Chapter 2. Ethereum Fundamentals

Ethereum is an open source public blockchain and is considered to be an alternative coin to Bitcoin. A Canadian cryptocurrency researcher and programmer, Vitalik Buterin, proposed the idea in late 2013. Founded by an online crowdsale that took place in the middle of 2014, the platform went live at the end of July 2015. The DAO event in 2016 led to a hard fork, resulting in a split into Ethereum (ETH) and Ethereum Classic (ETC).

In this chapter, we cover the following topics about Ethereum:

• Overview of Ethereum
• Basic concepts such as ether, ERC20 tokens, smart contracts, EVM, gas, accounts, and oracles
• The Ethereum performance issue and ongoing efforts to address the issue, such as PoS, Casper, Plasma, and Sharding

An overview of Ethereum

In late 2013, Vitalik Buterin sent an email to the blockchain community announcing a white paper outlining the idea for Ethereum. He described it as a universal platform with internal languages, so anyone could write an application. According to Vitalik, the original idea for Ethereum was to create a general-purpose blockchain for fintech. Ethereum is a variation on Bitcoin. Unlike Bitcoin, which is a blockchain focusing on payments, Ethereum is a programmable, general-purpose blockchain. The introduction of smart contracts is the key to differentiating Ethereum from Bitcoin.

A well-known analogy to describe Ethereum and smart contracts, which bring together untrusting parties trading digital or digitized physical assets, is a vending machine, as described at the end of Chapter 1, Introduction to Blockchain Technology. 

After a vending machine is made, nobody, including the machine owner, can change the rules. A buyer does not need to worry about the owner altering...

Ethereum basic concepts

Ethereum builds on top of the Bitcoin blockchain, including key features such as a distributed ledger containing chained blocks, the proof-of-work algorithm, and so on. However, its biggest addition is the introduction of smart contracts, which are coded in a Turing-complete scripting language. Because of this new addition, unlike Bitcoin or its non-smart contract close relatives, Ethereum allows developers to address generic business problems.

Before getting to the basic concepts, we summarize some useful facts on Ethereum as follows:

• Ethereum has three main ingredients:
  • Decentralization: For guaranteed execution
  •  Hashes: For safeguarding the world state
  •  Signatures: For authorizing programs and transactions

• Since Ethereum is a blockchain, it uses mathematical algorithms to replace intermediary entities and bring untrusting parties together to do businesses.
• Ethereum blockchain brings trust in data due to its ability to verify the validity of data on a node via its consensus...

Performance

Another problem inherited from Bitcoin is that Ethereum is slow. It is many magnitudes slower than other platforms that host transaction data, for instance a traditional database. For example, it takes an average of 10 minutes to build a new record for Bitcoin. As a rule of thumb, after waiting for six new blocks to be built, a transaction is considered to be finalized (the same as a commitment in a database). This means that, on average, a requester will wait for one hour to see a request completed. In Ethereum, the average time for miners to build a block is 17 seconds and it is recommended you wait for 12 blocks before a transaction is confirmed. This is 12 * 17 = 204 seconds, or 3.4 minutes' waiting time for a user. Here, waiting for a few subsequent blocks to be built before confirming a transaction is useful. At any point, Ethereum can have competing chains. The waiting gives Ethereum sufficient time to work out the issue of having competing chains and reach a consensus...

Summary

Ethereum was developed on top of Bitcoin by introducing smart contracts along with Turing-complete scripting languages such as solidity. Ethereum is a general-purpose platform for DApp development. The platform is very popular. However, Ethereum is not mature yet. Compared to Bitcoin, it is more vulnerable to hacking, since any human errors in writing a smart contract are visible to everybody. It inherited the performance issue from Bitcoin. Many initiatives are ongoing to address this scalability problem. In the next chapter, we will dive into the details of solidity, the most popular language for writing Ethereum smart contracts.