Session:

Ethereum: How It Works

Session: Ethereum: How It Works
Session Objectives
• Understand Ethereum's purpose and structure and its role in the blockchain ecosystem.
• Provide insight into Ethereum’s history, characteristics, scalability struggles and future
roadmap.
• Explain the functionality of smart contracts.
• Describe the role and security of the Ethereum Virtual Machine (EVM) in executing smart
contracts.
• Explain the foundational nature of blockchain technology for DeFi, and Ethereum’s role
therein.
• Discuss the Proof of Stake (PoS) consensus mechanism, including the transition from Proof of
Work (PoW) and its key features and benefits.
• Compare Ethereum's approach to blockchain technology with Bitcoin's, focusing on scalability
and decentralization.

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Session: Ethereum: How It Works
Agenda

1. Overview of Ethereum
2. Key Ethereum Concepts
3. Smart contracts & dApps
4. The Scalability Imperative in Blockchain
5. Conclusions
6. Further Reading
7. Appendix: Ethereum Roadmap

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Session: Ethereum: How It Works

1. Overview of Ethereum
Session: Ethereum: How It Works
Fundamentals of Ethereum (1/2)
• Ethereum, conceptualized as a "world computer," is The 2014 Ethereum whitepaper by Vitalik Buterin, the
a decentralized platform that enables the execution founder, identified key limitations in Bitcoin's scripting
of smart contracts and decentralized applications capabilities:
(dApps).
• Lack of Turing-completeness: Bitcoin's scripting language is
not Turing-complete, it can’t perform all possible computational
• Launched in 2015, Ethereum leverages blockchain operations.
technology for network state synchronization and
• Value-blindness: Bitcoin scripts cannot natively assess the
security, and it features its native cryptocurrency,
value of transactions.
Ether, for transaction processing and network
operations. • Lack of state: Bitcoin lacks a mechanism to track and store the
state of complex applications.

• It can be viewed as an internet framework that • Blockchain-blindness: Bitcoin scripts have limited ability to
interact with or understand blockchain data beyond simple
operates without central intermediaries. It relies on a transaction details.
vast network of participant computers, which
collectively perform computations and maintain the
network. This structure allows for the running of Ethereum was designed to overcome these limitations and
internet applications directly on the blockchain, to address the need for creating new blockchains for
independent of traditional service providers like different functionalities.
Google or Amazon.
Source: Ethereum Whitepaper | ethereum.org, Vitalik Buterin Created Ethereum Following World of Warcraft Debacle (businessinsider.com)

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Session: Ethereum: How It Works
Fundamentals of Ethereum (2/2)
As a blockchain based network that relies on cryptographic algorithms and economically
incentivised participants, Ethereum (like Bitcoin, but unlike traditional finance) is:

• Open
• Borderless
• Censorship resistant
• Immutable
• Transparent
• Global
• Decentralized

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Session: Ethereum: How It Works
Ethereum’s vision
• Following the popularity of Bitcoin, developers started to realise that blockchains could be used
for more than peer-to-peer electronic money.
• Ethereum started with a vision to unify all possible blockchain applications under a single
network that would operate as a world computer. Allowing for the building of decentralized
applications (dApps) that benefited from the unique properties of blockchain, without the need
for deploying a new network.
• Ethereum started as a platform for programmable money, and thus as an iteration upon bitcoin,
but eventually evolved into a general-purpose world computer. Many early Ethereum developers
came from the Bitcoin space.
• Remember that Bitcoin was launched in January 2009, and Ethereum in July of 2015.
• Ether, the network’s native token is currently the second largest cryptocurrency by market
capitalization.

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Session: Ethereum: How It Works
Ethereum’s culture
• Ethereum’s development deviated in culture from other decentralized networks. In Bitcoin for
example development is slow and guided by conservative principles. Changes are only
implemented if they are backwards compatible.
• By contrast, Ethereum has adopted a forward-looking culture focused on methodic innovation
and evolution, even at the expense of backwards compatibility, or community divide. This has
resulted in an ever-shifting landscape, yet arguably less secure and less decentralized than
that of Bitcoin.
• A clear example of this innovative approach is the difficulty bomb, implemented early in
Ethereum’s history, which was designed to eventually phase out PoW and encourage the
transition to PoS.
• This focus on continuous improvement highlights Ethereum’s commitment to scalability, security,
and sustainability over time.

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Session: Ethereum: How It Works
Relevant quote
“Gavin* can also be largely credited for the subtle change in vision from
viewing Ethereum as a platform for building programmable money, with
blockchain-based contracts that can hold digital assets and transfer them
according to pre-set rules, to a general-purpose computing platform. This
started with subtle changes in emphasis and terminology, and later this
influence became stronger with the increasing emphasis on the “Web 3”
ensemble, which saw Ethereum as being one piece of a suite of
decentralized technologies, the other two being Whisper and Swarm.”

Vitalik Buterin,
Ethereum Founder
*Gavin Wood
Ethereum Co-founder, Polkadot Founder

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Session: Ethereum: How It Works
Ethereum applications
Ethereum was initially envisioned as a flexible blockchain to encompass:
• Financial Applications: Ethereum's infrastructure supports a wide array of financial services, including
cryptocurrency transactions. It is integral to the decentralized finance (DeFi) ecosystem, offering platforms
for lending, borrowing, and asset management without traditional financial intermediaries. Additionally,
Ethereum enables asset tokenization, converting real-world assets into digital tokens, facilitating fractional
ownership and improved liquidity.
• Semi-Financial Applications: Ethereum blends financial mechanisms with other functionalities. A notable
use case is identity verification, where blockchain technology ensures the security and integrity of personal
data while enabling verifiable and tamper-proof digital identities. This feature is crucial for sectors like
banking, healthcare, and government services.
• Non-Financial Applications: Beyond finance, Ethereum supports various non-monetary use cases. Online
voting systems on Ethereum can enhance transparency and reduce fraud, revolutionizing electoral
processes. Decentralized governance models on the platform can lead to more democratic and participatory
decision-making processes in organizations. Digital identity solutions on Ethereum offer a secure and unified
way to manage and share personal identity information.

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Session: Ethereum: How It Works
Ethereum vs Bitcoin: Decentralization and Scalability
BTC ETH

• Prioritizes decentralization with a conservative, • Embraces a forward-looking, methodic innovation

stable network design. approach with frequent upgrades.

• Slow, deliberate updates to ensure long-term • Actively seeks to address scalability through
security and stability. innovations like PoS consensus and
Proto-DankSharding.
• Struggles with scalability, relying on second-layer
solutions like the Lightning Network. • Transitioned from PoW to PoS for more
energy-efficient and scalable consensus.
• Uses PoW consensus, which is energy-intensive
but highly secure. • Risks temporary centralization during major
upgrades but aims for long-term decentralization.
• Focuses on backward compatibility to maintain
• Focuses on continuous improvement even at the
network stability and user confidence.
expense of backward compatibility.

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Session: Ethereum: How It Works
Major events in the history of Ethereum (1/3)

Year Event
2013 Vitalik Buterin publishes the Ethereum whitepaper, outlining the concept of a decentralized
blockchain platform beyond payments.
2014 The Ethereum yellow paper is released by Gavin Wood, describing the technical aspects of
Ethereum. Ethereum's Initial Coin Offering (ICO) raises $20 million.
2015 The genesis block of Ethereum is mined, marking the beginning of the "Frontier" development
phase.
Ethereum introduces the "difficulty bomb" during the Frontier Thawing fork, designed to
eventually make Proof of Work (PoW) mining unsustainable and facilitate the transition to
Proof of Stake (PoS)
2016 The DAO hack occurs, resulting in a hard fork that splits Ethereum into two blockchains:
Ethereum and Ethereum Classic.

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Session: Ethereum: How It Works
Major events in the history of Ethereum (2/3)

Year Event
2017 Ethereum’s "Byzantium" fork delays the difficulty bomb and sets the groundwork for the PoS
transition.
2019 The "Constantinople" fork introduces key updates like EIP-1234, preventing the blockchain
from freezing before the PoS transition, and EIP-1014 to enable interactions with future
addresses.
2020 The "Muir Glacier" update delays the difficulty bomb by 600 days. In December, the Beacon
Chain is launched, marking the beginning of Ethereum’s transition to PoS.
2021 The "London Hard Fork" implements EIP-1559, restructuring transaction fees and delaying the
difficulty bomb again. The "Altair" upgrade adds slashing penalties for validators, further
preparing for PoS.

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Session: Ethereum: How It Works
Major events in the history of Ethereum (3/3)

Year Event
2022 The "Gray Glacier" delays the difficulty bomb to September 2022. Successful merges are
completed on key testnets (Ropsten, Sepolia, Goerli), finalizing testing for the Merge.
2022 The "Bellatrix" upgrade activates the Beacon Chain's consensus layer, preparing for the Merge.
(Sept.) The "Paris" upgrade completes the transition to PoS, shutting down PoW mining.
2023 The genesis block of Ethereum is mined, marking the beginning of the "Frontier" development
phase.
The "Capella" and "Shanghai" upgrades enable withdrawals of staked ETH, completing the full
transition to PoS.
2024 The "Cancun-Deneb (Dencun)" upgrade introduces EIP-4844 (Proto-Danksharding), reducing
data storage costs for layer 2 rollups and lowering transaction fees by using temporary data
"blobs".

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Session: Ethereum: How It Works
Ether daily price (In USD)

Source: etherscan.io.

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Session: Ethereum: How It Works

2. Key Ethereum Concepts

Session: Ethereum: How It Works
Ethereum Virtual Machine (EVM)
There are two different types of accounts in Ethereum: • The EVM is considered to be the part of the
externally owned accounts (EOAs) and contract Ethereum that runs execution and smart contract
accounts. deployment.
• EOAs are controlled by users, often via software
• Its role is to deploy a number of extra functionalities
such as a wallet application that is external to the
to the Ethereum blockchain
Ethereum platform.
• In contrast, contract accounts are controlled by • Every Ethereum node runs on the EVM to maintain
program code (also commonly referred to as consensus across the blockchain.
“smart contracts”) that is executed by the
Ethereum Virtual Machine (EVM). • The EVM is completely isolated, meaning the code
inside it has no access to network, file system or
other processes.

• The EVM is a computation engine which acts like a • Most of the source code for using smart contracts is
decentralized computer that has millions of written in the programming language Solidity.
executable projects. It acts as the virtual machine
which is the bedrock of Ethereum’s entire operating
structure.

Sources: Ethereum Book on github.com and Coinmarketcap

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Session: Ethereum: How It Works
The Ether token
• Ether is the native token of the Ethereum blockchain. Ether is referred to with
is ticker name, ETH, or by the Greek letter Ξ (Xi) which resembles a stylized
version of the letter “E” as in Ether. Sometimes it is also represented by the
symbol ♦ resembling Ethereum’s Octahedron logo 👉
• Ether can be subdivided into smaller units, similarly to how bitcoins are
subdivided to satoshis. The smallest possible unit is named wei, with 1 ETH
equal to 1 quintillion wei. (1 * 10^18 or 1,000,000,000,000,000,000) The
network executes all internal transactions in wei.
• Ether powers all applications that run on the Ethereum blockchain, from
simple transactions to complex decentralized applications. This Photo by Unknown
Author is licensed under CC
• While Ethereum’s purpose is not primarily to be a payment network, and BY-NC

ether’s purpose is not to serve the function of money, due to its high utility it is
often used as a currency and as a speculative instrument.

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Session: Ethereum: How It Works
Ethereum’s PoS consensus mechanism
• Different blockchains use various consensus mechanisms to ensure transactions are valid
and that all participants agree on the status of the ledger.
• These mechanisms are essential for maintaining security, fairness, and reliability in the network.

• Ethereum, like Bitcoin, originally used Proof-of-Work (PoW), which required significant
computational power to solve complex puzzles and keep the network secure. However,
Ethereum has now transitioned to Proof-of-Stake (PoS), a more energy-efficient alternative.

• Validators in PoS propose and verify blocks based on the amount of ETH they stake, acting
as collateral, which discourages malicious activity.
• This approach reduces hardware requirements and lowers energy consumption. However, PoS can
be criticized for favoring those who hold more tokens, making it somewhat plutocratic.

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Session: Ethereum: How It Works
Validators and the staking process
• Validators are required to stake a minimum of 32 ETH to participate in block validation,
receiving rewards in ETH for honest participation.
• Slashing: Validators engaging in malicious activity risk losing their staked ETH through a
penalty mechanism called slashing.
• Ethereum PoS operates in epochs
• Epochs are time intervals consisting of 32 slots, with each slot representing a block of transactions.
• An epoch lasts approximately 6.4 minutes, during which blocks are proposed and validated by a
selected group of validators.
• Validators are grouped into a committee for each epoch, responsible for voting on the validity
of blocks.

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Session: Ethereum: How It Works
Finality and security in PoS
• Finality mechanism: In Ethereum PoS, blocks are finalized through a voting process,
requiring at least 66% of the total staked ETH to confirm a block as permanent.
• Once finalized, the block cannot be altered, securing the network.

• The first block of each epoch is a checkpoint, which validators vote on. When a checkpoint is
approved by the majority, previous transactions are solidified, ensuring they can't be reversed.

• Block proposers and committees are selected randomly for each epoch, ensuring fairness
and security by preventing validators from knowing when they’ll be chosen.

• The RANDAO algorithm facilitates this semi-random selection, adding protection against
manipulation by keeping validators unaware of when they will propose or validate a block.

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Session: Ethereum: How It Works
Key benefits of PoS
• Significantly less energy consumption compared to PoW, making it more environmentally
friendly.
• No reliance on mining hardware, promoting greater decentralization.
• Lays the framework for scalability solutions.
• More censorship-resistant, as PoW's hardware infrastructure makes nodes more
detectable.

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Session: Ethereum: How It Works
Understanding Gas Fees and Limits
• As the name implies, gas is the fuel that empowers the Ethereum network.

• A gas fee is paid for executing operations on the network. The fee is denominated in Ether or in Gwei, the latter for
a better user experience.

• Gas limits play an important role in transaction fees:

• Users can set a gas limit in their wallet, determining the maximum amount they are willing to pay for a
transaction.
• Validators collectively decide on adjustments to the block gas limit, which defines the maximum amount of
gas allowed in one block of transactions.

• After Ethereum's transition to PoS in September 2022, a portion of gas fees became rewards for validators who
stake ETH and participate in block validation.

Sources include Investopedia and Blocknative and Gemini.

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Session: Ethereum: How It Works
Ethereum average gas limit
Ethereum transaction fees (gas)
fluctuate based on supply and
demand, with a busy network
leading to higher fees. The rise
of DeFi caused fees to soar,
driving interest in competing
Layer 1 chains. However,
Ethereum's development
roadmap includes proposed
solutions aimed at reducing fees
over time.
For more details on gas and its
future, visit Ethereum.org.

Source: Etherscan.io

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Session: Ethereum: How It Works
Tokens running on Ethereum
• Nowadays, the word ‘token’ in a crypto context refers to blockchain-based abstractions that
can be owned and that represent assets, currency, or access rights. Tokens on Ethereum
draw their properties from specific token standards, which come in many flavors.

• The most popular currently in use are:

• ERC20 tokens, for the majority of tokens that are, like Ether itself, fungible
• ERC721 tokens, for non-fungible tokens or NFTs

• This is a fast-moving space with new token standards proposed all the time.

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Session: Ethereum: How It Works
Token use cases (Non-currency)
• Resource: A token can represent a resource • Voting: A token can represent voting rights in a
earned or produced in a sharing economy or digital or legal system.
resource-sharing environment; for example, a
• Collectible: A token can represent a digital
storage or CPU token representing resources that
collectible (e.g., CryptoPunks) or physical
can be shared over a network.
collectible (e.g., a painting).
• Asset: A token can represent ownership of an
• Identity: A token can represent a digital identity
intrinsic or extrinsic, tangible or intangible asset;
(e.g., avatar) or legal identity (e.g., national ID).
for example, gold, real estate, a car, oil, energy,
MMOG items, etc. • Attestation: A token can represent a certification
or attestation of fact by some authority or by a
• Access: A token can represent access rights and
decentralized reputation system (e.g., marriage
grant access to a digital or physical property, such
record, birth certificate, college degree).
as a discussion forum, an exclusive website, a
hotel room, or a rental car. • Utility: A token can be used to access or pay for a
service.
• Equity: A token can represent shareholder equity
in a digital organization (e.g., a DAO) or legal
entity (e.g., a corporation).

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Session: Ethereum: How It Works

3. Smart contracts & dApps

Session: Ethereum: How It Works
What are smart contracts?
The term "smart contracts" can be misleading. They are not actually "smart" in the conventional sense, nor are
they legal contracts. A more fitting description would be "persistent scripts" – pieces of code that execute
automatically under specific conditions.

• Smart contracts are fundamental to blockchain applications. They operate as self-executing scripts where
the terms of the agreement are embedded directly in the code.
• The best way to conceptualize them is through "if-then" logic. They function by following a simple principle:
"IF condition A is met, THEN execute function B."
• In a more technical context, they are immutable and deterministic computer programs. They operate
within the EVM. This setup enables them to run on Ethereum's decentralized infrastructure, often referred to
as the world computer (source).
• This means that all EVM-compatible blockchains can execute similar contracts, fostering interoperability and
easing developer transition between different blockchain environments.

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Session: Ethereum: How It Works
Dissecting the definition:
• Computer programs: Smart contracts are simply computer programs. The word “contract” has no
legal meaning in this context.
• Immutable: Once deployed, the code of a smart contract cannot change. Unlike traditional software,
the only way to modify a smart contract is to deploy a new instance.
• Deterministic: The outcome of the execution of a smart contract is the same for everyone who runs it,
given the context of the transaction that initiated its execution and the state of the Ethereum
blockchain at the moment of execution.
• A simpler way of thinking about deterministic computations is the following: they either happen in full, exactly
as described, or they don’t run at all.
• Execution within EVM: Operating within the Ethereum Virtual Machine (EVM), smart contracts have
a limited and specific execution context. They can access their internal state, the details of the
transaction that triggered them, and certain recent blockchain data, ensuring a secure and isolated
operational environment.

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Session: Ethereum: How It Works
Smart contracts – The vending machine
• The example considered to be the primitive ancestor of smart contracts, is the
humble vending machine. Within a limited amount of potential loss (the amount in
the till should be less than the cost of breaching the mechanism).
• The machine takes in coins, and via a simple mechanism, which makes it a
freshman computer science problem in design with finite automata, dispenses
change and product according to the displayed price.
• The vending machine is a contract with bearer: anybody with coins can participate in
an exchange with the vendor. The lockbox and other security mechanisms protect
the stored coins and contents from attackers, sufficiently to allow profitable
deployment of vending machines in a wide variety of areas.
• Smart contracts go beyond the vending machine in proposing to embed contracts in
all sorts of property that is valuable and controlled by digital means.

This Photo by Unknown Author is licensed under CC

Derived from "Formalizing and Securing Relationships on Public Networks" , by Nick Szabo, BY-NC-ND
in 1997 (!)

Source: The idea of smart contracts

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Session: Ethereum: How It Works
Smart contracts - Another simple example
The King has put the castle up for rent through the blockchain, and the
rental payment has been made in cryptocurrency. The renter received a
receipt which is held in a smart contract with the following terms:
• The King must give the renter a digital entry key by a specified date. If
the key doesn’t come on time, the blockchain releases a refund. If it
does, the smart contract validates and releases both the rental fee to
the King and key to the renter.
• The smart contract works on the If-Then premise, so the renter can
expect a faultless delivery.
• If the King gives the renter the key, then he is sure to be paid.
• If the renter sends a certain amount of cryptocurrency, then the
renter receives the key from the King.
• The code cannot be interfered with by either party without the other
knowing since all participants are simultaneously alerted and the code
is open sourced, meaning it is publicly viewable.

Source: District0x, and castles on AirBnB

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Session: Ethereum: How It Works
Smart contracts - Implications
• Smart contracts have applications far beyond • The best part is that a “middleman” or any rent
improving the reliability & efficiency of rent seeking third party can in theory be completely
collection. eliminated.
• In fact, any processes that currently involve • Plus (apart from some gas fees to power the
manual interactions between two parties can network) there is no charge to setup and
be automated and the value can be moved deploy.
in real time over the blockchain, rather than
• Smart contracts are what enable developers to
settling days later as with traditional banking.
create decentralized applications or ‘dApps’.
• Ethereum and smart contracts are helping to They are also what allows dApps to be Turing
build the “smart economy” – one in which complete, which means given the required
slow, manual, error-prone processes that rely resources, a Dapp can perform any action.
on intermediaries, is replaced with automated
processes that are completely transparent,
verifiable, and thus trustworthy.

Source: District0x

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Session: Ethereum: How It Works
Advantages and challenges of smart contracts
Advantages Challenges
Efficiency: Automate contract execution, reducing the need for Expertise: Developing and understanding smart contracts requires
manual intervention and streamlining processes. a certain level of technical expertise, limiting accessibility for
non-technical users.
Reduced intermediaries: By automating contract execution, smart Dependence on Inputs: Smart contracts may rely on external data
contracts reduce the need for traditional intermediaries, streamlining sources (oracles), introducing potential points of failure.
processes and reducing costs associated with traditional contract
enforcement.
Transparency: Transactions are recorded on a public blockchain, Scalability: Scalability challenges can arise as blockchain networks
providing a transparent and auditable history. grow, impacting transaction speed and cost.
Security: Utilizes cryptographic principles and blockchain technology Security: Vulnerabilities in code may lead to exploits, emphasizing
for a secure and tamper-proof environment. the need for rigorous auditing and testing.
Trustless transactions: Enables parties to transact without relying on Legal Recognition: The legal status of smart contracts varies
trust, as the contract's execution is enforced by code and the globally, and their enforceability may face challenges in traditional
blockchain. legal systems.
Immutabilty: Once deployed, the code of a smart contract is Immutability: Code is immutable, meaning errors or vulnerabilities
immutable, meaning it cannot be altered or tampered with, providing a cannot be (easily) rectified once deployed.
high level of trust.
Programmability: Flexible and programmable, allowing for complex Evolving Technology: Ongoing technological advancements may
conditional statements and diverse applications. introduce uncertainties and necessitate updates to smart contract
standards.

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Session: Ethereum: How It Works
Decentralized Applications (dApps)
• dApps is short for decentralized applications. They are like normal applications, and can offer similar
functions, but the key difference is they are run on a peer-to-peer network, i.e., a blockchain.

• That means no one person or entity has control of the network. The wide consensus in the crypto
community is that the following must be true for something to be considered a dApp:
1. It must be open-source and operate on its own without any one entity controlling it.
2. Its data and records must be public.
3. It can use a cryptographic token to help keep the network secure.

• dApps can be simple programs, games, financial applications and more. DeFi is merely a popular
subset of all possible dApps

• Optionally, the collection of users of a dApp can be given (and share) the governance of the Dapp’s
future behavior, through so-called governance tokens. Essentially, those bestow voting rights.

Sources: Decrypt and District0x

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Decentralized Applications - Benefits

Source: Ethereum.org

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Decentralized Applications – Weaknesses
• Hacks: Since many dApps run on open-source smart contracts, hackers have the unique
opportunity to explore the networks for vulnerabilities, leading to several high-profile hacks on popular
dApps.

• Usability: Many dApps have poor user interfaces, which can turn users away. For example, see
this reviews page. However, if a dApp survives, its usability often improves over time.

• Users: Like many Web2 apps, dApps benefit from the network effect, where more users improve the
network's efficiency. Many dApps struggle with low user numbers, which can reduce interactivity and
security, as a dApp’s security often depends on its user base.

Source: Decrypt

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Session: Ethereum: How It Works
Ethereum and EVM compatible blockchains
Ethereum has inspired the creation of several • Avalanche: Offers rapid transaction processing and
blockchains compatible with the Ethereum Virtual lower latency, targeting a more energy-efficient
Machine (EVM), allowing them to run Ethereum-based approach. Avalanche's smaller network size,
smart contracts and dApps. EVM compatibility means compared to Ethereum, might affect its network
these blockchains can execute programs in the same security and decentralization level.
way Ethereum does, fostering interoperability.
• Tron: Tron's architecture allows for high transaction
throughput and efficient energy use. Its governance
This compatibility is crucial for developers who want to model, however, tends toward centralization,
leverage Ethereum's extensive tooling and community impacting its decentralization and potential resistance
support while exploring different blockchain features. to censorship.

Examples of EVM-compatible blockchains include: • Cardano: Emphasizes a research-based

development approach, aiming for high sustainability
• Binance Smart Chain (BSC): BSC provides higher and formal verification of smart contracts. Cardano is
transaction throughput and lower fees than Ethereum. partially EVM-compatible through specific projects
However, its consensus mechanism leads to a more and sidechains like Milkomeda. This compatibility
centralized network structure, which influences its allows Ethereum-based smart contracts to run on
security and decentralization aspects. Cardano, but Cardano itself is not inherently
EVM-compatible.

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Session: Ethereum: How It Works
Towards a multi-chain or omni-chain future
The term ‘Multi-Chain’ denotes a future where multiple blockchains operate simultaneously, each serving
specialized purposes or offering unique features, like enhanced privacy, scalability, or governance models.
Similarly, ‘Omni-Chain’ integration focuses on the seamless interaction among diverse blockchains, enabling
the transfer of assets and information in a secure, efficient manner across different blockchain networks.

• The EVM compatibility may prove central to this vision as it allows for the consistent execution of smart
contracts across various blockchains, ensuring interoperability and simplifying development processes.
• Cross-Chain Communication Protocols will also be essential for omni-chain integration, these protocols
enable different blockchains to communicate and share information, vital for asset transfers and data
synchronization.
• Sidechains and Layer 2 Solutions can also enhance scalability and efficiency by offloading transactions
and processes from the main blockchain, crucial for supporting a multi-chain ecosystem without
overburdening individual networks.
• Blockchain Bridges are specialized tools or protocols that connect two or more blockchains, enabling the
transfer of assets and data between them, a key component in building an omni-chain environment.

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Session: Ethereum: How It Works

4. The Scalability Imperative in

Blockchain
Session: Ethereum: How It Works
The Blockchain Trilemma: Understanding the three pillars
● Introduced by Vitalik Buterin in 2017, the Blockchain Trilemma
underscores the trade-offs of blockchain design. Blockchain
systems can prioritize two out of the three key attributes:
● Decentralization, which refers to the extent of control
and decision-making distributed across the network.
However, achieving high decentralization can result in
reduced operational efficiency due to the need for
distributed consensus.
● Security, encompassing measures and mechanisms
that safeguard a network from attacks while ensuring the
integrity and immutability of its data. Yet, complex
security protocols may diminish throughput and
scalability.
● Scalability, the capacity of a blockchain network to
efficiently accommodate a large volume of transactions
and operations. However, pursuing higher scalability may
introduce potential security compromises or lean towards
centralization.

Source: https://vitalik.ca/general/2021/04/07/sharding.htm

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Session: Ethereum: How It Works
Ethereum's scalability challenges (1/3)
● Ethereum's architecture struggled to balance the blockchain trilemma, with scalability arguably being the most
compromised aspect.

● The gas limit in Ethereum led to a transaction processing capacity of up to 20 transactions per second (TPS),
causing bottlenecks.

● High network demand and limited transaction capacity led to surging transaction fees, particularly during periods of
heavy network usage.
● This escalation in fees made Ethereum transactions increasingly costly for users, affecting the network's accessibility and
affordability.
● Furthermore complex dApps and the prioritization of transactions with higher fees by miners resulted in longer confirmation
times, with transaction speeds remaining relatively static despite the surge in fees.

● The high transaction fees and limited throughput disproportionately impacted smaller and newer users, who found it
challenging to compete with larger entities able to afford higher fees.

● The broader vision for blockchain includes revolutionizing digital transactions, facilitating DeFi, global payments,
and open markets, which necessitates support for support for high volumes of transactions, to ensure a global user
base can participate without excessive fees or delays.
Source: https://temtum.com/static/48f3605384983d404c16f221b8347e20/an-analysis-into-the-scalability-of-bitcoin-and-ethereum.pdf

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Session: Ethereum: How It Works
Ethereum's scalability challenges (2/3)
• Ethereum transaction fees reached new
highs in early 2021.

• For context, at the peak of the 2017/2018 bull

run, the average Ethereum transaction fee
reached $5.70. Ethereum average
transaction fee has been more than $5.70
every day since January 18th, 2021. The
median transaction fee has been above $10
for most of the year.

• Part of the growth in transaction fees has

been due to the sharp increase in ETH price.
As ETH gets more valuable, transaction fees
get more and more expensive when
measured in USD. But it’s also due to a large
increase in gas prices caused by network
congestion.

Source: Coinmetrics

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Session: Ethereum: How It Works
Ethereum's scalability challenges (3/3)

Ethereum’s Daily Average Gas Price (in Gwei), 2015-2023 Ethereum’s Daily Average Transaction Fee Chart (in USD), 2015-2023

Source: https://etherscan.io/charts

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Session: Ethereum: How It Works
Approaches to scalability*
To address scalability, various innovative solutions are categorized based on
their operational layer and impact on the blockchain ecosystem.

On-Chain Solutions (Layer 1): Off-Chain Solutions (Layer 2):

● Increasing Block Size: Expanding block capacity to ● Rollups (Optimistic and ZK-Rollups): Batching
accommodate more transactions. transactions off-chain for consolidated on-chain
● Sharding: Partitioning the blockchain into smaller, ● submission.
parallel-processing shards. ● State Channels: Establishing two-way channels for
● Optimized Block Propagation Techniques: transaction execution outside of the main chain.
Improving the efficiency of data transmission to ● Plasma Chains: Creating child blockchains for
quicken block propagation. off-loading transactions from the main chain.
● Segregated Witness (SegWit): Optimizing ● Validiums: Utilizing ZK proofs to batch transactions
transaction space within blocks by segregating off-chain while storing data off-chain.
signature data.
● Directed Acyclic Graphs (DAGs): Adopting a Other Solutions:
non-linear structure for faster, more flexible ● Sidechains: Running parallel chains with
transactions. independent consensus mechanisms.

*In-depth discussion in the “Advanced topics in Web3” session

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Session: Ethereum: How It Works

5. Conclusions
Session: Ethereum: How It Works
Conclusions
• Ethereum's architecture supports decentralized applications (dApps) and smart contracts, offering
flexibility for diverse use cases beyond transactions.
• Smart contracts automate processes, removing intermediaries and enabling transparent,
decentralized applications.
• The Ethereum Virtual Machine (EVM) runs smart contracts securely across the decentralized
network.
• Gas fees power the network, incentivizing validators, with prices fluctuating based on network
demand.
• Proof of Stake (PoS), replacing Proof of Work (PoW), increases energy efficiency while maintaining
security and scalability.
• Ongoing upgrades like Proto-DankSharding and EIP-1559 aim to improve scalability and reduce
transaction costs.
• The blockchain trilemma -balancing scalability, decentralization, and security- remains a challenge
as Ethereum evolves to address all three simultaneously.

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Session: Ethereum: How It Works

6. Further Reading

47
Session: Ethereum: How It Works
Further Reading
• Ethereum Whitepaper
https://ethereum.org/en/whitepaper/
• Antonopoulos, A.M. and Wood, G., 2018. Mastering ethereum: building smart contracts and dapps. O'reilly
Media.
https://github.com/ethereumbook/ethereumbook
• The Ethereum DeFi ecosystem:
https://defiprime.com/ethereum
• V. Buterin:
Who is Vitalik Buterin, Ethereum Creator? - Decrypt
• The Merge:
What Is 'The Merge'? Ethereum’s Move to Proof of Stake – Decrypt

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Session: Ethereum: How It Works
Further Reading
• The Merge:
What is the blockchain trilemma? | The Block

• Ethereum’s Future:
Ethereum – Future and Present: Onward to the Surge, Verge, Purge and Splurge w/ Vitalik Buterin - YouTube

• Smart Contracts:
Smart contract – Wikipedia

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Session: Ethereum: How It Works

7. Appendix: Ethereum Roadmap

Session: Ethereum: How It Works
Ethereum Roadmap
Phase Details
The Merge ✔ Upgrades related to the transition from PoW to PoS. Ongoing research continues to explore
further improvements and optimizations to PoS.
The Surge Upgrades focused on scalability, including rollups and data sharding, with the goal of achieving
100,000 transactions per second and beyond.
The Scourge Upgrades addressing decentralization concerns, minimizing the risks of MEV (Maximal
Extractable Value), and increasing censorship resistance.
The Verge Upgrades designed to make block verification easier, including the implementation of SNARKs
(Succinct Non-interactive Arguments of Knowledge).
The Purge Upgrades aimed at reducing the computational and storage costs of running nodes by clearing
old history and simplifying the protocol.
The Splurge Miscellaneous upgrades that don’t fit into the other categories, addressing remaining protocol
improvements and enhancements.

Source: https://ethroadmap.com/

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The Merge: Laying the Path for the Future of Ethereum
Ethereum is moving faster than Bitcoin in terms of development:
• Paris Upgrade: The Merge marked a significant milestone in Ethereum's evolution. The Paris
upgrade was implemented on this date, and its major feature was the switch-off of the PoW
consensus mechanism. The Ethereum mainnet merged with the separate PoS Beacon chain,
consolidating into a single chain. This integration marked a fundamental shift in Ethereum's
consensus mechanism.

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The Surge: Increasing Scalability
The Surge is an advancement aiming to increase scalability to 100,000 transactions per second
while maintaining security. It introduces "proto-danksharding" to achieve this. Proto-danksharding
shifts the focus from Ethereum's execution layer to its data layer for securing rollup transactions.
This prevents direct competition between rollup and mainnet transactions. The technical aspect
involves dividing transaction data into smaller shards, each handling a subset of transactions. This
optimizes resource usage, enabling Ethereum to process a higher volume of transactions
simultaneously, significantly improving scalability without compromising security.

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Session: Ethereum: How It Works
The Scourge: Addressing Censorship
The Scourge addresses censorship resistance and decentralization concerns in Ethereum by
tackling Miner Extractable Value (MEV) and front-running. The technical approach includes
optimizing consensus mechanisms and smart contract execution to reduce MEV incentives,
altering transaction execution order, implementing private transactions, and fair ordering
mechanisms. Additionally, it promotes decentralization through decentralized oracle networks and
governance mechanisms, reducing reliance on central entities. These measures enhance
Ethereum's resilience against censorship, protect transaction integrity, and align with the network's
core principles of security and decentralization.

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Session: Ethereum: How It Works
The Verge: Facilitating Efficiency
The Verge aims to introduce a Verkle tree structure to replace the current data storage format. This
innovation aims to streamline the verification process of blocks. By utilizing Verkle trees, Ethereum
can efficiently verify blocks, reducing the computational overhead required for this task. In
essence, Verkle trees enhance the network's scalability and efficiency by optimizing the way data
is organized and accessed.

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The Purge: Simplifying Ethereum
The Purge will focus on optimizing the Ethereum network by reducing computational burdens and
simplifying the protocol. One of its key objectives is the introduction of history expiration. This
change means that not all node operators are obligated to store the complete historical data of all
previous blocks. By allowing for more flexible data retention, The Purge aims to make running
Ethereum nodes more accessible and cost-effective. This optimization helps in decentralizing the
network further, as it becomes more manageable for a wider range of participants.

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Session: Ethereum: How It Works
The Splurge: Fixing everything else
The Splurge encompasses various fixes and improvements that do not fall neatly into the previous
categories. Among its key technical changes, it includes "Account Abstraction," which reduces
External Owned Accounts (EOAs) and Contract Accounts to a single account type. Additionally, it
introduces "Proposer/Builder Separation" (PBS), a mechanism that differentiates between block
builders and block validators. These technical adjustments enhance Ethereum's overall efficiency
and flexibility while addressing issues that don't neatly fit into other upgrade categories,
contributing to the network's evolution and optimization.

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