Ethereum Basics

1. What is Ethereum?

Ethereum is a decentralized, open-source blockchain platform designed to support smart contracts and decentralized applications (dApps). Unlike Bitcoin, which mainly focuses on digital currency, Ethereum acts as a programmable blockchain that enables developers to build complex on-chain logic.

Ethereum has a native cryptocurrency called Ether (ETH), which is used to pay transaction fees and secure the network.

Ethereum is often described as a “world computer” or “Blockchain 2.0”.

2. Ethereum vs Bitcoin

Although both are blockchain-based systems, they differ in purpose and design.

Purpose

  • Bitcoin: Digital money and store of value
  • Ethereum: Programmable platform for decentralized applications

Programmability

  • Bitcoin uses a limited scripting language
  • Ethereum supports Turing-complete smart contracts (via Solidity)

Consensus

  • Bitcoin: Proof of Work (PoW)
  • Ethereum: Proof of Stake (PoS) after The Merge

Usage

  • Bitcoin is mainly used for payments and value storage
  • Ethereum supports DeFi, NFTs, DAOs, and Web3 applications

3. Ethereum Evolution

The Merge

Ethereum transitioned from Proof of Work to Proof of Stake in an upgrade known as The Merge. This significantly reduced energy consumption and replaced miners with validators who stake ETH to secure the network.

Ongoing Upgrades

Ethereum continues to evolve through:

  • Layer 2 scaling solutions
  • Protocol optimizations
  • Future upgrades such as data sharding

4. Ethereum Architecture

Layer 1 (Mainnet)

  • Execution Layer: Executes transactions and smart contracts
  • Consensus Layer: Manages validators and block finalization
  • EVM (Ethereum Virtual Machine): Executes smart contract bytecode deterministically

Layer 2 (Scaling Solutions)

Layer 2 solutions improve scalability by processing transactions off-chain and submitting proofs or data to Layer 1.

  • Optimistic Rollups
  • Zero-Knowledge (ZK) Rollups

Sidechains

Independent blockchains connected to Ethereum with separate security assumptions.

5. Accounts in Ethereum

Ethereum has two types of accounts:

Externally Owned Accounts (EOAs)

  • Controlled by private keys
  • Can send transactions and hold ETH

Contract Accounts

  • Controlled by smart contract code
  • Execute logic when called

Each account contains:

  • ETH balance
  • Nonce
  • Storage (for contracts)
  • Code (for contracts)

6. Gas and Fees

Ethereum uses a gas system to measure computation cost.

  • Gas Limit: Maximum gas a transaction can consume
  • Gas Price: Cost per unit of gas (usually in Gwei)

EIP-1559 Fee Model

  • Base Fee: Burned by the protocol
  • Priority Fee (Tip): Paid to validators

Gas prevents network abuse and compensates validators.

7. Ethereum Virtual Machine (EVM)

The EVM is a decentralized runtime environment that executes smart contracts. It ensures that every node reaches the same result given the same input.

Characteristics:

  • Turing-complete
  • Deterministic execution
  • Isolated execution environment

8. Ethereum Ecosystem

Application Layer

  • DeFi protocols (Uniswap, Aave)
  • NFT platforms
  • Wallets (MetaMask)
  • DAO tools

Protocol Layer

  • Execution clients (Geth, Erigon)
  • Consensus clients (Lighthouse, Prysm)

Scaling Layer

  • Rollups
  • Sidechains

9. Ethereum Values and Philosophy

Ethereum is guided by:

  • Decentralization
  • Permissionless access
  • Censorship resistance
  • Open-source development
  • Public goods mindset

10. Typical Ethereum Transaction Flow

  1. User creates and signs a transaction
  2. Transaction is broadcast to the network
  3. Validators include the transaction in a block
  4. EVM executes the transaction
  5. Gas fees are charged and distributed
  6. Network state is updated