Ethereum | A Simplified Beginner’s Overview
“Bitcoin is great as a form of digital money, but it’s scripting language is too weak for any kind of serious advanced applications to be built on top…” - Vitalik Buterin
How Ethereum Works
Bitcoin set the stage by heralding a new era of computing, cryptography, & digitally native systems. Nevertheless, Bitcoin’s core design objective, cryptographically securing the economic value of the world’s first mathematically verifiable scarce asset in a natively digital format, means it’s not easily programmable. Technically, you can build smart contracts applications on top of the Bitcoin blockchain — multi-signature key management is an example of this — but it’s not nearly as effective, efficient, or expressive as is building atop the Ethereum blockchain with the Solidity language or even via the Ethereum Virtual Machine (EVM) emulator. That being said, let’s take a moment to assess the merits of Ethereum’s technology.
Proof of Stake: Efficient Incentives
Instead of using computational miners ala Proof-of-Work (PoW), Ethereum2.0 relies upon a Proof-of-Stake (PoS) mechanism stipulating validators must stake 32+ ETH in escrow-esque fashion to secure the network via block proposal & attestation. Along with reduced energy demands, PoS better incentivizes good actors, reduces hardware requirements & helps support sharding, a key component of ETH2.0’s scaling solution.
Though viewed by some as a pivot, PoS is effectively a requirement for ETH2.0 & was conceived of early on as a necessary adjustment to allow Ethereum to scale to the throughput required for long-term viability as a smart contract platform processing thousands of transactions a second. Much of Ethereum’s problems stem from the low transaction throughput of Ethereum’s PoW model. When switched to PoS, ETH2.0’s sharding framework enables far better throughput & scaling.
Alignment of incentives also happens to improve with the PoS approach. If ETH2.0 validators try to behave maliciously, proposing or attesting for malicious or incorrect blocks, they will get “slashed” & lose a portion of their staked ETH — a costly penalty. The more a validator stakes, the more they have at risk. In many ways, PoS is a far better way to incentivize cooperation across the network compared to PoW.
The Merits Of Ethereum’s Technology
Programmable + Turing Complete From a high level, broad strokes perspective, all “Turing Complete” means is that Ethereum’s coding language has more expressivity & logic. This expressivity is what allows people to create such nuanced & specific programs, dApps & smart contracts using Ethereum.
Composable + Interoperable
Smart contracts are often called “money Legos” because of how easily they allow financial applications to be built. One person could build a smart contract that functions as a savings wallet that dictates “If you deposit ‘X’ amount of ‘Y’ asset, you receive ‘Z’ yield. Somebody else takes that base layer component & integrates it into a wallet application. Now, that wallet has the same savings & yield functionality as the separate smart contract because they were able to integrate it into their new program just like an API. This “Lego” nature allows things to be built & iterated upon far more quickly than would otherwise be the case.
Ecosystem Development
Ethereum is responsible for kicking off the smart contract & dApp segment inside the digital asset sector in much the same way that Bitcoin is responsible for putting blockchain at the top of everybody’s mind. Anytime you hear about an “altcoin” or an application built on top of a distributed blockchain ledger, there’s an extraordinarily high chance it’s built on Ethereum. Of course, other blockchain’s exist & have similar features to what Ethereum offers, but until a competing blockchain like Polkadot, Solana or Cardano can convincingly entice developers & retain users, Ethereum will remain the segment’s clear leader.
Energy Friendly Consensus
It’s no secret — PoW uses a lot of energy. However, the impact of energy used is significantly blown out of proportion as a tool to steer the broader markets in a direction most advantageous & profitable for larger participants (i.e. “smart money”). If you were to really assess the energy impact of, let’s say, the traditional banking system, tech companies mining for rare Earth metals, or even the energy consumed by the Netflix-dominated film industry, PoW mining is far less of an issue. Still, PoS is a more efficient consensus mechanism.
The Downfalls Of Ethereum’s Technology
The expansive ecosystem into existence by Ethereum bears with it a two-sided blade. Frankly, a lot of projects just aren’t good, having poor code bases & poor security.
Substantial Update Roadmap
Citing Bitcoin’s fundamental code base as complete, critics express concerns about Ethereum’s seemingly perpetual beta state. For the most part, that’s a fair & valid critique. As I see it, occasionally things are so ambitious, be it in scale, scope or simply at a technical level, that the only viable way for it to come to fruition is by breaking it down into smaller pieces, releasing chunks at a time while steadily developing & tweaking things on the back end until final form is achieved.
Look at Tesla’s “autopilot” feature. No doubt, it has been integral to the company’s early EV market advantage & a key selling point for would-be Model “X” owners despite its live software being in ongoing beta development for years. Granted, flaws in Tesla’s software have resulted in the loss of human life on more than a handful of occasions, while the worst thing to happen to Ethereum was a hack that was ultimately undone via controversial chain-state rollback (we’ll discuss in more detail later). I digress…
As of press time, Ethereum is technically in beta. Though the stakes aren’t life & death with Ethereum, it is still livelihood & security for those choosing to entrust their capital with the protocol & any products, services, or tokens running on top of it. Things have gone relatively smoothly for many years, most recently with the implementation of EIP-1559 during the London upgrade. Still, every time there’s a major update there’s also an opportunity for a major flaw, exploit or hiccup that could spell disaster for the protocol & the wider ecosystem intertwined with it.
Smart Contract Vulnerability
Since anybody can create a smart contract, often regardless of their programming prowess, many low-quality contracts & dApps make it to market. The reality is that many of these lower tier offerings have never endured a proper code audit prior to going live & as such, can be particularly vulnerable to exploitation by savvy developers & hackers.
Low Quality, Low Security Projects
The expansive ecosystem spawned into existence by Ethereum bears with it a two-sided blade. Frankly, a lot of projects just aren’t good, having poor code bases & poor security. A common phenomenon that strikes me as quite telling is the propensity for developers within the Ethereum community to build & contribute code anonymously, a trend I rarely see inside of the Bitcoin development scene. Of course, anonymity is a basic right & is sometimes done for good reason. Be it self-preservation, altruism, or a pure aversion to notoriety or scrutiny, I can understand why someone may not want to be publicly involved with a project. Regardless, it must be acknowledged that anonymity brings a bevy of malicious actors building projects up only to “rug pool’’ or otherwise “exit scam”, hurting many unassuming users in the process.
Strengths Of Ethereum’s Team
Whereas Bitcoin mainly exists to preserve & store value, Ethereum is the go-to choice for powering blockchain native applications, services & products.
Strong Organization & Leadership
Imagine if Satoshi Nakamoto was around to guide Bitcoin daily, actively shaping the protocol’s future. Well, Ethereum has that in Vitalik Buterin, the project’s polyglot brainiac co-founder. Though no longer directly involved with the protocol, note that Polkadot’s Dr. Gavin Wood & Cardano’s Dr. Charles Hoskinson co-founded Ethereum alongside Vitalik, the former inventing the Solidity contract language & penning the project’s “Yellow Paper”, the later pivoting to build atop the Haskell environment.
Aside from Vitalik, there’s also the Ethereum Foundation, a non-profit dedicated to supporting Ethereum and related technologies, the Ethereum Enterprise Alliance (EEA), a member-led industry collective aiming to empower organizations to adopt + use Ethereum technology in their day-to-day business operations, as well as Consensys, the dedicated Ethereum software development firm behind products like MetaMask, Quorum & Infura. On the grassroots development side of things, you’ll find numerous hackathons & coding summits geared to attract talent into the space. Everywhere you look, there are dozens upon dozens of unique entities that have emerged intent on driving the Ethereum ecosystem forward.
Blockchain’s Largest Development Community
Due to the composability inherent within Ethereum’s coding language & the limited programmability of Bitcoin, most of the development throughout the blockchain & digital asset sector involves Ethereum. No doubt, it should be expected that Bitcoin will see more & more development over time. Whereas Bitcoin mainly exists to preserve & store value, Ethereum is the go-to choice for powering blockchain native applications, services & products.
An Ambitious Nature
Since inception the Ethereum protocol & its community have been quite audacious, proclaiming massive goals that may seem like a lot to bite off, perhaps even too much so. Perhaps the most striking example of such ambition is the planned merger of the current Ethereum blockchain with the ETH2.0 beacon chain. The London upgrade posed a similar challenge & yet, was executed relatively smoothly. Only time will tell how things will play out down the road as matters become more technically complex.
A Collaborative Spirit
Whether Satoshi Nakamoto was a single entity or thousands of individuals, there’s been very little in the way of substantial development, changes, or additions to the Bitcoin protocol since it was initially deployed to the mainnet. In all fairness, upgradability was never the real goal for Bitcoin, launching with most of its pure intent already fully realized, technologically speaking. For Ethereum, things have basically been the exact opposite, where the goal has been to continue pushing forward & building. Thus far the principles have been quite clear: so long as the application being designed, developed or built truly benefits from native blockchain integration — there always seems to be a member within the community ready to pitch in & help bring the idea to fruition.
Talent Specialization
The blockchain & digital asset industry is rife with sub-sectors, each sub-sector housing various niches. Inside the DeFi scene alone you have self-custody wallets, payment apps, high yield saving protocols, staking protocols, prediction markets, data aggregators — the list goes on & on. It can’t be overstated how many distinct niches already exist with more emerging all the time. Such growth inside of this tech-centric field encourages high specialization amongst participants hoping to make a name for themselves. Similarly, if you hope to maximize your ROI in the space, I’d recommend you also develop an investment “specialty”. Some people are drawn towards DeFi opportunities, others are drawn to NFTs, some focus on gaming. The choice is yours.
Weaknesses Of Ethereum’s Team
With that “trustless” principle in mind, the idea of having a leader is off-putting to many as it directly opposes their underlying value of decentralization.
Move Fast & Break Things
A commonly, perhaps overly used, axiom inside the tech & investing world is “Move fast. Break things.” This mindset has certainly been infused into the DNA of the Ethereum development community. The result? Sometimes things actually break. The good news? It’s not often the Ethereum network itself or the underlying Ethereum code breaks. It’s typically an issue with a smart contract’s composition or execution or some other piece of infrastructure supporting the protocol that experiences problems.
Prominent Leader
There’s a sizable cohort within the blockchain + cryptocurrency space who are committed to the sector for more than the technology. For many it’s the ethos, the spirit, the philosophy of trustlessness + confirmed verifiability that tempts them in. With that “trustless” principle in mind, the idea of having a leader is off-putting to many as it directly opposes their underlying value of decentralization. On one hand, prominent leaders like Vitalik can be pivotal in keeping a distributed project like Ethereum focused & mindful of the road ahead. If that leadership is used maliciously or otherwise diverts the project away from its intentions & stated goals though, it can become a problem.
Diffused Efforts
A key benefit of a project like Bitcoin is that developers are usually working on the same thing to solve a clear issue. This is possible because of Bitcoin’s focused mission. With so many subcategories + niches emerging from Ethereum over the years, developers are spread out across the various projects nested within the network’s ecosystem. Instead of everybody rallying to coordinate + laser focus their energy on a specific aspect of the greater protocol, a ton of talent gets diffused + distributed.
The Bullish Case For Ethereum
“…you have capital assets, consumable assets, & store of value assets…Ethereum serves as all three…that is quite rare for any asset, digital or otherwise.
Staked Tokens Exiting Circulation
When investors stake their coins, whether directly on the network with a minimum of 32+ ETH or contributing to a larger pool — coins are removed from circulation. As more coins are removed from circulation there tends to be a positive upward effect on the price of Ethereum. This bullish impact stems from basic supply/demand economics. As supply decreases scarcity increases. As scarcity increases the demand of the coin increases. As demand increases, the perceived value follows suit.
Gas Powered dApps
Though most blockchains use their native coins to pay for fees, Ethereum is unrivaled when it comes to the volume of transactions on its network. The prevalence of smart contracts underpinning DEXs, liquidity pools, yield farms, NFTs, & other dApps gives ETH substantial real-world utility. Regardless of one’s preference for ETH as an investment, many will still find themselves purchasing ETH because they have to, thus reinforcing the demand side pressure for the asset & positively impacting its price.
EIP-1559’s Burn Mechanism
Though the London Upgrade contained additional improvements, EIP-1559’s restructuring of fee auctions is likely to have a positive effect on the price of Ethereum. The new change means gas spent during transactions is burned, effectively removing ETH from the circulating supply. Supply + demand economics strikes again!
Triple Point Asset
Assets come in various forms. In short, you have capital assets, consumable assets, & store of value assets. Suffice it to say, Ethereum serves as all three classes, something that is quite rare for any asset, digital or otherwise. While more & more smart contract platforms are positioning themselves to claim “Triple Point” status, Ethereum is the current leader by far, having done the most to prove itself viable of all three categories. We shall explore this “Triple Point” concept in more depth later.
The Bearish Case For Ethereum
…unlike Bitcoin…ETH’s tokenomics can be altered at any moment. In the case of EIP-1559, the alteration may benefit the asset’s price. Nevertheless, it must be understood that not every change to the protocol will prove favorable.
Mutable Monetary Policy
Historically, Ethereum has been ever changing in its pursuit of creating the “open internet”. Embedded in its ethos & plainly stated in the white paper is a philosophical commitment to be agile + nimble. This means the core dev team will alter or otherwise change plans so long as it moves the protocol towards realizing its greater ambitions. This mutability makes some a bit wary though.
The most pressing concern is typically the realization that unlike Bitcoin, the design + functionality of ETH’s tokenomics can be altered at any moment. In the case of EIP-1559, the alteration may benefit the asset’s price. Nevertheless, it must be understood that not every change to the protocol will prove favorable. Point in case being the major consensus bug that affected over half of all nodes running Geth, the most widely used Ethereum node software client, resulting in a chain split. The issue stemmed from a vulnerability within Geth that was quickly patched. Nevertheless, given the event happened within weeks of the London upgrade, I would wager that Ethereum’s “nimble” nature may be at fault.
Unlimited Supply
Even though EIP-1559 introduced some additional positive price pressure by removing ETH from circulation, there’s still an unlimited supply with no fixed cap on new issuance. Compared against Bitcoin’s 21M hard ca, ETH’s appreciation potential is constrained by its free-flowing supply policy.
Ethereum’s Ambitious Intentions
Ethereum has been a complex + ambitious project since day 1. Where Bitcoin laid out a concise and singular purpose, Ethereum cast a vision of an entire ecosystem that could emerge from its Turing-complete code base. While Bitcoin launched in near “final form”, Ethereum debuted pursuing a new frontier of internet-enabled computing and applications.
Extrapolating upon the promise of smart contracts + dApps, possibilities detailed at inception included tokenization systems, financial derivatives, stable currency pegs, DAOs, prediction markets + more. Though it has endured technical hurdles & many remain to be cleared, Ethereum has already realized many of its intentions. Housing more development + evolution than any other blockchain project in history, it appears ETH2.0 will continue pressing forward towards the horizon to chart new territories. Ethereum is the internet’s future.