Chapter

1. Ethereum Basics
2. Where does Ethereum come from?
3. Getting Started with Ethereum
4. Scalability, Ethereum 2.0 and the Future of Ethereum
5. Ethereum and Decentralized Finance (DeFi)
6. Into the Ethereum network

Chapter 1 - Basic knowledge of Ethereum

Table of Contents

• What is Ethereum?
• What is the difference between Ethereum and Ethereum (ETH)?
• Where does the value of Ethereum come from?
• What is blockchain?
• What is the difference between Ethereum and Bitcoin?
• How does Ethereum work?
• What is a smart contract?
• Who created Ethereum?
• How are Ethereum coins distributed?
• What are "The DAO" and "Ethereum Classic"?

What is Ethereum?

Ethereum is a decentralized computing platform. We can think of it as a computer that does not run in a single device. That is, it can run on thousands of devices around the world at the same time, i.e. there is no specific owner.

Like Bitcoin and other digital currencies, Ethereum also supports the transfer of digital assets. But it does much more, allowing users to configure their own code and interact with applications developed by other users. Ethereum is extremely flexible, and various complex programs can be built on the Ethereum platform.

In short, the core idea behind Ethereum is: developers can create and run code in a distributed network without the use of a central server. Therefore, these apps theoretically cannot be shut down or censored.

What is the difference between Ethereum and Ethereum (ETH)?

The following statement may sound a bit confusing: The unit used by Ethereum is not called Ethereum, nor is it called Ethereums. Ethereum refers to the protocol itself, and the token that powers it is called Ethereum (abbreviated as "ETH").

Where does the value of Ethereum come from?

We mentioned before that Ethereum’s code runs in a distributed system. Therefore, the program cannot be tampered with by outsiders. Once they are in the Ethereum database, known as the blockchain, they can be programmed so that no one else can modify the code. Additionally, the database is visible to everyone and users can review the code before interacting.

These characteristics determine that anyone can launch applications that cannot be taken offline at any time and at any time. What’s more interesting is that Ethereum’s native unit, ether, can store value, creating conditions for these applications to implement value transfers. We call the programs that make up the application smart contracts. In most cases, they can operate without human intervention.

There is no doubt that the concept of "programmable currency" has attracted many users, developers and companies.

View the latest price of Ethereum now.

What is blockchain?

The blockchain is not only the core of Ethereum, but also the database that stores the information used by the protocol. If you have read our articleWhat is Bitcoin? 》, you will understand the basic knowledge about the operating mechanism of blockchain. The Ethereum blockchain is similar to the Bitcoin blockchain, except for the way data is stored and the content of the stored data.

The Ethereum blockchain is like a book that can continuously add new pages. Each page in the book is called a block, which stores transaction information. If a new page needs to be added, a special value should be included at the top of the page. This value indicates that the new page is added in order after the previous page, rather than randomly inserted into the book.

Essentially, this is a bit like a page number, which references information from the previous page and helps identify whether new pages (blocks) are added in order. We use hashing to accomplish this process.  

The hash operation takes a copy of the data (in this case, all the data in the block) and returns a unique identifier (our hash value). The probability that two pieces of data output the same hash value is very low, and the process is also one-way. So you can easily calculate the hash, but you can't work backwards from the information that created the hash. In subsequent chapters, we will analyze why this is a key factor affecting mining.

Now we have found a mechanism to connect all pages in the correct order. Any attempt to change the order or remove pages will hide the fact that "our books have been tampered with."

Want to learn more about blockchain? Read our beginner’s guide to blockchain technology.

What is the difference between Ethereum and Bitcoin?

Bitcoin uses blockchain technology and financial incentives to build a global digital cash system. It introduces several key innovations to help users around the world coordinate their work without a central authority. Bitcoin enables all participants to run programs on personal computers, allowing users to agree on the state of financial databases in a trustless, decentralized environment.

Bitcoin is often considered the first generation blockchain. Developers' reluctance to make Bitcoin an overly complex system gives it a unique advantage in terms of security. The reason why its design appears to be inflexible is to regard security as the first priority at the basic layer. The language of Bitcoin smart contracts is indeed extremely limited and does not lend itself well to applications outside of transactions.

In contrast, the second generation blockchain is more feature-rich. In addition to financial transactions, such platforms also enable a higher degree of programmability. Ethereum gives developers a higher degree of freedom, allowing them to experiment with personal code and create various decentralized applications (DApps).

Ethereum was the pioneer of the second generation blockchain wave and still dominates today. It has many similarities to Bitcoin and can perform many of the same functions. However, the core principles of the two are very different, and each has its own advantages.

How does Ethereum work?

We can define Ethereum as a state machine. That is, a snapshot showing the account balance and the current state of the smart contract is available at any given point in time. Certain operations result in state updates, in which all nodes update their snapshots to reflect the changes.

State transitions in Ethereum.

Smart contracts running in Ethereum are triggered by transactions (from users or other contracts). When a user sends a transaction to a contract, all nodes in the network run the contract code and record the output. This process is implemented through the Ethereum Virtual Machine, which converts smart contracts into instructions that can be read by the computer.

In order to update the status, the system uses a special mechanism called mining. Similar to Bitcoin, mining is done through proof of work. We’ll dig into that later.

What is a smart contract?

The essence of smart contracts is code. But it is neither smart nor a contract in the traditional sense. The reason for the name "smart contract" is that it can automatically execute ("intelligent") an agreement ("contract") reached by two parties under certain conditions.

In the late 1990s, computer scientist Nick Szabo first proposed smart contracts. He explained this concept using the example of a vending machine, which he believed could be considered a precursor to modern smart contracts. The vending machine executes a simple contract. After the user inserts their coins, the machine delivers the product of their choice.

Smart contracts apply this type of logic to the digital environment. You can specify something simple in your code, such as when the contract receives two ether coins, return "Hello, World!".

In Ethereum, developers will encode it so that the EVM can read it. The developer then sends it to the special address where the contract is registered. At that time, the contract will be available to everyone. A contract cannot be deleted unless the developer sets conditions when writing the contract.

Now, the contract has an address. To interact with it, users only need to send 2 ether coins to the address. This action will trigger the contract code - all computers in the network will run this operation, witness that the user has paid the contract, and record its output (“Hello, World!”) Come down.

The above is probably one of the most basic examples of Ethereum functionality. As technology continues to advance, people are able to create more sophisticated applications that connect large numbers of contracts, and such programs are already available.

Who created Ethereum?

In 2008, a developer (or developer group) under the pseudonym Satoshi Nakamoto released the Bitcoin white paper, completely changing the landscape of digital currency. A few years later, a young programmer named Vitalik Buterin hoped to further promote this concept and apply it to various applications. Eventually, the concept was transformed into Ethereum.

In a blog titled "Ethereum: The Ultimate Smart Contract and Decentralized Application Platform" published in 2013, Buterin first proposed "Ethereum ”. In the article, he introduced the concept of a "Turing complete blockchain" - a decentralized computer with sufficient time and resources can run any application.

As technology advances, more types of applications that can be deployed in the blockchain will emerge in the market, and developers can do whatever they want. Ethereum hopes to break through the design limitations intentionally imposed by Bitcoin and find more uses for blockchain technology.

How to issue Ether coins?

Ethereum was launched in 2015, with an initial supply of 72 million ether coins. More than 50 million tokens were publicly sold through the token sale event "Initial Coin Offering (ICO)". Participants can purchase Ethereum using fiat currency or Bitcoin on the exchange.

What are "The DAO" and "Ethereum Classic"?

With Ethereum, open collaboration in the Internet has also found a new way of presentation. DAO (Decentralized Autonomous Organization) is a typical example. Such entities are similar to computer programs and are controlled entirely by computer code.

The earliest and most ambitious project implemented by the organization is "The DAO". It consists of a number of complex smart contracts running in Ethereum and operates as an independent venture fund. DAO tokens are distributed in the form of ICO, and token holders enjoy both equity and voting rights.

However, the project was attacked by a vulnerability shortly after it was launched, and nearly one-third of the DAO funds were stolen by criminals. To make matters worse, 14% of the total Ethereum supply at the time was locked in the DAO. There is no doubt that the fledgling Ethereum network suffered a catastrophic blow as a result.

After consultation, the entire blockchain was divided into two chains through a hard fork. The malicious transaction in one of the forks was reversed and the funds were recovered successfully - this is today's "Ethereum blockchain". In contrast, transactions in the original chain were not reversed and remained immutable, now known as Ethereum Classic.

The painful lessons warn us that we must take the risks of this technology seriously, and also make us realize that entrusting large fortunes to autonomous code may be counterproductive. This particular example also illustrates the enormous challenges of collective decision-making in an open environment. Security vulnerabilities aside, The DAO does perfectly illustrate the potential of smart contracts to achieve large-scale trustless collaboration through the Internet.

Chapter 2 - Where does Ethereum come from?

Contents

• How are new Ethereum coins generated?
• What is the total amount of Ethereum?
• How does Ethereum mining work?
• What is Ethereum gas fee?
• Gas Fees and Gas Fee Limits
• How long does it take to mine an Ethereum block?
• What are Ethereum tokens?

How are new Ethereum coins generated?

We briefly mentioned "mining" before. If you are familiar with Bitcoin, you know that the mining process is key to protecting and updating the blockchain. The mining principle of Ethereum is the same, that is, mining participants (which are time-consuming, laborious and costly) are rewarded with Ether coins according to the agreement.

What is the total amount of Ethereum?

As of February 2020, the total supply of Ethereum is approximately 110 million.

Unlike Bitcoin, Ethereum did not have a dedicated token issuance plan when it was launched. Bitcoin maintains its value by limiting the supply and gradually reducing the production of new coins. Ethereum lays the foundation for decentralized applications (DApps) through tokens. This question remains undecided as the most appropriate type of token issuance plan has yet to be found.

How does Ethereum mining work?

Mining is crucial to network security. It ensures that the blockchain can be updated fairly and equitably, and enables the network to function properly without a single decision-maker. In a mining operation, a subset of nodes (literally "miners") contribute computing power to solve cryptographic puzzles.

The actual operation is to hash a set of pending transactions and their data. In order for a block to be valid, the hash value must be lower than the value set by the protocol. If the operation fails, the miner can modify some data and try again.

Due to competition, miners must complete hash operations as quickly as possible - the hash rate therefore becomes a measure of miners' computing power. The higher the hash rate in a network, the harder cryptographic puzzles are to crack. Only miners need to find a valid answer, and after the answer is broadcast in the network, other participants can easily verify its validity.

As you might expect, nonstop high-speed hashing is expensive. Miners can earn rewards as an incentive to secure the network. Rewards are derived from all transaction fees in the block. They also receive freshly minted Ethereum, which at the time of writing is 2 Ethereum.

What is the Ethereum gas fee?

Do you still remember the "Hello, World!" contract mentioned earlier? The program is easy to run and computationally inexpensive. However, you are not just running the program on your computer as an individual, you are asking everyone in the Ethereum ecosystem to run it together.

This leads to the following questions: What happens when tens of thousands of people run complex contracts at the same time? If someone set up a contract to run the same set of code in a loop, each node would need to run indefinitely. These processes consume a lot of resources and can cause the entire system to crash.

Fortunately, Ethereum introduces the concept of gas fee to avoid this risk. Just like a car cannot run without fuel, a contract cannot run without fuel charges. In order to ensure the normal operation of the contract, users must pay a certain amount of gas fees. If the fuel fee is insufficient, the contract will be terminated.

Essentially, this is a charging mechanism. We extend the concept to transactions, that is, the main motivation of miners is profit, and may ignore transactions with lower fees.

Please note that Ether is not the same as gas. The average price of gas fluctuates largely depending on the miners. When conducting transactions, gas fees are paid in Ether. The charging mechanism is similar to Bitcoin: if the network is congested and many users are participating in transactions, the average price of gas fees will increase. Conversely, if there is little activity in the network, prices will fall.

Although the price of fuel is constantly changing, the cost of fuel required for each operation is fixed. That is, executing complex contracts consumes more gas than simple transactions. Therefore, Fuel cost becomes a measure of computing power. It ensures that the system charges corresponding fees based on the user's Ethereum resource usage.

The gas fee usually only consumes a small part of the Ethereum currency, and we set a smaller unit "gwei" for it. 1 gwei is equivalent to one billionth of an Ethereum.

In short, you can run a program that loops for a long time, but this can get very expensive very quickly. Therefore, nodes in the Ethereum network are conducive to reducing spam.

Changes in the average price of fuel over time (unit: gwei). Source: etherscan.io

Fuel fee and fuel fee limit

Suppose Alice is conducting a contract transaction. She calculates the gas fee she needs to pay (e.g. via ETH Gas Station). Maybe she will set a higher price to incentivize miners to process transactions as quickly as possible.

She will also set a fuel limit for self-protection. After there is a problem with the contract, the fuel consumed will be higher than the planned value. The function of the fuel cost limit is to ensure that the operation stops when the set fuel cost x is exhausted. The corresponding contract then expires, and the final amount Alice pays will not exceed the initial set value.

At first glance, this concept may seem confusing. In fact, this suggests that gas fees (and their limits) can be set manually, and most wallets will do this for the user. Simply put, gas determines how quickly miners can process transactions, while gas limit determines the upper limit of gas you are willing to pay for this transaction.

How long does it take to mine an Ethereum block?

The average time to add a new block to the Ethereum blockchain is 12 to 19 seconds. This will most likely change if the network switches to proof-of-stake, which is primarily designed to reduce block times. For details, please read "Ethereum Casper Analysis".

What are Ethereum tokens?

The biggest charm of Ethereum is that it supports users to create personal assets on the chain, and they can be stored and transferred like Ethereum. The smart contract stipulates the governance rules for the above assets, allowing developers to set token parameters by themselves. These include token issuance, issuance mechanism, divisibility, interchangeability and many other characteristics. There are several technical standards that can be followed when creating tokens in Ethereum, the most prominent is called ERC-20 – therefore, these tokens are often referred to as “ERC 20 tokens”.

This token has excellent functions and provides a broad testing platform for innovators, supporting them to carry out more experiments in cutting-edge fields such as finance and technology. It is designed to be extremely flexible, from issuing a unified token as an in-app currency to producing unique tokens based on physical assets. There are probably all sorts of great use cases for token creation that are streamlined and easy to implement that are not yet known.

Chapter 3 - Getting Started with Ethereum

Contents

• How to buy Ethereum?
  • How to buy Ethereum using a credit/debit card
  • How to buy Ethereum on the P2P market
• Using Ethereum (ETH ) What can I buy?
• What are the uses of Ethereum?
• What should you do if you accidentally lose your Ether coins?
• Can Ethereum transactions be restored?
• Are Ethereum transactions private?
• Can Ethereum create revenue?
• How to store Ethereum?
• How to deposit Ethereum to Binance
• How to store Ethereum on Binance
• How to withdraw Ethereum from Binance
• How to Store Ethereum in an Ethereum Wallet
  • Hot Wallet
  • Cold Wallet
• What is the logo and symbol of Ethereum?

How to buy Ethereum?

How to buy Ethereum using a credit/debit card

Binance allows users to Smooth and hassle-free buying of Ethereum from your browser. Operation steps:

1. Log in to the digital currency buying and selling portal.
2. Select the digital currency (ETH) you want to purchase and the currency used for payment.
3. Log in to your Binance account. New users please register first.
4. Select a payment method.
5. Follow the prompts to enter your card details and complete identity verification.
6. Done! The purchased Ethereum will be deposited into your Binance account.

How to buy Ethereum in the P2P market

The P2P market is also a platform for buying and selling Ethereum. Through the Binance Mobile App, you can buy tokens directly from other users. Operation steps:

1. Open the APP, then log in or register an account.
2. Select One-click buying and selling, then click the Buy tab in the upper left corner of the interface.
3. Select one of the transaction types that pops up and click Buy.
4. You can pay using other digital currencies (Digital Currency Paymentstab) or fiat currencies (Fiat Currency Paymentstab).  
5. Next, the system will ask you to choose a payment method. You can choose flexibly according to your needs.
6. Select Buy Ethereum.
7. At this point, payment needs to be completed. When you're done, click Mark as paid and Confirm.
8. The transaction is completed when the seller delivers the tokens as scheduled.

What can I buy with Ethereum (ETH)?

Unlike Bitcoin, Ethereum’s application environment is not limited to digital currency networks. It can build a development platform for decentralized applications, and Ethereum, as a tradable token, becomes the "fuel" of this ecosystem. Therefore, the main role of Ethereum is to provide utility to Ethereum.

However, Ethereum can also be used to purchase goods and services, playing a similar role to other traditional currencies.

Heat map of retailers that accept Ethereum as payment. Source: cryptwerk.com/coinmap

What are the uses of Ethereum?

Ethereum's native currency "Ether" can be used as digital currency or collateral. Many also view it as a store of value similar to Bitcoin. However, Ethereum is different from Bitcoin in that the high degree of programmability of the Ethereum blockchain gives it more utility. As a result, Ethereum has become the lifeblood of decentralized financial applications, decentralized markets, trading platforms, games, and many other applications.

What should you do if you accidentally lose your Ether coins?

Ethereum transactions do not involve any banks, and users must be responsible for their own funds. Tokens can be deposited into the trading platform or stored in a personal wallet. Please note that when using a personal wallet to store funds, it is important to keep your mnemonic phrase safe so that you can recover your funds if you lose access to your wallet.

Can Ethereum transactions be resumed?

Once data is added to the Ethereum blockchain, it is almost impossible to change or delete it. This means that when entering into a transaction, it can be treated as if it were set in stone. Therefore, it is important to double-check that the destination address for receiving funds is correct. When transferring large amounts of funds, it is best to first send a small amount of funds to the receiving address to verify its authenticity.

Due to a hacker attack on the smart contract, Ethereum was forced to perform a hard fork in 2016, effectively reversing the malicious transaction. However, this is an extreme measure in response to an unusual event, not the norm.

Are Ethereum transactions private?

All transactions added to the Ethereum blockchain are publicly visible. Even if an Ethereum address does not reveal real names, observers can identify participants through other methods.

Can Ethereum create revenue?

Ethereum is a volatile asset with both profit opportunities and loss risks. Some people choose to hold Ethereum for the long term, convinced that the network will become a global programmable settlement layer in the future. Others choose to use Ethereum to trade with other altcoins. Of course, both strategies also have corresponding financial risks.

As a mainstay of decentralized finance (DeFi), Ethereum can also be used for lending, collateralizing loans, minting synthetic assets, or staking in the future.

Some investors may choose to invest in Bitcoin for the long term and use it as the only digital asset in their portfolio. Conversely, other investors are more flexible, building a diversified portfolio across Ethereum and other altcoins, or allocating a percentage of their capital to short-term trading (such as day trading or swing trading). There is no universal way to make profits in the market. Every investor should act according to his or her ability and choose the most appropriate strategy based on the actual situation.

How to store Ethereum?

There are many ways to store your tokens, each with their own pros and cons. As with anything at risk, the best solution is to build a diversified portfolio of options.

Generally speaking, storage solutions are divided into two types: managed and unmanaged. Escrow solutions mean that funds can be entrusted to a third party (such as a trading platform). At this time, you must log in to the custodian platform to trade digital currency assets.

Non-custodial solutions are just the opposite, where users use digital currency wallets to control their own funds. This type of wallet does not hold coins like a physical wallet, but instead stores access credentials to assets within the blockchain - cryptographic keys. Remember:When using a non-custodial wallet, always back up your mnemonic phrase!

How to deposit Ether to Binance

To deposit your Ethereum holdings to Binance, please follow the steps below Operation:

1. Log in to your Binance account. New users please register first.
2. Enter the spot wallet and click Deposit.
3. Check "ETH" in the token list.
4. Select a network and send Ether to the corresponding address.
5. Done! Once the transaction is confirmed, the purchased Ethereum will be credited to your Binance account.

How to store Ethereum on Binance

To actively participate in Ethereum trading , you need to deposit it into your Binance account. Storing Ethereum on Binance is easy and secure. With Ethereum, users can also enjoy various benefits of the Binance ecosystem through loans, staking, airdrop promotions, and lucky draws.

How to withdraw Ethereum from Binance

To withdraw Ethereum deposited in your Binance account , please follow these steps:

1. Log in to your Binance account.
2. Enter the spot wallet and click Withdraw.
3. Check "ETH" in the token list.
4. Select a network
5. Enter the recipient address and amount.
6. Authenticate via email.
7. Done! Once the transaction is confirmed, Ether will be deposited to the address you provided.

How to store ether in an Ethereum wallet

If you need to deposit ether Enter your personal wallet, you can choose a hot wallet or a cold wallet.

Hot wallet

A digital currency wallet that is connected to the Internet in some way is called a "hot wallet" ”. It is usually a mobile or desktop application through which users can check their balance or send/receive tokens. Hot wallets are connected to the network and are extremely vulnerable to attacks, but this convenient method is more popular for daily payments. Trust Wallet is a convenient and fast mobile wallet that supports multiple currencies.

Cold wallet

A cold wallet is a digital currency wallet that works offline. Such wallets are far away from online attack vectors, significantly reducing the probability of being attacked. However, cold wallets are generally not as convenient as hot wallets. Both hardware wallets and paper wallets are cold wallets. The latter technology is outdated and extremely risky, and has gradually faded out of users' horizons.

Please read "Analysis of Digital Currency Wallet Types" to learn more about wallet classifications.

What are the logo and symbols of Ethereum?

Vitalik Buterin designed the original Ethereum logo. It consists of two rotated summation symbols "Σ" (Sigma in the Greek letters). The final design is based on this pattern and consists of a rhombus called an "octahedron" surrounded by four triangles. Similar to other digital currencies, Ethereum also has its own standard Unicode symbol, and apps and websites can easily display its value. Just as the U.S. dollar is represented by the symbol "$", Ethereum is represented by the symbol "Ξ".

Chapter 4 - Scalability, Ethereum 2.0 and the future of Ethereum

Table of Contents

• What is scalability?
• Why does Ethereum need to expand?
• The Trilemma of Blockchain Scalability
• How many transactions can Ethereum handle?
• What is Ethereum 2.0?
• What is Ethereum sharding?
• What is Ethereum Plasma?
• What is Ethereum rollup?
• What is Ethereum Proof of Stake (PoS)?
• What is Ethereum staking?
  • How much ether is required to stake in Ethereum?
  • How much Ether can you earn by staking in Ethereum?
  • How long is the lock-up time for staking Ethereum?
  • Are there risks in staking Ethereum?

What is scalability?

Simply put, scalability is a measure of a system's ability to grow. For example, networks or servers used in computing can be expanded in different ways to handle more demand.

Scalability in cryptocurrency refers to the continuous development of the blockchain to absorb more users. The increase in users means that the blockchain will compete for more operations and transactions.

Why does Ethereum need to expand?

Advocates of Ethereum believe that the next iteration of the Internet will be based on the Ethereum platform. The so-called Web 3.0 will bring about a decentralized topology that will directly skip intermediaries, be more privacy-focused and move towards truly owning your own data. These basic properties will be built through distributed computing and distributed storage/communication protocols in the form of smart contracts.

To achieve its goals, Ethereum must massively improve its transaction processing capabilities while avoiding a decrease in network decentralization. At present, Ethereum does not limit the transaction volume by limiting the block size like Bitcoin, but only sets a gas fee limit for blocks, that is, a single block can Maximum fuel cost to accommodate.

For example, the gas fee limit for a block is 100,000 Gwei. You can submit 10 transactions with a gas fee limit of 10,000 Gwei, or 2 transactions with a gas fee limit of 50,000 Gwei to this block. Any other transactions submitted at the same time must wait for the next block.

This situation is not ideal for a system that is widely used by everyone. If pending transactions exceed block space, a backlog can quickly develop. Additionally, rising gas fees mean users must pay higher amounts to have individual transactions prioritized. That said, a busy network will make certain use cases very expensive to process.

The popular CryptoKitties game was a typical example of the limitations of the Ethereum network. In 2017, the Ethereum-based game “CryptoKitties” attracted a large number of users. They conduct transactions in the network and raise their own digital cats (representing non-fungible tokens). As the game gained popularity, the number of pending transactions skyrocketed, eventually leading to extreme network congestion.

The Trilemma of Blockchain Scalability

On the surface, as long as the area is improved Block gas limits alleviate all scalability issues. In other words, the higher the limit, the more transactions the network can process in a fixed period of time, right?

Unfortunately, this is not feasible without sacrificing some of Ethereum’s key features. Vitalik Buterin proposed the blockchain trilemma (shown in the figure below), explaining the delicate balance that blockchain must achieve.

The triple paradox of blockchain: (1) scalability, (2) security and ( 3) Decentralization.

Only two of the three major features can be optimized, but not all. Blockchains such as Ethereum and Bitcoin both prioritize security and decentralization. Their consensus algorithm ensures network security. However, its network consists of thousands of nodes, resulting in poor scalability. The reception and verification of transactions are completed by many nodes, and the speed is far slower than that of centralized solutions.

Another scenario is to remove the block gas fee limit. The network can gain security and scalability at the same time, but the degree of decentralization will be seriously reduced.

The reason is that more transactions will be included in a single block, resulting in a larger block. The nodes in the network still need to download and broadcast blocks regularly, which places very strict requirements on the hardware. After the block's gas fee limit is increased, it will be more difficult for nodes to verify, store and broadcast blocks.

Eventually, straggler nodes will exit the network. If it continues to operate in this manner, only a few powerful nodes will survive, further deepening the centralization of the system. Eventually, blockchain will be both secure and scalable, but no longer decentralized.

The last case is that blockchain focuses on decentralization and scalability. The network improves speed and decentralization by deprecating the consensus algorithm, at the cost of significantly reduced security.

How many transactions can Ethereum handle?

In recent years, Ethereum’s transactions per second (TPS) have rarely exceeded 10 transactions. The numbers are disappointing for a platform that aspires to be the "world's computer."

Scaling solutions have always been an important part of the Ethereum roadmap. Plasma is a typical example of a capacity expansion solution. The solution is designed to improve the efficiency of Ethereum, and its technology is also applicable to other blockchain networks.

What is Ethereum 2.0?

Although Ethereum has great potential, it does have limitations at present. Above, we have discussed the issue of scalability. In short, if Ethereum hopes to become the mainstay of the new financial system, it must significantly increase the total number of transactions processed per second. This problem is difficult to solve given the distributed nature of the network. Ethereum developers have also been looking for a solution for years.

On the one hand, in order to ensure the decentralization of the network, some restrictions must be implemented. The more demanding the requirements for running a node are, the fewer participants there will be and the network will become more centralized. Therefore, increasing Ethereum’s transaction processing capabilities will lead to increased node burden, ultimately threatening the integrity of the system.

Another drawback of Ethereum (and other proof-of-work cryptocurrencies) is that it is extremely resource intensive. In order to successfully add a block to the blockchain, mining is necessary. However, this method of block creation must perform operations quickly and consumes a lot of power.

In order to break the above limitations, developers have proposed a series of upgrade plans, collectively called "Ethereum 2.0" (or ETH 2.0). When fully implemented, ETH 2.0 will effectively improve the performance of the network.

What is Ethereum sharding?

As mentioned above, each node stores a copy of the entire blockchain. These nodes will also be updated as the blockchain changes, taking up huge bandwidth and memory.

The above process can be avoided if you use a method called sharding. As the name suggests, this process divides the network into different subsets of nodes, which is called sharding. Each shard handles its own transactions and contracts, while still communicating with other sharded networks as required. Each shard is independently verified, so there is no need to store data from other shards.

Comparison of the network in March 2020 and the network implementing sharding

"Sharding" is a complex expansion method that requires a lot of design and implementation work. However, if the application is successful, it will become one of the most effective methods to increase the throughput of the network by orders of magnitude.

What is Ethereum Plasma?

Ethereum Plasma is an off-chain scalability solution that aims to make transactions off the blockchain. Improve transaction throughput. In this regard, it has certain similarities with sidechains and payment channels.

Through Plasma, the secondary chain can be anchored to the main chain of the Ethereum blockchain while maintaining minimal communication. Although users rely on the main chain to resolve disputes and "complete" personal activities on the secondary chain, the two generally operate independently.

The key to successful scaling of Ethereum is to reduce the amount of data that nodes must store. The Plasma solution allows developers to stipulate some rules for "sub-chains" in the smart contract of the main chain. Afterwards, applications whose information or processes are too expensive to store/run in the main chain can be freely transferred to the "sub-chain" for creation.

For a detailed introduction to Plasma, please read "What is Ethereum Plasma?" 》.

What is Ethereum rollup?

Similar to Plasma, Rollup is also intended to detach transactions from the main chain and achieve Ethereum expansion. So, how does the latter work?

The answer is that a single contract in the primary chain holds all funds on the secondary chain and stores cryptographic proof of the current state of the chain. Secondary chain operators deposit margin into the mainnet contract and only submit valid state transitions to it. The idea behind this is that the state is maintained off-chain, so there is no need to store the data on the blockchain. However, the main difference between Rollup and Plasma is the way it submits transactions to the main chain. Through special transaction types, this method can "summarize" massive transactions and bundle them together into special blocks, called Rollup blocks.

Rollup is divided into two different types: Optimistic Rollup and Zero-Knowledge Rollup (ZK Rollup). Both ensure correct state transitions in different ways.

Zero-knowledge rollup (ZK Rollup) Submit transactions using a cryptographic verification method called zero-knowledge proof. Specifically, a method called zk-SNARK is used. This article will not introduce the specific operational details, but we can describe its application in rollup as follows: In this way, different participants can prove to each other that they have specific information without revealing the specific content.

As far as zero-knowledge rollup (ZK Rollup) is concerned, this information is a state transition submitted to the main chain. A big advantage of this process is that it happens almost instantaneously while minimizing the chance of committing a corrupted state.

Optimistic Rollup Improves flexibility by sacrificing scalability. Through the "Optimistic Virtual Machine (OVM)", smart contracts can run in the secondary chain. On the other hand, there is no cryptographic proof that can confirm that the state transition submitted to the main chain is correct. To alleviate this problem, a short delay is built into the process, allowing users to challenge and reject invalid blocks submitted to the main chain.

What is Ethereum Proof of Stake (PoS)?

Proof of Stake (PoS) is another block verification scheme in addition to proof of work. In a proof-of-stake system, the way to obtain new blocks is not mining but casting (sometimes called forging). Instead of miners competing through computing power, candidate blocks are now verified by randomly selected nodes (or validators) at regular intervals. If done correctly, it will receive all transaction fees for the block and may also receive block rewards depending on the protocol.

Proof-of-stake does not involve mining and is therefore considered more environmentally friendly. Validators consume less energy than miners, so blocks can be minted in consumer-grade hardware.

As part of Ethereum 2.0, Ethereum plans to transition from PoW to PoS through an upgrade operation called Casper. Although a specific date has not been officially confirmed, the first iteration may launch in 2020.

What is Ethereum staking?

In the workload proof protocol, miners are responsible for ensuring network security. They won't cheat because doing so consumes power and causes them to lose all potential rewards. This game theory does not exist in Proof of Stake, instead the network is secured through other cryptoeconomic measures.

Dishonest behavior is curbed not because users worry about wasting energy, but because they worry about losing money. Verifiers must pledge a certain number of tokens (become token holders) to obtain verification rights. If a node attempts to cheat, its staked tokens (a certain amount of Ether) will be lost; if the node becomes unresponsive or offline, these tokens will also gradually be depleted. However, if a validator runs more nodes, they will receive more rewards.

How many ether coins do you need to stake in Ethereum?

The minimum estimated stake per validator in Ethereum is 32 Ethereum coins. Setting the value so high makes a 51% attack extremely costly.

How much ether can you earn by staking in Ethereum currency?

This issue is more complicated. This metric is determined not only by the number of tokens staked, but also by the total amount of ether staked in the network and the inflation rate. As a rough estimate, the project's current annual rate of return is approximately 6%. Please keep in mind that this number is only an estimate and may change in the future.

How long is the lock-up time for staking Ethereum?

If you need to withdraw Ethereum from the validator, you must join the withdrawal queue. If there is no queue, the minimum withdrawal time is 18 hours. The specific time will be dynamically adjusted based on the number of validators withdrawing money within a specific period.

Are there risks to staking Ethereum?

As a validator responsible for maintaining network security, you must take various risks into consideration. If the validator node is offline for a long time, a considerable part of the deposit will be lost. Additionally, if your deposit balance falls below 16 Ethereum, you will be removed from the validator set.

Another systemic risk factor cannot be ignored. Proof of Stake has never been used on such a large scale, and glitches can occur during operation. Software inevitably has defects and loopholes, which may even cause devastating blows - when the value of the pledge reaches billions of dollars, it faces major risks.

Chapter 5 - Ethereum and Decentralized Finance (DeFi)

Directory

• What is decentralized finance (DeFi)?
• The uses of decentralized finance (DeFi)
• Can decentralized finance (DeFi) enter the mainstream?
• What decentralized finance (DeFi) applications are there?
• Decentralized Exchange (DEX) in Ethereum

What is decentralized exchange Centralized Finance (DeFi)?

Decentralized finance ("DeFi" for short) is an activity that implements decentralization of financial applications. DeFi is built on a public open source blockchain that is freely accessible to all users on the Internet (i.e. permissionless). This key feature has the potential to attract billions of people into this new global financial system.

In the increasingly mature DeFi ecosystem, users can interact with other users and smart contracts through peer-to-peer (P2P) networks and decentralized applications (DApps). The biggest advantage of DeFi is that it makes all this happen, but users still have ownership of their funds.

In short, decentralized finance (DeFi) activities aim to build a new financial system and gradually break the limitations of the current system. DeFi has a relatively high degree of decentralization and a large developer base, so most of DeFi is currently built on Ethereum.

Uses of decentralized finance (DeFi)

You may have learned that Bitcoin’s largest The advantage is that it does not require any central agency to coordinate network operations. What would it look like to develop programmable applications if we took this as a core idea? This is the potential of DeFi applications: get rid of a central "coordinator" or intermediary agency, and there will be no single point of failure.

As mentioned earlier, "open access" is the biggest advantage of DeFi. Billions of people around the world do not have access to financial services of any kind. How would we manage our daily lives without all financial security? This is not a figment of imagination, but a reflection of the real life of billions of people - it is this group of people that DeFi serves.

Can decentralized finance (DeFi) enter the mainstream?

These advantages seem very attractive, but why has DeFi still not taken over the mainstream market? Currently, most DeFi applications are still in the experimental stage, need to be improved in convenience and flexibility, and often crash. Facts have proved that the architectural design of this kind of ecosystem is very difficult, and the distributed development environment makes it even more difficult.

For developers such as software engineers, game theorists, and mechanism designers, building a DeFi ecosystem is full of challenges and has a long way to go. Therefore, it is still unknown whether DeFi applications can enter the mainstream.

What are the decentralized finance (DeFi) applications?

The most popular decentralized finance (DeFi) use case today is undoubtedly stablecoins. Essentially, a stablecoin is a blockchain token whose value is pegged to a real-world asset, such as a fiat currency. For example, the value of BUSD is pegged to the United States Dollar (USD). Such tokens are applied in the blockchain, and storage and transfer are very convenient.

Another popular application is lending. There are many peer-to-peer (P2P) services where users lend money to others and earn interest on it. In fact, Binance Lending is one of the most convenient platforms. The operation method is very simple, just deposit the funds into the lending wallet and earn interest the next day!

However, the most exciting thing is that DeFi can be applied to almost any field. It can be integrated into various peer-to-peer (P2P) and decentralized markets to create a platform for trading unique digital currency collectibles and other digital items. Such applications can also create synthetic assets, allowing anyone to create a market for anything of value. Other areas of use include prediction markets and derivatives.

Decentralized Exchange (DEX) in Ethereum

Decentralized Exchange (DEX) ) allows different user wallets to conduct transactions directly. When trading on centralized trading platforms such as Binance, users first need to transfer funds to the platform and then trade through the internal system.

Decentralized trading platforms are different. Through magical smart contracts, you can use your digital currency wallet to complete transactions directly, avoiding risks such as hacker attacks on the trading platform.

Binance DEX is a typical representative of decentralized trading platforms. Uniswap, Kyber Network, and IDEX are the leaders built on Ethereum. In order to maximize the security of funds, some trading platforms even allow transactions to be completed through hardware wallets.

Comparison of centralized and decentralized trading platforms.

We compare the differences between centralized and decentralized trading platforms through the figure above. In the image on the left, we can see that Binance is between the two sides of the transaction. Therefore, when Alice wants to exchange token A for Bob's token B, both parties must deposit their assets into the exchange. After the deal is concluded, Binance will reallocate the account balances between the two in proportion to the funds.

On the right is the decentralized trading platform. We note that no third party was involved in the entire transaction. Alice's tokens are directly converted into Bob's tokens through smart contracts. In this way, the contract reached by both parties will be automatically executed without relying on any intermediary agency.

As of February 2020, DEX has been the most commonly used application on the Ethereum blockchain. However, its trading volume is far from that of centralized trading platforms. Nonetheless, if developers and designers continue to optimize the user experience, DEX will gradually win the favor of more users. One day, it will surely be able to compete with centralized trading platforms.

Chapter 6 - Entering the Ethereum Network

Table of Contents

• What is an Ethereum node?
• How do Ethereum nodes work?
• Ethereum full node
• Ethereum light node
• Ethereum mining node
• How to run an Ethereum node
• How to mine in Ethereum
• What is Ethereum ProgPoW?
• Who is the developer of Ethereum software?
• What is Solidity?

What is an Ethereum node?

The term "Ethereum node" refers to a program that interacts with the Ethereum network in some way. Any device can act as an Ethereum node, from a simple mobile wallet app to a computer that stores a copy of the entire blockchain.

All nodes act as communication points in some way, but there are many types of nodes in the Ethereum network.

How do Ethereum nodes work?

Unlike Bitcoin, Ethereum cannot find any program as a reference implementation. In the Bitcoin ecosystem, Bitcoin Core is the main node software, and the Ethereum Yellow Paper proposes a series of independent (but compatible) programs. The most popular ones currently are Geth and Parity.

Ethereum full node

To connect to Ethereum in a way that allows independent verification of blockchain data network, you should run a full node using the previously mentioned software.

The software will download blocks from other nodes and verify the correctness of the transactions it contains. The software will also run all smart contracts called, ensuring that the information received is the same as other nodes. If everything works as planned, we can assume that all node devices store the same copy of the blockchain.

Full nodes are crucial to the operation of Ethereum. Without numerous nodes spread across the globe, the network would lose its censorship-resistant and decentralized nature.

Ethereum Light Node

By running a full node, you can directly contribute to the health and security of the network Make a contribution. However, full nodes typically require the use of independent machines for operation and maintenance. For users who are unable (or simply unwilling) to run a full node, light nodes are a better option.

As the name suggests, light nodes are lightweight devices that can significantly reduce resource and space usage. Portable devices such as mobile phones or laptops can serve as light nodes. However, lowering overhead comes at a cost: light nodes cannot be fully self-sufficient. They cannot be synchronized with the entire blockchain and require full nodes to provide relevant information.

Light nodes are favored by merchants, service providers and users. They are widely used for payments where full nodes are not necessary and running costs are too high.

Ethereum mining node

The mining node can be either a full node client or a light node client. The term "mining node" is used differently than in the Bitcoin ecosystem, but is still used to identify participants.

To participate in Ethereum mining, some additional hardware must be used. The most common approach is to build a mining rig. Users connect multiple GPUs (graphics processing units) through mining machines to calculate hash data at high speed.

Miners can choose between two mining options: mining alone or joining a mining pool. Solo mining means that miners create blocks alone. If successful, the mining rewards will be exclusive to you. If you join a mining pool, the hash power of many miners will be combined. The block generation speed is increased, but the mining rewards will be shared by many miners.

How to run an Ethereum node

One of the most important features of the blockchain is “open access ”. This shows that anyone can run an Ethereum node and strengthen the network by validating transactions and blocks.

Similar to Bitcoin, many businesses offer plug-and-play Ethereum nodes. This device is undoubtedly the best choice if you just want to get a single node up and running, but the downside is that you have to pay extra for convenience.

As mentioned earlier, there are many different types of node software implementations in Ethereum, such as Geth and Parity. To run a personal node, you must understand the installation process for your chosen implementation.

Unless running a special node called an archive node, a consumer-grade laptop is sufficient to support the normal operation of an Ethereum full node. However, it's best not to use your day-to-day work equipment, as nodes can seriously slow things down.

When running a personal node, it is recommended that the device is always online. If a node is offline, it may take a lot of time to synchronize when it is connected to the Internet again. Therefore, it is best to choose equipment that is cheap to build and easy to maintain. You can even run light nodes via a Raspberry Pi.

How to mine in Ethereum

With the network about to transition to a proof-of-stake mechanism, Ethereum mining Mines are no longer the safest form of long-term investment. After the transition is successful, Ethereum miners can only transfer their mining equipment to other networks or sell it directly.

Given that the transition is not yet complete, participating in Ethereum mining still requires the use of special hardware (such as a GPU or ASIC). To make substantial profits, you must customize your mining rig and find mining farms with low electricity prices. In addition, you need to create an Ethereum wallet and configure the corresponding mining software. This all consumes a lot of time and money. Before participating in mining, please carefully consider whether you can handle various challenges.

What is Ethereum ProgPoW?

ProgPow stands for ProgrammaticProof of Work. This is an extension of the Ethereum mining algorithm Ethash, designed to make GPUs more competitive than ASICs.

In the Bitcoin and Ethereum communities, ASIC resistance has been a controversial topic for many years. In the Bitcoin network, ASICs have become the main mining force.

In Ethereum, ASIC is not mainstream, and a considerable number of miners still use GPU. However, this will soon change as more and more companies introduce Ethereum ASIC mining rigs to the market. However, what are the problems with ASICs?

On the one hand, ASIC significantly weakens the decentralization of the network. If GPU miners are unable to make a profit and have to stop mining, the hash rate will eventually be concentrated in the hands of a few miners. In addition, the development cost of ASIC chips is quite expensive, and only a handful of companies have the development capabilities and resources. This current situation may lead to the concentration of the Ethereum mining industry in the hands of a few companies, forming a certain degree of industry monopoly.

ProgPow’s integration has been controversial since 2018. Some believe it is beneficial to the health of the Ethereum ecosystem. Others are opposed, arguing that it could lead to a hard fork. With the arrival of proof-of-stake, it remains to be seen whether ProgPoW can be applied to the network.

Who is the developer of Ethereum software?

Ethereum and Bitcoin are the same, both are open source platforms. Anyone can participate in protocol development or build applications based on the protocol. In fact, Ethereum is currently the largest developer community in the blockchain field.

Mastering Ethereum produced by Andreas Antonopoulos and Gavin Wood, and Developer Resources launched by Ethereum.org are ideal entry points for new developers. choice.

What is Solidity?

The concept of smart contracts was first proposed in the 1990s. Its application in blockchain brings a new set of challenges. Solidity, proposed by Gavin Wood in 2014, has become the main programming language for developing Ethereum smart contracts, and its syntax is similar to Java, JavaScript and C++.

Essentially, using the Solidity language, developers can write instructions that can be parsed by the Ethereum Virtual Machine (EVM) when broken down. You can learn more about how it works via the Solidity GitHub.

In fact, Solidity language is not the only choice for Ethereum developers. Vyper is also a popular development language, and its syntax is closer to Python.