What is Ethereum? Its History, How It Works, And Where It’s Going

1. A Brief History of Ethereum
2. What Makes Ethereum Different?
3. How Ethereum Works
4. What are Dapps and Smart Contracts?
5. What’s next for Ethereum?
6. Conclusion

Ethereum is the second largest blockchain network next to Bitcoin and is growing all the time. The Ethereum network hosts decentralized applications (Dapps) on its blockchain fueled by its native cryptocurrency ether. In this guide, we’ll explain the history of Ethereum, what makes it different from Bitcoin, how it works, what Dapps are, and where it's heading. By the end of this guide, you should have a basic understanding of Ethereum operates.

A Brief History of Ethereum

Ethereum was founded by Vitalik Buterin and Dr. Gavin Wood as a direct response to inefficiencies and shortcoming they both witnessed in the Bitcoin blockchain.

Vitalik Buterin was a teenage programmer living in Toronto and writing articles about Bitcoin and blockchain for his blog when he started to notice some of the limitations of Bitcoin. He outlined the specific issues with Bitcoin he found, and his Ethereum solution, in a white paper in 2013. Not long after, Co-founder Gavin Wood released a yellow paper detailing how the Ethereum protocol would actually operate.  

In its first crowdsourcing campaign in 2014, Ethereum raised $17.3 million. At the time it was the largest Initial Coin Offering (ICO) in history and got the ball rolling on one of the more practical applications of blockchain technology to date.

What Makes Ethereum Different?

Ethereum was invented because Bitcoin was not a sufficient platform to use as the base for things like smart contracts.

Bitcoin is a cryptocurrency and functions like digital cash. It uses its blockchain to validate transactions and maintain a distributed public ledger of all the activity taking place on it. Bitcoin was the first successful implementation of a cryptocurrency blockchain and does many things very well, but there are a few areas that Ethereum set out to improve.

Bitcoin’s scripting language is not Turing-complete meaning that it doesn’t support all types of computations. Lacking Turing-completeness means that the application for Bitcoin’s protocols are severely limited. The other main issue is that it was never desiged to store information in a smart contract, which also greatly reduces its usability. 

Ethereum is fundamentally different than Bitcoin because it is designed to provide the blockchain infrastructure for 3rd party developers to build on. Ethereum is Turing-complete meaning that its scripts can be used to build just about any type of application functionality imaginable.

The Dapps built on Ethereum all share the network’s blockchain infrastructure instead of having to create their own each time. While there is a native cryptocurrency called “ether” that is required to run Dapps, developers can build their own cryptocurrency on the platform if they wish. While some exchanges associated with ether with have suffered large hacks in the past, for the most part, the system is very secure.

How Ethereum Works

The Ethereum blockchain is made of many different elements that all work together to ensure an up to date copy of the transaction record and most recent state of each smart contract is stored on every node in the network.

The different elements of Ethereum can be broken down into several different parts/processes: Accounts, State, Transactions, Blocks, and Mining.

What Are Accounts On Ethereum?

The framework created by the Ethereum network is made up of many small and interconnected objects called Accounts. On the Ethereum blockchain; accounts initiate, control, determine, and validate all changes made to the state of the network. There are two types of accounts:

Externally Owned Accounts (EOAs)

Sometimes an EOA is referred to as a “user account” or an “address” on the network. It has an ether balance, is controlled by private keys, can send transactions, and has no associated code. This is the type of account that you would get if you signed up on Ethereum today.

Think of an EOA as the initiating force that kicks of a transaction, or set of transactions, on the Ethereum network. As the name suggests, the accounts are controlled by actors who exist outside of the network.

Contract Accounts

The other type of account on the Ethereum network is a smart contract account. These accounts have an ether balance, associated code that can be executed by either EOAs or other contract accounts, and can send transactions if code dictates it.

The easiest way to think of a contract account is an account that is managed by a computer program. A contract account can only perform actions outlined in its code on the network once it has been initiated by a transaction from an EOA.

What is State?

State is an accurate snapshot of the current conditions of an account or of the entire network. Knowing and agreeing on the real-time state of the network is what allows Ethereum to operate. Without accurately knowing what the state is it is impossible to trust that transactions have occurred or that any information on the network is valid.

Account State

Each account has variables that need to be tracked so that the network can understand the transactions that have occured between accounts. The state of any given account, EOA or Contract, is made up of four variables: Nonce, Balance, storageRoot, and codeHash.

Nonce: For an EOA, the nonce is the number of transactions that have been sent from that account. For a contract account, this would represent the number of contracts that the account has created.

Balance: Think of this like an “account balance” and it is the total amount of ether owned by the account. The number is usually measured in Wei which is the smallest denomination of ether.

storageRoot: This is the 256-bit hash of the storage trie’s (Merkel Patricia Trie) root node.

codeHash: For contract accounts, this is the hash of the EVM (Ethereum Virtual Machine), for EOAs this is the hash of the empty string.

Global State

The “global state” is the overall state of every associated account on the network. On the Ethereum network, new information regarding global state is packaged and added to the blockchain every 15 seconds. State information is efficiently stored and validated using Merkel Patricia Tries.  

Merkel Patricia Tries: This is a cryptographic algorithm that can be visualized as an inverted tree of number combinations that move towards a singular number at the top. Each number combination determines what the next number up the tree will be.

Patricia stands for (Practical Algorithm To Retrieve Information Coded In Alphanumeric) a “Patricia Trie” lets you store an enormous amount of information all in just one number. If you want a full explanation of how they work in the Ethereum network; check out the Ethereum whitepaper.

Determining World State: Constantly checking that all the posted transactions that occur on the network actually happened and are valid is what makes Ethereum a trustworthy system. All full nodes in the network download an entire copy of the Ethereum blockchain and run it to make sure that everything is correct. As new blocks are added, nodes check to see if any of the hash values break the algorithm and attempt to reach consensus with all other nodes in the network.  

One of the reasons that Merkel Patricia Tries are valuable to the Ethereum network because the allow for “light nodes” to exist which only need to download the header hash of each block. Because they don’t need the full blockchain to make determination, light nodes can validate transactions much faster and are much less resource intensive to run compared to full nodes.   

What are Transactions?

Ethereum is defined by the transactions taking place on its network. The network infrastructure has been designed to validate transactions, record them in its blockchain, and move the global state of Ethereum forward.

Types Of Transactions

A transaction on the Ethereum network is a private/public combination key signed set of instructions created by an EOA and posted to the blockchain for review. There are two types of transactions on the network: Message Calls, and Contract Creation Calls.

Message Calls: A message call can be a transaction and can be initiated between two EOAs to directly transfer ether. Any message sent on the network between actors that is not creating a contract and originates from a EOA can be called Message.

Contract Calls: A contract call is a message sent from a EOA to a contract account that creates a contract. Contract accounts may make message calls as part of their programming as well as long as they were initiated by an EOA originally.

Gas

Each transaction requires computer power to run it. Using computer power costs resources like electricity so to incentivize people to use their computers to run these transactions the network offers them a fee.

Gas is a digital resource on the Ethereum network that can be purchased for ether. Transactions will have a gas price which is the maximum amount of ether the sender is willing to pay per unit of gas, and a gas limit the maximum amount of gas the sender is will to pay to execute the transaction.  

Gas Fee: One of the main issues with the Bitcoin blockchain is that it can be difficult for miners to earn money doing anything accept mining blocks. The gas system in Ethereum is an ingenious system that allows miners to make an income simply processing transactions instead of directly mining blocks and minting coins. The other added benefit of adding cost to transactions is that it helps to avoid malicious loops and other kinds of attacks that could potentially slow or interrupt the network.

What are Blocks?

A block is a data package containing all the transaction data needed to move the current global state of the network to a new state. Each new block makes up a link in a “chain” of blocks that date back to the first block ever created on the network, the “genesis block”. The resulting structure of all these blocks chained together is known as a “blockchain”. Each new block has a block header and contains transaction information.

Block header: This is a series of 15 values that give complete information about the contents of the block and where it fits into the chain.

Transaction Information: Three of the values in the header are the roots of Merkel Patricia Tries. These three roots are stateRoot, transactionsRoot, and receiptsRoot. The information carried in these Roots can be unpacked to determine everything that needs to be know about the block in order to validate it.

What is Mining?

Mining on the Ethereum network works by searching for new blocks and adding them the chain. The process is conceptually similar to how mining works on the Bitcoin blockchain.

Mining Blocks: This is the process of validating transactions by turning them into blocks that can be added to the chain. For each new block created a miner get three ether in return. This is how new ether is minted and serves as an incentive to miners to continue to validate the blockchain.  

Proof-of-Work

The Ethereum blockchain is currently a “proof-of-work” system meaning that raw computer power is used to find new blocks and mint coins. A miner must calculate the correct hash of a new block and validate it against all the older blocks in the chain in order to win a reward.

The process is extremely energy intensive but serves the purpose of keeping the network secure and the mining process fair.    

What are Dapps and Smart Contracts?

Decentralized Applications (Dapps) are the front-end interfaces of one or many Smart Contracts. As was said earlier in the post, the functionality of the Ethereum network goes far beyond its native cryptocurrency ether. Developers can create and deploy Dapps on the network that users can interact with via their EOAs.

Smart contracts are the specific functions that are carried out within a Dapp. Many smart contracts can live within one Dapp and all that is needed to participate is ether and gas. Smart contracts can get you invested in new business ventures, create unique digital items, or even let you gamble on the outcome of future events. To learn more about how smart contracts work check out our full guide on the topic.

What’s Next for Ethereum?

The big question is, what will the Ethereum network look like in the future? The Dapp world is still in its infancy, but the potential is incredible. The two biggest determining factors to the continued success of any system are utility and usership.

The Utility of Ethereum: As a global computing system, Ethereum is extremely expensive to operate. Depending on the current price of ether, computations run on the Ethereum network are sometimes many thousands of times more expensive than traditional computing networks, but that doesn’t mean it’s not still valuable.

While the high price may not make sense to utilize the network for general computational tasks or storage, it is worth it for other reasons. When you send ether to a smart contract you’re buying trust that the actions outlined in the system will take place as stated. You also buy immutable proof that your account initiated the message call that started said contract.

Programming languages like Solidity and Vyper are being used more creatively to create different types of smart contracts to fuel new Dapps. As Dapps become more advanced, Ethereum will become more useful for both people and businesses.

Usership: Currently Ethereum is the second largest blockchain in the world next to Bitcoin. While it has had some hiccups along the way, Ethereum has proved itself to be a viable solution.

It’s already massive user base dwarfs other networks vying for the Dapp market who just might not have the ability to catch up at this point. The Ethereum network has attracted some of the brightest minds in the development world and is rapidly becoming the standard platform for Dapp development.

Conclusion

Ethereum is an amazing invention that has completely revolutionized how people use blockchain technology. By focusing its attention on building a stable platform to host Dapps and smart contracts, Ethereum has established itself as one of the primary leaders moving the world towards a blockchain future.