Ethereum is a distributed blockchain computing platform for smart contracts and decentralized applications. Its native token is ether (ETH), which primarily serves as a means of payment for transaction fees and as collateral for borrowing specific ERC-20 tokens within the decentralized finance (DeFi) sector.

History

Conception to token sale Vitalik Buterin conceived Ethereum in 2013, after what he perceived as limitations in the functionality of Bitcoin’s scripting language, namely the lack of Turing completeness. Buterin published the first Ethereum white paper later that year, describing a distributed computing platform for executing smart contracts and building decentralized applications (dApps). In 2014, Buterin and some other early contributors founded the Ethereum Foundation, a non-profit organization dedicated to Ethereum’s research, core protocol development, and ecosystem growth. The foundation’s first task was to host the Ethereum crowdsale, which raised 31,529 BTC (~$18 million at the time) in exchange for about 60 million ether, and use the proceeds to fund the network’s initial development. The Ethereum Foundation continues to be the primary funding organization, issuing grants to research teams and projects focused on Ethereum. The rise of initial coin offerings (ICOs) Ethereum’s mainnet launched in July 2015, with the first live release known as Frontier. Shortly thereafter, Augur (REP) conducted the first Initial Coin Offering (ICO), in which the startup sold its Ethereum-based REP tokens (created via the ERC-20 standard) to help fund the project. The ability to develop and sell a newly generated token to help raise capital became an attractive method of fundraising because projects could circumvent the legal policies and costs required from traditional companies (until more recently). Ethereum-focused startups created thousands of new tokens since Augur’s ICO, raising billions of dollars in the process. The DAO hack In April 2016, a decentralized venture fund known as The DAO hosted an ICO, raising ~$150 million in ETH in the process. A few months later (July 2016), an attacker exploited a bug in one of The DAO’s smart contracts, enabling the guilty party to siphon 3.6 million ETH. A significant portion of the Ethereum community opted to revert the chain to remove The DAO and its subsequent hack from the network’s history. The remaining stakeholders held the preservation of immutability in higher regard and refused to accept a ledger rewrite. The divide in the community led to a contentious hard fork a few weeks post-hack, causing a permanent split in the network. The legacy chain that did not reverse its transaction history is now known as Ethereum Classic ($ETC). The path to scalability: Ethereum 2.0 Scalability is a known limitation for the current state of Ethereum. Periods of high user activity, as seen during the CryptoKitties launch in Nov. 2017 and the DeFi bonanza during the Summer of 2020, can cause transaction times and fees to skyrocket, which often prices out retail users and newcomers. The potential shortcomings of Ethereum’s current design are nothing new to Ethereum developers. Various teams have been working since the launch of Ethereum to upgrade the network to account for better scalability and security measures without compromising the community’s values of decentralization. The current plan is to swap Ethereum’s consensus layer from Proof-of-Work (PoW) to Proof-of-Stake (PoS) and implement a scaling technique known as sharding in a massive upgrade called Serenity (also referred to as Ethereum 2.0). Ethereum developers have broken down this upgrade into three or more phases to minimize complexity as they add more features. The first phase Phase 0 has a minimum launch date of Dec. 1, 2020. It will bring the Beacon Chain (the backbone of Ethereum 2.0) to life and enable the network to bootstrap a stable of validators to ensure network security. The following phases are being developed in parallel but might take several years before they reach completion.

Technology

Account-based model Ethereum is an account-based blockchain consisting of external accounts, which are controlled by a user’s private keys, and contract accounts, which are managed by contract code. External contracts can create and sign messages to send to both types of accounts, while contract accounts can only execute transactions automatically in response to a message they have received. The latter are what are known as smart contracts and enable the programmability of decentralized applications (dApps). Ethereum Virtual Machine The heart of the Ethereum blockchain is known as the Ethereum Virtual Machine (EVM), which is the part of the protocol that executes transactions. It is a Turing complete virtual machine featuring a specific language “EVM bytecode,” typically written in a higher-level language called Solidity. Every operation on the EVM requires computational effort and memory. Ethereum node operators and miners provide these scarce resources to application developers and network users in exchange for gas. Different operations require different amounts of gas, and the user can specify how much they are willing to pay in ETH for each unit of gas. The amount of gas required for the transaction, along with the price paid, becomes the transaction cost. Every transaction also had a gas limit to prevent attacks from overloading blocks, which could slow down block production. Developer tools and token standards Ethereum adopted Ethereum Request for Comment (ERC) 20 in late 2015 as a standard for Ethereum smart contracts to issue tokens on the platform. The majority of tokens built on Ethereum are ERC-20 compliant, meaning they follow a standard set of rules defining how they are created and used. Another more popular token rule set is ERC-721 with standardizes the issuance of non-fungible tokens (NFTs) where any given token is distinguishable from another making them popular for gaming. Ethereum 2.0 As Ethereum transitions to Eth 2.0, it will undergo significant changes to its design. It will transition from Proof-of-Work to Proof-of-Stake and feature a sharding architecture. Currently, nodes must validate every transaction to maintain an updated global state. The new sharding model segments the network into various groups (called shards) and randomly assigns nodes to each shard. Rather than having to monitor the entire chain, nodes only have to validate their respective shard(s). Individual shards shared their transaction details with the Beacon Chain, which acts as the backbone of Ethereum 2.0. The Beacon Chain serves to validate the transactions on each shard, helping the entire network reach consensus. It also identifies dishonest validators and initiates penalties in the form of slashing, in which a portion of a validator’s stake is removed from circulation. Eth 2.0 will also replace the EVM with Ethereum WebAssembly (eWASM), which intends to translate coding logic more efficiently and help improve Ethereum’s scalability.

Supply Curve Details

Block Rewards, Block Time, Hard Forks and Issuance Rate New ether are generated via block rewards, initially set at 5 Ether per block. Those block rewards incentivize miners to secure the network. Miners that find an uncle block also receive 87.5% of the base block reward. Uncle blocks occur when several distinct miners simultaneously mine a block. In this case, the block that has the most accumulated PoW is conserved, and others are rejected. Unlike the Bitcoin chain that does not reward miners for orphan blocks, the Ethereum chain does reward uncle block miners. Transaction fees, however, are not awarded to uncle block miners. As Vitalik Buterin notes, the initial intent behind rewarding uncle block miners was to avoid mining centralization caused by the network lag that smaller miners could endure: “This mechanic was originally introduced to reduce centralization pressures, by reducing the advantage that well-connected miners have over poorly connected miners.” In 2017, the difficulty bomb increased block times drastically, thus reducing the issuance rate. Indeed, the difficulty bomb, also known as “ice age” was initially designed as a mechanism to disincentivize miners to continue mining the Ethereum chain by making it exponentially harder to create a new block. This was meant to accelerate the transition from Proof-of-Work to Proof-of-Stake. The Casper development and transition to Proof-of-Stake being delayed, Vitalik Buterin and Afri Schoeden proposed to delay the difficulty bomb and reduce the block rewards from 5 Ether to 3 Ether, thus leaving the system in the same general state as before. This proposal, EIP 649, was included in the Byzantium hard fork which was implemented on October 16, 2017, at block 4,370,000, thus effectively reducing block rewards from 5 Ether to 3 Ether and delaying the difficulty bomb for approximately 1.4 years. On February 28, 2019, at block 7,280,000, the Constantinople hard fork further reduced block rewards from 3 Ether to 2 Ether, and once again delayed the difficulty bomb for approximately 12 months with EIP 1234. The Ethereum’s Parity multi-sig wallet bug On November 06, 2017, a vulnerability in the “library” smart contract code was exploited by an anonymous user. Subsequently, the user destroyed the library contract. This destruction locked forever a total amount of 513,774.16 Ether located in 587 multi-signatures parity wallets. Messari Proprietary Methodology to calculate liquid supply excludes any non-transferable coins. Thus, these locked Ether are considered illiquid and are not included in our liquid supply calculation. ETH 2.0 and the transition to Casper Proof-of-Stake In ETH 2.0, the Ethereum chain will be maintained via a new proof-of-stake system, where rewards will be distributed on a sliding scale based on the total amount staked on the network. The more total supply that’s staked, the higher the system-wide issuance rate (to incentivize high cumulative participation). Although individual yields will decline as the staking participation increases. A table posted by Vitalik Buterin on Github lays out the sliding scale issuance rate. Justin Drake, a researcher at the Ethereum Foundation, argued that targeting 30,000,000 ETH at stake, long-term, “seems about right for strong security.” It would represent about 30% of the network and result in an approximate 3% annual inflation. Nevertheless, the penalties applied to validators going offline as well as the slashing penalties and the transaction fees burnt due to EIP 1559 will lead to the destruction of Ether, thus reducing the total net issuance amount. The transition to Proof-of-Stake will occur in three or four stages, according to the latest specifications shared by the core developers: Phase 0, expected for Dec. 1, 2020, will initially increase issuance compared to the current level. This is due to the fact that both the Proof-of-Work and Beacon Chain will run simultaneously and rewards will be distributed on both chains, although the staking participation, and thus annual issuance on the Beacon Chain, will most likely be very low during this Phase. Phase 1, expected for Q4 2021, will allow finalizing the Proof-of-Work chain with Proof-of-Stake. The Proof-of-Work rewards will most likely be reduced to match an issuance rate between 0.5% and 1% (versus 4.5% before Phase 1). Both Proof-of-Work and Proof-of-Stake rewards will co-exist and the global issuance rate should be around 1% at that stage. Phase 1.5, estimated for 2022, will mark when Ethereum 2.0 transfers will likely unlock, giving stakers access to their previously inaccessible staked ETH and accumulated rewards. These rewards and staking amounts will date back to the launch of the Beacon Chain. Phase 2, estimated for 2023, will progressively lead to an increase of staking participation, thus increasing the annual issuance rate, while Proof-of-Work will simultaneously progressively disappear.

Consensus Details

Modified GHOST protocol The Ethereum White Paper states Ethereum uses a modified version of the “Greedy Heaviest Observed Subtree” (GHOST) protocol to distinguish the “longest” base chain (the chain with the most accumulated Proof-of-Work backing it) from forks. Nakamoto Consensus, the implementation used by Bitcoin ($BTC) and its forks, is problematic in networks with fast confirmation times (i.e., block times) like Ethereum. Quick block times lead to a higher stale or orphan rate, which can split mining resources among competing forks and reduce overall network security. Accelerated confirmation times also increases the likelihood a single mining pool could obtain a majority of the hashpower on a given chain. The GHOST protocol attempts to solve this issue of network security by including orphan blocks in the calculation of the longest chain. Therefore, the GHOST model determines the valid chain by weighing the parent and further ancestors as well as the number of stale descendants. The protocol also rewards the mining of orphan blocks directly connected to the longest chain to combat potential centralization concerns. Orphan block miners do not receive any transaction fees, only a portion of the block subsidy, as stale transactions are not considered valid. Some say GHOST works better in theory than in practice, claiming Ethereum further modified its consensus implementation before (or soon after) launch to avoid security complications. Others suggest the Ethereum consensus model better resembles Nakamoto consensus or a modified version of the Inclusive protocol. But the inclusion of EIP-100 in the Byzantium fork changed Ethereum’s difficulty calculation algorithm to include orphan blocks, which indicates the proposed modified GHOST implementation is intact. Regardless of the security model classification, Ethereum continues to reward orphan block miners with 87.5% of the base block reward. Mining Ethereum miners solve computational puzzles to generate new blocks by running the Ethash Proof-of-Work (PoW) algorithm. In this process, miners compete to discover a valid hash, using the Keccak-256 and Keccak-512 hash functions, as defined by Ethereum’s difficulty adjustment algorithm. Unlike Bitcoin’s biweekly adjustments, Ethereum recalculates its difficulty level every block based on the time between the two previous blocks. Cryptographers designed Ethash to be ASIC-resistant by making it memory intensive for specialized mining chips. But the popularity of Ethereum led mining chip manufacturer Bitmain to release the first ASICs miners for Ethash in April 2018. The majority of the Ethereum remains opposed to ASIC miners, as evidenced by its support for the ProgPoW EIP (a likely inclusion in the second Istanbul hard fork). Ethereum also plans to transition to a Proof-of-Stake (PoS) consensus model, which would render any mining equipment obsolete.

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