Chapter
Fundamental Ethereum
Where does Ether come from?
Own Ethereum
Scalability, ETH 2.0, and the Future of Ethereum
Ethereum dan Decentralized Finance (DeFi)
Participate in the Ethereum Network
Bab 1 - Fundamental Ethereum
List of contents
What is Ethereum?
What is the difference between Ethereum and Ether (ETH)?
What makes Ethereum valuable?
What about the blockchain?
Ethereum vs. Bitcoin – what's the difference?
How does Ethereum work?
What are smart contracts?
Who is the creator of Ethereum?
How is ether distributed?
What is DAO and Ethereum Classic?
What is Ethereum?
Ethereum is a decentralized computing platform, you can think of it like a laptop or PC, but it doesn't run on a single device. Instead, it runs on thousands of machines around the world, which also means it has no owners.
Ethereum, like Bitcoin and other cryptocurrencies, allows you to send digital money. However, it goes beyond that – you can use your own code, and interact with apps created by other users. Because it is so flexible, all kinds of advanced programs can be launched on Ethereum.
Simply put, the main idea behind Ethereum is that developers can create and launch code that runs on a distributed network, rather than on centralized servers. This means that, in theory, these apps cannot be shut down or censored.
What is the difference between Ethereum and Ether (ETH)?
It may seem unintuitive, the units used in Ethereum are not called Ethereum or Ethereums. Ethereum is the protocol itself, but the currency that powers it is known as ether (or ETH).
What makes Ethereum Valuable?
Previously we discussed the idea that Ethereum can run code across distributed systems. Thus, the program cannot be damaged by external parties. These codes are added to the Ethereum database (its Blockchain), and programmed so that the code cannot be edited. Additionally, the database is visible to everyone, so users can audit the code before interacting with it.
This means that, anyone, anywhere, can launch applications that cannot be killed. More interestingly, because the original unit – ether – stores value, the application can set the conditions for how value is transferred. We call the programs that create these applications smart contracts. In most cases, smart contracts can be set to operate without human intervention.
Easy to understand, the idea of “programmable money” captivates users, developers, and businesses around the world.
What about the blockchain?
Its blockchain lies at the heart of Ethereum – the database that stores the information used by the protocol. If you have read our article entitled What is Bitcoin?, you will have a basic understanding of how blockchain works. The Ethereum blockchain is similar to Bitcoin. But the data stored – and how it is stored – is different.
You can imagine the Ethereum blockchain as a book that you keep adding pages to. Each page is called a block, filled with information regarding transactions. When you want to add a new page, you need to enter a special value at the top of the page. This value should be visible, and anyone can tell that a new page was added after the previous page, not just dropped into the book at random.
This value is similar to a page number that references the previous page. By looking at a new page, we can know for sure that it follows the previous one. To do this, we use a process called hashing.
Hashing takes a piece of data – you can think of it like all the content on one page of a book – and returns it in the form of a unique identifier (called a hash). It is very unlikely that two pieces of data will give the same hash. This process is also one-way: you can easily calculate a hash, but it is nearly impossible to reverse the hash to obtain the information used to create it. We will discuss in the next chapter why this is important in mining.
Now, we have a mechanism to link pages in the correct order. If there is any attempt to change the order or delete pages, it will be obvious, everyone will be able to see that the book has been tampered with.
Want to learn more about blockchain? You can read our article regarding a guide to blockchain technology for beginners.
Ethereum vs. Bitcoin – what's the difference?
Bitcoin relies on blockchain technology and financial incentives to create a global digital money system. This technology has introduced several important innovations that enable coordination between users around the world without a central controlling party. With each participant running the program on their own computer, Bitcoin allows users to agree on a financial database in a decentralized and trustless environment.
Bitcoin is often referred to as a first generation blockchain, it was not created as an overly complex system. When talking about security, this is one of the advantages. Intentionally made inflexible to prioritize security at the base layer. The downside is that the smart contract language in Bitcoin is very limited, and does not accommodate applications outside of transactions.
In contrast, the second generation of blockchain is capable of much more. Apart from financial transactions, this platform can accommodate higher level programs. Ethereum gives developers more freedom to experiment with their own code and create what we call Decentralized Applications (DApps).
Ethereum was the first of the second generation blockchain wave, and is still the most prominent today. Even though it has similarities to Bitcoin and can perform many of the same functions, if you look deeper, they are both very different and have their own advantages.
How does Ethereum work?
We can define Ethereum as a state machine. This means that, at any given time, you have a snapshot of all account balances and smart contracts as they currently appear. Certain actions will cause the state to be updated, all nodes updating their own snapshots to reflect the changes.
Transition in Ethereum state.
Smart contracts running on Ethereum are triggered by transactions (either from users or other contracts). When a user sends a transaction to a contract, each node in the network runs the contract code and records the results. This is done using the Ethereum Virtual Machine (EVM), which converts smart contracts into computer-readable instructions.
To update the state, a special mechanism called mining is used (for now). Mining is done with a Proof of Work algorithm, just like Bitcoin. We will discuss this in more depth later.
What are smart contracts?
A smart contract is just a code. This code is not intelligent, nor is it a contract in the traditional sense. However, we call it smart because it executes itself under certain conditions, and it can be considered a contract because it enforces the agreement between the parties.
Computer scientist Nick Szabo came up with this idea, proposed in the late 1990s. He uses the example of vending machines to explain the concept, stating that these machines can be seen as a precursor to modern smart contracts. In the case of a vending machine, or what is better known as a vending machine, there is a simple contract that is executed. Users insert coins, and in return, the machine dispenses the product of their choice.
Smart contracts apply this logic to digital governance. You can do simple things in code like replying with “Hello, World!” when two ethers are sent to the contract.
On Ethereum, developers will create code so that it can later be read by the EVM. They then publish it by sending the code to the special address that registered the contract. At this point, anyone can use it. contracts cannot be deleted, except under a condition specified by the developer when writing them.
Now, the contract has an address. To interact with this contract, users only need to send 2 ETH to the address. This will trigger the contract code – all the computers on the network will run it, see that payment has been made to the contract, and record the output (“Hello, World!”).
The above image is perhaps one of the most basic examples of what can be done with Ethereum. More sophisticated applications that link multiple contracts can – and have – been built.
Who is the creator of Ethereum?
In 2008, an unknown developer (or group) published a Bitcoin whitepaper under the pseudonym Satoshi Nakamoto. This event permanently changed the world of digital finance. A few years later, a young programmer named Vitalik Buterin envisioned a way to develop this idea further and apply it to all kinds of applications. This concept was eventually refined into Ethereum.
Ethereum was proposed by Buterin in a blog in 2013 entitled Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In his writings, he described the idea of a Turing-complete blockchain – a decentralized computer that, given enough time and resources, could run any application.
In time, the types of applications that can be used on a blockchain will be limited only by the imagination of the developer. Ethereum aims to find out whether blockchain technology has valid uses beyond the limitations of Bitcoin for which it was designed that way.
How is ether distributed?
Ethereum was launched in 2015 with a supply of 72 million ether. More than 50 million of the total tokens were distributed in a public token sale known as an Initial Coin Offering (ICO), where those who wish to participate can purchase ether tokens with bitcoin or fiat currency.
What is DAO and Ethereum Classic?
With Ethereum, all new ways of collaborating over the Internet become possible. One example is a DAO (decentralized autonomous organization), which is an entity governed by code, similar to a computer program.
One of the earliest and most ambitious organizations of this kind was “The DAO”. The organization is planned to consist of complex smart contracts running on top of Ethereum, functioning as an autonomous venture fund. DAO tokens are distributed in ICOs, giving ownership and voting rights to token holders.
However, not long after launch, malicious parties exploited the platform's vulnerabilities and managed to drain nearly a third of DAO's funds. Keep in mind, at that time, 14% of the entire ether supply was locked in the DAO. Needless to say, this was disastrous for the fledgling Ethereum network.
Through several considerations, this chain was hardforked into two chains. In one of the chains, malicious transactions were successfully “reversed” to recover the stolen funds – this chain is now known as the Ethereum blockchain. Meanwhile, the original chain, where transactions were not reversed, and immutability was maintained, is now known as Ethereum Classic.
This event was a stark reminder of the risks of this technology, and how entrusting autonomous code with large sums of money could backfire. This is also an interesting example of how making collective decisions in an open environment can have bad consequences. Confronting its security vulnerabilities, DAO perfectly illustrates the potential of smart contracts in large-scale trustless collaboration over the Internet.
Chapter 2 - Where does ether come from?
List of contents
How is new ether created?
How much ether is available?
How does Ethereum mining work?
What is Ethereum gas?
Gas and gas limits
How long does it take to mine one block of Ethereum?
What are Ethereum tokens?
How is new ether created?
Previously we discussed a little about mining. If you're familiar with Bitcoin, you'll know that the mining process is an important part of securing and updating the blockchain. In Ethereum, the same principle applies: to reward users for mining (it costs quite a lot), the protocol gives them ether.
How much ether is available?
In February 2020, the total supply of ether was around 110 million.
Unlike Bitcoin, Ethereum's token emission schedule was intentionally not specified at launch. To maintain value, Bitcoin is limited in supply, and the number of new coins produced is slowly reduced. On the other hand, Ethereum, aims to provide the foundation for decentralized applications (DApps). Since it is unclear what type of token emission schedule would best suit its objectives, this remains an open-ended question.
How does Ethereum mining work?
Mining is critical to network security. This process ensures that the blockchain is updated as it should and allows the network to work without a decision-maker. In mining, a subset of nodes (called miners) sacrifice computing power to solve cryptographic puzzles.
What it actually does is hash a series of pending transactions and some other data. For a block to be considered valid, the hash must be below the value set by the protocol. If it doesn't work, you can modify some data and try again.
To compete with others, miners need to hash as fast as possible – we measure this by hash rate. The more hash rates there are on the network, the more difficult the puzzle is to solve. Only miners need to find the solution – once it has been found, it is easy for all other participants to check its validity.
As you can imagine, continuous hashing at high speed is very expensive. As an incentive to secure the network, miners are given rewards. The reward is in the form of all transaction fees on the block. They will also receive newly generated ether – 2 ETH at the time of writing.
What is Ethereum gas?
Still remember the Hello, World! previously? This is an easy program to run. Computing-wise, it's not expensive at all. But you're not running it just on your PC – you're asking everyone in the Ethereum ecosystem to run it too.
Now we are faced with the following question: what happens when tens of thousands of people run sophisticated contracts? If someone creates a contract that repeats the same code over and over again, then every node will run it endlessly. This will put a strain on resources, and as a result, the system may collapse.
Luckily, Ethereum introduced the concept of gas to mitigate this risk. Just as your car can't run without gas, contracts can't run without gas. The contract specifies the amount of gas the user must pay for it to run successfully. If there is not enough gas, the contract will terminate.
In essence, this is a cost mechanism. The same concept applies to transactions: miners' primary motivation is profit, so they can ignore lower-cost transactions.
Please note that ether and gas are not the same. The average price of gas fluctuates and is largely decided by miners. When you make a transaction, you pay for gas in ETH. This is the same as fees in Bitcoin transactions – if the network is congested and many users are transacting, the average gas price may rise. Conversely, if there is not much activity, prices will fall.
Even though gas prices change, each operation has a fixed amount of gas required. This means that complex contracts will consume more gas than simple transactions. Thus, gas is a measure of computing power. This ensures that the system can charge users appropriate fees depending on their usage of Ethereum resources.
Gas generally consumes a small portion of ether. Therefore, we use a smaller unit (gwei) to denote it. One gwei is worth one millionth of an ether.
Long story short, you could be running a program that repeats itself, continuously for a long time. But this will quickly turn into a very expensive undertaking. For this reason, nodes on the Ethereum network can mitigate spam.
Average gas prices in gwei over time. Source: etherscan.io
Gas and gas limits
Imagine Alice makes a transaction to a contract. It calculates how much gas it wants to spend (for example, by using ETH Gas Station). It can set higher prices to encourage miners to enter transactions as quickly as possible.
But he will also set a gas limit, which functions to protect it. It could be that something went wrong with the contract, causing it to consume more gas than planned. Gas limits are enforced to ensure that, once x amount of gas is used up, operation will stop. The contract will fail, but Alice will not pay more than she originally agreed to pay.
It may initially seem like a confusing concept to understand. Don't worry – you can manually set the gas price (and gas limit) for the amount you want to pay, but most wallets will do this for you. In short, the gas price determines how fast miners will work on your transaction, and the gas limit determines the maximum amount you will pay for that transaction.
How long does it take to mine one block of Ethereum?
The average time it takes to add a new block to the chain is between 12-19 seconds. This will most likely change once the network switches to Proof of Stake, which aims, among other things, to speed up block times. If you want to learn more, you can read our article entitled Ethereum Casper Explained.
What are Ethereum tokens?
Ethereum's biggest appeal is the ability for users to create their own assets on the chain, which can be stored and transferred just like ether. Management rules are built into smart contracts, allowing developers to set specific parameters for their tokens. These rules can include how many to issue, how to issue them, whether tokens can be divided, whether each is fungible, and so on. The most prominent technical standard for creating tokens on Ethereum is called ERC-20 – that's why these tokens are known as ERC-20 tokens.
The token's functionality provides a broad arena for innovators to experiment with their applications in advanced financial and technological environments. From issuing uniform tokens that serve as in-app currency, to generating unique tokens backed by physical assets, there is a lot of design flexibility. It is very possible that some of the best uses or use cases for easy and efficient token creation have not yet been discovered.
Chapter 3 - Getting Started with Ethereum
List of contents
How to buy ETH?
How to buy ETH with credit/debit card
How to buy ETH on peer-to-peer markets
What can you buy with ether (ETH)?
What is the use of Ethereum?
What if my ETH is lost?
Are Ethereum transactions reversible?
Are Ethereum transactions private?
Can I make money with Ethereum?
How to store ETH?
How to deposit ETH to Binance
How to store ETH on Binance
How to withdraw ETH from Binance
How to store ETH in Ethereum wallet
Hot wallet
Cold wallet
What is the Ethereum logo and symbol?
How to buy ETH?
How to buy ETH with credit/debit card
Binance makes ETH purchases easy through your browser. To do so:
Please go to the Buy and Sell Cryptocurrency page.
Select the crypto asset you want to purchase (ETH), and the currency you want to pay with.
Log in to your Binance account, or register if you don't have an account yet.
Select a payment method.
If prompted, enter your card details and complete identity verification.
Just that! ETH will be credited to your Binance account.
How to buy ETH on peer-to-peer markets
You can also buy and sell ETH on peer-to-peer markets. In this market you can buy coins directly from other users via the Binance mobile application. To do so:
Open the application, then log in or register.
Select Sell with one click, then select the Buy menu in the top left corner of the page.
You will be presented with several offers – select Buy on the offer you want.
You can pay with other cryptocurrencies (in the With Crypto menu) or fiat money (in the With Fiat menu).
Below that, there will be a choice of payment methods. Choose the one you want.
Select Buy ETH.
Now you have to make payment. When finished, select Mark as paid, and confirm.
The transaction is successful if the seller sends you the coins.
What can you buy with ether (ETH)?
Unlike Bitcoin, Ethereum is not intended to be used solely as a cryptocurrency network. But also as a platform for building decentralized applications, and as a tradable token, ether is the fuel of this ecosystem. So, the main benefit of ether is the utility it provides within the Ethereum network.
As such, ether can also be used in the same way as traditional currency, meaning you can buy goods and services with ETH just like you would with any other currency.
Heatmap of retailers that accept ether as payment. Source: cryptwerk.com/coinmap
What is the use of Ethereum?
You can use Ethereum's native currency, ETH, as digital money or collateral. Many also see it as a store of value like Bitcoin. But unlike Bitcoin, the Ethereum blockchain is easier to program, so there is much more you can do with ETH. It can be used as the backbone of decentralized financial applications, decentralized markets, exchanges, games, and much more.
What if my ETH is lost?
Since there is no bank involved, you are solely responsible for the security of your funds. Some people prefer to store them on exchanges, and others choose various wallets. If you use a wallet, it is very important to write down the seed phrase and save it. Keep it in a safe place, as you'll need it to recover funds if you lose access to your wallet.
Are Ethereum transactions reversible?
When data is added to the Ethereum blockchain, it is almost impossible to change or delete it. This means that when you make a transaction, the transaction is irreversible. So, you should always double check that you are sending funds to the correct address. If you want to send a large amount, it is recommended to send a small amount first, to ensure address accuracy.
If you still remember, due to the smart contract hacking incident, Ethereum was hardforked in 2016, where transactions carried out by malicious parties were successfully “reversed”. However, this is an extreme measure for an extraordinary event, not something that is common or normal.
Are Ethereum transactions private?
No. All transactions added to the Ethereum blockchain are visible to the public. Even if your real name is not present in your Ethereum address, others may be able to link it to your identity through various methods.
Can I make money with Ethereum?
Because it is a volatile asset, you can make money with ETH, just as you can lose money on it. Some people may hold ether for the long term, believing that the network will become a global, programmable settlement layer. While others choose to trade them for altcoins. However, both of these strategies have their own financial risks.
As it is a key pillar of the Decentralized Finance (DeFi) movement, ETH can also be used for lending, as collateral to take out loans, mint synthetic assets, and – ultimately in the future – staking.
Some investors may only hold Bitcoin in long-term positions, excluding other digital assets in their portfolio. While others may choose to keep ETH and other altcoins in a portfolio, or allocate a certain percentage to short-term trading (for example: day trading or swing trading). There is no one-size-fits-all approach to making money in the markets, each investor must decide for themselves what strategy best suits their profile and circumstances.
How to store ETH?
There are several options for storing coins, each with its advantages and disadvantages. Since everything has risks, perhaps your best option is to diversify among the several options available.
In general, storage solutions can be custodial or non-custodial. A custodial solution means you entrust your coins to a third party (like an exchange). In this case, you will need to log in to the custodian platform to make transactions with your crypto assets.
The non-custodial solution is the opposite – you control your own funds when using a cryptocurrency wallet. A wallet doesn't store your coins like a physical wallet – instead it stores cryptographic keys that allow you to access assets on the blockchain. Please remember once again: you must backup your seed phrase when using a non-custodial wallet!
How to deposit ETH to Binance
If you have ether and want to deposit it to Binance, you can follow these simple steps:
Log in to your Binance account, or register if you don't have an account yet.
Log in to Spot Wallet and select Deposit.
Select ETH from the list of available coins.
Select a network and send your ETH to the appropriate address.
Just that! Once the transaction is confirmed, the ether will be credited to your Binance account.
How to store ETH on Binance
If you want to actively trade with ether, you will need to store it in your Binance account. Storing ETH on Binance is easy and safe. And it also allows you to easily take advantage of the Binance ecosystem through lending programs, staking, airdrop promotions, and giveaways.
How to withdraw ETH from Binance
If you have ether and want to withdraw it from Binance, you can follow these simple steps:
Enter Binance.
Log in to Spot Wallet and select Withdrawal.
Select ETH from the list of available coins.
Select network
Enter the recipient's address and the amount to be withdrawn.
Confirm the process via email.
Just that! Once the transaction is confirmed, ETH will be credited to the address you provided.
How to store ETH in Ethereum wallet
If you want to store ETH in your own wallet, there are two main options: hot wallets and cold wallets.
Hot wallet
Cryptocurrency wallets that are connected to the Internet in some way are called hot wallets. It usually takes the form of a mobile or desktop application that allows you to check your balance, and to send or receive tokens. Because they are online, hot wallets tend to be less vulnerable to attacks, but are also more convenient for everyday payments. Trust Wallet is an example of a mobile wallet that is easy to use and supports multiple coins.
Cold wallet
Cold wallets are crypto wallets that are not connected to the Internet. Since there is no online attack vector, the overall likelihood of an attack is lower. At the same time, cold wallets are usually less intuitive to use compared to hot wallets. Examples of this type of wallet are hardware wallets and paper wallets. Using paper wallets is not recommended because many people consider these wallets to become obsolete quickly and are very vulnerable.
To learn more about the types of wallets, please go to the Explanation of Types of Crypto Wallets.
What is the Ethereum logo and symbol?
Vitalik Buterin designed the earliest symbol for Ethereum. Consists of two rotated addition symbols Σ (Sigma from the Greek alphabet). The final design of the logo (based on this symbol) consists of a parallelogram shape called an octahedron surrounded by four triangles. Similar to other currencies, it may be useful for ether to have a standard Unicode symbol, so that applications and websites can easily display the value of ether. Although not as widely used as $ for USD, the most commonly used symbol for ether is Ξ.
Chapter 4 - Scalability, ETH 2.0, and the future of Ethereum
List of contents
What is scalability?
Why does Ethereum need to expand its capacity?
Blockchain Scalability Trilemma
How many transactions can Ethereum process?
What is Ethereum 2.0?
What is Ethereum sharding?
What is Ethereum Plasma?
What is an Ethereum rollup?
Apa itu Ethereum Proof of Stake (PoS)?
What is Ethereum staking?
How much ETH is needed for staking on Ethereum?
How much ETH can you earn from staking on Ethereum?
How long is ETH locked in the staking process?
Are there any risks in staking ETH?
What is scalability?
In the simplest terms, scalability is a measure of a system's ability to grow. In computing, for example, a network or server can be scaled up to handle more requests through different methods.
In cryptocurrencies, scalability is how well a blockchain can grow to accommodate more users. More users mean more operations and transactions “competing” for inclusion on the blockchain.
Why does Ethereum need to expand its capacity?
Ethereum proponents believe that the next iteration of the Internet will be built on this platform. The so-called Web 3.0 will result in a decentralized topology characterized by the absence of intermediaries, a focus on privacy, and a shift toward owning data. This foundation will be built using distributed computing in the form of smart contracts and distributed storage/communication protocols.
To achieve this, Ethereum needs to massively increase the number of transactions without breaking the decentralization of the network. Currently, Ethereum does not limit transaction volume by limiting block sizes as Bitcoin does. Instead, there is a block gas limit – only a certain amount of gas can enter the block.
For example, if you have a block gas limit of 100,000 gwei and want to enter ten transactions with a gas limit of 10,000 gwei each, the transactions will be successful. Likewise with two transactions of 50,000 gwei. Any other transactions sent along with this transaction must wait for the next block.
That's not ideal for the systems everyone uses. If there are more pending transactions than the available space in the block, it will end up in a backlog. Gas prices will rise, users will have to make higher bids than others to get their transactions entered first. Depending on how busy the network is, operations can be too expensive for certain use cases.
The surge in popularity of CryptoKitties is an excellent example of Ethereum's limitations in this area. In 2017, this Ethereum-based game encouraged many users to make transactions to participate in breeding their own digital cats (represented by non-fungible tokens). The game was so popular that the number of pending transactions skyrocketed, resulting in massive network congestion for some time.
Blockchain Scalability Trilemma
It seems that simply increasing the block gas limit will solve all scalability problems. The higher the ceiling, the more transactions that can be processed in a certain time period, isn't it like that?
Unfortunately, that cannot be done without sacrificing key properties or characteristics of Ethereum. Vitalik Buterin showcases the Blockchain Trilemma (visualized below) to explain the difficult but delicate balance blockchain must strike.
Blockchain Trilemma: Scalability (1), Security (2), and Decentralization (3).
By choosing to optimize two of the three characteristics above, the third will be weak. Blockchains like Ethereum and Bitcoin prioritize security and decentralization. Both consensus algorithms ensure the security of the network, which consists of thousands of nodes, but this leads to poor scalability. With so many nodes accepting and validating transactions, the system is much slower when compared to centralized options.
In a different scenario, the block gas limit can be increased so that the network achieves security and scalability, but it will not be decentralized.
More transactions in a block means a bigger block. However, nodes on the network need to download and deploy them periodically. And this process is hardware intensive. As the block gas limit increases, it becomes more difficult for nodes to validate, store, and broadcast blocks.
As a result, it is understandable that nodes that are unable to follow the process will leave the network. If this continues, only a small portion of the nodes will be strong and able to participate – which leads to further centralization. You might choose a blockchain that is secure and has scalability, but it will not be decentralized.
Finally, we can imagine a blockchain that focuses on decentralization and scalability. To be fast and decentralized, sacrifices must be made on the side of the consensus algorithm used, leading to weaker security.
How many transactions can Ethereum process?
In recent years, Ethereum has rarely exceeded ten transactions per second (TPS). For a platform that aims to be “the world's computer,” this number is extremely low.
Scalability solutions have long been part of Ethereum's roadmap. Plasma is one example of this solution. Aims to improve the efficiency of Ethereum, but can also be applied to other blockchain networks.
What is Ethereum 2.0?
If you look at all its potential, Ethereum currently still has big limitations. We have already discussed the issue of scalability. In short, if Ethereum aims to become the backbone of a new financial system, then the network must be able to process more transactions per second. Given its decentralized nature, this is an extremely difficult problem to solve, although Ethereum developers have been thinking about it for years.
For a network to be decentralized, boundaries must be enforced. The higher the requirements for operating a node, the fewer participants there are, and the more centralized the network. So, increasing the number of transactions that Ethereum can process could threaten the integrity of the system, as it would also increase the load on the nodes.
Another criticism of Ethereum (and other Proof of Work crypto assets) is that it is very power intensive. To successfully add a block to the blockchain, it must be mined. However, to create blocks in this way, the computation must be done quickly, which consumes a lot of electrical power.
To address the above weaknesses, a series of major upgrades have been proposed, collectively known as Ethereum 2.0 (or ETH 2.0). When fully rolled out, ETH 2.0 will greatly improve network performance.
What is Ethereum sharding?
As mentioned above, each node stores a copy of the entire blockchain. Every time the blockchain is extended, each node must perform updates, which consumes available bandwidth and memory.
By using a method known as sharding, this problem may be overcome. The name refers to the process of dividing a network into subsets of nodes – what we call shards. Each of these shards will process their own transactions and contracts, but will still be able to communicate with the wider shard network as they should. Because each shard validates independently, there is no need to store data from other shards.
Network in March 2020 vs. network with sharding implementation.
Sharding is one of the most complex scalability approaches that requires a lot of work to design and implement. However, if implemented successfully, it would also be one of the most effective, increasing network throughput capacity by size.
What is Ethereum Plasma?
We also call Ethereum Plasma an off-chain scalability solution – it aims to increase transaction throughput by pushing transactions off the blockchain. In this case, there are some similarities with sidechains and payment channels.
With Plasma, the secondary chain is tethered to the main Ethereum blockchain, but communication is kept to a minimum. The chains operate more or less independently, although users still rely on the primary chain to resolve disputes or “resolve” their activities on secondary chains.
Reducing the amount of data that nodes must store is critical to Ethereum's successful scalability. The Plasma approach allows developers to outline the functions of “child” chains in smart contracts on the main chain. Then, they are free to create applications with this information or processes, which if stored/executed on the main chain, would be too expensive.
To get to know Plasma more comprehensively, you can read our article about What is Ethereum Plasma?
What is an Ethereum rollup?
Rollups are similar to Plasma in that both aim to improve Ethereum by moving transactions off the main blockchain. So how does it work?
A single contract on the primary chain holds all funds on the secondary chain and stores cryptographic proof of the chain's current state. These secondary chain operators, which place bindings in the mainnet contract, ensure that only valid state transitions are submitted to the mainnet contract. The idea is, because this state is maintained off-chain, there is no need to store the data on the blockchain. However, the main difference between rollup and Plasma lies in the way transactions are submitted to the main chain. Using special transaction types, large numbers of transactions can be “rolled up” (combined) into a special block called a Rollup block.
There are two types of rollup: Optimistic and ZK Rollup. Both guarantee the correctness of state transitions in different ways.
ZK Rollup sends transactions using a cryptographic verification method called zero-knowledge proof. More specifically, the approach to this is called zk-SNARK. We won't go into detail about how it works here, but here's how it can be used for rollups. This is a way for parties to prove to each other that they have certain information without revealing what that information is.
In the case of ZK Rollup, this information is the state transitions handed over to the main chain. The big advantage: this process occurs almost instantaneously, and there is almost no chance of corrupted state delivery.
Optimistic Rollup sacrifices some scalability for more flexibility. By using a virtual machine called the Optimistic Virtual Machine (OVM), it is possible to run smart contracts on this secondary chain. On the other hand, there is no cryptographic proof that the state transition submitted to the main chain is correct. To mitigate this issue, there is a slight delay for users to challenge and reject invalid blocks submitted to the main chain.
Apa itu Ethereum Proof of Stake (PoS)?
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 printed (sometimes called forged). Instead of miners competing with hash power, a node (or validator) is randomly selected to validate candidate blocks. If done correctly, they will receive all of the block's transaction fees, and depending on the protocol, may also receive a block reward.
Because it does not involve mining, Proof of Stake is considered harmless to the environment. Validators consume less energy than miners, and can instead print blocks on regular hardware.
Ethereum is scheduled to switch from PoW to PoS as part of Ethereum 2.0, with an upgrade known as Casper. While an exact date has not been set, the first iteration will likely launch in 2020.
What is Ethereum staking?
In the Proof of Work protocol, network security is guaranteed by the miners. Miners will not cheat, because it would waste electricity and cause them to lose potential rewards. In Proof of Stake, there is no game theory as such, various cryptoeconomic measures are available to ensure network security.
What prevents dishonest behavior is not the risk of waste, but the risk of losing funds. Validators must submit stakes (meaning token holding) to be eligible for validation. The staked asset is an amount of ether that will be lost if the node tries to cheat, or slowly depleted if the node is unresponsive or goes offline. However, if validators run additional nodes, they are entitled to more rewards.
How much ETH is needed for staking on Ethereum?
The estimated minimum stake for Ethereum is 32 ETH per validator. This is set very high to avoid 51% attack attempts.
How much ETH can you earn from staking on Ethereum?
This is not an easy question to answer. Apart from being based on the amount you stake, staking returns also depend on the total amount of ETH staked on the network, and the inflation rate. As a very rough estimate, current calculations project a return of around 6% per year. Please keep in mind that these are just estimates, and may change in the future.
How long is ETH locked in the staking process?
There will be a queue to withdraw your ETH from the validator. The minimum withdrawal time is 18 hours, but this is adjusted dynamically based on how many validators are withdrawing at any given time.
Are there any risks in staking ETH?
Since you are the validator responsible for maintaining network security, there are several risks to consider. If your validator node is offline for a long period of time, there is a possibility that you will lose a large portion of your deposit. Additionally, if your deposit falls below 16 ETH, you will be removed from the validator list.
More systemic risk factors are also worth considering. Proof of Stake has never been implemented on a large scale before, so we can't be completely sure that it won't fail. Software always has bugs and vulnerabilities, and can also have devastating effects – especially if billions of dollars are at stake.
Bab 5 - Ethereum dan Decentralized Finance (DeFi)
List of contents
What is Decentralized Finance (DeFi)?
What are the benefits of Decentralized Finance (DeFi)?
Will Decentralized Finance (DeFi) reach the mainstream?
What Decentralized Finance (DeFi) applications are available?
Decentralized Exchange (DEX) pada Ethereum
What is Decentralized Finance (DeFi)?
Decentralized Finance (abbreviated as DeFi) is a movement that aims to decentralize financial applications. DeFi is built on an open-source public blockchain, freely accessible to anyone with an Internet connection (permissionless). This is a critical element for integrating 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 (DApp). The incredible benefit of DeFi is that users retain ownership of their own funds at all times.
Simply put, the Decentralized Finance (DeFi) movement aims to create a new financial system free from the constraints that exist today. Due to its developer base and relatively high degree of decentralization, most DeFi is currently being built on Ethereum.
What are the benefits of Decentralized Finance (DeFi)?
As you probably already know, one of the great advantages of Bitcoin is that no central party is required to coordinate network operations. What if we use this as the core idea to create programmable applications on top of it? This is the forerunner of DeFi applications. There is no central coordinator or intermediary party, no single point of failure.
As mentioned above, one of the advantages of DeFi is open access. There are currently billions of people around the world who do not have good access to any type of financial service. Can you imagine how to manage the days without financial certainty? There are billions of people who live this way, and ultimately, this is the demographic that DeFi is trying to serve.
Will Decentralized Finance (DeFi) reach the mainstream?
This all sounds great, so why hasn't DeFi taken over the world yet? Well, currently, most DeFi applications are still difficult to use, complicated, frequently disconnected, and highly experimental. As it turns out, the techniques and even the framework for this ecosystem are very difficult, especially in a distributed development environment.
Solving all the challenges in building a DeFi ecosystem is a long road ahead for software engineers, game theorists, mechanism designers, and more. Thus, whether DeFi applications will achieve mainstream adoption remains an unanswered question.
What Decentralized Finance (DeFi) applications are available?
One of the most popular uses of Decentralized Finance (DeFi) is stablecoins. Essentially, stablecoins are tokens on a blockchain whose value is pegged to a real-world asset, such as fiat currency. For example, BUSD is pegged to the value of the USD. What makes them convenient to use is that because they are on the blockchain, these tokens are very easy to store and transfer.
Another popular type of application is lending. There are many peer-to-peer (P2P) services that allow you to lend funds to others and receive interest payments in return. In fact, one of the easiest ways to do this is through Binance Lending. You just need to transfer funds to your lending wallet, and start earning interest the next day!
However, arguably the most interesting part of DeFi is that these applications are difficult to categorize. This can include any type of decentralized peer-to-peer marketplace, where users can exchange unique crypto-collectibles and other digital goods. DeFi applications can also create synthetic assets, where anyone can provide a market for almost anything that has value. Other uses are prediction markets, derivatives, and many more.
Decentralized Exchange (DEX) pada Ethereum
Decentralized Exchange (DEX) is a platform that allows direct trading from wallet to wallet. When you trade on Binance, a centralized exchange, you send your funds to Binance, and trade through its internal systems.
Decentralized exchanges are different. With the magic of smart contracts, you can trade directly from your crypto wallet, reducing the risk of possible exchange hacks and more.
A good example of a decentralized exchange is Binance DEX. Some other notable examples built on Ethereum are Uniswap, Kyber Network, and IDEX. Many even allow you to trade from a hardware wallet for maximum security.
Centralized vs. centralized exchanges decentralized.
The image above is an illustration of the difference between centralized and decentralized exchanges. On the left, we can see that Binance is in the middle of transactions between users. So, if Alice wants to exchange Token A for Bob's Token B, they must first deposit their assets on the exchange. Once the trade is complete, Binance will reallocate the balance to each account as appropriate.
In contrast, on the right are decentralized exchanges. Note that there are no third parties involved in the transaction. Alice's tokens are immediately exchanged for Bob's tokens using a smart contract. In this way, intermediaries are not needed, because the terms of their contracts automatically govern the transaction.
As of February 2020, DEXs tend to be the most widely used applications on the Ethereum blockchain. However, the trading volume is still small compared to decentralized exchanges. Nonetheless, if DEX developers and designers improve the user experience to make it more user-friendly, DEXs could rival decentralized exchanges in the future.
Chapter 6 - Participation in the Ethereum Network
List of contents
What are Ethereum nodes?
How do Ethereum nodes work?
Ethereum full node
Ethereum light node
Ethereum mining node
How to run an Ethereum node
How to mine Ethereum
What is Ethereum ProgPoW?
Who developed Ethereum software?
What is Solidity?
What are Ethereum nodes?
“Ethereum node” is a term that can be used to describe a program that interacts with the Ethereum network in a certain way. An Ethereum node can be anything from a simple mobile wallet application to a computer that stores an entire copy of the blockchain.
All nodes work as communication points, but despite this, there are many different types of nodes on the Ethereum network.
How do Ethereum nodes work?
Ethereum, unlike Bitcoin, does not have a single program as its reference implementation. Where the Bitcoin ecosystem has Bitcoin Core as the main node software, Ethereum has a set of individual (but compatible) programs based on its Yellow Paper. The most popular are Geth and Parity.
Ethereum full node
To interact with the Ethereum network allowing you to independently validate blockchain data, you need to run a full node using software as mentioned above.
The software will download blocks from other nodes and verify whether the transactions entered are correct. The software will also run all smart contracts to ensure that you receive the same information as other peers. If everything works as it should, then each node will have an identical copy of the blockchain on each device.
Full nodes are critical to the functioning of Ethereum. Without multiple nodes spread across the world, the network would lose its censorship-resistant and decentralized nature.
Ethereum light node
Running a full node allows you to directly contribute to the health and security of the network. But full nodes often require separate machines to operate as well as occasional maintenance. Light nodes may be a better option for users who can't afford (or don't want to) run a full node.
As the name suggests, light nodes are lightweight – they use fewer resources and don't take up space. This way, this type of node can be run on devices with lower specifications such as cellphones or laptops. But this low cost has a downside: light nodes are not completely self-contained. Cannot fully synchronize blockchain, so requires full nodes to provide relevant information.
Light nodes are very popular among traders, services, and end users. Widely used to make and receive payments in scenarios where a full node is considered unnecessary and too expensive to run.
Ethereum mining node
Mining nodes can be full or light nodes. The term “mining node” doesn't really mean the same thing as the same term used in the Bitcoin ecosystem, but, still, it's a decent term to identify its participants.
To mine Ethereum, users need additional hardware. Generally involves assembling a mining rig. With this device, users connect multiple GPUs (graphics processing units) together to hash data at high speed.
Miners have two options: mining solo, or mining in a mining pool. Solo mining or mining alone means the miner works alone to create blocks. If they are successful, they do not share the mining rewards with anyone. Alternatively, by joining a mining pool, users combine their hashing power with other users. This method makes it easier to find blocks, but if successful, you also have to share the reward with fellow pool members.
How to run an Ethereum node
One of the great aspects of blockchain is open access. This means that anyone can run an Ethereum node and strengthen the network by validating transactions and blocks.
As with Bitcoin, there are a number of businesses offering plug-n-play Ethereum nodes. This is probably the best option if you just want to get a node and run – however, with the convenience it offers, it will of course be a little more expensive.
As mentioned previously, Ethereum has a number of different node software implementations, among them Geth and Parity. If you want to run your own node, you'll need to familiarize yourself with the process of installing and setting up the type of node you choose to run.
Unless you want to run a special node called an archival node, a simple laptop is enough to run a full Ethereum node. Also, it is recommended not to use this device at the same time for daily activities, as it can slow down the work significantly.
Running the node itself works fine on devices that are always online. If your node is offline, it will take a lot of time to synchronize with the network once it comes online again. Thus, the best solution for this is a device that is cheap and easy to maintain. For example, you can run a light node even on a Raspberry Pi.
How to mine Ethereum
As the network will soon transition to Proof of Stake, mining on Ethereum is not the safest bet in the long term. After the transition, Ethereum miners will likely move their mining equipment to another network or sell it entirely.
However, if you want to participate in Ethereum mining, you will need special hardware, such as a GPU or ASIC. If you want reasonable profits, you will need a special mining rig and low electricity costs. Additionally, you'll need to set up an Ethereum wallet and assemble the software to use it. This all requires a significant investment of time and money, so consider carefully if you are up to the challenge.
What is Ethereum ProgPoW?
ProgPoW stands for Programmatic Proof of Work, is a proposed extension of Ethereum's mining algorithm, Ethash, designed to make GPUs more competitive with ASICs.
ASIC-resistance has been a highly debated topic for years in the Bitcoin and Ethereum communities. Within the Bitcoin environment, ASICs have become the dominant mining force on the network.
However, in Ethereum, ASICs are present but not very prominent – most miners still use GPUs. This situation may soon change, as more and more companies bring Ethereum ASIC miners into the market. But why do ASICs cause problems?
ASICs can drastically reduce network decentralization. If GPU miners don't make a profit and have to shut down their mining operations, the hash rate will concentrate in the hands of just a few miners. Moreover, ASIC chip development is expensive, and only a few companies have the capabilities and resources to do it. This situation creates the threat of monopoly on the manufacturing side, potentially centralizing the Ethereum mining industry into the hands of a few companies.
ProgPow integration has been a controversial topic since 2018. Some people think that it can be healthy for the Ethereum ecosystem, others are against it because it has the potential to cause a hard fork. With the upcoming transition to Proof of Stake, there is no telling whether ProgPow will be implemented onto the network.
Who developed Ethereum software?
Like Bitcoin, Ethereum is open-source. Anyone is free to participate in the development of the protocol, or build applications on top of it. In fact, Ethereum currently has the largest developer community in the blockchain environment.
For developers who want to get involved, as a first step, you can check out Mastering Ethereum by Andreas Antonopoulos and Gavin Wood, as well as Developer Resources from Ethereum.org.
What is Solidity?
Smart contracts were originally described in the 1990s, but implementing them on top of a blockchain poses a whole new set of challenges. Solidity was proposed in 2014 by Gavin Wood, and has since become the primary programming language for developing smart contracts on Ethereum. Syntactically, this language resembles Java, JavaScript, and C++.
Basically, Solidity allows developers to write code that can be broken down into instructions that the Ethereum Virtual Machine (EVM) understands. If you want to get a better understanding of how it works, GitHub Solidity is the place for you.
It's worth noting that Solidity is not the only language available to Ethereum developers. Another popular option is Vyper, which is syntactically more similar to Python.
