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Ethereum is a decentralized blockchain platform that enables the creation and execution of smart contracts and decentralized applications (DApps). Unlike Bitcoin, which is primarily a digital currency, Ethereum is designed to be a versatile platform for various applications. Its transactions are validated through consensus mechanisms. So how does Ethereum work?

Blockchain Technology and Decentralized Work

Blockchain technology is a decentralized and distributed ledger system that records transactions across multiple computers. It ensures security, transparency, and immutability. Each block in the chain contains a list of transactions and a cryptographic hash of the previous block creating a secure link between them.

Decentralized work refers to a model where tasks and projects are distributed across a global network of independent workers rather than managed by a central authority. By utilizing blockchain technology it ensures transparency, security, and trust in collaborations.

This model empowers individuals to participate in various projects by earning cryptocurrency or tokens for their contributions. It also fosters a more open, efficient, and inclusive work environment.

History, Development, and Purpose

Proposed by Vitalik Buterin in late 2013 and launched in 2015, Ethereum is a decentralized platform that enables developers to build and deploy smart contracts and DApps. The Ethereum Virtual Machine (EVM) allows for executing Turing-complete smart contracts, which are self-executing contracts with the terms directly written into code. (A Turing-complete system in blockchain refers to a computational system capable of performing any logical step of computation.)

Ethereum’s development was funded through an initial coin offering (ICO) in 2014, raising over $18 million in Bitcoin. This funding enabled the creation of a solid ecosystem that supports a wide range of applications, from DeFi to gaming and supply chain management.

It has undergone several upgrades. This includes transitioning to Ethereum 2.0, which aims to improve scalability, security, and sustainability by shifting from proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism.

Overall, Ethereum aims to provide a versatile and programmable blockchain that empowers developers to innovate and create decentralized solutions across various industries.

Architecture and Components

The Ethereum Virtual Machine (EVM) is a decentralized computing engine that executes smart contracts on the Ethereum network. It operates as a runtime environment for smart contracts, written in Ethereum’s native programming language, solidity. The EVM ensures that smart contracts are executed consistently across all nodes in the network. The latter while maintaining the integrity and immutability of the blockchain.

By providing a Turing-complete environment, the EVM allows for complex computations and the creation of decentralized applications. Its role is crucial in verifying and enforcing the rules of smart contracts. All this ensures that transactions are processed securely and accurately without intermediaries.

The EVM differs from traditional virtual machines in that it is specifically designed to execute smart contracts within a decentralized blockchain environment, ensuring consistency across all network nodes. Unlike traditional virtual machines, which typically run on centralized servers and execute general-purpose applications. Additionally, the EVM uses a unique gas system to manage computational resources and incentivize efficient contract execution. The latter is not a feature of traditional virtual machines.

Smart Contracts

Smart contracts as you may know are self-executing agreements with the terms of the contract directly written into code, running on a blockchain. They automatically enforce and execute contractual clauses when predefined conditions are met. This eliminates the need for intermediaries.

On blockchain platforms like Ethereum, smart contracts are decentralized, which ensures transparency, security, and immutability of transactions as seen before. Their functionality extends to various applications, including financial services, supply chain management, and DApps.

Ethereum Accounts and Transactions

The network has two main types of accounts: externally owned accounts (EOAs) and contract accounts.

EOAs are controlled by private keys held by users and can send transactions, hold Ether, and interact with smart contracts.

Contract accounts, on the other hand, are managed by their smart contract code and do not have private keys. Instead, they execute code in response to transactions received from EOAs or other contracts. EOAs can initiate transactions, while contract accounts can only execute code when triggered by a transaction.

This distinction allows EOAs to act as the human interface to the Ethereum network, while contract accounts enable the automated execution of smart contract logic.

Transactions on the network are created by EOAs and can include transferring Ether, deploying smart contracts, or interacting with existing contracts. Once a transaction is created, it is broadcast to the network and picked up by miners who validate it and include it in a new block through a process called mining. Each transaction requires a fee (known as gas) which compensates miners for the computational resources needed.

After the transaction is mined and the block is added to the blockchain, it becomes immutable and is confirmed by the network.

From Proof-of-Work to Proof-of-Stake

Proof-of-work (PoW) is a consensus mechanism used by Ethereum to secure the network and validate transactions. In PoW, miners compete to solve complex mathematical puzzles. The first to solve them gets to add a new block to the blockchain along with their reward in Ether.

This process ensures that transactions are verified and prevents double-spending. In fact, the computational effort required makes it costly to alter the blockchain’s history. PoW plays a major role in maintaining the integrity and security of the Ethereum network.

However, Ethereum is currently transitioning to Proof-of-Stake (PoS) for improved efficiency and scalability. (Refer to our article about Understanding Proof-of-Stake to find out more about it.)

Community and Governance

The Ethereum community plays a pivotal role in the platform’s development and decision-making through a collaborative and decentralized governance model.

Developers, users, and stakeholders contribute to the improvement of the Ethereum network by proposing and discussing Ethereum Improvement Proposals (EIPs). The latter outlines new features, standards, or modifications.

Community consensus is vital for implementing significant changes, to ensure that decisions reflect the diverse interests and needs of its participants. This inclusive approach fosters innovation, transparency, and resilience in the ecosystem.