Ethereum White Paper Breakdown: From Mining to Real World Implications

Let's dive into the Ethereum White Paper Breakdown and explore how it laid the foundation for the Ethereum network. The white paper was published in 2014 by Vitalik Buterin, and it proposed a new type of blockchain that could support smart contracts.

The white paper introduced the concept of a decentralized, open-source platform that would allow for the creation of decentralized applications (dApps). This was a radical idea at the time, and it has since become the backbone of the Ethereum ecosystem.

The white paper also proposed the use of a proof-of-work (PoW) consensus algorithm, which relies on miners to validate transactions and secure the network. This was the same consensus algorithm used by Bitcoin at the time.

As the Ethereum network has grown, the PoW consensus algorithm has become a topic of debate, with some arguing that it is energy-intensive and inefficient. However, it remains a crucial component of the Ethereum network, allowing for secure and decentralized transactions.

The Ethereum blockchain is similar to the Bitcoin blockchain, but with some key differences. One difference is that Ethereum blocks contain a copy of both the transaction list and the most recent state.

The basic block validation algorithm in Ethereum involves checking several conditions, including the existence and validity of the previous block, the timestamp of the block, and the validity of the block's contents. This process is repeated for each block, ensuring that the blockchain remains secure and tamper-proof.

In Ethereum, the state is stored in a Patricia tree, which allows for efficient insertion and deletion of nodes. This results in significant space savings, estimated to be 5-20 times less than traditional blockchain storage.

The execution of contract code is part of the definition of the state transition function, which is executed by all nodes that download and validate a block. This means that contract code is executed on a distributed network, providing a high level of security and decentralization.

On a similar theme: Ethereum Contract Address

The Ethereum blockchain is similar to the Bitcoin blockchain, but with some key differences. It stores a copy of both the transaction list and the most recent state in each block, along with the block number and difficulty.

The basic block validation algorithm in Ethereum involves checking the existence and validity of the previous block, as well as the timestamp, block number, difficulty, transaction root, uncle root, and gas limit. It also checks the proof-of-work on the block and executes all the individual transactions, updating the state and paying the miner.

Storing the entire state in each block may seem inefficient, but it's actually comparable to Bitcoin in terms of efficiency. This is because most of the tree isn't actually going to change for most of the time, allowing for a 5-20x savings in space. A special type of tree called a Patricia tree is used to accomplish this, allowing for efficient insertion and deletion of nodes.

For another approach, see: Bitcoin White Paper Pdf

Contract code is executed as part of the definition of the state transition function, which is part of the block validation algorithm. This means that if a transaction is added to a block, the code execution spawned by that transaction will be executed by all nodes that download and validate that block.

A commonly asked question is where contract code is executed in terms of physical hardware. The answer is that it's part of the block validation algorithm, so it's executed by all nodes that download and validate the block.

Here's a simplified overview of the Ethereum mining process:

Ethereum's switch to proof-of-stake in 2022 was a major move towards a more secure and energy-efficient consensus mechanism.

Proof of stake computations don't use as much energy, making it a more environmentally friendly option compared to proof of work.

You can create new blocks without any expensive equipment, reducing the barriers to entry and making it more accessible to participants.

Proof-of-stake should result in more nodes safeguarding the network, reducing the possibility of centralization.

The low energy demand means that less ETH needs to be issued to encourage participation, making it a more sustainable option.

Bad behavior makes 51% style attacks for an attacker much more expensive than proof-of-work, providing an added layer of security.

If a 51% attack manages to get past the crypto-economic barriers, the community can turn to social recovery to restore an honest chain, providing a safety net for the network.

Messages in the context of Ethereum are virtual objects that exist only in the execution environment. They are produced by contracts and can be sent to other contracts.

A message contains the recipient of the message, an optional data field, and a STARTGAS value. The sender of the message is implicit.

Contracts can have relationships with other contracts in the same way external actors can. Messages lead to the recipient account running its code.

Here's a breakdown of the components of a message:

The gas allowance assigned by a transaction or contract applies to the total gas consumed by that transaction and all sub-executions.

Explore further: What Is Ethereum Transaction Cost

A Merkle tree is a type of binary tree used in the Bitcoin network to store and verify transactions.

It's a multi-level data structure that allows nodes to download only the relevant data, making it more efficient and scalable.

The tree has a large number of leaf nodes at the bottom containing the transactions, and intermediate nodes that are the hash of their two children.

The root node, formed from the hash of its two children, represents the top of the tree and is the only thing included in the blockchain.

A malicious user can't swap in a fake transaction without causing a change in the root of the tree, which would be detected by the protocol.

The Merkle tree protocol is essential to long-term sustainability, allowing light nodes to download only the block headers and relevant branches, rather than the entire blockchain.

This allows for a more decentralized network, where anyone can participate, even with limited resources.

Light nodes can determine the status of any Bitcoin transaction and their current balance, while downloading only a small portion of the entire blockchain.

A full node takes up about 15 GB of disk space, and is growing by over a gigabyte per month, making it impractical for phones and eventually only viable for businesses and hobbyists.

The Simplified Payment Verification (SPV) protocol utilizes Merkle trees to enable this more efficient and scalable system.

The Ethereum platform is designed to provide a smart contract platform that allows users to create and execute contracts with arbitrary rules. This is made possible by the Ethereum Virtual Machine (EVM), which is Turing-complete, meaning it can execute any algorithm that can be expressed in a finite amount of time.

Ethereum's smart contracts are self-executing, meaning they can automatically enforce the rules and conditions specified in the contract. This is in contrast to traditional contracts, which rely on intermediaries to enforce the terms. Ethereum's smart contracts are also transparent, meaning that anyone can see the code and the data being used to execute the contract.

The Ethereum platform provides a range of tools and features to support the creation and execution of smart contracts, including a built-in programming language called Solidity, which is similar to JavaScript. Solidity allows developers to write smart contracts that can interact with each other and with external data sources.

Ethereum's smart contracts can be used to implement a wide range of applications, including financial contracts, such as sub-currencies and financial derivatives, as well as non-financial applications, such as online voting and decentralized governance. The platform's anti-denial of service model, which includes features such as a gas limit and a fee system, helps to prevent malicious activity and ensure the security of the network.

Here are some key features of Ethereum's smart contract platform:

A smart contract is a collection of computer code that controls the exchange of valuable items between parties, including shares of stock, real estate, and money. It exists within the Ethereum execution environment and has direct control over its own key/value store and ether balance.

Smart contracts have the feature of self-executing exactly as intended once certain requirements are met. They can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined.

Ethereum intends to provide a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create contracts. This language is similar to JavaScript and is used to improve the Ethereum Virtual Machine.

The Ethereum Virtual Machine is Turing Complete, allowing for the creation of complex smart contracts. It uses a JUMP function to jump to a previous part of the code and has a max number of computational steps to prevent malicious infinite loops.

Transactions in Ethereum contain a STARTGAS value, representing the maximum number of computational steps the transaction execution is allowed to take, and a GASPRICE value, representing the fee the sender pays per computational step. This is crucial for Ethereum's anti-denial of service model.

There are three types of applications on top of Ethereum: financial applications, semi-financial applications, and non-financial applications. Financial applications provide users with more powerful ways of managing and entering into contracts using their money.

Decentralized Autonomous Organizations (DAOs) can be implemented on Ethereum, allowing for a democracy-like system where members vote on passing how the organization should act. This can be enforced with cryptography and has exciting applications and features.

Here are the three types of transaction types for DAOs:

Tokenomics is the study of a cryptocurrency's structure, supply, distribution, and yields. This model makes cryptocurrencies more engaging by developing a framework to attract investors and encourage them to adopt the protocol.

Token systems are surprisingly easy to implement in Ethereum, requiring only a contract that subtracts X units from A and gives X units to B, given that A had at least X units and approved the transaction.

A token system can represent assets, smart property, unforgeable coupons, or even have no conventional value. Fundamentally, it's a database with one operation.

Implementing a token system in Serpent requires just a few lines of code, essentially a literal implementation of the "banking system" state transition function. A few extra lines are needed to provide for initial distribution and edge cases.

One super cool feature of token systems is the ability to pay transaction fees directly in that currency. This is achieved by maintaining an ether balance that refunds ether used to pay fees to the sender and refills it by collecting internal currency units and reselling them in a constant running auction.

Ethereum's total supply is 122,373,866, with a circulating supply of the same amount, and a market cap of $192,409,631,179.

Broaden your view: Why Are Ethereum Fees so High

The file storage market can be inefficient, with monthly prices for mainstream file storage costs being higher than the cost of the entire hard drive in a single month.

Decentralized file storage solutions can help reduce costs by allowing users to rent out their unused hard drive space and earn small quantities of money.

A decentralized file storage ecosystem can be built using Ethereum contracts, where individual users can earn money by renting out their own hard drive space.

The key underpinning piece of such a device is the "decentralized Dropbox contract", which works by splitting the desired data into blocks, encrypting each block, and building a Merkle tree out of it.

Here's a step-by-step overview of how the decentralized Dropbox contract works:

To increase security, we can just send the file in many places, and then set up a contract that will only pay the storage node if there’s cryptographic proof they’re still storing it.

Ethereum's architecture is built on several key components, each designed to ensure the network's security, scalability, and transparency. The Ethereum Virtual Machine (EVM) is the engine that powers the ETH network, executing code in the same way across every node.

The EVM relies on the Ethereum blockchain, which is home to decentralized applications (DApps) that provide transparency and security. These DApps are software programs functional on the ETH blockchain, resistant to ownership and tampering.

Gas and fees are also an essential part of Ethereum's architecture, serving as the unit of measurement for computational effort and incentivizing validators to ensure efficient resource allocation.

The Virtual Machine is the backbone of Ethereum's architecture, allowing for the creation of smart contracts and decentralized applications. It's essentially a computer that can execute code and perform computations.

The Ethereum Virtual Machine (EVM) is a key component of this architecture, capable of handling any computation challenge thanks to its Turing complete programming language. This means it can execute complex calculations and operations.

One of the EVM's main functions is to synchronize smart contracts with the rest of the network, ensuring that all contracts are executed on time and in the correct order. This is crucial for maintaining the integrity and security of the Ethereum network.

By providing a programmable blockchain, the EVM enables the creation of hundreds of different applications that can all run on the Ethereum platform. This has opened up a wide range of possibilities for developers and users alike.

Accounts in Ethereum are made up of objects called "accounts", with each account having a 20-byte address. This address is unique to each account and serves as its identifier.

The state of an Ethereum account is comprised of four fields: the nonce, ether balance, contract code, and storage. The nonce is a counter used to prevent spam transactions, while the ether balance is the account's current amount of Ethereum's internal cryptocurrency.

An account can be either externally owned or a contract account. Externally owned accounts are controlled by private keys and have no code. They can send messages, also known as transactions, to other accounts.

Contract accounts, on the other hand, are controlled by their contract code. When a contract account receives a message, its code activates and executes, allowing it to read and write to internal storage and send other messages or create contracts.

Here's a breakdown of the four fields that make up an Ethereum account:

It's worth noting that contracts in Ethereum are not like traditional paper contracts, but rather like autonomous agents that execute a specific piece of code when "poked" by a message or transaction.

In Ethereum, the Modified GHOST implementation helps tackle two major problems with fast confirmation times. Fast confirmation times lead to a high stale rate, where nodes waste computation and don't contribute to security.

The first problem is solved by including stale blocks into the calculation of which chain should be trusted the most. This is done by using the Greedy Heaviest Observed Subtree (GHOST) algorithm.

Ethereum implemented a simplified GHOST that goes down 7 levels. Here's how it works:

The uncle must have the properties of being a direct child of the 2nd to 7th ancestor of the current block, and can't be an ancestor of the current block. This ensures that the uncle is unique within the block and within the blockchain.

In this system, if you include an uncle, you get 3.125% of the added coinbase reward, and the uncle gets 93.75%. This incentivizes miners to include more transactions in their blocks.

Scalability is a big problem for both Bitcoin and Ethereum. Bitcoin is currently 15GB, grows at 1MB per hour, but would be 1MB per 3 seconds if it were processing things like VISA.

This would result in an enormous blockchain size of 8 TB per year, making it difficult for most people to run full nodes. Centralization is the big deal here - only a few people could actually run full nodes, and the rest would run SPV.

Ethereum avoids this problem by requiring all nodes to be full nodes. This ensures that everyone has a complete copy of the blockchain, making it much harder for attackers to cheat.

The protocol used by Ethereum also provides an intermediate state root between each transaction, which allows honest nodes to prove that a transaction is invalid and propagate that to the rest of the network.

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Ethereum's applications are diverse and can be categorized into three main types: financial, semi-financial, and non-financial. Financial applications include sub-currencies, financial derivatives, and savings wallets, which provide users with more powerful ways of managing their money.

Ethereum's token systems can be implemented quickly, allowing users to pay transaction fees in the currency itself. Token systems can be used for identity and reputation management, decentralized file storage, and decentralized autonomous organizations (DAOs).

Ethereum's use cases include:

Ethereum's use cases are vast and varied, making it a versatile platform for creating decentralized applications.

Ethereum can be used as a token system, allowing for the creation of custom currencies and financial instruments, such as colored coins. These tokens can even be used to pay transaction fees, making it a convenient option for users.

Ethereum's smart contract functionality enables the creation of decentralized autonomous organizations (DAOs), which are virtual organizations that can make decisions and take actions without the need for a central authority.

Ethereum's decentralized file storage system allows users to rent out free space on their hard drives to others in exchange for modest payments. This creates a peer-to-peer storage network that is more secure and efficient than traditional cloud storage services.

Ethereum's identity and reputation management systems enable users to register their names and other identifying information, creating a decentralized database that can be expanded but not changed or deleted.

Some examples of Ethereum's use cases include:

These use cases are just a few examples of the many possibilities that Ethereum offers. By leveraging its smart contract functionality and decentralized network, users can create a wide range of applications and services that are secure, efficient, and scalable.

Identity and reputation systems are a crucial aspect of blockchain technology, allowing individuals to register their names and data in a public database. This can be used for various purposes, such as creating a decentralized DNS system.

The earliest alternative cryptocurrency, Namecoin, attempted to use a Bitcoin-like blockchain for a name registration system. This system allows users to register their names alongside other data, which can then be queried by other contracts.

A basic contract for a name registration system on Ethereum is simple: it's a database that can be added to, but not modified or removed from. Anyone can register a name with some value, and that registration sticks forever.

A more sophisticated name registration contract can have a "function clause" allowing other contracts to query it, as well as a mechanism for the "owner" of a name to change the data or transfer ownership. This adds an extra layer of functionality to the basic contract.

One can even add reputation and web-of-trust functionality on top of the basic contract. This allows users to build a reputation system that can be used for various purposes, such as email authentication or more advanced reputation systems.

Here are some possible use cases for identity and reputation systems:

The Ethereum white paper is a comprehensive guide to building decentralized applications and smart contracts.

Ethereum is built on blockchain technology, which enables safe, open, and unchangeable record-keeping.

Developers can create decentralized apps and smart contracts using Ethereum's integrated programming language.

The Solidity programming language is used to create smart contracts tailored to specific business needs.

Ethereum's blockchain allows for diverse applications to interact efficiently, making it ideal for situations requiring quick development times and security for small programs.

Developers can use Solidity to build personalized smart contracts, giving them the flexibility to create unique business solutions.

Ethereum's decentralized platform has the potential to revolutionize the way we do business and communicate online.

Developers can create self-executing smart contracts that automatically carry out the terms of an agreement when specific criteria are met.

Smart contracts are not dependent on middlemen, such as banks or payment processors, making them a secure and efficient option.

Ethereum's whitepaper has had a profound impact on the real world, enabling a range of innovative applications that are changing the way we think about finance, ownership, and the internet.

ETH has been the foundation for bringing DeFi, a system that allows users to borrow, lend, and trade digital assets without the need for traditional banks or financial intermediaries.

DeFi has made it possible for people to access financial services that were previously unavailable to them, such as lending and borrowing without the need for collateral.

ETH’s blockchain is home to NFTs, which are unique digital assets that represent ownership of everything from art and music to virtual estate.

NFTs have opened up new opportunities for artists and creators to monetize their work in ways that were previously impossible.

Beyond finance, ETH supports dApps in different sectors, including gaming, supply-chain management, and social media.

These dApps are changing the way we interact with each other and with digital systems, making them more decentralized and user-friendly.

The whitepaper laid the groundwork for the creation of custom tokens on the ETH network, which are often used for initial coin offerings (ICOs) and crowdfunding campaigns.

Tokenization and crowdfunding have made it possible for projects to raise funds directly from their community, without the need for intermediaries.

ETH is at the core of the Web3 movement, which envisions a decentralized Internet where users have control over their data and online interactions.

This vision of a decentralized internet is becoming a reality, with ETH playing a key role in making it happen.

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