users now need useful tools to track their lending, spending, and network liquidity. Luckily, there are numerous sites that help showcase the status of the overall DeFi economy like DefiPulse, LoaScan, DefiScore, and others. While sites like Zapper, Zerion, and Instadapp help users track their DeFi funds.
Currently, due to the finite block space in each ETH block coupled with increasing demand, the fees to use ETH and interact with the Ethereum chain are quite high (> $5). This hampers many of the use cases on the network but also helps drive layer 2 adoption like Loopring, Optimism, and others that will help reduce chain congestion and drive fees down.
Regulation
The SEC has already commented on Ethereum (twice) – in conjunction with Bitcoin – saying that it is not a security. Ethereum will likely still be subject to any blanket regulation imposed on cryptocurrencies but regulatory restrictions that target Ethereum specifically are unlikely. As such, Ethereum will not be subject to as much intense regulatory scrutiny as the many ICOs that were launched on its platform. A recent landmark case by the SEC sets a precedent for them to evaluate ICOs as securities retroactively, but this does not affect Ethereum itself, even though it had an initial token sale in 2015.
Many digital assets lack clear utility and thus have no purpose other than for retail investors to speculate on price (e.i. invest). ETH has a clear-cut utility case on the platform in the form of gas. Gas performs the role of a utility in the form of an internal pricing mechanism for allocating computational resources on the network. Since it is derived from but not the same thing as the native token Ether, discerning the functionality of Ether on the network is difficult to tease apart.
Road Map
There is no official roadmap for Ethereum, as it is predicated more on rough community consensus. That said, specific developments are tied to future upgrades. A general overview of Ethereum’s past upgrades, as well as those that are on the horizon (including new technical implementations) are as follows:
Serenity - The pure PoS and sharding-complete implementation also known as Eth 2.0. Serenity will be introduced in 4 phases, to be completed approximately in the year 2022. The first phase (Phase 0) will introduce the PoS Beacon Chain that will coexist next to the Ethereum chain. The Beacon Chain went live in December 2020.
Phase 1 is set to be rolled out in 2020 and will address finality and consensus on shard chains. The shards will be each have their own random validator assigned to that specific shard (1024 total shards) while the Beacon Chain will monitor all shards.
Phase 2 introduces a new virtual machine: eWASM. This will enable cross-shard communication and true functionality to the shards. It also will enable smart contracts to be written in multiple languages, not just Solidity.
Phase 3 is only tentative and less defined as it is most likely not to be deployed until 2021 at the earliest. At the moment, the idea will be to continue improving the new infrastructure with new optimizations and technology.
Ethereum’s roadmap is constantly evolving; however, the flagship upgrades in the pipeline are focused on integrating PoS and sharding to help the network scale. These were supposed to be accompanied by Plasma, but that is now uncertain, and the implementation of zk-SNARKs for improved scalability and privacy seems like a blossoming development.
