Departments
Fundamentals of Ethereum
Where Does Ether Come From?
Getting Started with Ethereum
Scalability, ETH 2.0 and the Future of Ethereum
Ethereum and Decentralized Finance (DeFi)
Participation in the Ethereum Network
Part 1 - Ethereum Fundamentals
Contents
What is Ethereum?
What is the difference between Ethereum and ether (ETH)?
What makes Ethereum valuable?
What is Blockchain?
What is the difference between Ethereum and Bitcoin?
How does Ethereum work?
What is a smart contract?
Who created Ethereum?
How was Ether distributed?
What was The DAO and what is Ethereum Classic?
What is Ethereum?
Ethereum is a decentralized computing platform. You can think of Ethereum like a desktop or laptop computer, but it doesn't run on a single device. Instead, it runs simultaneously on thousands of machines from all over the world, which means Ethereum has no owner.
Like Bitcoin and other cryptocurrencies, Ethereum allows you to transfer digital money. However, it is capable of much more than that. For example, you can create your own code and interact with applications created by other users. Because it is so flexible, all kinds of sophisticated programs can be made available on Ethereum.
In its simplest form, the main idea behind Ethereum is that developers can create and make available code that runs on a distributed network rather than a central server. So, in theory, these applications cannot be closed or censored.
What is the difference between Ethereum and ether (ETH)?
Although unusual, the units used in Ethereum are not called Ethereum or Ethereums. Ethereum is the protocol itself, but the currency it uses is called ether (or ETH).
What makes Ethereum valuable?
We briefly mentioned that Ethereum can run codes on a distributed system. Therefore, external parties cannot manipulate the programs. These codes are added to Ethereum's database (i.e. blockchain) and can be programmed to be unalterable. In addition, the database is publicly viewable so users can audit code before interacting with it.
This means anyone, from anywhere, can launch untakeable apps. More interestingly, since ether, a platform-specific unit, stores value, these applications can determine the conditions for value transfer. These programs that create applications are called smart contracts. In many cases, they can be arranged to work without human input.
Predictably, the idea of “programmable money” has attracted users, developers, and businesses from all over the world.
What is Blockchain?
Blockchain underlies Ethereum and is the database that holds the information used by the protocol. If you have read our article What is Bitcoin, you should have basic knowledge of how a blockchain works. The Ethereum blockchain is similar to Bitcoin, but the data held and the way this data is kept is different.
You can think of Ethereum's blockchain as a book to which you add new pages. Each page is called a block and contains information about transactions. When you want to add a new page, a special number must be added at the top of the page. Thanks to this number, everyone can see that the new page is added behind the previous page, and is not placed at a random point in the book.
This number is essentially like a page number that references the previous page. By looking at the new page, it can definitely be said that the previous page is followed. To do this, a process called hashing is used.
Hashing consists of taking a piece of data (in this case, everything on the page) and outputting a unique token (hash). The probability that two different pieces of data will create the same hash is astronomically low. The process is also one-way: it is extremely easy to calculate a hash, but it is almost impossible to get the actual information by returning the hash. We will discuss why this feature is important for mining in a later section.
We now have the mechanism to link our pages together in the correct order. Any attempt to change the order or remove pages will clearly indicate tampering with the book.
If you want to learn more about Blockchains, you can read our Blockchain Technology Guide for Beginners article.
What is the difference between Ethereum and Bitcoin?
Bitcoin uses blockchain technology and financial incentives to create a global digital currency system. It has introduced some important innovations that allow users in different parts of the world to coordinate without the need for a central party. Thanks to Bitcoin, it has become possible for users to reach consensus on a financial database in a trustless, decentralized environment, with each participant running a program on their own computer.
Bitcoin is often referred to as the first generation blockchain. It was not created as a very complex system, and this feature offers strength in terms of security. It is specifically designed to be inflexible, prioritizing security as the base layer. Therefore, the smart contract language in Bitcoin is extremely limited and does not succeed in incorporating applications other than money transfer.
In contrast, second-generation blockchains have more capabilities. These platforms allow for a higher level of programmability in addition to financial transactions. Ethereum allows more freedom for developers to experiment with their own code and create Decentralized Applications (DApps).
Ethereum is the first example of the second generation blockchain wave and remains at the forefront to this day. It is similar to Bitcoin and can perform many of the same functions. But the two blockchains are extremely different from each other and each has its own advantages over the other.
How does Ethereum work?
We can define Ethereum as a state machine. This means that at any given time you have a snapshot of the current view of all account balances and smart contracts. Certain actions cause the state to be updated, meaning that all nodes update their snapshots to reflect this change.
A change in Ethereum's status.
Smart contracts running on Ethereum are triggered by transactions (from users or other contracts). When a user submits a transaction to a contract, each node on the network executes the contract and records the output. This is done using the Ethereum Virtual Machine (EVM), which translates smart contracts into instructions that computers can read.
A special mechanism called mining is used to update the state (for now). Mining is done with a Proof of Work algorithm, similar to Bitcoin. We will talk about this in detail in the coming sections.
What is a smart contract?
A smart contract is just a code. The code is not a smart contract or a contract as we know it. However, the code is called smart because it implements itself under certain conditions, and it is a contract in a sense because it ensures that the agreements between the parties are fulfilled.
Computer scientist Nick Szabo proposed this idea in the late 1990s. He used an example of an automaton to explain the concept and stated that automatons can be considered as the predecessor of modern smart contracts. There is a simple contract implemented in the vending machine example. The user inserts a coin into the machine and the machine dispenses the product the user wants.
A smart contract applies the same logic to digital conditions. Koda says that when two ethers are sent to this contract, “Hello, World!” A simple condition such as send your answer can be entered.
In Ethereum, the developer encodes this input so that it can then be read by the EVM. It then publishes this code by sending it to the special address that implements the contract. At this point the contract becomes available to everyone. Additionally, the contract cannot be deleted unless the developer specifies a special condition while writing the code.
The contract now has an address. To interact with this address, all users need to do is send 2 ETH to the address. This triggers the contract's code – it runs it with every computer on the network, sees that the contract has been paid, and records the output (“Hello, World!”).
The transaction we mentioned above is one of the simplest examples of what you can do with Ethereum. More sophisticated applications that tie together many contracts can (and have) been created.
Who created Ethereum?
In 2008, an anonymous developer (or developer community) published the Bitcoin whitepaper under the pseudonym Satoshi Nakamoto. As a result, the world of digital money has changed permanently. A few years later, Vitalik Buterin, a young programmer, started thinking about taking this idea one step further and finding a way to use it on all kinds of applications. The concept eventually emerged as Ethereum.
Ethereum was introduced by Buterin in 2013 in his blog post titled Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In this article, Buterin explained the idea of a full Turing blockchain, a decentralized computer that can run any application given enough time and resources.
Over time, the types of applications that can be used on a blockchain have become limited only by the developer's imagination. It aims to find out whether Ethereum blockchain technology has valid uses outside of Bitcoin's intentional design limitations.
How was Ether distributed?
Ethereum was launched in 2015 with an initial supply of 72 million ether. More than 50 million of these tokens were distributed in a public token sale called an Initial Coin Offering (ICO), in which interested participants could purchase ether tokens in exchange for bitcoin or fiat currencies.
What was The DAO and what is Ethereum Classic?
With Ethereum, entirely new ways of open collaboration over the internet have become possible. For example, DAOs (decentralized autonomous organizations) have emerged that are governed by computer codes similar to computer programs.
One of the first and most ambitious attempts at such an organization was “The DAO”. It would consist of complex smart contracts running on Ethereum and operate as an autonomous venture fund. DAO tokens were distributed via ICO, giving ownership and voting rights to token holders.
But soon after its launch, malicious actors discovered a vulnerability and withdrew almost a third of the DAO's funds. It should also be noted that at the time, 14% of the entire ether supply was locked up in the DAO. Predictably, this incident caused great damage to the nascent Ethereum network.
After the evaluations, the chain was split in two with a hard fork. In one, malicious transactions were “reversed” to recover funds – the chain now known as the Ethereum blockchain. In the original chain, now known as Ethereum Classic, transactions were not reversed and the principle of immutability was preserved.
The incident was a harsh reminder of the risks of this technology and how entrusting large amounts of funds to autonomous codes could backfire. It also offered an interesting example of how making collective decisions in an open environment can create challenges. But security vulnerabilities aside, The DAO demonstrated the potential of smart contracts to enable large-scale trustless collaboration over the internet.
Part 2 - Where do ethers come from?
Contents
How are new ethers created?
How many ethers are there in total?
How does Ethereum mining work?
What is Ethereum gas?
Gas and gas limits
How long does it take to mine an Ethereum block?
What are Ethereum tokens?
How are new ethers created?
We briefly mentioned mining before. If you know about Bitcoin, you probably know that the mining process is closely related to the security and updating of the blockchain. The same principle applies in Ethereum: to reward users who mine (which is a costly process), the protocol gifts them ether.
How many ethers are there in total?
As of February 2020, the total ether supply is around 110 million.
Unlike Bitcoin, Ethereum's token emission schedule is not specifically finalized from the beginning. Bitcoin attempts to maintain its value by limiting its supply and slowly reducing the amount of new coins created. Ethereum, on the other hand, aims to provide a foundation for decentralized applications (Dapps). Since the token emission program that will best serve this purpose is not clear, the question remains open-ended.
How does Ethereum mining work?
Mining is critical to the security of the network. It ensures that the blockchain can be updated fairly and that the network can operate without a single decision-maker. In the mining process, a subset of nodes (miners) devote their computing power to solving a cryptographic puzzle.
What they actually do is hash a group of pending transactions and some other data. For the block to be considered valid, the hash must be below a protocol-specified value. If the miner cannot reach this value, it can try the operation again by changing some of the data.
Therefore, in order for miners to compete with other miners, they need to be able to hash as quickly as possible. Therefore, the power of miners is measured by hash rates. The higher the hash rate on the network, the more difficult the puzzle to solve. What miners have to do is find the actual solution, once found the validity of this solution can be easily checked by other participants.
As you can imagine, constantly hashing at high speeds is costly. Miners are paid a payment to incentivize them to keep the network secure. The payment consists of all expenses paid for transactions in the block. Miners also receive newly created ether (2 ETH as of now).
What is Ethereum gas?
The aforementioned Hello, World! Do you remember our contract? This is an easy program to run and is not computationally expensive at all. However, this program cannot be run only on one's own personal computer; everyone in the Ethereum ecosystem is also asked to run the program.
So the question arises: what happens when tens of thousands of people run sophisticated contracts? If one were to set up their contract to repeat the same code, each node would have to run it infinite times. This puts a huge strain on resources and will probably eventually crash the system.
Fortunately, Ethereum introduced the concept of gas to eliminate this risk. Just as your car cannot run without gas, contracts cannot be implemented without gas. Users must pay a certain amount of gas to run contracts successfully. If there is not enough gas, the contract stops working.
At its most basic, this is a transaction fee mechanism. The same concept is reflected in transactions: miners' primary motivation is to make a profit, so they may ignore low-cost transactions.
It is important to note that ether and gas are not the same. The average price of Gas varies and is largely determined by miners. When you make a transaction, you pay gas in ETH. In this respect, it is similar to Bitcoin's transaction fees – if the network is congested and many users are trying to make transactions, the average gas price will likely rise. Conversely, when there is not much movement, the gas price drops.
Although the gas price changes, the amount of gas required for each transaction is constant. This means that complex contracts will be more costly than simple transactions. Therefore, gas is a measure of computational power. It ensures that users can be offered an affordable transaction fee based on how much of Ethereum's resources they use.
Gas generally consists of a small percentage of ether. Therefore a smaller unit (qwei) is used for gas. One gwei is one billionth of ether.
In short, you can run a program that will loop for a long time. But doing this quickly becomes very costly. In this way, nodes on the Ethereum network can block spam.
Average gas price in gwei over time. Source: etherscan.io
Gas and gas limits
Suppose Alice pays into a contract. It first calculates how much gas it wants to spend (e.g. using ETH Gas Station). It may set a higher price to encourage miners to add the transaction as soon as possible.
Alice also needs to set a gas limit to protect herself. Something might go wrong with the contract and he might have to spend more on gas than he planned. Thanks to the gas limit, it is guaranteed that the transaction will stop after x amount of gas is spent. The contract fails, but Alice does not have to pay more than she originally agreed to.
This may seem like a difficult concept to understand at first. But don't worry, you can manually set the gas price (and gas limit) you want to pay, but most wallets will handle this for you. In short, the gas price determines how long it takes miners to process your transaction, and the gas limit limits the maximum amount you can pay.
How long does it take to mine an Ethereum block?
The average time for a new block to be added to the chain is between 12-19 seconds. This will likely change as the network moves to Proof of Stake, which aims for faster block times among other improvements. If you want to learn more about this topic, What is Ethereum Casper? You can read our article.
What are Ethereum tokens?
The appeal of Ethereum is largely based on the fact that users can create their own assets on the chain and that these assets can be stored and transferred like ether. Rules for assets are determined by smart contracts so developers can set specific parameters for their tokens. Parameters may include how many assets to mine, how the assets are mined, whether they are divisible, whether they are fungible, and other things. The most widely used technical standard that allows token creation on Ethereum is ERC-20. This is why the tokens are commonly known as ERC-20 tokens.
Token functionality gives developers great room to experiment with the latest financial and technology applications. There is a wide range of design flexibility, from issuing single types of tokens to serve as in-app currencies to issuing unique tokens backed by physical assets. It is very possible that best practices for simple and seamless issuance of tokens have yet to be discovered.
Part 3 - Getting Started with Ethereum
Contents
How can I buy ETH?
How to buy ETH with credit/debit card?
How to buy ETH on peer-to-peer markets?
What can I buy with Ether (ETH)?
What is Ethereum used for?
What happens if I lose my ETH?
Can I reverse Ethereum transactions?
Are Ethereum transactions private?
Can I make money with Ethereum?
How can I store my ETH?
How can you deposit your ETH to Binance?
How can you store your ETH on Binance?
How can you withdraw your ETH from Binance?
How can you store your ETHs in an Ethereum wallet?
hot wallets
cold wallets
What is the Ethereum logo and symbol?
How can I buy ETH?
How to buy ETH with credit/debit card?
Binance allows you to seamlessly purchase ETH through your browser. To do this:
Go to the Buy and Sell Cryptocurrency portal.
Select the cryptocurrency (ETH) you want to purchase and the currency you want to use for payment.
Log in to your Binance account. If you don't have an account, sign up and create a new account in minutes.
Choose your payment method.
If you are directed this way, enter your card information and complete identity verification.
That's it! Your ETHs will be deposited into your Binance account.
How to buy ETH on peer-to-peer markets?
You can also buy and sell ETH on peer-to-peer markets. This method allows you to buy coins from other users directly through the Binance mobile app. For this:
Open the app and log in or register.
Select the Buy tab in the upper left corner of the interface, then select One-click buy and sell.
You will be presented with different suggestions – click Get the one you prefer.
You can pay with other cryptocurrencies (With Cryptocurrency tab) or fiat currencies (With Fiat tab).
Below you will be asked for your payment method. You can choose the method you want.
Select Buy ETH.
You need to pay now. When you make the payment, click Mark as Paid and confirm.
The transaction is completed when the seller sends you your coins.
What can I buy with Ether (ETH)?
Unlike Bitcoin, Ethereum does not aim to be used solely as a cryptocurrency network. It is a platform for creating decentralized applications, and ether is the driving force of the ecosystem as a tradable token. Therefore, it can be said that the main usage area of ether is its functions within the Ethereum network.
However, ether can also be used similarly to traditional currencies. So, you can buy services and products with ETH just like any other currency.
Current map of sellers accepting ether as payment. Source: cryptwerk.com/coinmap
What is Ethereum used for?
ETH, Ethereum's platform-specific currency, can be used as digital currency or collateral. Like Bitcoin, ETH is a store of value for many people. But unlike Bitcoin, the Ethereum blockchain is more programmable, so there are more things that can be done with ETH. It can be used as a source for decentralized financial applications, decentralized markets, exchanges, games and many other things.
What happens if I lose my ETH?
Since there is no intermediary bank, you are responsible for keeping your coins safe. You can keep your coins on an exchange or in your own wallet. If you are using your own wallet, it is very important to save your recovery phrase. You should keep your sentence safe as you will need this sentence to access your funds in case you lose access to your wallet.
Can I reverse Ethereum transactions?
Since the data is added to the Ethereum blockchain, it is almost impossible to change or remove it. In other words, any action you make is permanent and irreversible. Therefore, you should double check whether you are sending the funds to the correct address. If you're sending a large amount, it may be worth testing with a small amount first to make sure you're using the correct address.
However, due to an attack on one of the smart contracts, Ethereum made a hard fork in 2016 and the attack transactions were “reversed”. However, this is an exceptional action taken in the face of an extraordinary situation and is not the norm.
Are Ethereum transactions private?
No. All transactions added to the Ethereum blockchain are visible to everyone. Although your real name does not appear in your Ethereum address, an observer can link your identity and address using other methods.
Can I make money with Ethereum?
Since it is a volatile asset, you can make or lose money with ETH. Some people hold their ether long-term in the belief that the network will be a global, programmable payment layer. Others trade their ether for other altcoins. Both of these strategies carry unique financial risks.
As a mainstay of the Decentralized Finance (DeFi) movement, ETH can be used in lending, collateral for taking out loans, mining synthetic assets, and someday in the future, staking.
Some investors may choose to take a long-term position only in Bitcoin and not add other digital assets to their portfolio. Others, in contrast, may choose to hold ETH and other altcoins in their portfolios or allocate a certain percentage of their funds for short-term trades (e.g., day trading or swing trading). There is no one-size-fits-all method to make money in the markets, and each investor must determine strategies that suit his or her own profile and conditions.
How can I store my ETH?
There are many options for storing coins, each with their own advantages and disadvantages. As with anything that involves risk, the best approach may be to diversify between different options.
Generally, custody solutions are divided into fiduciary and non-custodial. An escrow-based solution means that you entrust your coins to a third party (such as an exchange). In this case, you need to enter the platform to trade with your crypto assets.
A non-custodial solution is the opposite, meaning you control your own funds using a cryptocurrency wallet. The wallet does not store your coins like a physical wallet. Instead, cryptographic keys that allow you to access your assets on the blockchain are stored in these wallets. We would like to emphasize this again: for non-custodial wallets it is very important to backup the recovery phrase!
How can you deposit your ETH to Binance?
If you already have ether and want to deposit them to Binance, you can follow these steps:
Log in to Binance or sign up if you don't have an account.
Go to your Spot Wallet and select the Deposit option.
Select ETH from the coin list.
Select the network and send your ETHs to the address.
That's it! After the transaction is confirmed, your ethers will be deposited to your Binance account.
How can you store your ETH on Binance?
If you want to actively trade your ethers, you need to store them in your Binance account. You can store your ETHs easily and safely on Binance. You can also easily benefit from the benefits offered by the Binance ecosystem, such as lending, staking, airdrop promotions and gifts.
How can you withdraw your ETH from Binance?
If you already have ether and want to withdraw it from Binance, you can follow these steps:
Log in to Binance.
Go to your Spot Wallet and select the Withdraw option.
Select ETH from the coin list.
Select network
Enter the recipient's address and amount.
Confirm the process by email.
That's it! After the transaction is confirmed, ETHs will be deposited to the account you specified.
How can you store your ETHs in an Ethereum wallet?
If you want to store your ETH in your own wallet, you have two options: hot wallets and cold wallets.
hot wallets
Wallets that are connected to the internet in some way are called hot wallets. These are usually mobile or desktop applications that allow you to check your balance and send and receive tokens. Hot wallets tend to be more vulnerable to attacks because they are online, but they are also more useful for everyday payments. Trust Wallet is an example of an easy-to-use mobile wallet with a large number of coins it supports.
cold wallets
A cold wallet is a crypto wallet without an internet connection. Since there is no online attack vector, the likelihood of an attack is generally lower. At the same time, cold wallets are less intuitive to use than hot wallets. Examples of cold wallets are hardware wallets or paper wallets, but paper wallets are not recommended because they are considered old-fashioned and risky.
For a more in-depth review of wallet types, see What Are the Types of Crypto Wallets? You can read our article.
What is the Ethereum logo and symbol?
The first Ethereum emblem was designed by Vitalik Buterin. It consists of two rotated addition symbols Σ (Greek Sigma). The final design of the logo (based on this emblem) consists of an octahedral parallelogram with four triangles around it. It would be useful for ether to have a standard Unicode symbol, similar to other cryptocurrencies, so that applications and websites can easily display ether values. The most commonly used symbol for ether is Ξ, although it is not as commonly used as USD with the symbol $.
Part 4 - Scalability, ETH 2.0 and the future of Ethereum
Contents
What is scalability?
Why does Ethereum need to scale?
Blockchain Scalability Trilemma
What is Ethereum's transaction capacity?
What is Ethereum 2.0?
Ethereum sharding nedir?
What is Ethereum Plasma?
What are Ethereum rollups?
Ethereum Proof of Stake (PoS) nedir?
What is Ethereum staking?
How much ETH should I stake on Ethereum?
How much can I earn by staking ETH on Ethereum?
How long will my ETH be locked when staking?
Are there any risks to staking ETH?
What is scalability?
In its simplest form, scalability measures the system's ability to grow. For example, in programming, a network or server can be scaled to meet more demands using different methods.
Scaling in cryptocurrencies refers to how much a blockchain has the ability to grow to serve more users. More users means more operations and transactions “competing” with each other to be included in the blockchain.
Why does Ethereum need to scale?
Proponents of Ethereum believe that the next cycle of the internet will be built on this platform. It is thought that Web 3.0 will bring a decentralized structure with features such as the absence of intermediaries, a focus on privacy, and people truly owning their own data. This foundation can be built using distributed computing systems and distributed storage/communication protocols in the form of smart contracts.
But for this to happen, Ethereum must greatly increase its transaction capacity without harming the decentralization of the network. Currently, Ethereum does not limit transaction volume by limiting block sizes the way Bitcoin does. Instead, a block gas limit is imposed – only a certain amount of gas can fit in a block.
For example, if there is a block gas limit of 100,000 qwei and you want to add ten transactions, each with a gas limit of 10,000 gwei, this transaction can be performed. Likewise, two transactions of 50,000 gwei each can be added. Any additional operations to be performed must wait for the next block.
This approach is not ideal for a system that everyone uses. If there are more pending transactions than the available space in the block, you will eventually end up with a backlog of transactions. Gas prices rise and users have to pay more fees to have their transactions added. Depending on how busy the network is, operations may become too expensive for some use cases.
The rapidly growing popularity of CryptoKitties has clearly demonstrated Ethereum's shortcomings in this area. In 2017, the Ethereum-based game attracted a large number of users to trade so that they could create their own types of digital cats (represented as non-fungible tokens). The game became so popular that the number of pending transactions increased rapidly, causing major congestion in the network.
Blockchain Scalability Trilemma
Simply increasing block gas limits may seem like a simple solution to all scalability issues. The higher the ceiling, the higher the number of transactions that can be processed within a given time period, right?
Unfortunately, this is not possible without sacrificing some of Ethereum's most important features. Vitalik Buterin introduced the concept of the Blockchain Trilemma (see below) to show how delicate the balance in blockchains is.
Blockchain Trilemma: Scalability (1), Security (2) and Decentralization (3).
When two of the three above features are optimized, the third feature becomes weak. Blockchains like Ethereum and Bitcoin prioritize security and decentralization. Consensus algorithms ensure the security of networks consisting of thousands of nodes, but as a result, scalability is weakened. Due to the large number of nodes that receive and verify transactions, the system is much slower than centralized alternatives.
In another scenario, the block gas limit can be removed so that the network can achieve security and scalability, but this time the network will not be as decentralized as before.
This is because increasing the number of transactions in a block creates larger blocks. Nodes in the network need to download and broadcast transactions at regular intervals. And this process creates load on the hardware. When the block gas limit is increased, it becomes more difficult for nodes to verify, store and publish blocks.
As a result, nodes that cannot adapt to the conditions may have to leave the network. If it continues this way, only a very small number of powerful nodes can continue to be participants, which means more centralization. Ultimately, you may be left with a blockchain that is secure and scalable, but not decentralized.
The final option could be a blockchain that focuses on decentralization and scalability. To be both fast and decentralized, some compromises must be made in the consensus algorithm used, which weakens security.
What is Ethereum's transaction capacity?
In recent years, Ethereum's transactions per second (TPS) has rarely exceeded ten. For a platform that aims to be the “World computer”, this number is surprisingly low.
But scaling solutions have been on Ethereum's roadmap for a long time. Plasma is also an example of these scaling solutions. This technique aims to increase the throughput of Ethereum, but can also be applied to other blockchain networks.
What is Ethereum 2.0?
Despite all its potential, Ethereum currently has significant shortcomings. We have already mentioned the scalability issue. In short, if Ethereum aims to be the backbone of the new financial system, the number of transactions per second must be much higher. This is a very difficult problem to solve, given the distributed nature of the network, and Ethereum developers have been pondering the solution for years.
First, limits need to be enforced to keep the network sufficiently decentralized. The higher the requirements of operating as a node, the more centralized the network becomes. In other words, increasing Ethereum's transaction capacity may damage the integrity of the system as it will also increase the load on the nodes.
Another criticism of Ethereum (and other Proof of Work cryptocurrencies) is that they require extremely high levels of resources. Mining is used to successfully add a block to the blockchain. But creating a block in this way requires rapid calculations, which consume a lot of electricity.
A group of important upgrades, generally known as Ethereum 2.0 (or ETH 2.0), have been proposed to address the shortcomings mentioned above. Once fully implemented, ETH 2.0 will greatly improve the performance of the network.
Ethereum sharding nedir?
As we mentioned above, each node keeps a complete copy of the blockchain. When there is an addition to the blockchain, all nodes must update, and this process reduces the bandwidth and memory capacity of the nodes.
This process may no longer be necessary with the method called sharding (database fragmentation). In this method, the network is divided into node subgroups, and these groups form shards. Each of these shards runs its own transactions and contracts, but can communicate with a larger shard network if necessary. Since all shards verify independently of each other, there is no need to store data from other shards.
Network after network and sharding implementation in March 2020.
Sharding is one of the most complex approaches to scaling and requires a lot of work in both design and implementation. However, if it can be implemented successfully, it can become the most effective scaling method and increase the input-output capacity of the network many times over.
What is Ethereum Plasma?
Ethereum Plasma is an off-chain scaling solution. In other words, it aims to increase transaction efficiency by taking transactions off the blockchain. In this context, it bears some similarities to sidechains and payment channels.
With Plasma, secondary chains are connected to the main Ethereum blockchain, but communication is kept to a minimum. They operate almost independently, but users still use the main chain to resolve disagreements or “complete” their actions on the secondary chain.
Reducing the amount of data that nodes must store is crucial for Ethereum to scale successfully. The plasma approach allows developers to specify the functionality of “child” chains via a smart contract on top of the parent chain. They can then create their applications with information or processes that would otherwise be too costly to store/run on the mainchain.
For more information about Plasma, see What is Ethereum Plasma? You can read our article.
What are Ethereum rollups?
Rollups are similar to Plasma in that they aim to move transactions off the main blockchain. So what are their working mechanisms?
A single contract on the main chain holds all the funds on the secondary chain and provides cryptographic proof of the current state of that chain. Operators on the secondary chain connected by the mainnet contract ensure that only valid changes to the current state are passed to the mainnet contract. The main idea is that data does not need to be stored on the blockchain, as this is protected off-chain. The main difference that distinguishes Rollups from Plasma is the way transactions are sent to the main chain. Using a special type of transaction, multiple transactions are “rolled up” (put together) and a special block called a Rollup block is created.
There are two types of rollups: Optimistic and ZK Rollup. Both ensure the correctness of the state change in different ways.
ZK Rollups send transactions using a cryptographic verification method called zero-knowledge proof. The exact name of the method used is zk-SNARK. We will not talk about all the details of how the method works here, but the way it is used for rollups is as follows: With Zk-SNARKs, different parties can prove to each other that they have information without revealing the information itself.
In ZK Rollups, this information is state changes sent to the main chain. One of the main advantages of this is that the process is almost instantaneous and it is impossible to send misleading statuses.
Optimistic Rollups sacrifice some scalability for greater flexibility. Smart contracts are made possible to run on these secondary chains by using a virtual machine called Optimistic Virtual Machine (OVM). On the other hand, there is no cryptographic proof that the state change sent to the main chain is correct. To eliminate this problem, there is a slight delay that allows users to evaluate and reject invalid blocks sent to the main chain.
Ethereum Proof of Stake (PoS) nedir?
Proof of Stake (PoS) is an alternative method to Proof of Work for validating blocks. In a Proof of Stake system, blocks are not mined but minted (sometimes this process is also called forging). Instead of miners competing for hashing power, a node (or validator) is randomly selected at regular intervals to verify the candidate block. If the miner executes the transaction correctly, he/she receives all transaction fees of this block and possibly a block reward depending on the protocol.
Because it does not use mining, Proof of Stake is seen as less harmful to the environment. Validators do not consume as much energy as miners and can create blocks with consumer-grade hardware.
Ethereum is planned to switch from PoW to PoS with an upgrade called Casper as part of ETH 2.0. Although the exact date has not yet been officially released, the first transition is expected to take place in 2020.
What is Ethereum staking?
In Proof of Work protocols, the security of the network is provided by miners. Miners do not cheat because it would consume a lot of electricity and could result in losing potential rewards. In Proof of Stake, there is no such game theory and different cryptoeconomic measures are applied to guarantee network security.
The factor that hinders dishonest attempts is the risk of losing funds rather than wasted energy. Validators must stake (i.e. a balance of tokens) to be eligible to verify. The stake is a certain amount of ether that the node will lose if it tries to cheat or will slowly decrease if it goes down or goes offline. But if the validator starts running additional nodes, it may start earning more rewards.
How much ETH should I stake on Ethereum?
The estimated minimum stake for Ethereum is 32 ETH per validator. This amount was specifically set so high to make 51% attack attempts extremely costly.
How much can I earn by staking ETH on Ethereum?
This is not a simple question to answer. The answer is based on the stake you place, but also on the total amount of ETH staked on the network and the inflation rate. As a very general estimate, according to current calculations, an annual return of 6% can be expected. It should be noted that this is only an estimate and may change in the future.
How long will my ETH be locked when staking?
There will be a queue for you to withdraw your ETHs from your validator. If there is no queue, the minimum withdrawal time is 18 hours, but this time is dynamically determined by how many validators are shooting at a certain time.
Are there any risks to staking ETH?
Since you will be an authenticator responsible for ensuring network security, there are some risks to consider. If your validator node goes offline for a long time, you may lose a significant portion of your deposit. Additionally, if at any point your deposit drops below 16 ETH, you will be removed from the validator group.
In addition, a more systemic risk factor should also be taken into consideration. Since Proof of Stake has not been implemented on such a large scale before, it is not yet clear whether it will fail at some point. Software will always have bugs and vulnerabilities, and this can have very damaging consequences, especially when it's worth billions of dollars.
Part 5 - Ethereum and Decentralized Finance (DeFi)
Contents
What is Decentralized Finance (DeFi)?
What can Decentralized Finance (DeFi) be used for?
Will Decentralized Finance (DeFi) ever become mainstream?
What are the current Decentralized Finance (DeFi) applications?
Decentralized Exchanges (DEXs) on Ethereum
What is Decentralized Finance (DeFi)?
Decentralized Finance (or DeFi for short) is a movement that aims to decentralize financial applications. DeFi is developed on public, open-source blockchains that can be accessed by anyone with an internet connection (not permission-based). This is the most critical element of bringing billions of people into this new, global financial system.
In the growing DeFi ecosystem, users interact with smart contracts and each other through peer-to-peer (P2P) networks and Decentralized Applications (DApps). An important advantage of DeFi is that it makes all this possible while also allowing users to keep ownership of their own funds.
In its simplest form, the aim of the Decentralized Finance (DeFi) movement is to create a new financial system that does not have the shortcomings of the current financial system. Currently, the majority of DeFi is built on Ethereum due to its high level of decentralization and large developer base.
What can Decentralized Finance (DeFi) be used for?
You probably know that one of the key advantages of Bitcoin is that the network does not require a central party to operate. So what happens if we take this as our core idea and build programmable applications on it? This is the potential of DeFi applications: No central coordinators or intermediaries and no single point of failure.
As we mentioned before, one of the biggest advantages of DeFi is open access. Billions of people around the world do not have access to any type of financial service. Can you imagine how you can manage your daily affairs without being fully sure of your financial situation? Billions of people live their lives this way, and the audience that DeFi aims to serve consists of these people.
Will Decentralized Finance (DeFi) ever become mainstream?
While this all sounds great, why hasn't DeFi taken over the world yet? In fact, currently most DeFi applications are difficult to use, cumbersome, frequently malfunctioning, and highly experimental. It turns out that just creating the general framework of this ecosystem is extremely difficult, especially in a distributed development environment.
There is a long road ahead for software engineers, game theory experts, mechanism designers and many others to overcome all the challenges of building the DeFi ecosystem. So, we have to wait and see if DeFi applications can become mainstream.
What are the current Decentralized Finance (DeFi) applications?
One of the most popular uses of Decentralized Finance (DeFi) is stablecoins. At their most basic, stablecoins are tokens on the blockchain whose values are pegged to real-world assets such as fiat money. For example, the value of BUSD is pegged to the USD. What gives these tokens ease of use is that they are very easy to store and transfer since they exist on the blockchain.
Another popular practice is lending. There are many peer-to-peer (P2P) services that allow you to lend your funds to someone else and earn interest in return. In fact, one of the easiest ways to do this is through Binance Lending. All you have to do is transfer your funds to the lending wallet and you can start earning interest in just one day!
But DeFi's most exciting applications are those that are difficult to group into one category. These can include all peer-to-peer, decentralized marketplaces where users can buy and sell unique crypto collectibles and other digital goods. It would also make the creation of synthetic assets possible, and anyone could create a market for almost anything of value. Other uses include prediction markets, derivatives, and many other things.
Decentralized Exchanges (DEXs) on Ethereum
Decentralized Exchange (DEX) is a space where trades occur directly between user wallets. When you trade on Binance, a centralized exchange, you send your funds to Binance and trade through the platform's internal system.
Decentralized Exchanges are different. Thanks to smart contracts, you eliminate the risk of exchange hacking and other risks by trading directly from your crypto wallet.
A good example of a decentralized exchange is Binance DEX. Other examples created on Ethereum include Uniswap, Kyber Network, and IDEX. Most of these exchanges even allow you to trade directly from the hardware wallet for maximum security.
Centralized and decentralized exchanges.
You can see the difference between centralized and decentralized exchanges above. In the example on the left, you can see that Binance is in the middle of the transactions made between users. So if Alice wants to exchange Token A for Bob's Token B, they must first deposit both of their assets into the exchange. Once the swap takes place, Binance realigns the balances accordingly.
In the example on the right, the decentralized stock market is shown. You can see that there is no third party involved in the transactions. Instead, Alice's token is exchanged directly for Bob's token using a smart contract. Because contracts automatically enforce conditions, no party has to rely on an intermediary.
As of February 2020, the most used applications on the Ethereum blockchain are DEXs. However, the transaction volume of these exchanges is still low compared to central exchanges. Still, if DEX developers and designers find a way to streamline the user experience, DEXs could become rivals to centralized exchanges in the future.
Part 6 - Joining the Ethereum Network
Contents
Ethereum node'u nedir?
How does an Ethereum node work?
Ethereum full nodes
Ethereum light nodes
Ethereum mining nodes
How to run an Ethereum node?
How to mine on Ethereum?
What is Ethereum ProgPoW?
Who develops Ethereum software?
What is solidity?
Ethereum node'u nedir?
“Ethereum node” can be used to describe a program that interacts with the Ethereum network in some way. An Ethereum node can be anything from a simple mobile phone wallet app to a computer that maintains an exact copy of the blockchain.
All nodes operate as communication points at some point, but there are different types of nodes on the Ethereum network.
How does an Ethereum node work?
Unlike Bitcoin, Ethereum does not use a single program as a reference implementation. While Bitcoin Core is used as the main node software in the Bitcoin ecosystem, Ethereum uses different individual (but compatible) programs based on Yellow Paper. Popular options include Geth and Parity.
Ethereum full nodes
You need to become a full node using software like the ones mentioned above before you can interact with the Ethereum network in a way that allows you to independently verify blockchain data.
The software downloads blocks from other nodes and verifies whether the transactions involved are correct. In addition, it also runs all the necessary smart contracts to ensure that you receive the same information as other peers. If all goes well, each node will have an exact copy of the blockchain on its own machine.
Full nodes are crucial for Ethereum to work. Without a large number of nodes distributed around the world, the network loses its censorship-resistant and decentralized features.
Ethereum light nodes
Becoming a full node allows you to directly participate in the health and security of the network. However, becoming a full node usually requires a separate machine used specifically for this purpose and occasional maintenance. For users who cannot (or do not prefer) to go full node, lightweight nodes may be a better option.
As the name suggests, lightweight nodes are more compact – they require fewer resources and take up less space. Therefore, they can be run on devices with lower specifications such as phones and laptops. But these low requirements also mean that lightweight nodes cannot be fully self-sufficient. Since they cannot fully synchronize with the blockchain, they need the necessary information to be sent to them by full nodes.
Lightweight nodes are popular among vendors, providers, and users. They are generally used for payment sending and receiving scenarios where full nodes are considered unnecessary and too costly.
Ethereum mining nodes
A mining node can be a full or lightweight node. The concept of “mining node” is not used in exactly the same way as in the Bitcoin ecosystem, but it is worth mentioning that there are such participants.
To mine Ethereum, users need additional hardware. A mining rig often needs to be set up. With this rig, users can connect multiple GPUs (graphics processing unit) together to hash data at high speeds.
Miners have two options: individual mining or joining a mining pool. Individual mining means that the miner works alone to create blocks. If he is successful, he does not need to share the mining reward with anyone. On the contrary, if the user joins the mining pool, he combines his hash power with other users. This increases the probability of finding a block, but the mining reward also needs to be shared with other members of the pool.
How to run an Ethereum node?
One of the best features of blockchains is that they are open to access. So, anyone can become an Ethereum node and strengthen the network by verifying transactions and blocks.
As with Bitcoin, there are many companies that sell plug-and-play Ethereum nodes. If you want to buy a node and start running it immediately, this may be the best option, but you will have to pay a little more for the ease of use provided.
As we mentioned before, there are different node software implementations in Ethereum such as Geth or Parity. If you want to run your own node, you need to learn about the installation process of the application you want to use.
Unless you want to run a special node type called an archive node, a consumer-grade laptop will be sufficient to become an Ethereum full node. It is also recommended that you do not use your computer daily because the machine may slow down significantly.
The best way to run your own node is to use devices that are always online. If your node goes offline, it may take quite a while to sync with the network when it comes back online. Therefore, the best solution is to choose devices that are cheap to install and keep running. For example, a lightweight node can even be run via Raspberry Pi.
How to mine on Ethereum?
Mining on Ethereum is not a safe long-term investment as the network will soon switch to Proof of Stake. Once this transition occurs, Ethereum miners will likely start using their equipment for another network or sell it.
If you still want to participate in Ethereum mining, you need special hardware such as GPUs or ASICs. If you want to make a profit, you should probably get a specially designed mining rig and have cheap access to electricity. In addition, you must set up an Ethereum wallet and configure the mining software to use it. All of these require significant investments of time and money, so it is recommended that you carefully consider whether you are ready to tackle such challenges.
What is Ethereum ProgPoW?
ProgPoW stands for Programmatic Proof of Work. It is an extension to the Ethereum mining algorithm Ethash to make GPUs more competitive with ASICs.
ASIC resilience has been a frequently discussed topic in the Bitcoin and Ethereum community for years. In the Bitcoin example, the mining power in the network is dominated by ASICs.
But although ASICs are also used in Ethereum, they are much less common – the majority of miners still use GPUs. But this may soon change as more and more companies launch Ethereum ASIC miners. So why might ASICs pose a problem?
First of all, ASICs can significantly reduce the decentralization of the network. If GPU miners cannot make a profit and are forced to shut down their mining operations, hashing power may end up in the hands of only a few miners. Moreover, developing ASIC chips is costly, and only a few companies have the skills and resources to do so. This creates the potential for the Ethereum mining industry to become centralized in the hands of a small number of companies, creating the risk of monopolizing the production front.
The integration of ProgPow has been a matter of debate since 2018. While some think this is healthy for the Ethereum ecosystem, others oppose the idea due to its potential to cause a hard fork. It is still unclear whether ProgPow will be available on the network with the upcoming switch to Proof of Stake.
Who develops Ethereum software?
Like Bitcoin, Ethereum is open source. Anyone can contribute to developing the protocol or building applications on it. Currently, Ethereum has the largest developer community in the blockchain world.
Resources like Mastering Ethereum by Andreas Antonopoulos and Gavin Wood and Ethereum.org's Developer Resources are great starting points for developers looking to get involved.
What is solidity?
Smart contracts were first introduced in the 1990s, but completely new challenges had to be overcome before they could be made available on the blockchain. Solidity was introduced by Gavin Wood in 2014 and has since become the primary programming language for developing smart contracts on Ethereum. Syntactically, it is similar to Java, JavaScript and C++.
At its most basic, Solidity makes it possible for developers to write code that can be broken down into instructions that can be understood by the Ethereum Virtual Machine (EVM). For more information about how it works, Solidity GitHub is a good starting point.
However, Solidity is not the only language available to Ethereum developers. Another popular option is Vyper, which is very similar to Python in terms of syntax.
