Exploring Ethereum: Whitepaper[4]

Welcome, dear readers, to the fifth and final installment of our series, "Exploring Ethereum." Throughout this journey, we have delved deep into the revolutionary Ethereum blockchain and its implications for the world of smart contracts and decentralized applications. From understanding its roots in Bitcoin and existing concepts to exploring its diverse applications, we have covered a wide range of topics.

In this concluding blog, we will address several miscellaneous aspects and concerns related to Ethereum. We'll discuss the modified GHOST implementation, fees, computation and Turing completeness, currency and issuance, long-term supply growth rate, mining centralization, scalability, and much more. It's time to tie up loose ends and reflect on the broader implications of this groundbreaking technology.

So, if you've been following our series from the beginning, we extend our heartfelt gratitude for joining us on this informative journey. And if you're just joining us now, we encourage you to explore the previous blogs in the series to gain a comprehensive understanding of Ethereum's foundational concepts and applications.

Modified Ghost: Afterlife in Ethereum?⛓️

The Ethereum blockchain has continuously evolved to address the challenges of scalability and security. One critical aspect of its development is the implementation of the GHOST (Greedy Heaviest Observed Subtree) protocol. Originally introduced in 2013 as an improvement to Bitcoin's consensus algorithm, GHOST has been modified and adapted to suit Ethereum's unique needs

The GHOST protocol was initially proposed by academics Sompolinsky and Zohar in their paper titled "Secure High-Rate Transaction Processing in Bitcoin." Bitcoin's underlying consensus algorithm, called Nakamoto Consensus or Proof-of-Work (PoW), relies on the longest chain rule. However, this approach presents scalability challenges as the network grows.

To tackle this issue, the GHOST protocol introduces a different approach to selecting the "winning" chain. Rather than considering only the longest chain, GHOST considers the weight of all blocks, including those in branches that were not chosen as the main chain. This modification allows the blockchain to include more valid transactions and achieve higher throughput.

Ethereum adapted and enhanced the original GHOST protocol to suit its specific requirements. In Ethereum's modified GHOST implementation, the selection of the "winning" chain takes into account not only the weight of the blocks but also the uncles—blocks that were valid but not included in the main chain. By including 'uncles' in the consensus process, Ethereum increases security and incentivizes miners to include valid but slightly delayed blocks.

In the modified GHOST implementation of Ethereum, 'uncles' are blocks that are not included in the main chain but are still recognized and rewarded.

Uncles have the following characteristics:

1. Definition: An uncle block is a valid block that is a direct child of a previous block but is not included in the main chain. It must adhere to the criteria of being a valid block header.

2. Ancestor Relationship: An uncle block is required to be a direct child of a specific generation ancestor of the current block being mined. In Ethereum's modified GHOST implementation, the uncles can be up to seven levels deep, meaning they can be descendants of ancestors up to seven generations back.

3. Non-Ancestor Requirement: An uncle block cannot be an ancestor of the block in which it is included. This ensures that uncles are separate from the main chain and do not cause conflicts or interfere with the integrity of the blockchain.

In the modified GHOST implementation of Ethereum, when a block becomes stale (i.e., not included in the main chain), it receives 87.5% of its base reward. The remaining 12.5% of the base reward is awarded to the nephew block which includes the stale block. It's important to note that transaction fees are not awarded to uncles in this scenario.

The inclusion of uncles through the modified GHOST protocol has several benefits. It reduces the possibility of forks, enhances network security, and rewards miners who produce valid blocks that may not make it to the main chain. This incentivization encourages a higher level of network participation and contributes to a more robust and decentralized blockchain.

The modified GHOST implementation significantly improves Ethereum's security and scalability. By allowing the inclusion of uncles, Ethereum achieves faster block confirmation times and reduces the occurrence of stale blocks. This enhancement is crucial for a blockchain that supports a wide array of decentralized applications and requires efficient transaction processing.

Moreover, the modified GHOST implementation aligns with Ethereum's move towards Ethereum 2.0 and the transition from PoW to Proof-of-Stake (PoS) consensus. Ethereum 2.0 will further enhance scalability and energy efficiency, making Ethereum a more sustainable and scalable blockchain platform.

Fees: No free lunches?💰

In the Ethereum blockchain, fees play a crucial role in incentivizing participants and facilitating the smooth operation of the network. They serve multiple purposes, including preventing spam, prioritizing transactions, and compensating miners for their computational efforts.

Transaction Fees:

Every transaction executed on the Ethereum network incurs a certain fee known as the gas fee. Gas is the unit used to measure the computational effort required to execute a transaction or run a smart contract. The gas fee is calculated by multiplying the gas price (set by the sender) with the amount of gas consumed by the transaction. The gas price acts as a bidding mechanism, where higher prices result in faster transaction processing.

The purpose of transaction fees is twofold. Firstly, they prevent malicious actors from flooding the network with excessive transactions by imposing a cost on each operation. This helps maintain network stability and efficiency. Secondly, fees prioritize transactions, as miners are more likely to include transactions with higher fees in their blocks.

Block Rewards:

Miners, who dedicate their computational resources to secure the network and validate transactions, are rewarded for their efforts. Block rewards consist of two components: the base reward and the uncle inclusion reward.

The base reward is a fixed amount of Ether (ETH) that is allocated to the miner of a successfully mined block. As of the Ethereum 2.0 upgrade, the base reward is 2 ETH. However, it's important to note that the base reward may be subject to future changes through network upgrades and consensus protocol transitions.

Uncle Inclusion Rewards:

In addition to the base reward, miners can receive uncle inclusion rewards for including uncles in their blocks. Uncles are valid blocks that are not part of the main chain but are recognized and included as a means to enhance network security and encourage participation.

It's important to note that transaction fees are not awarded to uncles. Only the miner of the block containing the transaction receives the transaction fee as part of their block reward.

Turing-Completeness and Computation🧑‍💻

In computer science, a system is Turing complete if it can simulate an arbitrary computer program. Turing complete systems must be able to run any possible computation, including the most complex types of computation such as those found in blockchain.

In Ethereum, Turing completeness means using conditional statements and loops to program smart contracts. The formal execution model of the Ethereum Virtual Machine (EVM) code is surprisingly simple. EVM is a stack-based architecture, where each operation consumes zero or more operands from the stack and produces zero or more results on the stack.

The EVM has a maximum computational cost per operation, so creating an infinite loop or performing an operation that takes too long to execute is impossible. Turing completeness is important in determining usability as well as many other aspects of the software. Since Ethereum relies on programmable smart contracts, it is not dependent on third-party services to function.

In the Ethereum whitepaper, it is proposed that the transaction will have to mention the number of steps it will take in the beginning itself. EVM is stateful, meaning that it can access and modify the internal state of the Ethereum blockchain. This state includes account balances, contract storage, and other relevant information.

An attacker constructs a contract that runs an indefinite loop and then sends a transaction to the miner that activates that loop. The miner will process the transaction in an unending loop until it runs out of gas. Even if the execution runs out of gas and terminates halfway through, the transaction remains legitimate, and the miner is still entitled to the fee from the attacker.

An attacker can also take control of one of a financial contract's data feeds and convert it to run an indefinite loop, seeking to force any efforts to collect funds from the financial contract to fail. To avoid this difficulty, the financial contract can specify a gas limit for the message.

The contract creator does not need to worry about defending against attacks where execution stops halfway through because the changes are restored if execution stops. Turing completeness is easy to manage even with some flaws, while Turing incompleteness is difficult to manage even though it looks like an easy fix.

In the next section, we will explore the currency and issuance in the Ethereum blockchain.

Currency and Issuance💵

Currency and issuance in Ethereum involve the native cryptocurrency called Ether (ETH) and the rules governing its supply and denominations.

Ether serves as the fuel for the Ethereum network, used to pay for transaction fees and computational resources within the platform. It also incentivizes network participants, such as miners, who validate and secure the blockchain.

Ethereum has a defined monetary policy that determines the issuance and supply of Ether. Unlike traditional fiat currencies, Ether's supply is not controlled by a central authority, but rather by a predetermined set of rules implemented in the Ethereum protocol.

The initial issuance of Ether took place through a public sale known as the Ethereum Initial Coin Offering (ICO) in 2014. Since then, new Ether has been issued as a block reward to miners who successfully add new blocks to the blockchain. This process, known as mining, involves solving complex mathematical problems that secure the network.

Ethereum has a dynamic issuance model that aims to balance inflation and network security. The issuance rate has gone through various stages, transitioning from a high inflationary rate to a more moderate rate over time. The current issuance model is commonly referred to as Ethereum Improvement Proposal 1559 (EIP-1559).

Denominations of Ether include wei, gwei, and Ether itself. Wei is the smallest unit, followed by gwei (gigawei) and then Ether. One Ether is equivalent to 1,000,000,000,000,000,000 wei.

Some of the other denominations commonly used include:

1 Szabo: 10^12 wei.

1 Finney: 10^15 wei

Ethereum's supply rules include a maximum cap on the total supply of Ether. At the time of writing, this cap is not fixed but rather subject to the current issuance rate. However, there have been discussions and proposals to introduce a fixed supply limit in the future, similar to Bitcoin's fixed supply of 21 million coins.

Mining Centralization⛏️⚒️

In the context of blockchain networks like Ethereum, mining refers to the process of validating transactions and adding them to the blockchain. It involves solving complex mathematical puzzles to find a solution known as a hash that meets specific criteria. Miners compete with each other to find the correct hash, and the first miner to solve the puzzle is rewarded with newly minted cryptocurrency.

While both Ethereum and Bitcoin rely on a mining consensus algorithm, they differ in their approaches to mining and decentralization.

Ethereum initially adopted a mining algorithm called Ethash, which is designed to be memory-intensive. This approach was intended to encourage wider participation in mining by making it less feasible for specialized mining hardware (ASICs) to dominate the network. Ethash aimed to foster a more decentralized mining ecosystem by allowing individuals to mine using consumer-grade hardware, such as GPUs (graphics processing units).

However, Ethereum has been undergoing a transition from proof-of-work (PoW) to proof-of-stake (PoS) with the implementation of Ethereum 2.0. PoS eliminates the need for miners to solve resource-intensive puzzles. Instead, it relies on validators who lock up a certain amount of cryptocurrency (in this case, Ether) as a stake to secure the network and participate in block validation. The probability of being chosen as a validator to create new blocks is proportional to the amount of cryptocurrency staked.

This shift to PoS in Ethereum 2.0 aims to address scalability concerns and reduce energy consumption associated with PoW mining. PoS also introduces a higher level of decentralization by allowing more individuals to participate as validators, as the barrier to entry is lower compared to traditional mining.

In contrast, Bitcoin still relies on PoW mining using the SHA-256 algorithm. Bitcoin mining has become highly specialized and dominated by powerful ASIC mining hardware. This concentration of mining power in the hands of a few large mining pools has raised concerns about centralization.

Scalability Issues⚖️

Ethereum's past consensus mechanism (proof-of-work) was the cause to limit its transaction processing capacity. The network could handle around 15 transactions per second (TPS), which was significantly lower than the demand during peak times. As the popularity of Ethereum grows, network congestion becomes more common, resulting in higher fees and slower transaction times.

Bitcoin faces similar scalability challenges, with a transaction processing capacity of approximately 7 TPS. Both Ethereum and Bitcoin are limited by the block size and block time, leading to congestion and delays.

Ethereum's major solution to scalability is Ethereum 2.0, which introduces a shift from proof-of-work (PoW) to proof-of-stake (PoS) consensus. PoS is expected to increase the network's capacity and reduce energy consumption, enabling faster and more efficient transactions.

Ethereum 2.0 also introduces the concept of shard chains, dividing the network into multiple parallel chains. Each shard chain will have its own capacity for processing transactions, thereby significantly increasing the overall scalability of the Ethereum network.

Ethereum employs layer 2 scaling solutions, such as state channels (e.g., Raiden Network) and sidechains (e.g., Polygon), to offload a significant portion of transactions from the main Ethereum blockchain, improving scalability and reducing fees.

Optimistic rollups and the implementation of Ethereum Improvement Proposal 1559 (EIP-1559) aim to increase transaction throughput and efficiency, reduce fees, and enhance the user experience within Ethereum. It's important to note that Ethereum's scalability solutions are currently being developed and implemented.

Conclusion🔚

In conclusion, Ethereum has emerged as a groundbreaking platform that revolutionizes the way we envision and build decentralized applications. The Ethereum whitepaper laid the foundation for a programmable blockchain capable of executing smart contracts, enabling a wide range of applications and possibilities. With its focus on decentralization, security, and inclusivity, Ethereum has fostered a vibrant ecosystem that empowers developers, entrepreneurs, and users worldwide.

Just as the Ethereum whitepaper emphasized the need for a decentralized and trustless platform, the progress made since its publication has been remarkable. The Ethereum network has evolved, adapting to challenges and seeking innovative solutions to improve scalability, energy efficiency, and user experience. The ongoing transition to Ethereum 2.0 and the introduction of proof-of-stake demonstrate the Ethereum team's commitment to scalability, sustainability, and the continuous advancement of the platform.

As Ethereum continues to mature, it holds the potential to reshape industries, democratize finance, and redefine how we interact with technology. The combination of smart contracts, decentralized applications, and the vibrant community surrounding Ethereum creates a fertile ground for innovation and collaboration.

Ethereum's journey is far from over. The vision outlined in the whitepaper continues to inspire and drive the Ethereum community toward new frontiers. Together, we are building a decentralized future where trust is established through code, and opportunities for growth and development are accessible to all.

In the spirit of Ethereum's ethos, let us embrace this transformative technology, explore its possibilities, and contribute to shaping a more decentralized and inclusive world.