How Ethereum work? Programmer explains

Summary

Ethereum is a decentralized blockchain platform that enables the creation of decentralized applications (dApps) and smart contracts. It introduced the cryptocurrency Ether, which fuels these applications and facilitates unstoppable transactions. Ethereum is more advanced than Bitcoin, offering greater flexibility for a wide range of use cases, including decentralized finance (DeFi), games, and supply chains. While Ethereum faces challenges like limited scalability and high transaction fees, its upcoming upgrade to Ethereum 2.0 aims to address these issues, promising enhanced scalability, security, and sustainability through the proof-of-stake consensus mechanism.

Takeaways

• 😀 Ethereum is the first decentralized computer built on the blockchain, enabling decentralized applications (dApps) and decentralized finance (DeFi).
• 💰 Ethereum's cryptocurrency, Ether, reached a market cap of $100 billion and continues to drive innovations in various sectors beyond finance.
• 🔗 Ethereum's blockchain is a decentralized network of over 10,000 computers, which run the Ethereum client software and support smart contracts.
• 📑 Smart contracts are self-executing programs that run on the Ethereum blockchain, with code that can't be altered or stopped once deployed.
• 💸 Unlike Bitcoin, Ether does not have a limited supply, with over 110 million Ether in circulation and new Ether being created through mining.
• 🛠️ The Ethereum blockchain consists of two types of accounts: EOAs (Externally Owned Accounts) for humans and smart contract accounts for programmatic execution.
• ⚙️ Smart contracts are written in Solidity, a high-level programming language that is compiled into low-level instructions understood by the Ethereum Virtual Machine (EVM).
• 💼 Ethereum wallets use private keys to send transactions and interact with the network, allowing users to transfer Ether or engage with smart contracts.
• 🌍 Decentralized applications (dApps) combine smart contracts with a user-friendly interface, allowing anyone to interact with Ethereum in a seamless way.
• 💥 Ethereum faces scalability issues, such as limited transaction capacity (15 per second), high transaction costs, and slow processing times, but Ethereum 2.0 aims to address these through proof of stake and other improvements.

Q & A

What is Ethereum and how does it differ from Bitcoin?

Ethereum is a decentralized blockchain network that allows for the creation and execution of smart contracts and decentralized applications (dApps). Unlike Bitcoin, which is primarily used for financial transactions, Ethereum provides a more versatile platform for complex applications and use cases such as decentralized finance (DeFi), voting systems, and gaming.

Who created Ethereum and when was it launched?

Ethereum was created by Vitalik Buterin in 2014. It officially launched in July 2015 after a team of developers, including Buterin, worked on its first prototype.

What is a smart contract in Ethereum?

A smart contract is a self-executing program that automatically enforces the terms of a contract. It operates based on pre-set rules and is executed when those rules are met. Once deployed on Ethereum, a smart contract runs permanently without the ability to alter or stop it, which can be both an advantage and a disadvantage.

How is Ethereum different from Bitcoin in terms of cryptocurrency?

Ether (ETH), the cryptocurrency of Ethereum, differs from Bitcoin in that it has no fixed supply. While Bitcoin has a capped supply of 21 million coins, Ether is continuously created as new blocks are mined. Additionally, Ethereum supports the execution of smart contracts, making it more versatile compared to Bitcoin.

What are decentralized applications (dApps) in Ethereum?

Decentralized applications (dApps) are software applications that run on the Ethereum blockchain. They consist of a smart contract backend combined with a front-end interface (usually a website or mobile app) that allows users to interact with the blockchain without intermediaries.

What role does gas play in Ethereum transactions?

Gas is used to pay for transaction fees on the Ethereum network. It compensates miners for the computational resources required to process transactions. The amount of gas required depends on the complexity of the transaction, and users can set a gas limit to control how much they're willing to pay for faster processing.

How does Ethereum ensure the security of its blockchain?

Ethereum ensures security through its decentralized nature and the immutability of its smart contracts. However, vulnerabilities can arise if there are bugs in smart contract code. Additionally, if a hacker obtains the private key of a wallet, they can potentially steal funds. To prevent this, hardware wallets and secure key management are recommended.

What is the main use case for Ethereum in decentralized finance (DeFi)?

The main use case of Ethereum in decentralized finance (DeFi) is to replace traditional financial intermediaries like banks with smart contracts. DeFi platforms like Uniswap (a decentralized exchange) and Compound (a lending protocol) allow users to trade, borrow, and lend cryptocurrencies directly on the blockchain.

What challenges does Ethereum face today?

Ethereum faces scalability issues, as its current network can only process about 15 transactions per second, which is far lower than other systems like Visa. Additionally, high network congestion can lead to expensive transaction fees and slower processing times. Ethereum 2.0 aims to address these issues by improving scalability and transitioning to a proof-of-stake (PoS) consensus model.

What is Ethereum 2.0 and how will it improve Ethereum's performance?

Ethereum 2.0 is the upcoming upgrade to the Ethereum network that will transition from proof-of-work (PoW) to proof-of-stake (PoS). This change will improve Ethereum’s scalability by increasing transaction throughput and reducing energy consumption. Ethereum 2.0 is also expected to make it more accessible for individuals to become validators on the network.