Fundamentals of Blockchain

Unit-3
Ethereum
Blockchain
Er. Harsh Raj
(Assistant Professor, CSE)
 Course Objectives
1. The students should be able to understand a broad overview of the essential concepts of blockchain
technology.

2. To familiarize students with Bitcoin protocol followed by the Ethereum protocol – to lay the
foundation necessary for developing applications and programming.

3. Students should be able to learn about different types of blockchain and consensus algorithms.

Expected Course Outcome

1. To explain the basic notion of distributed systems.

2. To use the working of an immutable distributed ledger and trust model that defines blockchain.

3. To illustrate the essential components of a blockchain platform.

Syllabus
 Text Books
1. Kirankalyan Kulkarni, Essentials of Bitcoin and Blockchain, Packt Publishing.

2. Anshul Kaushik, Block Chain & Crypto Currencies, Khanna Publishing House.

3. Tiana Laurence, Blockchain for Dummies, 2nd Edition 2019, John Wiley & Sons.

4. Mastering Blockchain: Deeper insights into decentralization, cryptography, Bitcoin, and

popular Blockchain frameworks by Imran Bashir, Packt Publishing (2017).

Reference Books
1. Blockchain: Blueprint for a New Economy by Melanie Swan, Shroff Publisher O’Reilly
Publisher Media; 1st edition (2015).

2. Mastering Bitcoin: Programming the Open Blockchain by Andreas Antonopoulos.

 Topics

Ethereum Blockchain:
• Smart Contracts
• Ethereum Structure
• Operations
• Features
• Consensus Model
• Incentive Model
 Ethereum Blockchain:

Smart Contracts
 Smart Contracts
• A Smart Contract (or crypto-contract) is a computer program that directly and automatically
controls the transfer of digital assets between the parties under certain conditions.

• A smart contract works in the same way as a traditional contract while also automatically enforcing
the contract. Smart contracts are programs that execute exactly as they are set up(coded,
programmed) by their creators.
 Key Aspects Of Smart Contracts
1. Code-Based: Smart contracts are written in programming languages specifically designed for the
blockchain, such as Solidity for Ethereum. These contracts contain instructions and logic that
define their behaviour.

2. Immutable: Once deployed on a blockchain, smart contracts are immutable, meaning their code and
rules cannot be altered or tampered with. This ensures trust and security in the contract's execution.

3. Decentralized: Smart contracts operate on decentralized blockchain networks, making them

resistant to censorship and control by any single entity. This decentralization is a core feature of
blockchain technology.

4. Automated Execution: Smart contracts automatically execute actions or transactions when

predefined conditions are met. For example, a simple smart contract on Ethereum could release
funds to a seller when a buyer confirms receipt of goods.

5. Trustless: Smart contracts eliminate the need for trust between parties because the contract's
execution is enforced by the blockchain. Parties can trust the code and the blockchain network's
consensus mechanism.
6. Transparency: Smart contracts are publicly visible on the blockchain, allowing anyone to inspect
the code and track the contract's execution and transaction history. This transparency adds a layer
of accountability.

7. Cost-Efficiency: By removing intermediaries and automating processes, smart contracts can reduce
costs associated with traditional contract enforcement, such as legal fees and administrative
overhead.

8. Use Cases: Smart contracts have a wide range of applications across various industries, including
finance (DeFi platforms, lending, and trading), supply chain management, healthcare, real estate,
gaming, and more.

9. Gas Fees: Executing smart contracts on blockchain networks often requires users to pay gas fees in
the native cryptocurrency to compensate miners or validators for processing the contract. Gas fees
are proportional to the computational complexity of the contract.

10. Challenges: Despite their advantages, smart contracts also face challenges, such as security
vulnerabilities in code, scalability issues on some blockchain platforms, and legal recognition and
enforcement in many jurisdictions.
11. Oracles: Some smart contracts require external data to trigger their execution. Oracles are third-
party services or mechanisms that provide this external data to smart contracts, bridging the gap
between blockchain and real-world information.

Smart contracts have gained significant attention and are a fundamental building
block of blockchain-based decentralized applications (DApps). They have the
potential to revolutionize industries by automating processes, reducing fraud, and
increasing transparency and efficiency. However, developers must carefully consider
security best practices when creating smart contracts to mitigate vulnerabilities and
ensure their reliability.
 How Does A Smart Contracts Works?
• Identify Agreement: Multiple parties identify the cooperative opportunity and desired outcomes and
agreements could include business processes, asset swaps, etc.

• Set conditions: Smart contracts could be initiated by the parties themselves or when certain conditions are met
like financial market indices, events like GPS locations, etc.

• Code business logic: A computer program is written that will be executed automatically when the conditional
parameters are met.

• Encryption and blockchain technology: Encryption provides secure authentication and transfer of messages
between parties relating to smart contracts.

• Execution and processing: In blockchain iteration, whenever consensus is reached between the parties
regarding authentication and verification then the code is executed and the outcomes are memorialized for
compliance and verification.

• Network updates: After smart contracts are executed, all the nodes on the network update their ledger to reflect
the new state. Once the record is posted and verified on the blockchain network, it cannot be modified, it is in
append mode only.
 Ethereum Blockchain:

Ethereum
 Ethereum
Ethereum is a blockchain network that introduced a built-in Turing-complete programming
language that can be used for creating various decentralized applications(also called Dapps).

The Ethereum network is fueled by its own cryptocurrency called ‘ether’.

• The Ethereum network is currently famous for allowing the implementation of smart contracts.
Smart contracts can be thought of as ‘cryptographic bank lockers’ which contain certain values.

• These cryptographic lockers can only be unlocked when certain conditions are met.

• Unlike bitcoin, Ethereum is a network that can be applied to various other sectors.

• Ethereum is often called Blockchain 2.0 since it proved the potential of blockchain technology beyond
the financial sector.

• The consensus mechanism used in Ethereum is Proof of Stake(PoS) which is more energy efficient
when compared to that used in the Bitcoin network, that is, Proof of Work(PoW) PoS depends on
the amount of stake a node holds.
 History Of Ethereum
• 2013: Ethereum was first described in Vitalik Buterin’s white paper in 2013 with the goal of
developing decentralized applications.

• 2014: In 2014, EVM was specified in a paper by Gavin Wood, and the formal development of the
software also began.

• 2015: In 2015, Ethereum created its genesis block marking the official launch of the platform.

• 2018: In 2018, Ethereum took second place in Bitcoin in terms of market capitalization.

• 2021: In 2021, a major network upgrade named London included Ethereum improvement proposal
1559 and introduced a mechanism for reducing transaction fee volatility.

• 2022: In 2022, Ethereum has shifted from PoW( Proof-of-Work ) to PoS( Proof-of-State )
consensus mechanism, which is also known as Ethereum Merge. It has reduced Ethereum’s
energy consumption by ~ 99.95%.
 Features Of Ethereum
1. Smart Contracts: Ethereum allows the creation and deployment of smart contracts. Smart
contracts are created mainly using a programming language called solidity. Solidity is an Object
Oriented Programming language that is comparatively easy to learn.

2. Ethereum Virtual Machine (EVM): It is designed to operate as a runtime environment for

compiling and deploying Ethereum-based smart contracts.

3. Ether: Ether is the cryptocurrency of the Ethereum network. It is the only acceptable form of
payment for transaction fees on the Ethereum network.

4. Decentralization Applications (Dapps): Dapps has its backend code running on a

decentralized peer-to-peer network. It can have a frontend and user interface written in any language
to make calls and query data from its backend. They operate on Ethereum and perform the same
function irrespective of the environment in which they get executed.

5. Decentralization Autonomous Organization (DAO): It is a decentralized organization that

works in a democratic and decentralized fashion. DAO relies on smart contracts for decision-making
or decentralized voting systems within the organization.
 Type Of Ethereum Accounts
Ethereum has two types of accounts: An externally owned account (EOA), and a Contract account.

These are explained as following below:

• Externally owned account (EOA): Externally owned accounts are controlled by private
keys. Each EOA has a public-private key pair. The users can send messages by creating and
signing transactions.

• Contract Account: Contract accounts are controlled by contract codes. These codes are stored
with the account. Each contract account has an ether balance associated with it. The contract code
of these accounts gets activated every time a transaction from an EOA or a message from another
contract is received by it. When the contract code activates, it allows to read/write the message to
the local storage, send messages and create contracts.
 How does Ethereum Work?
Ethereum implements an execution environment called Ethereum Virtual Machine (EVM).

• When a transaction triggers a smart contract all the nodes of the network will execute every instruction.

• All the nodes will run The EVM as part of the block verification, where the nodes will go through the
transactions listed in the block and run the code as triggered by the transaction in the EVM.

• All the nodes on the network must perform the same calculations to keep their ledgers in sync.

• Every transaction must include:

• Gas limit.
• Transaction Fee that the sender is willing to pay for the transaction.

• If the total amount of gas needed to process the transaction is less than or equal to the gas limit then the
transaction will be processed and if the total amount of gas needed is more than the gas limit then the
transaction will not be processed the fees are still lost.

• Thus it is safe to send transactions with the gas limit above the estimate to increase the chances of
getting it processed.
 Real World Application Of Ethereum
• Voting: Voting systems are adopting Ethereum. The results of polls are available publicly,
ensuring a transparent fair system thus eliminating voting malpractices.

• Agreements: With Ethereum smart contracts, agreements and contracts can be maintained and
executed without any alteration. Ethereum can be used for creating smart contracts and for digitally
recording transactions based on them.

• Banking systems: Due to the decentralized nature of the Ethereum blockchain it becomes
challenging for hackers to gain unauthorized access to the network. It also makes payments on the
Ethereum network secure, so banks are using Ethereum as a channel for making payments.

• Shipping: Ethereum provides a tracking framework that helps with the tracking of cargo and
prevents goods from being misplaced.
• Crowdfunding: Applying Ethereum smart contracts to blockchain-based crowdfunding platforms
helps to increase trust and information symmetry. It creates many possibilities for startups to raise
funds to create their own digital cryptocurrency.

• Domain names: Ethereum name service allows crypto users to buy and manage their own domain
names on Ethereum, thus simplifying decentralized transactions without requiring users to
remember long, machine-readable addresses.
 Benefits Of Ethereum
• Availability: As the Ethereum network is decentralized so there is no downtime. Even if one
node goes down other computing nodes are available.

• Privacy: Users don’t need to enter their personal credentials while using the network for
exchanges, thus allowing them to remain anonymous.

• Security: Ethereum is designed to be unhackable, as the hackers have to get control of the
majority of the network nodes to exploit the network.

• Less ambiguity: The smart contracts that are used as a basis for trade and agreement on
Ethereum ensure stronger contracts that differ from the normal traditional contracts which require
follow-through and interpretation.

• Rapid deployment: On Ethereum decentralized networks, enterprises can easily deploy and
manage private blockchain networks instead of coding blockchain implementation from scratch.
• Network size: The Ethereum network can work with hundreds of nodes and millions of users.

• Data coordination: Ethereum’s decentralized architecture better allocates information so that

the network participants don’t have to rely on a central entity to manage the system and mediate
transactions.
 Drawbacks Of Ethereum
• Complicated programming language: Learning solidity from programming smart contracts on
Ethereum can be challenging and one of the main concerns is the scarcity of beginner-friendly
classes.

• Volatile cryptocurrency: Ethereum investing can be risky as the price of Ether is very volatile,
resulting in significant gains as well as a significant loss.

• Low transaction rate: Bitcoin has an average transaction rate of 7TPS and Ethereum has an
average speed of 15 TPS which is almost double that of bitcoin but it is still not enough.
 Ethereum Blockchain:

Bitcoin Vs
Ethereum
 Bitcoin Vs Ethereum
Bitcoin
Bitcoin is a digital currency that can be transferred on a peer-to-peer (P2P) network
without the need for any central authority.
It was invented by a person or group of people with the name Satoshi Nakamoto in
2008.
All the transactions are stored in an immutable distributed ledger.

• Bitcoin is created, stored, transacted, and distributed using a decentralized system

known as Blockchain.

• A public ledger records all the transactions of the Bitcoin and copies are retained on
all the servers around the world.

• It is not necessary to buy an entire bitcoin, one can buy only a fraction of it if that
is all necessary.
Ethereum
Ethereum is a blockchain-based distributed platform.
The network currency of Ethereum is known as Ether (ETH).
Here also, the transactions are stored in an immutable distributed ledger.

• Ethereum is designed to be scalable, decentralized, and programmable.

• It provides a flexible platform to build applications using the solidity scripting

language.

• Transactions are sent and received in user-created Ethereum accounts.

• It is a blockchain-based platform With the cryptocurrency Ether(ETH).

Bitcoin Vs Ethereum
• Bitcoin and Ethereum have many similarities but there are some long-term different
visions and limitations that make them two different blockchain networks that have
their pros and cons and are suitable for varying user requirements.
 Difference
Basis Bitcoin Ethereum
Ethereum is a decentralized global
Bitcoin (abbreviation: BTC; sign: ₿) is a
software platform powered by blockchain
decentralized digital currency that can be
Definition technology. It is most commonly known
transferred on the peer-to-peer bitcoin
for its native cryptocurrency, ether
network.
(ETH).
The word bitcoin was defined in a white Ethereum was conceived in 2013 by
History paper published on 31 October 2008. The programmer Vitalik Buterin, and then
currency began use in 2009. went live on 30 July 2015.
The purpose of Ethereum was to utilize
The purpose of bitcoin was to replace
blockchain technology for maintaining a
Purpose national currencies during the financial
decentralized payment network and
crisis of 2008.
storing computer code.
 Although bitcoin do have smart contracts,
Ethereum allows us to create smart
they are not as flexible or complete as
contracts. Smart contracts are computer
Ethereum smart contracts. Smart
Smart Contracts codes that is stored on a blockchain and
contracts in Bitcoin does not have all the
executed when the predetermined terms
functionality that a programming
and conditions are met.
language would give them.

Smart Contract Smart contracts on Bitcoin are written in Smart contracts on Ethereum are written
Programming programming languages like Script, in programming languages like Solidity,
Language Clarity. Vyper, etc.
Generally, bitcoin transactions are only for Ethereum transactions may contain some
Transactions
keeping notes. executable code.
Bitcoin runs on the SHA-256 hash Ethereum runs on the Keccak-256 hash
Hash Algorithm
algorithm. algorithm.
The Proof-of-Work (PoW) is the
Consensus The Proof-of-Stake is the consensus
consensus mechanism used by the Bitcoin
Mechanism mechanism used by Ethereum.
network.
Assignment
 Unit Assignment
1. What do you understand by Ethereum?
2. Explain the difference between Bitcoin and Ethereum in blockchain.
3. Explain smart contracts in detail.
4. What is Ethereum structure? Explain with diagrams.
5. Explain core components of Ethereum blockchain operation.
6. What are the features of Ethereum? Explain each point.
7. Explain consensus model in Ethereum and their importance with evolution.
8. What do understand by incentive model in Ethereum blockchain? How does it
work?
 Any
Queries