Ethereum represents a significant evolution in blockchain technology, embedding a global, decentralized computer within its architecture. It serves as a foundation for building applications and organizations that are open, censorship-resistant, and permissionless.
This guide breaks down the core components of Ethereum, from its underlying blockchain mechanics to its native cryptocurrency and innovative smart contracts, providing a clear understanding for beginners and enthusiasts alike.
What is a Blockchain?
A blockchain is best described as a public database that is updated and shared across many computers in a network. These computers, known as nodes, work together to maintain a single, consistent version of the data.
The term "block" refers to how data and state are stored in sequential batches. For instance, when you send ETH to someone, that transaction data must be added to a block to be considered successful.
The "chain" component comes from each block cryptographically referencing its parent block. This linking ensures that data within a block cannot be altered without changing all subsequent blocks—a change that would require consensus from the entire network.
Every computer in the network must agree on each new block and the state of the chain. This distributed agreement is managed by a consensus mechanism. Ethereum uses a Proof-of-Stake (PoS) consensus mechanism to secure its network and validate transactions.
Introduction to Ethereum
Ethereum is a blockchain with a built-in computer. It is the foundation for a new generation of decentralized applications (dapps) that operate without central control.
At the heart of Ethereum is a canonical computer called the Ethereum Virtual Machine (EVM). The state of this computer is agreed upon by everyone participating in the Ethereum network. Every Ethereum node stores a copy of the EVM's state.
Additionally, any participant can broadcast a request for this computer to perform arbitrary computations. When such a request is broadcast, other participants on the network verify, validate, and execute the computation. This execution causes a state change in the EVM, which is then propagated across the entire network.
These computation requests are called transaction requests. The record of all transactions and the current state of the EVM is stored on the blockchain, which is maintained and agreed upon by all nodes.
Cryptographic mechanisms ensure that once a transaction is verified as valid and added to the blockchain, it cannot be tampered with later. The same mechanisms also ensure that all transactions are signed and executed with the proper permissions.
What is Ether (ETH)?
Ether (ETH) is the native cryptocurrency of the Ethereum network. Its primary purpose is to allow for a market in computation. This market provides an economic incentive for participants to verify and execute transaction requests, providing computational resources to the network.
Any participant broadcasting a transaction request must also offer a certain amount of ETH to the network as a reward. The network burns a portion of this reward and gives the remainder to whoever ultimately validates and executes the transaction, commits it to the blockchain, and broadcasts it to the network.
The amount of ETH paid corresponds to the resources required to perform the computation. This payment mechanism also discourages malicious actors from clogging the network with requests for infinite computations or other resource-intensive scripts, as they must pay for the computational resources.
ETH is also used to provide cryptoeconomic security for the network in three main ways: 1) as a reward for validators who propose blocks or identify dishonest behavior; 2) staked by validators as collateral to deter dishonest acts—if a validator attempts to act maliciously, their ETH can be destroyed (slashed); 3) used to weight "votes" on newly proposed blocks, influencing the fork-choice part of the consensus mechanism.
What are Smart Contracts?
In practice, participants don't write new code every time they want to request a computation on the EVM. Instead, application developers upload programs—reusable snippets of code—into the EVM state. Users then make requests to execute these code snippets with different parameters. We call these programs, uploaded to and executed by the network, smart contracts.
A simple way to think about a smart contract is as a digital vending machine: a script that, when called with specific parameters, performs certain actions or computations if specific conditions are met. For example, a simple vendor smart contract could create and assign ownership of a digital asset if the caller sends ETH to a specific recipient.
Any developer can create a smart contract and make it available to the network using the blockchain as its data layer, paying ETH to the network to do so. Any user can then call the smart contract to execute its code, again paying a fee to the network.
Thus, through smart contracts, developers can build and deploy complex user-facing applications and services, such as marketplaces, financial instruments, games, and more.
Key Ethereum Terminology
Blockchain
The sequence of all blocks that have ever been committed to the Ethereum network in the history of the network. It is named because each block contains a reference to the previous one, helping to maintain an order and a precise historical record.
Ether (ETH)
Ether (ETH) is the native cryptocurrency on Ethereum. Users pay ETH to other users to have their code execution requests fulfilled. It is the fuel that powers the network.
Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine is a global virtual computer whose state every participant on the Ethereum network stores and agrees upon. Any participant can request the execution of arbitrary code on the EVM; code execution changes the state of the EVM.
Nodes
Physical computers that store the state of the EVM. Nodes communicate with each other to propagate information about the Ethereum state and its new state changes. Any user can also request code execution by broadcasting a request from a node. The Ethereum network itself is the collection of all Ethereum nodes and their communication.
Accounts
Accounts are where ETH is stored. Users can initialize accounts, deposit ETH into them, and transfer ETH from their account to other users. Accounts and account balances are stored in a large table within the EVM and are part of the overall state of the EVM.
Transactions
A "transaction request" is the formal term for a request for code execution on the EVM. A "transaction" refers to the fulfilled transaction request and the associated EVM state change. Any user can broadcast a transaction request from a node to the network. For a transaction request to affect the consensus-agreed EVM state, it must be validated, executed, and "committed to the network" by other nodes. Executing any code causes an EVM state change; once committed, this change is broadcast to all nodes in the network. Examples of transactions include:
- Sending X ETH from my account to Alice's account.
- Publishing smart contract code to the EVM state.
- Executing the smart contract code at address X in the EVM with parameters Y.
Blocks
The volume of transactions is vast, so transactions are "committed" in batches, or blocks. Blocks typically contain anywhere from dozens to hundreds of transactions, grouped together for efficiency.
Smart Contracts
Reusable snippets of code (programs) that developers publish to the EVM state. Anyone can request the execution of smart contract code by making a transaction request. Because developers can write arbitrary executable applications into the EVM by publishing smart contracts, these are often also called dapps, or decentralized applications.
Frequently Asked Questions
What is the main purpose of Ethereum?
Ethereum is a decentralized platform that enables developers to build and deploy smart contracts and decentralized applications (dapps). Its goal is to create a censorship-resistant, open world computer where users control their own data and digital interactions.
How is Ethereum different from Bitcoin?
While both are cryptocurrencies, Bitcoin is primarily a decentralized digital currency. Ethereum is a programmable blockchain that allows developers to build complex applications on top of it through smart contracts. Ethereum's native currency, ETH, is used to power these operations, not just as a medium of exchange.
How do I start developing on Ethereum?
To begin developing on Ethereum, you'll need to understand the basics of smart contracts, learn a programming language like Solidity, and set up a development environment with tools like Remix IDE. You can also explore various testnets to practice without spending real ETH. For a comprehensive guide, you can explore more strategies for getting started.
What does 'gas' refer to on Ethereum?
Gas is the unit that measures the amount of computational effort required to execute operations, like making a transaction or running a smart contract, on the Ethereum network. Users pay for gas fees in ETH. It prevents network spam and allocates resources efficiently.
Is Ethereum secure?
Ethereum's security is upheld by its vast, decentralized network of nodes and its Proof-of-Stake consensus mechanism. While the underlying protocol is highly secure, the security of individual smart contracts depends on the code quality written by developers. It's essential to audit smart contracts for vulnerabilities.
Can Ethereum be upgraded?
Yes, Ethereum can be upgraded through a community-driven process. Upgrades, like the historic Merge which transitioned the network to Proof-of-Stake, are proposed, tested, and implemented after reaching consensus among developers, node operators, and the community. This allows the network to evolve and improve over time. To understand the full scope of possibilities, you can view real-time tools that track network upgrades.