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Blockchain is one of the most discussed technologies nowadays: potentially revolutionary but still with many uncertainties about its future. Ethereum is one of the most significant and widely used projects in this context, and today, we will delve into how it works. Before we begin, if you’re not yet familiar with what a blockchain is, I recommend checking out the article where I discuss Bitcoin: the project that gave birth to the first example of this technology.
DApp (Decentralized Application)
In the article I just mentioned, we saw how the Bitcoin blockchain was primarily created for decentralized currency exchange. This type of blockchain is commonly referred to as a “first-generation blockchain” and is the simplest type of blockchain. Over time, it was realized that this technology could also be utilized in other contexts. In fact, in 2013, Ethereum introduced the so-called “second-generation blockchains” which revolutionized the concept of blockchain by allowing the utilization of its security and immutability not just for money exchange but also for building decentralized applications (DApps). Think about the applications you use every day; what they have in common is that they are centralized. In other words, there is a single organization that manages and has full control over them and all the data users provide through their interaction. Ethereum eliminates this central authority by leveraging a decentralized network of nodes, similar to what we saw with Bitcoin.
At the core of everything is the concept of “Smart Contract”. You probably already know what a contract is; you’ve likely signed one before. In short, a contract is an agreement between two or more parties that creates legally binding obligations among them. It defines the rights and obligations of the involved parties, establishing the conditions and terms under which the parties commit to specific actions, providing specific goods or services. We can see a smart contract as nothing more than a transposition of the contract concept into the digital world. Specifically, a smart contract also automatically verifies the fulfillment of the conditions defined in the contract and self-executes actions when those conditions are met and verified. This eliminates the need for intermediaries between the parties and makes processes more transparent, efficient, and secure.
Transactions on Ethereum
On Ethereum, transactions are carried out using the cryptocurrency Ether (ETH). In this case, transactions encompass not only simple currency exchanges but also various interactions with smart contract functionalities. Let’s delve into what happens when such functionality is utilized:
First and foremost, it’s important to know that each smart contract is associated with an address. To use its functionality, the user needs to initiate a transaction to that address, paying a certain amount of ETH as a fee if required. At that point, the user’s transaction will be included in a transaction pool, a collection of all pending transactions. The nodes comprising the Ethereum network periodically select transactions from this pool, gradually executing all the requested operations. Once a certain number of transactions are chosen, a block is created and shared with other nodes in the blockchain. Subsequently, a validation phase takes place, during which all the other nodes in the blockchain analyze the content of the new block and compare it with one another to reach a consensus.
The validation of transactions ensures that only correct and legitimate transactions are included in the blockchain. This prevents fraud, malicious attacks, and unauthorized transactions. Once an agreement is reached, the proposed block is added to the blockchain.
Proof of Stake (PoS)
Similar to Bitcoin, Ethereum was initially built on a proof-of-work (PoW) consensus mechanism. However, with the update on September 15, 2022, Ethereum transitioned to the so-called “Proof of Stake” (PoS). The underlying idea of PoS remains the same: to discourage dishonest behavior. In this case, every node that wants to participate in the network must “stake” a certain amount of ETH as a guarantee that it will behave honestly. This mechanism is known as staking, and if a node misbehaves, it risks losing all the Ether it has staked to participate in the network. On the other hand, to incentivize honest participation in the network, well-behaving nodes receive rewards. The transaction fees I mentioned earlier are precisely used for that purpose.
Keep in mind that Ethereum nodes need to invest time and resources to process transactions. This requires computational power and electricity. Additionally, nodes need to allocate storage space to store the blockchain and confirmed transactions. All of this incurs significant basic costs, so it is reasonable for nodes to receive rewards. However, it’s worth noting that the transition to PoS has led to a reduction in these costs and, more importantly, the energy consumption of the network, as nodes are no longer required to perform complex and lengthy computations to generate PoW.
Tokens and NFTs
Ethereum has played a significant role in the development of the cryptocurrency industry and blockchain technology in general. It has introduced many innovations, contributing to the evolution of both fungible tokens and non-fungible tokens (NFTs). Fungible tokens are essentially new cryptocurrencies born on the Ethereum platform. They are simply other specific smart contracts that follow the ERC-20 standard. These tokens are designed to manage the issuance, transfer, and management of such tokens on the Ethereum network. On the other hand, non-fungible tokens, better known as NFTs, are contracts that follow the ERC-721 standard. This standard has made it possible to create and exchange unique digital assets such as digital artwork. Now, let’s delve into the difference between fungible and non-fungible tokens:
In my previous article, “Search Engines: Friends or Foes of Your Privacy?” I mentioned the PRE token. If you’re not familiar with it, I recommend revisiting that article. The PRE token is an example of an ERC-20 token. There are 500 million PRE tokens in existence, and they are all of the same type. What I mean is that there is no difference between one PRE token and another. You can have as many PRE tokens as you want, up to the 500 millionth token, and they will all have the same value and can be exchanged with one another without any distinction. These are the characteristics that typically differentiate an ERC-20 token from an ERC-721 token. In contrast, a non-fungible token represents a unique item. When you purchase an NFT, you are acquiring something that is incomparable, something that holds its own value and cannot be divided into multiple pieces.
With this, I have briefly summarized the most important things you needed to know about Ethereum. There is a whole world to explore behind this technology, and I hope I have been helpful and sparked your curiosity. Keep following if you’re interested in the topic of cryptocurrencies and cybersecurity. Thank you for reading this far. Goodbye!