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Network Profile: Ethereum

Ethereum Explored: A Look into the Pioneering Cryptocurrency


Ethereum, a groundbreaking platform for decentralized applications, was proposed in late 2013 by a programmer named Vitalik Buterin. Dissatisfied with Bitcoin's limited scripting capability, Buterin set out to create a blockchain that would support more complex operations, resulting in the inception of Ethereum. He introduced his vision through a whitepaper titled "Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform."

Ethereum's development was crowdfunded in 2014, and the network officially went live on July 30, 2015, with its first release called Frontier. Unlike Bitcoin, which was solely a digital currency, Ethereum introduced the concept of "smart contracts." These are self-executing contracts where the terms of agreement or conditions are directly written into lines of code, allowing for programmable and automated transactions.

Ethereum's vision and flexibility have earned it the moniker "world computer," as developers from across the globe collaborate to explore its vast potential. Over the years, Ethereum has grown to become the second-largest blockchain platform by market capitalization, only behind Bitcoin.

The Bitcoin Upgrade Process:

A Model of Decentralized Consensus

A Model of Continuous Innovation and Community Involvement Ethereum, in its quest to be a world computer for decentralized applications, places emphasis on continuous innovation. However, with the decentralized nature of the platform, upgrades require a consensus-driven approach involving various stakeholders, from developers to miners, node operators, and everyday users.

  1. Ethereum Improvement Proposals (EIPs): Similar to Bitcoin's BIPs, the Ethereum upgrade process starts with the submission of an Ethereum Improvement Proposal. This proposal outlines the suggested changes, their technical specifications, potential impacts, and the rationale behind them.

  2. Community Deliberation: Post-submission, the EIP undergoes rigorous debate, critique, and discussion within the Ethereum community. Developers, node operators, and users analyze the feasibility and implications of the proposed changes, often leading to iterative refinements or alternative proposals.

  3. Coding and Testing: If the community reaches a consensus on the EIP, developers initiate the coding process. This newly coded feature undergoes rigorous testing in testnet environments, ensuring that it doesn't present vulnerabilities or unintended consequences.

  4. Implementation: Once satisfactorily tested, the upgrade gets incorporated into the various Ethereum clients like Geth or OpenEthereum. However, it doesn't become immediately operative. Ethereum often utilizes a mechanism like "fork blocks" where the network agrees to adopt the upgrade at a specific block number.

  5. Network Upgrade (or Hard Fork): When the specified block number is reached, nodes running the updated client software will implement the changes, resulting in a network-wide upgrade or a "hard fork." Noteworthy hard forks in Ethereum's history include the likes of Constantinople, Istanbul, and Muir Glacier.

  6. Community Adoption: It's pivotal for the broader Ethereum community, especially node operators and miners, to adopt and support the upgrade. If consensus isn't achieved, it can result in a network split, as seen with Ethereum and Ethereum Classic in 2016.

Ethereum's upgrade process emphasizes both innovation and community consensus. It's a delicate balance between introducing novel features and ensuring network stability and security. This methodology reflects Ethereum's commitment to evolve and adapt in the dynamic landscape of blockchain technology, all while valuing the voice of its vast community.

2016 DAO Hack: Ethereum Fork

In 2016, Ethereum witnessed one of its most pivotal moments: the DAO (Decentralized Autonomous Organization) exploit. The DAO was a complex smart contract designed as a decentralized venture capital fund. However, a vulnerability in its code was exploited, leading to a theft of around 3.6 million ETH.

In response, the Ethereum community was faced with a choice: let the attacker keep the stolen funds or perform a hard fork to revert the theft. A majority decided on the latter, leading to the DAO Hard Fork.

The Fork's Consequences

Post-fork, Ethereum was split into two chains: Ethereum (ETH) and Ethereum Classic (ETC). Those opposing the rollback continued to support the original chain, which was named Ethereum Classic. This event was a defining moment for Ethereum, highlighting both the strength and challenges of decentralized decision-making.

Fork-Diagram from Daily Coin

2020 and Beyond: Ethereum 2.0 & The Beacon Chain

Ethereum 2.0, commonly termed as Eth2 or Serenity, is an ongoing series of upgrades aimed at solving the scalability, security, and sustainability challenges of Ethereum. The most significant change in Ethereum 2.0 is the shift from a PoW consensus mechanism to PoS, significantly reducing the energy consumed in the process of securing the network.

The Beacon Chain, launched in December 2020, is the PoS blockchain running in parallel with Ethereum's existing PoW chain, ensuring the transition's security and stability.

For businesses, Ethereum 2.0 brings the promise of higher transaction throughput, lower costs, and an eco-friendlier blockchain. It aims to further establish Ethereum as a foundational layer of the decentralized internet.

Ethereum's journey, marked by these milestones, is a testament to its commitment to continuous innovation, decentralized governance, and the ever-evolving landscape of blockchain technology.

ethereum beacon chain

Ethereum's EIP-1559 and ETH Burning

EIP-1559, or Ethereum Improvement Proposal 1559, is one of the most discussed and significant changes to the Ethereum network's economic model. Implemented as part of the London Hard Fork in August 2021, this proposal introduced a mechanism where a portion of the transaction fees (known as the "base fee") is "burned," or permanently removed from circulation.
The Dynamics of ETH Burning
Prior to EIP-1559, Ethereum's transaction fees were entirely based on an auction system. Users would bid on gas prices, and miners would prioritize transactions with higher fees. This led to unpredictable and often exorbitant transaction costs, especially during network congestion.

With the introduction of EIP-1559:
  1. Base Fee: A standard "base fee" is set for each block, which is adjusted up or down depending on network congestion. This base fee is burned, meaning it's removed from the total supply of ETH, reducing the overall circulation.
  2. Tip: In addition to the base fee, users can opt to include a "tip" to incentivize miners to prioritize their transactions. This tip goes to the miners and is not burned.
  3. Fee Cap: Users set a maximum fee they are willing to pay, which includes both the base fee and the tip.
Implications for Ethereum's Economics
The burning mechanism introduced by EIP-1559 has several significant implications:

  1. ETH Scarcity: By burning a portion of the transaction fees, the total supply of ETH is reduced over time, potentially increasing its scarcity and, in turn, its value.
  2. Predictable Fees: The new system provides more predictable transaction fees for users, as the base fee is algorithmically determined based on network demand.
  3. Reducing Miner Revenue: While the burning mechanism can increase the scarcity of ETH, it also reduces the revenue miners receive from transaction fees, as a part of it is now burned. This was a contentious point, but the broader Ethereum community saw the benefits of a more predictable fee structure and the economic implications of reducing ETH's overall supply.
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