Ethereum Overview
Module 1 of Ethereum & Smart Contracts
What Is Ethereum?
Ethereum is a decentralized computing platform that runs smart contracts — self-executing programs stored on the blockchain.
| Bitcoin | Ethereum |
|---|---|
| Decentralized money | Decentralized computation |
| Limited scripting | Turing-complete programs |
| UTXO model | Account model |
| Store of value | Programmable platform |
"Ethereum is a global, decentralized platform for money and new kinds of applications." — ethereum.org
The Vision
Vitalik's Insight (2013)
Bitcoin showed you could have decentralized money. But why stop there?
What if you could decentralize:
- Exchanges
- Lending
- Insurance
- Identity
- Voting
- Any application?
The World Computer: A global, censorship-resistant computer that anyone can program.
Key Components
1. Ether (ETH)
The native cryptocurrency:
- Pays for computation (gas)
- Secures the network (staking)
- Store of value
- Medium of exchange within dApps
2. Smart Contracts
Programs that:
- Live on the blockchain
- Execute automatically
- Cannot be modified once deployed
- Have their own state and balance
3. The Ethereum Virtual Machine (EVM)
The runtime environment:
- Executes smart contract code
- Deterministic (same input = same output)
- Sandboxed (isolated from system)
- Runs on every node
4. Accounts
Two types:
| External Accounts (EOAs) | Contract Accounts |
|---|---|
| Controlled by private keys | Controlled by code |
| Can initiate transactions | Cannot initiate (only respond) |
| No code | Has code |
| Human users | Smart contracts |
How Ethereum Works
Transaction Flow
1. User signs transaction with private key
2. Transaction broadcast to network
3. Validators include in block
4. EVM executes the transaction
5. State is updated
6. Block is finalized
State Machine
Ethereum is a giant state machine:
State N + Transaction → State N+1
State includes:
- All account balances
- All contract storage
- All contract code
Every transaction transitions the world state.
Gas: Paying for Computation
Why Gas Exists
Problem: Infinite loops would halt the network.
Solution: Make computation cost money.
Gas = Unit of computation
Gas Price = ETH per unit of gas
Transaction Fee = Gas Used × Gas Price
Gas Economics
| Operation | Gas Cost |
|---|---|
| Addition | 3 gas |
| Storage write (new) | 20,000 gas |
| Storage write (existing) | 5,000 gas |
| ETH transfer | 21,000 gas |
| Contract deployment | 32,000+ gas |
EIP-1559 (London Upgrade)
New fee structure:
- Base fee: Burned (destroyed)
- Priority fee: Tip to validators
- Max fee: Upper limit you're willing to pay
If block is >50% full: Base fee increases
If block is <50% full: Base fee decreases
Result: More predictable fees
From PoW to PoS: The Merge
The Merge (September 2022)
Ethereum switched from Proof-of-Work to Proof-of-Stake.
| Before (PoW) | After (PoS) |
|---|---|
| Miners | Validators |
| Energy: ~80 TWh/year | Energy: ~0.01 TWh/year |
| Hardware: GPUs | Hardware: Consumer PC |
| Minimum: Expensive rigs | Minimum: 32 ETH |
99.95% Energy Reduction
One of the largest decarbonization events in tech history.
How PoS Works
- Validators stake 32 ETH
- Randomly selected to propose blocks
- Other validators attest to validity
- Rewards for honest behavior
- Slashing for misbehavior
Key Differences from Bitcoin
| Aspect | Bitcoin | Ethereum |
|---|---|---|
| Purpose | Money | Platform |
| Smart Contracts | Limited Script | Turing-complete |
| Block Time | 10 minutes | 12 seconds |
| Supply | 21M cap | No hard cap (but issuance low) |
| State | UTXO set | World state (accounts + storage) |
| Consensus | PoW (Nakamoto) | PoS (Casper) |
| Programming | Bitcoin Script | Solidity, Vyper |
The Ethereum Roadmap
Completed
- The Merge (2022): PoW → PoS
- Shapella (2023): Staking withdrawals enabled
In Progress
- Proto-Danksharding (EIP-4844): Cheaper L2 data
- Account Abstraction: Smart contract wallets
- Single Slot Finality: Faster finalization
Future
- Full Danksharding: Massive L2 scaling
- Statelessness: Lighter nodes
- Quantum Resistance: Post-quantum crypto
The Ethereum Ecosystem
Layer 2s
Scaling solutions that inherit Ethereum security:
- Optimistic Rollups: Optimism, Arbitrum, Base
- ZK Rollups: zkSync, Starknet, Polygon zkEVM
DeFi
Financial applications:
- Exchanges (Uniswap)
- Lending (Aave, Compound)
- Stablecoins (DAI, USDC)
NFTs
Non-fungible tokens:
- Digital art
- Gaming assets
- Identity/credentials
DAOs
Decentralized organizations:
- Treasury management
- Governance
- Coordination
Criticisms and Challenges
Scalability
- Base layer: ~30 TPS
- Solution: Layer 2 rollups
Complexity
- Larger attack surface than Bitcoin
- More bugs possible
- Harder to audit
Centralization Concerns
- Staking concentration
- Infrastructure (Infura, Alchemy)
- MEV dynamics
Monetary Policy
- No fixed supply
- "Ultrasound money" vs. "Ethereum is not money"
Key Takeaways
- Ethereum extends Bitcoin's vision to general computation
- Smart contracts enable complex applications
- The EVM provides deterministic, sandboxed execution
- Gas prevents infinite loops and spam
- The Merge reduced energy use by 99.95%
- L2s are scaling Ethereum for mass adoption
Questions to Consider
- Is Ethereum a competitor to Bitcoin or complementary?
- What can't be decentralized on Ethereum?
- How decentralized is Ethereum really?
- Will L2s make the base layer irrelevant?