I Read Ethereum’s Whitepaper So That You Don’t Have To

 

The Ethereum Merge which will happen around September 15, 2022, will see Ethereum make its long-awaited transition from Proof of Work (PoW) to Proof of Stake (PoS). Ethereum has come a long way since its inception back in 2013. Few people would know but back then, Vitalik Buterin already had visions for Ethereum to eventually move to Proof of Stake which he noted in Ethereum’s Whitepaper. 

 

Ethereum’s Whitepaper is one of the few mediums in which readers have a comprehensive insight into Vitalik’s vision for Ethereum. If you want to better understand Ethereum’s upcoming Merge, the Whitepaper is a good place to start. However, the content in Ethereum’s Whitepaper can leave most people scratching their heads. This article was written to provide you with a simple summary of Ethereum’s Whitepaper without having to feel like you are drinking from a water hose. 

 

Problems with Existing Blockchain Networks/Protocols  

Vitalik highlighted some problems he believed were hindering consensus protocols back in the early 2010s. Most of these protocols he argued were designed rigidly around a specific application. 

 

“Up until this point all the protocols that have been invented have been specialized, attempting to offer detailed feature sets targeted toward specific industries or applications usually financial in nature”

 

For example, Namecoin functions solely as a decentralized name registration database while Colored coins only allow people to create their digital currencies. Beyond their main applications, these protocols do not offer much else. 

 

The ever-changing nature of the crypto industry means that what developers have in mind for their protocols in terms of use cases one day might be obsolete one week later. Thus, there is power in generality. 

 

Back then, if developers wanted to build a consensus protocol, they had two options: build an independent network or build their protocols on top of an existing blockchain network i.e. Bitcoin

 

While the first option allows developers the freedom to build in any feature set, having to bootstrap an entire network from the ground up takes both time and money which makes implementation difficult. Furthermore, most applications are too small to warrant their blockchain networks.

 

The latter option requires building on top of an existing blockchain, Bitcoin being the only real option then. However, the limited capabilities and scalability issues of building protocols on top of Bitcoin also present issues for developers. 

 

The Solution: Ethereum

Vitalik Buterin had a very clear vision for Ethereum when he wrote the Whitepaper; Ethereum is to be more than just a digital currency. He wanted Ethereum to be an open software platform, powered by blockchain technology, that developers can easily build decentralized applications on. Ethereum is to be “the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions.”

 

Think of Ethereum as the operating system on which (decentralized) applications run. Developers that are looking to build decentralized applications on top of Ethereum’s chain can expect a fast and simple process. Rapid development time, security for small and rarely used applications and the ability of different applications to interact very efficiently are the things that were promised in the Whitepaper. 

 

While Vitalik viewed Ethereum as an upgrade over Bitcoin, he still thought highly of certain aspects of Bitcoin’s network. For instance, he thought that the consensus mechanism that Bitcoin uses which allows distributed systems to collectively agree to update the ledger solved the important issue of deciding who gets a say in the consensus process while also simultaneously preventing Sybil attacks. In Bitcoin’s consensus mechanism, the weight that a miner has in the consensus voting process is directly proportional to the computing power that he or she can provide i.e Proof of Work. 

 

Vitalik Buterin did not want Ethereum to replace existing aspects of cryptocurrency and blockchain networks but to build on them with some new additions. 

 

Ethereum’s Main Applications

These are the main applications that Vitalik intended for Ethereum to support when he wrote Ethereum’s Whitepaper. 

 

  • Financial applications

Rather than just simple financial transactions between users, Ethereum offers users more options when it comes to these transactions by utilizing smart contracts. For instance, in Bitcoin, users can only send bitcoin to one another. In Ethereum, on the other hand, users can state that they want the transaction to take place only if it meets a certain date and criteria. These transactions can self-execute once the conditions set out are met.

 

Financial applications include but are not limited to sub-currencies, financial derivatives, hedging contracts, and savings wallets. 

 

  • Semi-financial applications

According to the Whitepaper, semi-financial applications are situations where “money is involved but there is also a heavy non-monetary side to what is being done”. An example would be bounties that are self-enforcing that will be paid out for solutions to computational problems. 

 

  • Non-financial applications

As its name suggests, non-financial applications are financial in nature. This includes online voting, decentralized file storage and decentralized governance (DAOs).

 

Through the types of applications that Ethereum supports, we see again how Vitalik wanted Ethereum to be more than just a cryptocurrency and a blockchain network that only supports financial applications. 

 

Other Things You Need To Know About Ethereum 

 

Ether

“Ether” is the cryptocurrency of the Ethereum network. It has a “dual purpose of providing a primary liquidity layer is to allow for efficient exchange between various types of digital assets and to provide a mechanism for paying transaction fees”. On top of being the fuel for the network, Ether can also be tradeable on most crypto exchanges. When investors and traders trade Ethereum, they are trading Ether. 

 

Ether serves as both an incentive and a disincentive for users. Developers are rewarded for designing quality applications on Ethereum’s network and ensuring that the network runs smoothly. As computations and file storage place a strain on Ethereum’s network, fees (in terms of Ether) discourage developers from excessively using the network.

 

Ether’s denominations are: 

  • 1: wei
  • 10^12: szabo
  • 10^15: finney
  • 10^18: ether

 

Ether Supply

Even though the overall supply of Ether is infinite, only a maximum of 18 million Ether are mined each year. Furthermore, “the supply growth rate percentage still tends to zero over time because of the endowment pool and coins lost over time due to carelessness, death, etc, and coin loss.” 

 

Fees

Fees are imposed on each transaction on the Ethereum network. As transactions place a strain on the network, fees serve as a regulatory mechanism to prevent abuse of the network. 

 

One of the potential issues that the Ethereum network might face is the Halting problem. Think of the Halting problem as similar to a distributed denial-of-service (DDOS) attack. In the case of the Ethereum network, without these fees, attackers can potentially run programs forever on the network, diverting valuable resources away from the network.  

 

“The intent of the fee system is to require an attacker to pay proportionately for every resource that they consume, including computation, bandwidth and storage.”

 

Decentralizing the Mining Process 

Vitalik argued in the Whitepaper that mining for Bitcoin tends towards centralization. Firstly, miners need to use specifically designed computer chips called ASICs (application specific integrated circuits) to mine Bitcoin. To effectively take part in the mining process, miners require millions of dollars of capital which places the mining process out of the hands of all but a few. Secondly, most Bitcoin miners rely on a centralized pool and they do not perform block validation locally. As of the writing of the Ethereum Whitepaper, “the top three mining pools indirectly control roughly 50% of processing power in the Bitcoin network.” These two issues in the mining of Bitcoin go against the very idea of decentralization.  

 

Vitalik proposed that Ethereum will use a mining algorithm where “miners are required to fetch random data from the state, compute some randomly selected transactions from the last N blocks in the blockchain, and return the hash of the result.”

 

The benefits are twofold. The first is that since Ethereum contracts can include any kind of computation, the chips used to verify and mine on Ethereum are more generalized than those used for Bitcoin which will theoretically lower the economic barrier of entry to mine on the Ethereum network. 

 

The second is that since mining on Ethereum requires access to the entire blockchain, this forces miners to store the entire blockchain and at least be capable of verifying every transaction. This reduces the need for centralized pools and lowers the probability of centralization in the mining process.

 

Scalability

Ethereum is not immune to the issues that Bitcoin experiences. Ethereum also suffers from the same flaw as Bitcoin whereby every transaction needs to be processed by every node in the network. Bitcoin’s network, even with its relatively lower transactions per second, is growing by 1MB per three seconds (1GB per hour, 8TB per year). While Ethereum full nodes need to store just the state instead of the entire blockchain history unlike Bitcoin, scalability is still an issue for the network as

 

“Ethereum is likely to encounter a similar growth pattern, worsened by the fact that there will be many applications on top of the Ethereum blockchain instead of just a currency as in the case with Bitcoin”.

 

In such a scenario, only a very small number of large businesses would run full nodes on the Ethereum network. This would increase both the risk of centralization and the probability of a successful 51% attack and also pose a scalability issue for Ethereum.

 

As with the previous issues, Vitalik Buterin had ready solutions. Firstly, Ethereum full nodes do not need to store the entire blockchain history just the state. Secondly, Ethereum will include blockchain-based mining algorithms making sure that “every miner will be forced to be a full node, creating a lower bound on the number of full nodes.” Lastly, there will be the inclusion of an intermediate state tree root in the blockchain after each transaction is processed. This means that “even if block validation is centralized, as long as one honest verifying node exists, the centralization problem can be circumvented via a verification protocol.”

 

While it might seem obvious now, many layer-one blockchain networks back in the early 2010s did not have the multi-purpose capabilities that we see today. Ethereum, through its open-ended design, led the way forward for the crypto industry. Fast forward to today, while Ethereum has and will continue to undergo both minor and major changes (the recent Ethereum Merge being one example), the Whitepaper remains relevant today as it reveals the visions that Vitalik Buterin had for Ethereum.

 

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. 

 

Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.


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