Deep Dive into Ethereum (October 2018) - Crush Crypto

Deep Dive into Ethereum (October 2018)

Summary

  • Project name: Ethereum
  • Token Name: Ether
  • Token ticker: ETH
  • Release date: July 2015

What is Ethereum?

Ethereum is a blockchain-based decentralized platform designed for running smart contracts. It was created by the Ethereum Foundation, a Swiss non-profit lead by Vitalik Buterin. The Ethereum Foundation supports Ethereum by leading research, development, and education efforts for the platform.

Smart contracts are simply pieces of code stored on the blockchain that can read and write data and are triggered by blockchain transactions.

Similar to transactional history, smart contracts are immutable once written into the blockchain and can never be changed. Smart contracts are important because they allow for the creation of decentralized applications (dApps) that can automate processes and will run exactly as programmed forever, with no possibility of censorship or downtime.

Ethereum currently uses a proof-of-work consensus mechanism to validate blocks of transactional data and keep the network secure from malicious actors. This means that miners across the world are constantly competing to validate blocks and receive the block rewards and transaction fees associated with each block.

However, a switch to proof-of-stake is planned for implementation in the next 1-2 years.

The native currency for Ethereum is called Ether (ETH) and it powers the platform through transaction fees. However, one of the biggest features of Ethereum is for the creation of unique tokens that exist and operate on the Ethereum blockchain.

There are many different types of Ethereum tokens but the most popular is a standard called ERC20, which lead to the explosion of initial coin offerings (ICO). An ICO is a fundraising model where companies raise money from investors in return for a certain amount of a unique token. From January through September 2018, there has been over $7 billion raised by companies through ICOs.


History

The idea for Ethereum was initially described in a whitepaper released in late 2013 by Vitalik Buterin, a programmer who was working as a writer for Bitcoin Magazine at the time.

He argued that Bitcoin needed a scripted language for application development but did not receive much agreement from the community, so he proposed a new platform called Ethereum with a more general scripting language.

A public announcement about Ethereum was made in January 2014, and formal development began in early 2014 through a Swiss company called Ethereum Switzerland GmbH. The Ethereum Foundation was also created as Swiss non-profit that would oversee research and development of the platform.

The Ethereum crowdsale took place for 42 days from July 20 to September 2 in 2014. Over 31,500 BTC was raised and close to 60 million ETH was distributed to contributors. The price structure began at 2,000 ETH for 1 BTC and increased linearly to 1,337 ETH per BTC at the end of the sale. This gave Ether a valuation of $18.4 million at the time, enough to be the eighth largest cryptocurrency by market cap at that time.

Ethereum’s mainnet was deployed on July 30, 2015.

In 2016, the DAO, or Decentralized Autonomous Organization, was developed as a decentralized venture capital fund that would approve and fund new decentralized applications built on top of Ethereum.

It operated with a DAO token that was purchased with ETH and ended up raising 14% of the total ETH supply from over 11,000 contributors for a valuation of around $150 million.

On June 17, 2016, an anonymous hacker exploited a loophole in the DAO smart contract and was able to steal 3.6 million ETH, worth roughly $55 million. The Ethereum community and Ethereum Foundation decided to implement a hard fork – essentially creating a new blockchain that reversed the hack and gave people their hacked ETH back.

The new hard forked chain was continued as Ethereum, while the existing chain that used to be Ethereum was renamed as Ethereum Classic. There was a lot of controversy between people who agreed with the hard fork and those who though the original blockchain should continue.

However, most miners and community members agreed to make the switch, and Ethereum continued without losing a significant chunk of the ETH supply to the hacker.


Key Features

  • Ethereum Virtual Machine (EVM): The EVM is a Turing-complete virtual machine that can execute scripts using a global network of public nodes.
  • Smart contracts: Ethereum allows for the creation and deployment of smart contracts, which act as immutable programs that have a variety of use cases.
  • Decentralized applications: Ethereum supports the development of dApps that allow users to interact with smart contracts and have no possibility of downtime, censorship, or fraud.
  • Ethereum token standards: There is a wide range of ERC token standards that allow for the creation of unique tokens with different properties existing on the Ethereum blockchain. Ethereum-based tokens have been used in most initial coin offerings and power popular dApps such as CryptoKitties. Click here for further reading on Ethereum token standards.
  • Large developer community: As Ethereum was one of the first platforms to launch with smart contract functionality and an easy-to-use native programming language, it has attracted a large number of blockchain developers around the world. As of September 2018, there are over 19,000 Github repositories related to Ethereum with 270k code commits.
  • Enterprise Ethereum Alliance: The Enterprise Ethereum Alliance (EEA) was formed in March 2017 as a consortium of companies committed to the integration of blockchain technology within enterprise establishments. Initially, there were 30 founding companies; this number has since grown to over 500 and includes big names such as Microsoft, BP, J.P. Morgan, BBVA, Accenture, and more.

Key Milestones

Ethereum is an open source project and its source code can be viewed here: https://github.com/ethereum/

  • February 1, 2014: First Ethereum proof of concept (PoC) released.
  • July 22, 2014: Ethereum crowdsale began.
  • September 2, 2014: Ethereum crowdsale ended.
  • November 24 – 28, 2014: First Ethereum conference, DEVCON0, took place in Berlin.
  • July 30, 2015: Ethereum’s blockchain was officially deployed live (Frontier release).
  • August 4, 2015: Ethereum protocol update 1 occurred.
  • October 17, 2015: Vitalik released an ecosystem update highlighting 4 key areas of research: zk-SNARK integration, Casper, Scalability, and Ethereum Virtual Machine upgrades.
  • February 29, 2016: Homestead, the second major version of Ethereum, was released featuring multiple network upgrades.
  • March 30, 2016: Solidity, the Ethereum programming language, was made available on Microsoft’s Visual Studio application.
  • June 17, 2016: The DAO is hacked through a recursive calling vulnerability, the attacker made off with $55 million worth of ETH.
  • July 20, 2016: Ethereum hard fork is completed, Ethereum moves on with a new blockchain and 85% support from miners. The original blockchain was continued as “Ethereum Classic”.
  • October 18, 2016: Ethereum underwent another hard fork to fix issues with gas costs and stop a denial of service (DoS) attack.
  • November 22, 2016: Ethereum underwent a hard fork as the second round of a two-part hard fork.
  • January 19, 2017: Plans to integrate Zcash on Ethereum are announced.
  • February 28, 2017: Enterprise Ethereum Alliance formed with over 30 corporate members.
  • October 16, 2017: Byzantium hard fork occurred, bringing many protocol upgrades.
  • November 1 – 4, 2017: Ethereum developer conference DEVCON3 took place in Cancun, Mexico.
  • March 7, 2018: First wave of Ethereum Foundation grants announced.
  • May 2, 2018: More Ethereum Foundation grants announced, totaling $2.84 million across 22 recipients.
  • August 17, 2018: Wave 3 of Ethereum Foundation grants announced, with focus on scalability, client diversity, usability, and security.

For more details and for future technical updates, please check out Ethereum's official blog at https://blog.ethereum.org/.

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Future Development

Although there is no official Ethereum roadmap, there is a lot planned for implementation in the coming years, including a major consensus mechanism overhaul from proof-of-work to proof-of-stake. This switch was initially planned to take place within a few years of the initial Ethereum release but has been postponed multiple times.

The four development stages of Ethereum are called Frontier, Homestead, Metropolis, and Serenity, although Metropolis has been broken up into two stages called Byzantium and Constantinople.

The next major upgrade coming to Ethereum is Constantinople - it will feature five different Ethereum Improvement Proposals (EIPs) and will be implemented through a hard fork.

Constantinople is characterized as a “maintenance and optimization upgrade” and will include updates to network efficiency and fee structure, a reduced block reward of 2 ETH, smart contract improvements, and more.

After Constantinople is released, the next major upgrade will be the implementation of Casper and sharding. Casper is the proof-of-stake protocol for Ethereum, and sharding would expand the scalability of Ethereum by many fold.

One major area that Ethereum needs to improve on is scalability, as the network can currently handle around 10-15 transactions per second but this is not nearly close to the throughput needed to realize the Ethereum Foundation’s vision to become a smart contract platform.

On-chain scaling solutions such as sharding are being worked on, but for now applications can scale using off-chain solutions like Plasma and state channels.

In addition, there is a lot of community-based research going on for Ethereum, with most of it documented at https://ethresear.ch/. Research topics include signature aggregation, random number generation, fork choice, data availability, light client support, P2P communication, cross-shard communication, state/execution separation, among others.


Token Economics

Ether (ETH) is the native token for the Ethereum blockchain that acts as fuel for transactions and deploying smart contracts. It is a form of payment made by the clients of the platform to the machines executing the requested operations. Ether is also the incentive for developers to write quality smart contracts, as wasteful code costs more to execute, and ensures those who contribute computing resources are compensated.

After the crowdsale, 60 million Ether were created and 12 million of that was locked in as a development fund. The issuance of Ether is capped at 18 million ETH per year, although the relative inflation is decreased every year. As of October 17, 2018, the circulating supply is 102,628,407 ETH.

Currently 3 ETH are created with each block, yielding a yearly inflation rate of 7.4% per year. However, a new protocol update called Ethereum-Improvement-Protocol 1234 (EIP-1234) will be implemented as part of Constantinople and reduce the block reward to 2 ETH and bring the yearly inflation rate down to 4.7% per year. When Casper/proof of stake is implemented, the inflation rate will drop even lower to below 1%.


Team

The Ethereum Foundation is the main organization that supports research, development, and education efforts for the Ethereum network. It was founded as a Swiss non-profit in 2014 and still operates out of Switzerland. The biographies of key people of the Ethereum ecosystem are listed below:

Vitalik Buterin – creator of Ethereum and on the Foundation Council for the Ethereum Foundation. He discovered Bitcoin in 2011, co-founded Bitcoin Magazine in September 2011 and wrote the original Ethereum white paper in November 2013. Currently, he leads Ethereum’s research team, working on future versions of the Ethereum protocol.

Gavin Wood – co-founder and former CTO of Ethereum. In August 2014, he proposed Solidity, a contract-oriented programming language for writing smart contracts. He is the founder and former CTO and Chairman of Parity Technologies. Parity Ethereum is the most used Ethereum client.

Patrick Storchenegger – Patrick is an attorney at law and notary public in Canton Zug, Switzerland. He has years of experience in international tax and business consultancy, company and capital market law. He advises international companies engaged in trading, re-insurance, transportation, and blockchain technology.


Analysis

Strengths

  • The developer community for Ethereum is one of the largest in the blockchain space, and they have a first-mover advantage over other platforms in terms of smart contract/dApp development. This creates a strong network effect because more support/resources will be spent on developing this ecosystem as the network becomes bigger.
  • Ethereum also enjoys a strong network effect in blockchain usage. Because of the many projects being built on Ethereum and ease of issuing new tokens, Ethereum is the most used blockchain and averages over 600,000 transactions per day in the past 6 months.
  • Most of the new stable coins are issued as Ethereum tokens. There are various forms of promising stable coins such as DAI, GUSD, TUSD, and USDC, which are all ERC-20 tokens. We believe that stable coins play an important role in the cryptocurrency space and if one of these stable coins become the dominant one, then we believe it would greatly propel the usage/popularity of Ethereum.
  • Because ether is a form of programmable money, certain functions (for example, gambling, staking, escrow) require the locking of ether and the amount cannot be released during the period that it is staked. This would, in effect, take the staked coins out of circulation and reduce the velocity of the coin.
  • Ethereum is the most mature smart contract platform that has been battle-tested. It survived the DAO hack and went through a contentious hard fork which is frowned upon by many in the blockchain space.
  • Once the transition to proof-of-stake is completed, the inflation rate is expected to be lower than 1%, making it less inflationary than most of the other competing projects.
  • Many tokens have an ETH trading pair in addition to BTC on exchanges, which encourages investors to hold ether. These investors are used to holding and transacting ether and related tokens, which promotes the adoption of Ethereum.
  • The Enterprise Ethereum Alliance contains many major companies, and they are all committed to driving adoption and usage of the Ethereum platform in the global economy. If these companies decide to use a public blockchain, we believe they would go for a more mature platform instead of an unproven one.

Weaknesses

  • There are many smart contracts currently deployed on the Ethereum network that have security vulnerabilities, with the more notable ones being the DAO hack and Parity multi-sig vulnerability. Once deployed, these vulnerabilities will be there forever and can lead to stolen or lost funds as well as other issues.
  • Protocol update delays – Casper, sharding, and other Ethereum upgrades have been delayed multiple times. It is important to ensure the updates are ready before implementation, but taking too long to deliver could discourage the community.
  • This highlights that it is difficult to upgrade a protocol drastically and ensure backward compatibility, especially when there are so many live smart contracts deployed. There is no guarantee that the Ethereum 2.0 vision can be achieved at all because of the complexity of the work involved.
  • As other scalable smart contract platforms (e.g. Dfinity, Cosmos, Polkadot, etc.) go live, it may draw developer interest away from Ethereum. The entire space is still very early and competent developers can easily switch between different platforms if other platforms prove to be more promising.
  • Scalability is still a major issue for the Ethereum network. This has been highlighted by various DoS attacks and network congestion from popular dApps such as CryptoKitties.

Conclusion

Overall Rating: ​A

Ethereum is a strong project with a great research team, community, and support from businesses across the world. It is remarkable that it has built such a large network of developers and users in such a short period of time after launching its mainnet in 2015.

It is currently the most mature smart contract platform that draws the most usage. Despite delayed protocol upgrades, we believe it has one of the best chances of achieving mainstream adoption as a smart contract platform.

The community’s strength can also be seen by the large turnouts at Ethereum hackathons and developer conferences like DEVCON. These events continue to get bigger, sell out, and feature support from well-known companies across the globe.

There are lots of smart contract platforms with different technical features, but the community behind Ethereum is currently unmatched by any of them.

As many dApps are still being developed and there are no killer dApps that require high throughput at the momeht, Ethereum is still the preferred smart contract platform despite the scalability issues that it is facing.

We believe the biggest risk Ethereum has is its own development progress. If the improvements of the protocol continue to be delayed, then developers may be forced to use other platforms that can support the throughput that new/updated dApps demand.

There are numerous other smart contract platforms promising better technology, so they could replace Ethereum as the dominant platform if they are able to draw significant developer interest.


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Additional Resources


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