Why Ehereum? The Technology Behind Ethereum
What is Ethereum?
The goal of Ethereum is to enable users to create new software on the blockchain system. Ethereum provides users with the opportunity to create many altcoins through the capabilities it offers. The intended purpose of the Ethereum system is to prevent data such as personal information from falling into the hands of third parties and being used for different purposes. While all transactions on the normal internet are recorded in data banks as data, with Ethereum, these transactions are stored in a completely decentralized and anonymous manner across many devices. This makes access to this information more difficult, and in some cases, reaching the desired information may be nearly impossible. In essence, Ethereum achieves decentralization in this way.
What are Smart Contracts?
Smart contracts are the foundational building blocks of Ethereum applications. They are computer programs stored on the blockchain that transform traditional contracts into digital parameters. Smart contracts can be considered a type of Ethereum account. They have a balance and can send transactions on the network. However, they are not controlled by a user; instead, they are distributed across the network and operate as programmed. Users can interact with smart contracts by sending transactions that execute a function defined in the smart contract.
Smart contracts operate on a simple logic. They are commands that act according to the established contract. Traditional contracts are flexible and sometimes open to change, making their objectivity questionable, especially in cases where decision-making involves human factors, such as emotions. This human factor is one of the significant drawbacks of traditional contracts.
Nick Szabo first introduced the term "smart contract" in 1994. In 1996, he proposed a theory that seemed distant at the time about what smart contracts could achieve. This system, envisioned as a place where transactions could be securely conducted without intermediaries, essentially outlined the main vision of Ethereum.
Smart contracts work in a deterministic way, meaning they perform the same function independently of the environment in which they are executed. They can execute any action when the necessary resources are provided. They run in an isolated environment known as the Ethereum Virtual Machine (EVM), ensuring that errors in a smart contract do not disrupt the normal functioning of the blockchain.
Token Standards:
Token standards, often presented as Ethereum Request for Comment (ERC), are crucial standards widely used in the Ethereum ecosystem. Some well-known ERC standards include:
- ERC-20: A standard interface for interchangeable (fungible) tokens like voting tokens, staking tokens, or digital currencies.
- ERC-721: A standard interface for non-fungible tokens (NFTs) representing unique items like copyrighted songs or artworks.
- ERC-777: A token standard that enhances ERC-20.
- ERC-1155: A token standard that can include both fungible and non-fungible assets.
Decentralized Applications (Dapps):
Dapps have the following general characteristics:
- Decentralized: They operate on an open, shared, and decentralized platform without any single person or group in control.
- Deterministic: Dapps perform the same function independently of the environment they are run in.
- Turing Complete: They can perform any action when provided with the necessary resources.
- Isolated Execution: Dapps run in the Ethereum Virtual Machine (EVM), a virtual environment, preventing errors in smart contracts from disrupting the normal operation of the blockchain.
Advantages of Dapp Development:
Once a smart contract is deployed and reaches the blockchain, it can always serve clients who want to interact with the contract as a whole network. When deploying or interacting with a Dapp, you do not need to provide your real-world identity. Additionally, since Dapps use the blockchain to store data, no one can tamper with or change the content of the data stored in the blockchain. The data stored in the blockchain remains immutable and indisputable due to cryptographic foundations.
Challenges of Dapp Development:
Maintaining Dapps can be challenging because modifying code and data published on the blockchain is more difficult. There is a significant performance overhead, and scaling can be extremely challenging. Each node runs and stores every transaction to achieve the desired level of security, integrity, transparency, and reliability, leading to increased resource usage. If a Dapp consumes too many computer resources, the entire network may become congested.
Ethereum Virtual Machine (EVM):
The EVM serves as a virtual machine that is the foundation of Ethereum's entire operating structure. It is considered a single entity maintained by thousands of connected computers running Ethereum clients. The Ethereum protocol exists solely to maintain the continuous, uninterrupted, and immutable operation of this machine. The role of the EVM is to provide functional support to the blockchain for users to overcome challenges in a distributed ledger.
Ethereum Virtual Machine (EVM)
The EVM serves as the foundational virtual machine for Ethereum, acting as a single entity maintained by thousands of connected computers running an Ethereum client. It is often referred to as the sole entity responsible for the continuous, uninterrupted, and immutable operation of the entire Ethereum infrastructure. The Ethereum protocol exists solely to maintain the continuous functionality of this machine on the distributed ledger, allowing users to overcome issues on the decentralized ledger in terms of functionality.
Ethereum has two types of accounts within the EVM: both External Owned Accounts (EOA) and Contract Accounts function similarly within the scope of the EVM. EOAs are controlled by private keys, while Contract Accounts are stored in smart contracts, also known as smart wallets. The code written in smart contract programming, typically using the Solidity programming language, is then converted into bytecode. This bytecode is further transformed into opcodes for interpretation by the EVM. The EVM uses these opcodes to complete specific tasks.
Distributed Ledger and State Machine
While distributed ledgers, often defined using fundamental cryptographic tools, describe blockchains like Bitcoin, enabling decentralized currencies, Ethereum introduces a more powerful feature: smart contracts. While Ethereum has its native cryptocurrency (Ether), which follows almost the same intuitive rules as Bitcoin, it enables smart contracts. Ethereum functions as a distributed state machine rather than just a distributed ledger. Ethereum's state encompasses not only all accounts and balances but also a large data structure holding the machine's state, which can change from block to block based on a predefined set of rules and execute optional machine code.
EVM Instructions
The EVM operates as a stack machine with a depth of 1024 items. Each item is a 256-bit word selected for ease of use with 256-bit cryptography. During execution, the EVM maintains a transient memory between transactions that does not persist. However, contracts include a Merkle Patricia storage tree associated with the account and global state.
Merkle Patricia: A crucial data structure for Ethereum's storage layer, it provides a verified data structure that can be used to store all bindings in Ethereum.
GAS FEE
Gas represents the unit measuring the amount of computational effort required to execute specific operations on the Ethereum network. Since processing resources are needed for every Ethereum transaction, each transaction incurs a fee. In summary, gas denotes the fee required to interact successfully on Ethereum. Gas fees are paid in Ether (ETH), Ethereum's native currency. Gas prices are specified in Gwei, where each Gwei is equivalent to 0.000000001 ETH.
The calculation of transaction fees on the Ethereum network changed with the London Upgrade in August 2021.
Ethereum Gas Fee - BTCC
BEFORE THE LONDON UPGRADE
Suppose person X needs to pay 1 ETH to person Y. The gas limit in the transaction is 21,000 units, and the gas price is 200 Gwei. The total fee would be: Gas units * Gas price per unit, i.e., 21,000 * 200 = 4,200,000 Gwei or 0.0042 ETH. When person X sends the money, 1.0042 ETH is spent from X's account. 1.0000 ETH is deposited into Y's account, and the miner receives 0.0042 ETH.
AFTER THE LONDON UPGRADE
The London Upgrade, implemented on August 5, 2021, overhauled Ethereum's transaction fee mechanism to make transaction processing more predictable for users. Among the benefits brought by this change are better transaction fee estimation, often faster inclusion in blocks, and balancing ETH issuance by burning a percentage of transaction fees.
After the London upgrade, each block has a base fee, and the gas unit price is calculated based on the block space demand by the network. As the base fee of the transaction is burned, users are expected to set a tip in their transactions. The tip serves as compensation for miners who process and propagate user transactions in blocks, and most wallets automatically adjust the tip.
The total transaction fee is calculated as follows: Gas units (limit) * (Base fee + Tip)
Suppose person X needs to pay 1 ETH to person Y. The gas limit in the transaction is 21,000 units, and the base fee is 100 Gwei. Person X adds a tip of 10 Gwei. Using this formula, we can calculate it as 21,000 * (100 + 10) = 2,310,000 Gwei or 0.00231 ETH. When person X sends the money, 1.00231 ETH is deducted from X's account. 1.0000 ETH is deposited into Y's account, and the miner receives a tip of 0.00021 ETH. Additionally, person X can set a maximum fee for the transaction and not worry about overpaying the base fee because the difference between the maximum fee and the actual fee is refunded to person X.
Block Size
Before the London upgrade, Ethereum had fixed-size blocks. During times of high network demand, these blocks operated at full capacity. As a result, users often had to wait for the demand to drop to be included in a block, leading to a poor user experience. The London Upgrade introduced variable block sizes. While the target size of each block is 15 million gas, block sizes can increase or decrease based on network demand, up to the 30 million gas block limit.
Initiatives to Reduce Gas Costs
As the number of Ethereum users increased, the blockchain reached certain capacity limitations. This situation increased the cost of using the network by raising the need for "scaling solutions." There are numerous solutions being researched, tested, and implemented to achieve similar goals with different approaches. Conceptually, scaling is categorized as either on-chain scaling or off-chain scaling.
On-Chain Scaling
This scaling method requires changes to the Ethereum protocol, i.e., transactions are processed at layer 1. Sharding is currently the primary focus of this scaling method.
Sharding
Sharding is the process of horizontally dividing a database to spread the load. In the context of Ethereum, sharding reduces network congestion and increases transaction capacity per second by creating new chains known as "shards." This also mitigates the burden on validators by eliminating the requirement for all validators to process all transactions.
Off-Chain Scaling
Off-chain solutions are implemented separately from Layer 1 Mainnet and do not require any changes to the existing Ethereum protocol. "Layer 2 scaling" is a term often used to refer to these solutions.
Layer 2 Scaling
Layer 2 scaling is a secondary scaling solution. Layer 2 processes transactions off-chain and sends their data to the main network in the form of packetized transactions. In times of network congestion, transaction speed decreases, affecting the user experience for certain types of DApps. As network density increases, those wanting to transact increase their transaction fees to outbid others, leading to increased fees. The goal of Layer 2 scaling is to reduce congestion on the chain. Layer 2 scaling significantly improves gas costs, user experience, and scalability.
Aggregations
Aggregations perform transaction execution outside Layer 1 and then send the data to the agreed-upon Layer 1. Since transaction data is included in Layer 1 blocks, aggregations are secured by the local Ethereum security.
There are two types of aggregations with different security models:
Optimistic Aggregations: Assumes transactions are valid by default and runs computations through fraud proofs only when faced with a challenge.
Zero-Knowledge Aggregations: Runs computations off-chain and sends a proof of correctness to the chain.
State Channels
State channels use multi-signature contracts to enable participants to transact quickly and freely off-chain, then finalize with the Mainnet. This minimizes network congestion, fees, and delays. Currently, there are two types of channels: state channels and payment channels.
Sidechains
A sidechain is an independent Ethereum Virtual Machine-compatible blockchain running parallel to the Mainnet. They are compatible with Ethereum through two-way bridges and operate under their chosen consensus rules and block parameters.
Plasma
A Plasma chain is a separate blockchain connected to the main Ethereum chain and uses fraud proofs (similar to optimistic aggregations) to arbitrate disputes. It aims to increase transaction throughput to 10,000 transactions per second per Plasma chain and can work in parallel with multiple chains.
Validium
A Validium chain uses zero-knowledge proofs similar to optimistic aggregations but does not store data on the main Layer 1 Ethereum chain. This allows each Validium chain to process 10,000 transactions per second and work in parallel with multiple chains.
Strategies to Reduce Gas Costs:
- Set Transaction Priority: If you want to reduce gas costs for ETH transactions, you can specify the priority level of your transaction by setting a tip. Miners are more likely to prioritize transactions with higher tips, and after those are processed, they move on to transactions with lower tips. This method involves some time and risk.
- Monitor Gas Prices: To send your ETH more affordably, you can use various tools to track gas prices, such as:
- Etherscan.io/gastracker: Transaction gas price estimator.
- Blocknative ETH Gas Estimator: A Chrome extension supporting both Type 0 legacy transactions and Type 2 EIP-1559 transactions.
- ETH Gas Station: Consumer-focused metrics for the Ethereum gas market.
- Cryptoneur Gas Fees Calculator Mainnet: Calculate gas fees in your local currency for different transaction types on Arbitrum and Polygon.
- Understand Gas Fee Calculation: Gas fees on the Ethereum network are calculated based on the gas limit and gas price. The gas limit represents the computational effort required, and the gas price is specified in Gwei. The total transaction fee is calculated as Gas units (limit) * (Base fee + Tip).
- Explore Scaling Solutions: As the Ethereum network faces capacity limitations, various scaling solutions are being explored. These include on-chain scaling (sharding) and off-chain scaling (Layer 2 solutions, state channels, sidechains, Plasma, Validium).
- Stay Informed about Upgrades: Ethereum undergoes protocol upgrades, and staying informed about these upgrades can help you adapt to changes in gas fee calculation and overall network functionality.
- Consider Alternative Networks: Explore alternative blockchains or layer 2 solutions that may offer lower gas fees. Networks like Binance Smart Chain and Polygon have gained popularity for their lower transaction costs.
Proof of Work (PoW):
Proof of Work is a protocol designed to prevent disruptions to a system's operation, such as denial-of-service attacks or unwanted messages (spam). It involves solving complex mathematical problems to validate transactions and add new blocks to the blockchain. Bitcoin and many other cryptocurrencies initially adopted PoW.
Proof of Stake (PoS):
Proof of Stake is an alternative to PoW that considers ownership of assets. Validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to "stake." PoS is seen as a more energy-efficient consensus mechanism compared to PoW.
Delegated Proof of Stake (DPoS):
DPoS introduces a social system where users can delegate their stake to other participants who act as representatives. These representatives, chosen through voting, play a crucial role in block validation and governance.
Leased Proof of Stake (LPoS):
LPoS allows users to lease a portion of their stake to a full node operator, enabling smaller investors to participate in block validation. The leased amount is not transferred but contributes to the operator's influence in the network.
Forks:
Forks occur when significant technical upgrades or changes are needed in a blockchain network. There are two main types:
- Hard Fork: Results in the creation of a new blockchain that is not backward-compatible with the old one. Users must choose between the old and new versions.
- Soft Fork: Introduces backward-compatible changes, meaning users can continue using the old version if they choose. It becomes the new standard when widely adopted.
Understanding these concepts and staying informed about the evolving Ethereum ecosystem can help you navigate the network more efficiently and make informed decisions about gas costs and transaction strategies.
To understand the historical development of Ethereum and its current state, let's start from the beginning.
Firstly, Ethereum's founder, Vitalik Buterin, shared an introductory paper in 2013, outlining the structure and functionality of Ethereum in its most basic form. This paper evolved to become Ethereum's current whitepaper.
In 2014, Dr. Gavin Wood, a British computer programmer and co-founder of Ethereum and creator of Polkadot, published a yellow paper, an unfamiliar term for many, which was a technical definition of the Ethereum protocol. Details of this paper can be found at https://ethereum.github.io/yellowpaper/paper.pdf.
In the same year, the official sale of Ether began. This 42-day sales process was conducted entirely in Bitcoin. The initial Ether price was set at a discounted rate of 2000 ETH per BTC, maintaining this rate for 14 days before linearly decreasing to 1337 ETH per BTC. At that time, Bitcoin's price was around $520, making an Ethereum available at an average of $0.25 per token.
In 2015, Ethereum reached a significant milestone with the release of Frontier. Frontier was a live but basic implementation of the Ethereum project designed specifically for technical users, especially developers. It had a gas limit of 5,000 for blocks, allowing miners to start their activities during a "thawing" period.
Following Frontier, Frontier Thawing was released after the 200,000th block of Ethereum. This fork removed the 5,000 gas limit per block, set the default gas price to 51 gwei, and increased the gas required for transactions to 21,000. During this period, the price of Ethereum had risen to around $1.20.
In 2016, after the release of Ethereum into the market, the Homestead fork was implemented. Homestead included several protocol changes and network upgrades, allowing Ethereum to undergo further improvements. The Homestead version was activated at block number 1,150,000.
Key EIPs (Ethereum Improvement Proposals) used in the Homestead fork:
- EIP-2: Mainnet hardfork changes,
- EIP-7: Hardfork EVM upgrade - DELEGATECALL,
- EIP-8: devp2p forward compatibility.
In the same year, following a hack incident, the DAO Fork was released at block 1,920,000. This hard fork was a response to a hack that resulted in the theft of 3.6 million ETH. The fork transferred the funds from the compromised contract to a new one. This decision was accepted by over 85% of the votes, but the remaining 15% of miners rejected the fork, leading to the creation of Ethereum Classic.
Ethereum Classic is based on the principle of "Code is Law," where smart contracts are self-executing applications capable of running autonomously. Ethereum Classic emerged as a blockchain that does not reverse transactions. Developers emphasized that there was no official team associated with the project, and it operated as a globally decentralized management open to anyone.
Following the hack, denial-of-service (DOS) attacks continued, and Ethereum responded with two upgrades. The first was Tangerine Whistle, released at block 2,463,000, implementing solutions to mitigate spam attacks and remove empty accounts. The second response was the Spurious Dragon fork at block 2,675,000, addressing issues related to gas costs and optimizing the Ethereum protocol.
Moving to 2017, Ethereum experienced a relatively calm period. The price reached a peak of $736, providing some relief, and only one upgrade, the Byzantium fork, was implemented at block 4,370,000. The Byzantium fork reduced block rewards from 5 to 3 ETH, delayed the difficulty bomb, introduced the DELEGATECALL opcode, and made advancements in devp2p forward compatibility.
In 2018, Ethereum faced challenges due to market conditions, and there were no significant developments. The year 2019 saw two important upgrades: Constantinople and Istanbul. Constantinople, released at block 7,280,000, introduced protocol changes and allowed for further network upgrades. Istanbul, released at block 9,069,000, optimized gas costs for specific EVM operations and improved resistance against denial-of-service attacks.
EIPs used in Constantinople included:
- EIP-145: Optimizes the cost of certain EVM operations.
- EIP-1014: Enables interaction with addresses not yet created.
- EIP-1052: Optimizes the cost of certain EVM operations.
- EIP-1234: Delays the difficulty bomb before the introduction of Proof of Stake.
EIPs used in Istanbul included:
- EIP-152: Enables Ethereum to work with privacy-preserving currencies like Zcash.
- EIP-1108: Improves gas costs with cheaper elliptic curve cryptography.
- EIP-1344: Adds the "CHAINID" opcode to protect against replay attacks.
- EIP-1884: Optimizes gas costs for computation-heavy transactions.
- EIP-2028: Lowers CallData costs to allow more data in blocks.
In 2019, the average price of ETH was around $129.21.
In 2020, Ethereum initiated a significant shift by laying the foundations for a Proof of Stake (PoS) mechanism. The Muir Glacier fork, implemented at block 9,200,000, delayed the difficulty bomb. Following this, the staking contract was deployed at block 11,052,984, introducing staking to the Ethereum ecosystem. Staking involves depositing 32 ETH to activate validator software, responsible for storing data, processing transactions, and adding new blocks to the blockchain.
The Beacon Chain, launched shortly after, marked the beginning of Ethereum 2.0. It operates as an independent network with a Proof of Stake consensus mechanism, running parallel to the existing Proof of Work Ethereum mainnet. The Beacon Chain serves as a coordination layer, and when fully operational, it will enable a transition to Proof of Stake without splitting the Ethereum network permanently.
In 2021, Ethereum consolidated its developments from 2020. The Berlin upgrade, at block 12,244,000, optimized gas costs for specific EVM actions and increased support for multiple transaction types. Following this, the London upgrade, at block 12,965,000, introduced EIP-1559, reshaping the transaction fee market and changing how gas refunds are handled. The London upgrade also introduced changes to the Ice Age schedule.
EIPs used in Berlin included:
- EIP-2565: Reduces the gas cost of the ModExp opcode.
- EIP-2718: Provides easier support for multiple transaction types.
- EIP-2929: Increases gas costs for state access opcodes.
- EIP-2930: Adds optional access lists.
EIPs used in London included:
- EIP-1559: Improves the transaction fee market.
- EIP-3198: Returns "BASEFEE" from a block.
- EIP-3529: Reduces gas refunds for EVM operations.
- EIP-3541: Prevents the deployment of contracts starting with "0xEF."
- EIP-3554: Delays the Ice Age until December 2021.
In October 2021, the Altair upgrade was released at epoch 74,200. Altair introduced support for "sync committees," enabling light clients and enforcing penalties for validator inactivity.
On December 9, 2021, the Arrow Glacier upgrade was implemented at block 13,773,000. Arrow Glacier delayed the difficulty bomb until June 2022.
Looking ahead, Ethereum has two upgrades in progress: the Ethereum Merge, focusing on the transition from Proof of Work to Proof of Stake, and shard chains concentrating on gas fee improvements.
Ethereum Merge:
The current environmentally unfriendly Proof of Work (PoW) consensus mechanism used by Ethereum will be replaced by the much more eco-friendly Proof of Stake (PoS). The Beacon Chain, a fully independent network with a PoS consensus mechanism, is already running parallel to the existing Ethereum mainnet. The Merge proposes to combine the PoW and PoS mechanisms, ensuring that Ethereum's PoW history is preserved. After the transition, the PoW consensus layer will be removed, making way for the new PoS consensus layer, which will be applicable to all blocks.
In addition to the Merge, Ethereum is actively working on shard chains, which will focus on gas fee improvements.
After the Merge, What Will Happen to Ethereum's Proof of Work (PoW) Version?
This question can also be phrased as follows: What will miners do, and will they be able to continue Ethereum mining with the devices they use? The answer to this question is negative because there will be only one Ethereum network, and the entire network will transition to the new Proof of Stake (PoS) consensus mechanism. When the Merge occurs, the entire Ethereum Proof of Work (PoW) chain will transform into the Ethereum PoS chain. In the long term, this will actually be a positive turn for miners. If any node were to continue mining a PoW version of Ethereum, it would be in its own minority forks, and the economic value of block rewards would fall far below operational costs. Therefore, adaptation seems to be the most reasonable option.
Apart from these, there will be miners who want to capitalize on their devices. Here, two possibilities arise: either they will introduce their devices to the market at a lower price, which could lead to minor corrections in computer prices, although this is somewhat uncertain as the lifespan and efficiency of used devices may be lower. The second option is to explore cost-effective mining systems to capitalize on their devices. They may invest in systems they believe will recover their costs or take risks by venturing into projects they believe may rise in the future.
A significant question on users' minds is whether the Merge will have an impact on high gas prices.
We discussed the reasons for the high Eth gas fees; one of the primary reasons was security measures against DOS attacks or spam attacks. In this context, the Merge is limited to upgrading Ethereum's consensus mechanism and will not have any immediate impact on the current user experience. Future updates in Ethereum's roadmap, such as Sharding, contain different ideas to help improve gas prices. Currently, addressing gas fees is considered a lower priority than eliminating the energy inefficiency of Proof of Work (PoW) through the Merge, as perceived by the majority of the Ethereum community.
What will happen to fees paid to Ethereum miners after the Merge?
EIP 1559 will be activated in Ethereum before the Merge, and when the Merge occurs, a significant portion of Ethereum transaction fees will have been burned for months. After EIP 1559, the remaining fees that are not burned will be paid not to Proof of Work miners but simply to the proposer of the Proof of Stake block.
EIP 1559 takes the place of the current gas limit with two values: the "long-term average target" (equal to the current gas limit) and the "exact limit per block" (twice the current gas limit). To target the average block gas usage to stay close to the current gas limit, there is a BASEFEE (burned) adjusted on a block-by-block basis, which aims to regulate the fees paid for transactions.
Shard Chains:
Another major upgrade expected in Ethereum in 2023 is Shard Chains. Sharding is a multi-phase upgrade designed to enhance Ethereum's scalability and capacity. Shard Chains will provide additional and cheaper storage layers for applications and allow the storage of data. It will activate layer 2 solutions to offer lower transaction fees while benefiting from the security of Ethereum. This upgrade is planned to merge with the Mainnet and the Beacon Chain subsequently. In other words, it cannot proceed to this stage without the Merge.
Sharding horizontally divides a database to distribute the load and create new chains known as "Shards" to increase transaction speed. This makes Ethereum less accessible for network validators because they require powerful and expensive computers. In Shard Chains, validators only need to store and run data for the shard they validate, which speeds up these processes and significantly reduces hardware requirements.
Connection between the Beacon Chain and shards:
The Beacon Chain encompasses the entire logic to secure and synchronize the shards. It coordinates stakers in the network, assigns them to the shards they need to work on, and facilitates communication between shards by receiving and storing transaction data accessible by other shards. This provides an instantaneous snapshot of Ethereum's state to shards to keep everything up-to-date.
Until additional shards are added, Ethereum Mainnet will be secured by Proof of Stake through the Beacon Chain. This creates an efficient Mainnet strengthened by layer 2 solutions that support scalability significantly. Whether the Mainnet will exist as the sole "smart" shard capable of executing code is yet to be determined, but in either case, the decision to expand shards will be reconsidered when necessary.
