In this article we will provide a beginner’s guide to the Ethereum blockchain.
What is Ethereum? What challenges does it face?
1. What is Ethereum?
The purpose of Ethereum boils down to the transfer and storage of money and data. According to Ethereum.org, Ethereum is a “technology that lets you send cryptocurrency to anyone for a small fee. It also powers applications that everyone can use and no one can take down”. That is a humble view of the technology because of what it is achieving. The Ethereum network is now a programmable platform for financial services, decentralized apps (Dapps), games, and many other innovations and is supported by a large community who constantly improves the network.
Ethereum Community
The Ethereum community is a virtual nation of blockchain designers, developers, researchers, investors, traders, miners, and regular users from every walk of life. This community is a kind of ecosystem where communal engagement is high and members can explore everything from the basics of Ethereum to the programming code that operates it. At the heart of the community is a commitment to making a positive impact on people’s lives. For example, members offer grants for projects for the ecosystem’s benefit. The Academic Grants Round funds academic work in a wide range of domains from economics and consensus protocols to cryptography and P2P networks. The Ethereum Community has monthly events including hackathons, meetups, challenges, and conferences like Deficon. In addition to all of this, enthusiasts can also apply for Ethereum related jobs in the community hub.
Smart Contracts
The power of Ethereum lies in the smart contract which allows the creation of advanced self-executing applications whereby data is transferred automatically for a fee charged in Ether (ETH), the native cryptocurrency of the Ethereum network. This makes it possible to build decentralized autonomous corporations on other blockchains such as Bitcoin or Ripple. While Bitcoin is increasingly viewed as a store of value, it can only be used to create simple smart contracts, which limits the ability of users to create new applications. As a result, Bitcoin and Ethereum should not be viewed as direct competitors. They each address a distinct need.
Ethereum makes it easier to realize any programmable idea through the use of smart contracts. You can set up your own currency as a contract. You can interweave thousands of contracts to perform different functions. You can find jobs where the salary is paid in Ether through the Ethlance job market platform. Payments can also be scheduled for a future date using Caishen, which uses smart contracts to create virtual red packets that the recipient can only open after a certain date.
Ethereum Virtual Machine
Smart contracts are made possible by the Ethereum Virtual Machine (EVM), which can be thought of as a decentralised processor that combines the resources of thousands of computers connected to the Ethereum network. EVM verifies transactions and translates smart contracts into bytecode so that they can be executed on the network.
EVM is fuelled by Ethereum gas fees, which are typically quoted in gwei (1 billionth of an Ether). Gas fees pay for a transaction to be processed, and vary depending on the type of transaction and the speed at which the sender wants it to be verified. Miners are obviously incentivized to priorise the highest bidder. The general idea is that gas fees should only increase due to increased network activity, obeying the basic laws of supply and demand. More demand pushes up mining fees through the bidding process. This can be good for miners, but can also cause problems by preventing some users from settling transactions.
2. Ethereum faces Significant Challenges
Ethereum faces significant challenges due to a slow network, high energy consumption, and a history of security breaches.
Although the Ethereum blockchain seems to be unsustainable in its current form, Ethereum’s ecosystem is hard at work to address the challenges faced in the areas of scalability, sustainability, and security. Solutions planned years ago are due for implementation, in fact some have already taken place.
Scalability
Network activity has spiked on multiple occasions leading to high fees and slow transactions. The 2017 Cryptokitties craze led to a spike in network activity which significantly slowed down the network. At one stage, the game accounted for about 10% of traffic on the network. This event exposed Ethereum’s limitations to cope with high levels of traffic and to scale the volume of transactions to accommodate demand.
Ethereum can currently support around 30 transactions per second, which is extremely slow given the blockchain’s aspirations.
Scalability is being addressed through a Consensus layer, layer 2. If you think of the main Ethereum blockchain as layer 1, an execution or base layer, then layer 2 is a grouping of solutions that will run in parallel with the existing Ethereum network. This is not a split of the cryptocurrency, Ethereum will remain exactly the same.
The Consensus layer is intended to initially settle 1,000 transactions per second, and eventually up to 100,000 transactions per second after the completion of various upgrades. Given Ethereum’s growing popularity, and the continual threat posed by competing cryptocurrencies, this significant upgrade will offer much needed network capacity and speed. Scalability will reduce transaction fees and allow developers to create more powerful Dapps and smart contracts.
There are various proposed solutions for achieving increased scalability: rollups, side chains, channels, and sharding.
- Rollups are where transactions are taken off the Ethereum blockchain, executed, and then a summary of the transactions is posted back to the network.
- Sidechains are an extension of the main network that process transactions, and reduce traffic load on the main network.
- Channels allow private participants to perform transactions off chain, while recording final settlement on the blockchain.
- Sharding splits the Ethereum network into smaller segments (shards), which makes it easier for nodes to keep records and process transactions. This boosts efficiency since each node doesn’t have to read the full history of transactions, just the shard, speeding up validations and transaction throughput.
Energy Consumption
In order to verify transactions, Ethereum currently uses a proof-of-work protocol, which requires miners to solve a complex mathematical puzzle. This process is extremely energy intensive, and the Ethereum network currently consumes roughly the same amount of energy as Finland.
Sustainability is expected to be achieved by shifting from a proof of work to a proof-of-stake model. Proof-of-stake is expected to be much less resource intensive and reduce the Ethereum network’s power consumption by around 99%. Staking requires users to stake their ETH as collateral in order to become a validator of transactions on the network. The job of validating transaction will be randomly distributed among stakers by the Ethereum Virtual Machine (EVM). Validators will be rewarded in proportion the amount and duration of their stake, and face the prospect of losing their stake if they incorrectly attest to malicious transactions.
Security
Due to the complexity of Ethereum’s code, it has had a history of security breaches. For example, in March 2022 $600 million worth of Ether was stolen from Ronin, an Ethereum-linked blockchain platform.
Proof-of-stake should offer the Ethereum network a high level of security, and has already been introduced with the launch of Beacon Chain. In order to be decentralized and secure, the proof-of-stake model requires a large number of validators. Currently there are over 350,000 validators, which means that the network is highly secure. The risk of 51% attacks is reduced under the proof-of-stake model since malicious actors risk having their ETH slashed in value. The blockchain should also be more reliable as nodes that fail can expect to be similarly penalized.
Security upgrades will take place over several years. The first step was Beacon Chain, which launched in December 2020. In late 2022, the main network and Beacon Chain will be combined, making the full switch to proof-of-stake. And further upgrades are expected in 2023, such as the introduction of sharding.
Slow Progress
Despite promising developments having been made, delays are inevitable. Challenges such as faulty protocols, weaknesses in digital infrastructure, and security loopholes can be expected given the complexity of the upgrades.
In the fast paced world of technology, the seemingly glacial pace of the Ethereum upgrades have caused confusion and concern for many users. Some have even been scammed to swap ETH for ETH2 tokens, which don’t exist.
The transition from a proof-of-work to proof-of-stake model won’t be seamless. For example, users will be required to stake 32 ETH in order to become a validator of the network, which is equivalent to a membership fee of around US$60,000. This may limit the number of users who are willing and able to validate transactions.
The bottom line
When the Ethereum upgrades are fully implemented some time in 2023, Ethereum will have made history by successfully undertaking one of the biggest redevelopments of a blockchain. In theory, demand for Ethereum should rise dramatically as faster transaction speeds enable more sophisticated Dapps and smart contracts and falling transaction fees open up new use cases for the blockchain.
Rhulani (Ruce) Ndlala is former President of the UCT Consulting Club and holds a Bachelor of Commerce (Accounting) from the University of Cape Town.
Image: Unsplash
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