Summary
The emergence of bitcoin paved the way for a decentralised world. This world could possibly have systems that did not depend on a third-party to act as the bearer of trust between two parties. While bitcoin showed that a system like this was possible, there were several pain points that made the real world applications impractical. By developing a platform that would let developers build decentralised apps on top of its blockchain, Ethereum created a new world order for blockchain and crypto based projects.
The original Ethereum whitepaper was published in 2013 and the project was launched in 2015. The project has undergone several upgrades and changes since its launch. In this explainer article, we touch upon the proposals made in the original whitepaper.
The Problem
Real world decentralised applications.
Bitcoin solved the problem that ‘e-cash’ and ‘digital currencies’ faced. These concepts had been around for about 4 decades, but every time someone proposed a concept for digital currencies, they were hit with the problem of needing a third-party to be the ‘trust player’ between two transacting parties. While concepts like ‘proof-of-work’ and ‘rewards’ existed before bitcoin, no one had figured out a way to combine these two concepts till ‘Satoshi Nakamoto’ did it with bitcoin.
With money getting decentralised with bitcoin, developers were faced with the possibility of building business solutions that could now use the trustless system(A ‘trustless system’ is where the parties engaged in a transaction do not need a third party to play the police between them). However, they faced a few problems as listed by the Ethereum whitepaper
- Lack-of Turing completeness- A ‘Turing-complete’ language or system is one that can solve any computational problem. Unfortunately, bitcoin is not Turing-complete and hence, can’t be used as a base to build solutions.
- Value-blindness- Let’s say A and B together put INR 1,000 in bitcoin. They want it to be programmed in a way where after 2 weeks A receives INR 1,000 worth of bitcoin and B receives the remaining- this is not possible with bitcoin as uses a all-or-nothing way of maintaining ledger books.
- Lack of state- bitcoin protocol only allows for a binary ‘state’. So, somey is either spent or unspent in a transaction. This limits possibilities of real world applications where, for example, an intermediary ‘state’ of escrow may be needed.
- Blockchain blindness- Data such as counter or preceding hash are unrecognised in bitcoin, leading to non-support for applications that have binary results for multiple inputs, like gambling.
The Solution
Ethereum came up with a Turing-complete programming language that allows anyone to write smart contracts and program decentralised apps. There are several solutions that Ethereum puts forth. The most significant among them is smart contracts and we’ll understand that.
What is a smart contract?
Let’s take an example
‘A’ buys a car and takes a loan to do so. He is required to pay an EMI of INR 20,000/- on the 15th of each month. If ‘A’ defaults for 2 months in a row, the lender will appoint a recovery agent to recover the loan amount. If the default continues for 6 months, then the lender stands to confiscate the car. This is the loan contract and both parties agree to this.
In the current scenario, in case ‘A’ defaults on paying the EMI, the onus of recovering the loan amount or confiscating the car lies with the lender and it requires human intervention, thus increasing the cost of recovery and also reducing the efficacy.
Take a scenario where this whole transaction is done with a smart contract. There is a blockchain and there is a cryptocurrency. The lender attaches a device to the car that detects payments received. There are also computational rules programmed into the device, like if the borrowed defaults on one payment, then the music system in the car will stop working, if the borrower defaults on 6 payments, then the car will fail to start and so on and so forth. This is made possible by the fact that the smart contract is enabled by the blockchain and value is determined by using a cryptocurrency to that effect.
This is a very basic example to bring forth the nuances of a smart contract. Being Turing-complete is what makes all these transactional computations a possibility and solves most issues that plague bitcoin.
The numerous ERC20 tokens that we see in the market today are all smart contracts written for one purpose or the other.
The Timelines
Here’s a peek into some important events that have happened since the whitepaper was published.
27/11/2013- Whitepaper released
22/07/2014- Initial Ether sale (the network is called Ethereum and the token is called Ether)
30/07/2015- Frontier and Olympic, two phases that allowed miners and early adopters to latch on to Ethereum
14/03/2016- Homestead ‘fork’. A fork that had included protocol changes and enabled Ethereum to do future network upgrades
20/07/2017- DAO fork. In response to a hack that led to a loss of 3.6 million Ether(ETH), the fork found a way to compensate anyone who had lost funds. The fork also created another token, Ethereum Classic(ETC).
16/10/2017- Byzantium fork. Among several noteworthy changes, the mining reward was reduced from 5ETH to 3ETH
28/02/2019- Constantinople fork. The major outcome of this fork was that it prevented the blockchain from freezing when the network went from ‘proof-of-work’ to ‘proof-of-stake’.
01/12/2020- Beacon Chain genesis. A significant step in Ethereum’s movement towards achieving a set of milestones, collectively known as the Ethereum Vision.
Tokenomics
The exact amount of supply of Ether is unknown. This is one of the criticisms the project faces.
Similar to the ‘halving’ in bitcoin, Ethereum went through something known as ‘thirdning’, where the block reward went from 3 ETH to 2 ETh after the Constantinople upgrade.
As of 8th March 2022, a total of 119,872,580 ETH are in circulation.The tokenomics of Ethereum is a complex matter. It has an unlimited supply, but with a cap of 18 million ETH a year.
Ethereum also has complex concepts like Uncle rewards and Nephew(uncle’s children) rewards, given for blocks that almost got published to the chain but did not. These are information one can easily avoid.
Initially, Ether did have an ICO. Over 50 million Ether were sold in exchange for bitcoin. 9.9% of this was kept aside for the founding team and another 9.9% for the Ethereum Foundation.
The Team
Ethereum had 8 co-founders, including Vitalik Buterin, Charles Hoskinson and Gavin Wood. Ethereum was Vitalik’s brainchild and he’s the only one from the original 8 to still be actively involved in the project.
The Ethereum Foundation plays a big role in driving the community towards making contributions to Ethereum’s development through a variety of programs.
Any protocol level changes on Ethereum happen through something called Ethereum Governance.
On-chain changes are implemented through votes by stakeholders. Some of these changes are already programmed and will automatically come into effect as and when the stakeholders approve.
There are also off-chain changes that happen in a social setting and when approved, implemented in the code.
