What Is Ethereum and How Does It Work?

[Carolyn Miller]

Ethereum is a decentralized, open-source blockchain platform that enables developers to build and deploy smart contracts and decentralized applications (dApps). Launched in 2015 by Vitalik Buterin and other co-founders, Ethereum is designed to go beyond the capabilities of Bitcoin by providing a more versatile platform for creating programmable blockchain applications. Ether is the native cryptocurrency of the Ethereum network. It's used to pay for transactions and computational services, and incentivise network participants (such as miners or validators).

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically execute and enforce the terms of the contract without the need for intermediaries. For example, a smart contract could be used in a decentralized crowdfunding campaign, automatically returning funds to contributors if the funding goal isn't met by a certain date. The EVM is the runtime environment for smart contracts on Ethereum. It's a Turing-complete virtual machine, meaning it can execute any computation that can be described algorithmically. The EVM ensures that smart contracts run consistently and independently across all nodes in the network.

dApps are applications that run on the Ethereum blockchain. They operate without a central authority, relying on smart contracts for their backend logic. Examples of dApps include decentralized finance (DeFi) platforms, games, and marketplaces. Ethereum originally used a proof-of-work (PoW) consensus mechanism, similar to Bitcoin, where miners compete to solve complex mathematical puzzles to validate transactions and create new blocks. However, Ethereum transitioned to a proof-of-stake (PoS) mechanism in 2022 with the Ethereum 2.0 upgrade (known as "The Merge"). In PoS, validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to "stake" as collateral.

Users who want to send Ether or interact with a smart contract create a transaction. This transaction is broadcast to the Ethereum network and picked up by miners (under PoW) or validators (under PoS). Miners/validators validate the transaction by ensuring it's legitimate (e.g., checking that the sender has enough funds) and then include it in a new block. The block is added to the blockchain, and the transaction is considered complete.

When a transaction involves a smart contract, the EVM processes the contract code, executing its logic. The outcome of this execution can result in changes to the blockchain, such as transferring funds, creating new tokens, or updating contract states. Each operation within the smart contract requires a small amount of computational work, paid for in "gas," which measures the computational resources required. Gas fees are paid in Ether, and the amount of gas required can fluctuate based on network demand.

Ethereum has undergone several upgrades to improve scalability, security, and functionality. The most significant recent upgrade is Ethereum 2.0, which introduced PoS and aims to make the network more energy-efficient and scalable. Hard forks occur when there is a significant change in the Ethereum protocol that isn't backward-compatible. One famous fork resulted in the creation of Ethereum Classic (ETC) after a disagreement within the community over how to handle the DAO hack in 2016.

[beyond11]

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