Ethereum was proposed in 2013 thanks to Vitalik Buterin and was born in 2014, with the main objective of improving the technology offered by Bitcoin. The main improvement was the concept of Smart Contract that allows it to be converted into programmable money, a great revolution for the industry. If Bitcoin is considered the Gold of the Internet, the Ethereum network is considered the protocol that will support a new Internet based on Blockchain.
The Blockchain has an infinite number of applications besides simple transactions, for example on the Bitcoin network the possibilities are very limited. Therefore, it was necessary to create a more complex system to offer more possibilities while keeping the decentralization.
Ethereum is considered the basis for decentralized applications (Dapps). If you want to create decentralized applications and no one can take control, you can do it with the Ethereum language called Solidity. With this language you can write what is known as Smart Contracts that allow you to perform actions according to some conditions.
Practical example: if we paid the rent through a Smart Contract, there would be two options: if I pay the monthly fee, the door to the accommodation would be opened, if not I would not be allowed to enter. It is very important that all the contracts take into account all kinds of details and exceptions because if it is not well written we could find ourselves with undesirable situations since the contract will execute exactly what is written. Once the contract is released to the Blockchain network it cannot be modified, not even its own creator can do it. The Ethereum network has thousands of nodes making it work. These nodes will make sure that the applications work as written. If the system became scalable and fast, a decentralized internet could be achieved without the need for intermediaries.
We have to differentiate between Ethereum which is the Blockchain which is where the whole ecosystem is built and Ether which is the currency (ETH). The operations are executed through the Ethereum Virtual Machine (EVM).
The main issues facing the Ethereum network today are: scalability, transactions per second, cost per transaction and environmental impact. For these reasons, the biggest change in the history of Ethereum has occurred.
The Visa payment processor can do thousands of transactions per second and Ethereum can only do 15 and at a very high cost. Decentralisation with the POW (proof of work) system is costly to maintain and directly affects the transaction fees and speed of delivery. One of the main problems with its slowness is that the faster nodes must wait for the slower ones. This is because if they did not have to wait, the slower ones would not be able to keep up and only the large data centers would operate in the end. If some did not wait for the others, there would come a point where the slower ones could not keep up and the big ones could take over the majority of the network. The most important thing is not to have to trust a third party to make the network work, so the key is decentralization, without it the Blockchain loses its meaning.
Currently there are two main styles of mining:
POW (proof of work)
It was the first system designed to execute transactions and provide security to the Blockchain. Thousands of miners who have specialized computers to solve very complex mathematical equations to process transactions, give security to the network and create new currencies. The system works with blocks that are chained with the previous and the next one, in those blocks there is a limited amount of transactions or information. The miners compete with each other to be the first to find the new block by solving complex mathematical equations that can only be solved by brute force, i.e. by trying all possible options.
When a miner finds the block, the other miners confirm that it is correct and if it is, the winning miner gets the reward. Today, in most cases, it is a little different. A single miner cannot solve the mathematical problem. To deal with this complexity, the Pools were created, which is a place where several mining groups connect and share their computing power to solve the mathematical problem. Therefore, if a Pool discovers a new block, the prize is shared equally according to the computing power that each miner has offered to solve the problem.
So that the blocks cannot be changed, each block contains something called a Hash which is like a unique and unrepeatable security number that, if you change a single letter in the same block, it will change the Hash completely and that block will be invalidated as fraudulent. The blocks are linked to each other because each block, apart from its own Hash, includes the Hash of the previous block.
The more miners there are in the network, the more difficult the math puzzles are to solve the blocks and that makes the network safer but slower. According to some data, an Ethereum transaction uses 29kw/h, enough to power an average household for a day. Much less than Bitcoin, which consumes the same amount of energy as Chile each year. Although electricity consumption is very high, it is still less than the consumption of traditional banks and payment processors. In addition, because the costs of mining equipment and facilities are so high, the cost of electricity must be achieved at the lowest possible price to be profitable, which only renewable energies such as solar panels or hydroelectric plants can offer.
It is an inefficient technology and could be susceptible to market monopolization. About 65% of Bitcoin is made by 5 large mining groups that could theoretically join together to control most of the network.
POS (Proof of Stake)
Despite being very different from traditional mining, the concept of the Blockchain remains. It improves energy efficiency and transaction speed because it reduces the complexity of the task. It differs mainly in that such sophisticated equipment is not necessary since complex mathematical puzzles do not need to be solved to ensure the security of the network. In this new method, a certain amount of coins are blocked (frozen) in the nodes and if someone tries to manipulate the network in a fraudulent way, he loses part or all of the coins he has frozen in the nodes.
If someone wanted to control the network they would have to control 51% of the nodes and would put at risk all the coins that were frozen in them. Therefore, the security of the network depends on the value of the coin. This mechanism offers a great incentive to follow the rules of the protocol. Another advantage is that the network does not compete with each other, which is why there is no need for Mining Pools and this favours decentralisation. The cost of electronic POS equipment is comparatively much cheaper and more accessible and encourages more people to participate thus making the network more decentralized.
Another big difference is that in POW everyone mines at the same time and in POS only a few nodes are selected for verification. The nodes that validate the transactions are chosen in a partially random way, also the amount that each node has deposited and the time that it takes to operate is taken into account. Once the block has been created, other nodes check that it has been done correctly and when they reach the 51% consensus it is considered valid. Some crypto-currencies using this system have slight modifications, but the main concept is preserved.
Update to Ethereum 2.0
The current version of Ethereum is called Constantinople. The main improvement was the possibility of developing Dapps (decentralized applications). Ethereum 2.0 which is also known as ETH2 or Serenity is the biggest update to date that will bring many improvements.
The main objectives are to improve mining efficiency, decentralization and scalability. The main idea has been to migrate from the consensus system of Proof of Work to Proof of Stake but with some variations to the current known system.
The most important variation is that not all the nodes have to process all the information. That is, the information is divided and the load is distributed in small pieces. This concept is known as Sharding and would allow thousands of transactions per second to be processed. Instead of having to process each transaction, a validator will only have to verify one fragment and each fragment will have the same security as any other. To break a single fragment you would have to break the whole system. Fragmentation is believed to be the best solution for network scalability while preserving decentralization.
It also changes the system of rewards that will no longer come from solving mathematical puzzles but from validating information.
Another important point is simplification, the complexity of the network must be minimized, even if some efficiencies are lost.
The network must also be resistant to failure and be operational for as long as possible, even when most of the nodes will no longer be online.
It is also important that there is a low entry price to validate transactions and encourage decentralization. All the processes of the validation system must be reduced to the average of any user with a computer can become a validator.
It will also allow all developers to use their own rules to perform transactions. This means that rules from another cryptocurrency within the Ethereum ecosystem could be used to execute the transactions.
ETH2 is being built by 9 teams of engineers and each team is creating applications called Clients. The premise of having several systems is that if one were to break or have an error, the whole network would not fall.
ETH2’s implementation is divided into different phases and the most important will be the first 3.
The first one (phase 0) will implement the beacon chain that will be responsible for organizing the validators and assigning the fragments. The beacon chain will also be responsible for taking money from nodes that behave fraudulently. It is like a chain of blocks that manages another chain of blocks. Some nodes will be responsible for organizing the fragments and others for validating them.
Phase 1 would be like a test environment where you can test that the chains of fragments can communicate with each other and with the beacon chain. The Dapps will be able to use it to increase their scalability, but in this phase it will not be possible to perform calculations within the data, but it would be possible to store information. During this phase, ETH1 and ETH2 will continue to coexist to make traditional Proof of Work mining less profitable, and they will move to the new system in an upgrade called Bizantio. The concept of Ethereum pumps was applied, which increases the difficulty of mining and thus reduces the profitability of POW so that they can move to POS.
The last one will be phase 2 and is expected to occur around 2022 and will meet the objective of ETH2. The fragments will be able to process transactions and can be used for real commercial applications. Also in this phase, intelligent contracts will be implemented in the fragments with the new virtual machine that will be called WebAssembly (eWASM). The versatility of these contracts will be improved and even execution environments can be created, which could imitate the transaction rules of other Blockchains.