The second project in my cryptocurrency and blockchain project breakdown series is Ethereum (ETH). The Ethereum project itself is an open-sourced public blockchain that was specifically designed for the use of smart contracts and decentralized applications (DApp) by introducing a Turing-complete computational system.
DISCLAIMER: I have never owned any Ether (ETH)
History of Ethereum/Ether (ETH)
Ethereum was proposed in a white paper released by Vitalik Buterin in late 2013. Buterin had been involved with Bitcoin (BTC) since 2011 and had been working as a writer for Bitcoin Magazine at the time of the white paper’s release.
BTC’s development has always been focused for a singular purpose, to become a decentralized transactional currency. Buterin determined that BTC, due to the limitations in its code to strictly perform as a currency, was too limited a usage of blockchain technology.
Buterin believed that BTC needed a scripting language (Turing-complete programming language) in order to allow developers to build applications onto the BTC blockchain. Due to the lack of this ability in the BTC blockchain, technologies have to be built as layers using their own blockchains.
As Buterin was unable to garner consensus on adopting these features for BTC, he instead moved forward with developing ETH.
Ethereum itself refers to the blockchain utilized by the project, whereas Ether is the token that powers the functions within the blockchain. Both are referred to interchangeably as ETH although the correct reference is only for Ether.
Basis of Ethereum
Buterin’s primary purpose for creating Ethereum was in order to have a blockchain that allowed the use of a Turing-complete programming language.
Turing completeness is named after the computer scientist Alan Turing. The theory relates to the ability for a system to be able to manipulated by a set of rules, much like a programming language. Your ability to press certain keys on your keyboard, or click your mouse for specific actions, are all determined because the system is is programmed to recognize these actions.
By building the Ethereum project with this in mind meant that it allowed anybody to add applications into the Ethereum blockchain as long as they followed available programming rules.
One of the ways Ethereum accomplishes this is through its primary innovation, the Ethereum Virtual Machine (EVM). The EVM is the backbone of the Ethereum blockchain and allows for programming in different languages so as to create smart contacts for the blockchain. Programming languages include, but are not limited to, Solidity, Vyper, Flint, and HAseembly-evm. Solidity is the most updated of all the EVM programming languages at time of writing.
Programming code is submitted through smart contracts. The idea of smart contracts were first introduced by Nick Szabo. Contrary to the word “contract”, smart contracts are not limited to the traditional binding agreement between parties. Smart contracts are basically a technology that allows computational code to be written and executed on a blockchain. Implementation of smart contracts in Ethereum are how high level programming code is submitted to the EVM which then deploys it onto the Ethereum blockchain.
The Ether in Ethereum
Ether is in a way the grease in the wheels of the Ethereum network. The term ETC, although used interchangeably, is actually the correct reference for Ether. Similar to BTC, ETC is is the crypto token of the Ethereum blockchain. Unlike many other cryptocurrencies, ETC does not have a supply limit and at time of writing the circulating supply for ETH is 104,202,228.
ETC tokens are generated similar to BTC as a reward to miners who mine new blocks on the blockchain and currently the reward per block is 2ETH. Additionally, ETC is paid whenever an interaction is done on the blockchain through Ethereum’s Gas.
Gas is based on a calculated measurement within the EVM that is determined by how much computational work needs to be done on the blockchain. The Gas is not a token and cannot be owned, it is strictly a system of measurement. Having a secondary measurement for Gas is important as the amount of Gas needed to do a set amount of work on the blockchain doesn’t change. Comparatively, ETC is traded and its price can change depending on the market.
When submitting a transaction to the blockchain, you can set the amount of Gas and thus ETC tokens you would reward to miners who process that transaction.
Ether and Gas
According to ETHGasStation.info, at the moment the standard price for a unit of Gas is 1.2 Gwei. As tokens go up in value, they are being broken down into smaller denominations in order to facilitate the ability to spend the tokens on a normal basis. A Gwei is the second smallest denomination of ETH and is the equivalent of 1/1,000,000,000 of an ETH token.
This means that at the current price of ETH ($160.55 USD) a Gwei would equal $0.00000016055 USD making the standard single unit price for gas $0.00000019266 USD. Since these long decimal numbers are difficult to use, units such as the Gwei are substituted.
ETH is the price of Gas, Gas is the amount of fuel you need to complete your transaction.
Since you are able to set the amount of Gas and Ether on your transaction, you need to calculate two things.
First, you need to ensure you are providing enough gas for the computational needs of your transaction. If you set too low of a gas amount, your transaction will end prematurely and you will not be refunded this gas since the work was picked up by a miner and work was completed up to that point. You can provide more gas than is necessary
Second, the amount of ETH you attach to the transaction dictates how much you are pricing the Gas at. As such, it is important that you try to match the current market value of gas in order to make sure miners are willing to process your transaction.
Knowing how much computational power is required for your transaction is defined in the Ethereum Yellow Paper. Functions and the calculation for their computation costs are called OPCODES and are located in Appendix H, section H1 of the ETH Yellow Paper.
Some simple functions include a STOP function, which has no cost, to SHA3, an encryption function, which costs 30 units of gas plus the number of characters you are encrypting. Danny Ryan (@djrtwo) over at Hacker Noon maintains a simplified list of gas prices per function.
Submitting a smart contract to the ETH network will typically utilize multiple operations and the gas costs would need to be calculated based on each operation.
Transacting Ether through the network typically requires about 21000 units of gas. From there you would need to figure out the current gas prices by checking out ETHgasstation.info and adding the appropriate amount of ETH.
Enter too low of a gas price and your transaction will take longer to be processed as most miners aim for higher profits. Too high and you are potentially just wasting money, such as in the case when someone paid a fee valued at $158 for a simple transfer of ETH.
The Different ERC Tokens
One of the the main purposes for Buterin’s development of Ethereum was the fact that every single BTC application requires a new and separate blockchain. This varies greatly from Ethereum, as it is possible to launch your own tokens as long as they are ERC compliant.
Ethereum Request for Comment (ERC) refers to the system in which developers can make a proposal (request) within the Ethereum community on the establishment of a new protocol. This Ethereum Improvement Proposal (EIP) is made and if accepted, becomes a new ERC protocol o the Ethereum blockchain.
These protocol standards then allow developers to build smart contracts utilizing the protocol.
ERC-20 protocol is the most widely used and at time of writing 161,452 token contracts exist using this protocol.
Other ERC protocols and proposals can be viewed on the Ethereum ERC proposal page.
Flaws With Ethereum
Even though Ethereum does not aim to be strictly a currency, Ether does need to maintain a value in order to power the Ethereum network. A combination of this need for value as well as the usefulness of the underlying blockchain technology means Ethereum has a scalability issue.
1. Raiden Network – Scalability of Ethereum
Scalability is a major problem many current blockchain projects face and there are numerous angles being approached to address this. If you read my BTC breakdown or are familiar with industry news, you would know BTC’s current solution to scalability is the Lightning Network.
Ethereum’s solution to scalability involves two developing technologies. The first is very similar to the Lightning Network, where Ethereum’s version is called the Raiden Network.
Like the Lightning Network, the Raiden Network addresses scalability by performing transactions off-chain, in that they are completed on a separate blockchain before being committed to the main Ethereum ledger.
The Raiden Network approaches the problem with three primary functions, payment channels, multihop transfers, and bidirectional payment channels.
An initial payment channel is opened between two participants. Both parties involved in this payment channel can deposit ETH into an escrow on the Ethereum blockchain. Because the payment channel is bidirectional, the payments can go back and forth, meaning the total amount of ETH in the escrow is transferable as long as both parties agree. None of these changes are committed to the Ethereum blockchain until the payment channel is closed.
Multihop transfers are the final key in scalability. Instead of requiring every participant to open a payment channel with each other, multihop transfers allow participants to send their payments through an interconnected web of participants. This is accomplished by hashlocking transactions as they travel to the recipient.
Sally can send Jack a payment even though they do not have a payment channel open because both Sally and Jack have a payment channel open with Bob.
By sending Jack a payment, Sally hashlocks the transaction and it goes through Bob who then sends that hashlocked transaction to Jack who then confirms the receival of the haslock. Sally receives both confirmation from Bob that he sent the transaction as well as from Jack that he received the transaction, so she sends the secret to remove the hashlock to Jack.
Once transactions are completed, the entire record of this is sent back to the Ethereum blockchain where the funds are then released from escrow.
Each new payment channel, as long as it is interconnected to another web of payment channels, means that the number of people actually increase the potential transactions between participants. By doing this, Ethereum hopes to provide linear scalability where number of users does not affect transaction ability, time, and fees.
2. Proof-of-Work on Ethereum
Again similar to many other blockchain-related products, Ethereum has the issue of utilizing massive amounts of power in order to accomplish Proof-Of-Work (PoW) hashing to confirm new blocks.
Vitalik Buterin revealed in October 2018 that Ethereum would shift to Ethereum 2.0 with the release of Serenity Protocol. The Serenity Protocol’s main purpose will be to shift Ethereum from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
Everything I’ve stated previously about miners is related to a PoW blockchain, which requires miners to solve advanced cryptographical equations in order to confirm new blocks.
PoS will shift the block rewards to those who hold a stake. By having a wallet with a predetermined minimum amount of ETH on the blockchain means you get a stake in the network. Once consensus for new transactions are reached, the block rewards are given to stakeholders in a randomized fashion.
Value of Ethereum
Like many other cryptocurrency or blockchain projects near the end of 2017, ETH saw its price rise to very high levels. With the several downward spirals of market value since, ETH has equally suffered.
ETH being the fuel of the Ethereum blockchain project means that its value relies on that technology. Following my previous sentiments, the ability for any project in this space to succeed will depend on the underlying technology.
Ethereum by having the underlying EVM and being turing complete, makes it unique in trying to create this technology on a blockchain. If the developers are able to scale the platform in a way that allows it for mass adoption, this will be the true driver of value.
Several large blockchain projects actually utilize ERC-20 token contracts, including, but not limited to, Binance Coin (BNB), EOS, and Basic Attention Token (BAT).
Any opportunity for ETH as an investment will solely rely on the potentials of this nascent technology. Whether or not these potentials can be reached by the development team has many in doubt especially as the project timelines drag on.
Ethereum is certainly one of the more unique approaches to a public blockchain, which gives it a very different potential as an investment opportunity. If the blockchain is able to adapt and scale to where it can be reliably used for its designed purpose, this will inevitably give ETH value.
However, only invest what you can afford and do your own due diligence. Just because the technology is useful does not mean the value of ETH can moon, nor is it designed to.