Unit IV Blockchain Components and Consensus

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

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
 The consensus mechanism used in Ethereum is Proof of Stakes(PoS), which is more energy efficient
when compared to that used in the Bitcoin network, that is, Proof of Work(PoW).

 History of Ethereum

 2013: Ethereum was first described with the goal of developing decentralized applications.
 2014: In 2014, EVM formal development of the software 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 for reducing transaction fee volatility.
 2022: In 2022, Ethereum has shifted from PoW( Proof-of-Work ) to PoS( Proof-of-State ) consensus
mechanism..

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. Decentralized applications (Daaps): Dapp 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. Decentralized autonomous organizations (DAOs): 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 execute every instruction.
 All the nodes will run EVM as part of the block verification.
 All the nodes on the network must perform the same calculations for keeping 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 the 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 Applications of Ethereum

 Voting:
 Agreements
 Banking systems: Due to the decentralized nature of the Ethereum block chain 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.
 Crowd funding: Applying Ethereum smart contracts to block chain-based crowd funding platforms
helps to increase trust and information symmetry

 Domain names: Allows the crypto users to buy and manage their own domain names on Ethereum,

Benefits of Ethereum

 Availability: As the Ethereum network is decentralized so there is no downtime.

 Privacy: Users don’t need to enter their personal credentials while using the network for exchanges.
 Security: Ethereum is designed to be unhackable.
 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.
 Rapid deployment: On Ethereum decentralized networks, enterprises can easily deploy and manage
private blockchain networks instead of coding blockchain implementation from scratch.
 Network size: Ethereum network can work with hundreds of nodes and millions of users.
 Data coordination: Ethereum 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.
What is Ethereum Virtual Machine and How it Works?

Introduction to Ethereum Virtual Machine (EVM) ?

Ethereum Virtual Machine (EVM) is designed as the runtime environment for smart
contracts in Ethereum.
It is isolated from the other parts of the system.
This means that any operation on EVM do not affect your data or programs in any way

 Ethereum contains its own Turing-complete scripting language, called Solidity, and with this comes a
need to execute this code.
 A program called the Ethereum Virtual Machine (EVM) can do this task.
 It runs on top of the Ethereum network, meaning that all nodes reach a consensus about what code
should be executed at every given time.

Purpose of EVM

 It is the computer that stores data and also executes code in smart contracts on the Ethereum network.
 The machine run any kind of Crypto-contract that can be built on Ethereum’s blockchain by using a
programming language called Solidity.
 The intention behind writing code on the Ethereum network is to create smart contracts and programs
that automatically execute things when certain conditions are met.
 If a terms or condition is not met, the system can execute it in an “exit” function as well.
 For example, if an account has been hacked, the hacker cannot steal money from the system, because
they don’t have authority to do so.

How Does EVM Works?

Ethereum Virtual Machine (EVM) is a program which executes scripts used to implement certain
operations and generate smart contract. These contracts allows exchange of money and information.
 These contracts are predefined by the creator of the smart contract to ensure outcome as per
happening.
 Ethereum Virtual Machine provides Turing complete environment for execution of scripts and smart
contracts. This means that anything that can be implemented with a computer can be run on EVM.

Ethereum Virtual Machine ensures that all transactions and smart contracts made on the Ethereum
blockchain are executed in correct and expected manner as desired by the smart contract code.
It serves as a platform for applications to be executed on.
In simple words, it can be said that Ethereum Virtual Machine facilitates DApp creation and execution on
the blockchain.

Benefits of EVM

 Execute untrusted code without risking data:

 Can run complex smart contracts
 Deterministic processing
 Distributed consensus.
 Robust against failure
 Easy to write stateful contracts:
 Disadvantages of EVM

 High cost of storing data: The high cost of storing data on the blockchain, more than 3TB
 High gas cost: In Ethereum, all transactions require a fee to execute. These fees are called “gas”, and
are paid in ETH tokens. Gas is priced at the moment of execution, and depends on the complexity of
executing a transaction. The more difficult the computation for a transaction, the higher its gas cost
will be.
 High gas price during network congestion: During times when there is high network congestion due
to many transactions being pushed onto the blockchain, gas prices rise because there are fewer
transactions that can go through (the same amount of computational power has to service more
transactions).
 Technical expertise required: Writing smart contracts and using EVM requires technical expertise.

What is Ethereum Node?

An Ethereum node is a computer that is running the software client.

The blockchain network is made up of nodes, which are the only method to access it.
Nodes communicate with one another in order to validate transactions and record data about the status
of the blockchain.
On the Ethereum network, these computers or servers are responsible for storing, validating, and
trading data.
Each node keeps its own copy of the blockchain and strives to verify that it matches the copies of all
the other nodes.
Every node on the network must process any action that requires a new block to be added to the
blockchain.
This network of continually communicating nodes allows us to avoid relying on a single source of truth
and all of the challenges it entails.
A new block is added based on whether or not the majority of nodes accept it.

Types of Ethereum Nodes

Ethereum Nodes are a system that operates in a Point to Point network model. There are 3 types of
Nodes:
1. Full Node: The responsibility of a full node is to verify and validate each and every transaction that
takes place inside the network and maintain the state of the blockchain. When a smart contract
transaction occurs, full nodes also execute all of the instructions in the smart contract. It determines
whether or not the smart contract execution is producing the expected results. These nodes maintain a
full copy of the blockchain data.
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2. Archive Nodes: Archive nodes are complete nodes that have the “archive mode” option enabled.
While a Full Node only stores the latest state of the transaction, the Archive nodes hold all of the
blockchain’s history data dating back to the genesis block.

3. Light Nodes: A light node, unlike a full node, does not hold the complete current block chain state
and stores only the block header. It is suitable for low memory and computational devices since
maintaining a light node involve the least investment in hardware, running costs, and technical skill.
 Light nodes rely on full nodes to function.
 These nodes do not need to run continuously or read and publish a large amount of data on the block
chain.
 It provides an easy way to create a wallet, especially for beginners.
What is Ethereum Client?

An Ethereum client is a software program that is used to implement the Ethereum specification and
connect with other Ethereum clients over a network.
Different Ethereum clients can communicate with one another if they follow the reference
specification and the defined communication protocols.
While these many clients are created by various teams and in various programming languages, they all
follow the same protocol.

Types of Ethereum Clients

There are 3 types of Ethereum Clients

1. Full Client: Full clients save the complete Ethereum blockchain, which might take several days to
synchronize and takes a massive amount of disc space – more than 1 Terabyte, according to the most
recent estimates. Full clients enable connected nodes to conduct all network functions, including as
mining, transaction and block-header validation, and smart contract execution.

2. Light Client: Ethereum clients do not always need to necessary keep all of the data, so often, when
data storage and performance are concerns, developers utilize the “light clients”. Light clients provide a
portion of full client capability. Because light clients do not keep the entire Ethereum blockchain,
as a result, they can provide quick delivery and free up data storage space.
 The functionality of a light client is adapted to the purposes of the Ethereum client.
 Light clients, for example, are widely used within wallets to maintain private keys and Ethereum
addresses.

3. Remote Client: A remote client is much like a light client. The primary distinction is that a remote
client does not keep its own copy of the blockchain or validate transactions or block headers. Remote
clients, on the other hand, rely entirely on a full or lite client to have access to the Ethereum blockchain
network. These clients are mostly used as wallets for transmitting and receiving transactions.