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Crypto Classroom Lesson #2: Ethereum (ETH)

What is Ethereum

Ethereum is an open-source, public blockchain platform that allows users to build and deploy decentralised applications (Dapp). A Dapp is a server-less peer-to-peer application which uses Smart Contracts to execute commands and retrieve information from the blockchain.

Unlike traditional contracts, a smart contract is a program designed by developers that automatically executes itself based on the underlying agreement coded in the contract. Its self-execution nature provides three advantages over traditional contracts:

  1. Immutable – Once a smart contract is deployed on the blockchain, its code cannot be modified unless it was rewritten to be upgradable.
  2. Fast – Smart contracts are executed almost instantly without human confirmation.
  3. Cheap – The costs associated with developing and executing smart contracts are relatively low compared to traditional contracts which involve third parties (lawyers, brokers, etc).

The Ethereum Virtual Machine (EVM)

The EVM is a system that can read and execute contracts written in the Ethereum programming language. The EVM from each node is a completely segregated network on its own (isolated from the main network).

All full nodes execute smart contracts using the same software and agree on the outcome (which should be the same for all nodes). This allows nodes to verify the computation themselves without the need to rely on other parties, making the network less vulnerable to hacking or data corruption. Moreover, the isolation provides developers with a sandbox environment to test their programs in a real use-case environment without affecting the main blockchain.

How Smart Contracts Work

In this example, we will demonstrate how a smart contract can be used for crowdfunding.

1. A smart contract is written and placed on the blockchain so that the project owner can receive funds from investors only if certain conditions are met (e.g. total funding reached 100k).

2. Investors can now send funds (in ETH) to the smart contract. Since the smart contract is distributed across the network, there is no single owner to the funds. The funds will be recorded by all the nodes in the Ethereum network.

3. When the underlying conditions are met, the smart contract will automatically release the funds to the project owners. On the other hand, if the conditions are not fulfilled, the funds will be automatically returned to the investors.

4. For every transaction, a transaction fee (gas) will have to be paid to other nodes for computing and executing the contract. In the Ethereum network, the gas is called Ether (ETH). It incentivises developers to write better applications to reduce waste on ether and rewards nodes for executing contracts.

Other than crowdfunding, smart contracts can also play an important part in Insurance (Fizzy AXA), Finance (Quorum), Gambling (Dice2win), Logistics (dexFreight), Real Estate (Propy) and many other industries.

Features of the Ethereum network

  • Average block time: 14 to 15 seconds
  • Consensus algorithm: Proof-of-Work – Ethash (Proof-of-Stake in the roadmap)
  • Supply limit: Currently no limit
  • Ether is mined with GPU

Further Reading:

Ethereum White Paper


Written by Peter Chan
Trader @Genesis Block
For any queries please contact [email protected]