Grayscale outlines Ethereum's brief history: Technological and community development momentum, leading the way, competition platforms difficult to replicate

The cryptocurrency asset management company Grayscale provides a comprehensive overview of the three development stages, features, potential advantages, and risks of Ethereum.

Original Title: "An Introduction to Ethereum" (An Introduction to Ethereum)
Author: Grayscale, a cryptocurrency asset management company
Translated by: [Translator's Name]

Ethereum is a global open-source blockchain platform for decentralized applications (DApps) that is supported by smart contracts and embedded with the native digital currency Ether (ETH). On Ethereum, code can be written to control the transfer of digital value based on programmed conditions. Ethereum is primarily used for three purposes: storing value in ETH, settling transactions by sending or receiving payments in ETH, and facilitating network operations (empowering DApps) through transaction fees paid in ETH, which are costs calculated based on executing code.

In November 2013, Vitalik Buterin released a white paper conceptualizing Ethereum, and with contributions from seven co-founders and other developers, the network was launched in June 2015. The initial development was led by Ethereum Switzerland GmbH EthSuisse and is currently overseen by the Ethereum Foundation, a nonprofit organization based in Switzerland.

Prior to its establishment, Ethereum aimed to expand the primary functions of cryptocurrencies like Bitcoin as peer-to-peer (P2P) digital currencies by integrating a platform capable of deploying smart contracts and more complex structures such as DApps and Decentralized Autonomous Organizations (DAOs). Its progress has been collectively driven by its global developer community, which is considered the largest among all cryptocurrency networks. Currently, Ethereum is in its fourth development stage known as Serenity or Ethereum 2.0, which will be rolled out in several phases and is expected to be completed after 2022.

Ethereum History

In the next section, we will briefly introduce the three main periods in Ethereum's history: events before the network launch, the infamous DAO hack in June 2016, and the four planned stages of recent and future Ethereum developments.

In 2013, early Bitcoin contributor and co-founder of Bitcoin Magazine, Vitalik Buterin, first introduced Ethereum as a concept of a "world computer" in the initial white paper. As an early adopter of Bitcoin, Buterin proposed the view that digital currency and its associated blockchain could be more than just a simple P2P electronic value transfer. To realize this grand vision, he set out to create a complete virtual ecosystem that includes a global blockchain and a smart contract programming platform, both to be supported by the native digital currency ETH.

By integrating programming functionality directly into the Ethereum protocol, developers worldwide would be able to use Ethereum ETH for automatic payments and design new decentralized applications hosted on the public blockchain. Through the use of smart contracts, applications on Ethereum could automatically transmit information and value under dynamic conditions, providing customized business models for the new internet economy (Web3.0).

At the end of 2013 and beginning of 2014, Buterin, along with Mihai Alisie, Amir Chetrit, Charles Hoskinson, Anthony Di Iorio, Dr. Gavin Wood, Joseph Lubin, and Jeffrey Wilke, co-founded Ethereum. Shortly thereafter, Dr. Gavin Wood encoded the first feature of Ethereum in the yellow paper, detailing the technical specifics of the protocol, including the Ethereum Virtual Machine (EVM) and the smart contract programming language Solidity. Along parallel paths, two entities were established to oversee the development of Ethereum: the for-profit entity EthSuisse founded in February 2014 and the non-profit organization Ethereum Foundation founded in July 2014.

At the network launch on July 30, 2015, based on the approximately $18 million raised during the initial crowdfunding conducted from July to August 2014, 72 million ETH were created and allocated. At the launch of the network, the decision was made to dissolve EthSuisse and designate the Ethereum Foundation as the sole organization dedicated to accelerating adoption and usage.

On April 30, 2016, blockchain and IoT solutions company Slock.it announced "The DAO" on Ethereum. Positioned as a decentralized venture capital fund, The DAO raised over $150 million within a 28-day crowdfunding window. The DAO granted voting rights to members based on their investment proportions, allowing members to vote on funding projects. If a project proved to be profitable, members would be rewarded according to the terms of the relevant smart contract and their share in The DAO.

However, The DAO did not operate as planned. On June 17, 2016, an anonymous hacker exploited a flaw in the smart contract code governing The DAO to siphon off about $60 million worth of ETH to a separate wallet address. This led to a massive sell-off in the ETH market, as investors rushed to sell off their stakes.

Unable to recover the stolen funds, the digital currency community internally debated how to better address the situation. Ultimately, a hard fork was decided on July 20, 2016, creating a new version of the Ethereum blockchain. This version would be known as Ethereum, erasing all theft records and restoring the stolen ETH to the original owners. The original Ethereum protocol was renamed Ethereum Classic, with its original token renamed ETC. Ethereum Classic retained the transaction history, including the DAO theft, to maintain the fundamental principles of decentralized governance and immutability.

Today, Ethereum and Ethereum Classic networks coexist, and they are just beginning to interoperate in many aspects. Although these two networks are similar in functionality and practical application features, the underlying separation since the hard fork has led to significant differences in technical architecture, development philosophy, and governance principles.

The development of Ethereum is divided into four main stages, some of which are further subdivided into multiple phases. Each stage is integrated into the main protocol like a hard fork and thoroughly tested for functionality on the test network. Over time, the roadmap has evolved to reflect community consensus. Contributions to the Ethereum project aim to reach its final stage, Serenity, where the goal is to become a globally scalable payment network and smart contract platform resistant to centralized governance.

Stage 1: Frontier - On July 30, 2015, the Ethereum network was launched, allowing users to mine ETH and test basic functions.

Stage 2: Homestead - On March 14, 2016, Solidity was updated and several parameters were added, including gas price and cost dimensions.

Stage 3: Metropolis – Byzantium - On October 16, 2017, privacy and security were enhanced by adding zk-SNARKs and the difficulty bomb (as the basis for ETH issuance inflation).

Stage 3.5: Metropolis – Constantinople - On February 28, 2019, smart contracts were improved, and scalability solutions were explored using state channels.

Stage 4: Serenity - Ethereum 2.0 - Expected to be implemented in stages after 2022? to transition Ethereum to a proof-of-stake (PoS) protocol, including Ethereum Web Assembly (eWASM) for enhanced network performance and a scalable smart contract programming language support.

For a comprehensive explanation of the features introduced in each stage of the four stages, please refer to EthHub.

The Ethereum network aims to expand on Bitcoin's use cases and operate as a decentralized world computer. While Bitcoin uses a limited script language that only allows P2P value transfer, Ethereum is designed to be Turing complete, enabling more advanced types of programmable data interactions with ETH.

Nevertheless, Ethereum and Bitcoin share some features, although to varying degrees:

Decentralization: Ethereum currently adopts PoW, effectively eliminating the need for central authorities like governments and financial institutions to verify transactions or operate the network based on smart contracts. Buterin claims that the blockchain is politically and architecturally decentralized but logically centralized, where nodes have equal power in the network and must cooperate to validate transactions. It is worth noting that while the governance design is decentralized, the degree of mining pool decentralization in the Ethereum network may pose related risks. As of February 12, 2020, the two largest mining pools controlled over 50% of the network hash rate.

Permissionless: Anyone can participate in the network.

Security: In the PoW protocol, the network is "secure as long as honest nodes control more [energy] than collectively attacking nodes." Attackers attempting fraudulent transactions on the blockchain must find the required blocks, alter the transaction data, and mine each subsequent block until the fraudulent block is confirmed by the network, known as a 51% attack. The main barriers to these attacks are the high computational costs, uncertain returns, making them less likely to occur. Although the 2016 DAO hack raised concerns about Ethereum's security, Atzei et al. (2016) found that the main reason for the attack was a vulnerability in Solidity (the programming language used to design Ethereum smart contracts) rather than a flaw in the network itself. However, it is worth noting that with the completion of Serenity, Ethereum will transition from a PoW network security model to a PoS network security model. As a significant update to the Ethereum network, any failure to implement this change correctly could have a significant adverse impact on Ethereum's value.

Open Source: The source code of the Ethereum project is available on the internet, allowing anyone to access, contribute, or fork it for free. This is an important feature for building trust and accumulating users, as evidenced by the Ethereum project having the most active developers in the entire digital currency community. Users can propose Ethereum Improvement Proposals (EIPs), which are feature suggestions designed to improve the network and adhere to strict technical guidelines.

Transparency: All transactions are recorded on the Ethereum blockchain and can be publicly viewed anywhere in the world.

Pseudonymous: Public wallet addresses are not directly linked to any identifiable personal information. However, achieving complete anonymity is challenging in the current state. This is because any addresses involved in Ethereum transactions are permanently and publicly visible on the blockchain. Information such as multiple transactions from one wallet, custody solutions or exchange data can essentially be traced back to an individual's identity.

Deflationary Supply: Initially, 72 million Ethereum were created. The supply of ETH increases based on a deflationary mechanism, which adjusts as the network matures. However, there is no specified maximum supply limit. Establishing a transparent currency supply and issuance schedule is crucial for assessing the long-term investability of a digital currency.

Ethereum is the first digital asset to combine a platform with smart contract functionality. It consists of the following elements, which are crucial for understanding the network and its many applications.

ETH is the native digital currency of Ethereum. It serves three main purposes: storing value in ETH, enabling users to send or receive ETH for transaction settlement, and facilitating network operation (empowering DApps) by paying transaction fees in ETH (called "Gas"), which are based on the computational cost of executing code. Gas is an internal value unit used for executing smart contract code, calculated by measuring the cost of executing a given instruction. Miners and smart contract programmers charge transaction fees in ETH based on an equal amount of Gas. The minimum unit of Gas price is Wei, where 10^18 Wei is equal to 1 ETH.

Smart contracts are lines of code that facilitate the exchange of anything of value, such as money, information, property, or voting rights. They are uploaded to the blockchain and execute transactions that cannot be tampered with. Using smart contracts, users can send or receive ETH, create markets, store registries of debts or commitments, represent ownership of assets or companies, transfer funds under a set of logical instructions, and form new digital assets in compliant issuance or distribution. The concept of smart contracts was first proposed by Nick Szabo, a prominent computer scientist specializing in digital currencies and the founder of BitGold, who explored it in a 1997 white paper.

Solidity is the primary programming language of Ethereum. It is used to write smart contracts, develop DApps, build DAOs, and operate IoT devices based on Ethereum technology. Other languages for the Ethereum network, such as Vyper, still exist, while languages like Serpent and Mutan have been deprecated.

DApps are apps, programs, or tools built using smart contracts on the Ethereum network. DApps have potential use cases in many areas, including financial services, asset management, supply chain management, identity management, and encrypted data storage and transmission. Some popular DApps built on the Ethereum blockchain include MakerDAO, CryptoKitties, and IDEX. Particularly, MakerDAO is the largest decentralized finance (DeFi) platform currently. As a practical application of Ethereum, it has the potential to democratize financial services. As of February 12, 2020, approximately 3.1 million ETH is locked as collateral for DeFi.

Decentralized Autonomous Organizations (DAOs) are organizations independent of central management entities. Unlike traditional corporate ownership distributed among shareholders, DAOs are owned by those who provide tokens, who also have voting rights. Additionally, DAO rules are determined by the attached smart contracts.

While Ethereum's Ethash and Bitcoin's SHA-256 both use PoW, these protocols differ in their treatment of ASICs (application-specific integrated circuits). In Ethash, GPUs (graphics processing units) are the preferred devices, which are relatively cheaper compared to ASICs designed for SHA-256. Thus, Ethereum mining is more egalitarian, with lower entry barriers. It also reduces the likelihood of mining centralization, decreasing the risk of network attacks. However, the adoption of Ethash comes with the cost of requiring more memory for computation. For more technical details about Ethash, refer to the open-source guide on Github.

The EVM was created by Dr. Gavin Wood in 2014, detailed in the technical version of the original Ethereum yellow paper. A Virtual Machine (VM) is software that simulates computer behavior, essentially serving as a runtime environment to execute any activities on a regular computer. It allows users to test functionality and eliminates the risk of attacks and failures on the main computer hosting the VM. If the VM is attacked and certain functions are compromised, users can simply exit the VM.

The EVM handles the state of the Ethereum blockchain and executes all smart contracts, DApps, and DAOs on the network. It is Turing complete, meaning that programs will run continuously until completion given enough time and memory. This is a significant innovation in blockchain technology, as it allows for complex conditional logic and forms the foundation for more intricate programs. Other virtual machines, such as SputnikVM, are under development and gaining increasing utilization in Ethereum blockchain projects.

Initially, 72 million ETH were created and distributed to the public, Ethereum Foundation, and developers. Ethereum is equipped with a mechanism to suppress inflation to control the new ETH issuance rate, currently capped at an additional 16 million ETH per year. The consideration behind this is to prevent arbitrary creation of currency, which could lead to malicious inflation or manipulation.

Miners who successfully confirm and upload transactions to the blockchain receive block rewards for their efforts, providing incentives that promote exponential growth in network usage. Block rewards started at 5 ETH, reduced to 3 ETH after the Byzantium hard fork, and further reduced to the current 2 ETH after the Constantinople hard fork. Similar to Bitcoin, Ethereum miners may also receive additional ETH transaction fees.

Since its inception, the history of block rewards has been as follows:

• Block #0 to Block #4,369,999: 5 ETH
• Block #4,370,000 to Block #7,280,000: 3 ETH (changed via EIP-649)
• Block #7,280,000 to present: 2 ETH (changed via EIP-1234)

Compared to traditional financial institutions, payment channels, and other digital currency networks, the Ethereum protocol's design offers three potential advantages:

1. Pioneering Smart Contract Functionality: Ethereum is the first digital currency network to integrate a smart contract platform. Because of this feature, real-world use cases are emerging and maintaining value (e.g., DeFi). Given Ethereum's position as the second-largest digital currency network in the past few years, it must be acknowledged that Ethereum has had an impact on the digital asset class and the traditional financial sector.

2. Active Developer Community: Ethereum is one of the most popular digital currency networks in terms of GitHub activity metrics, including the number of commits, total contributors, total project watchers, and total stars.

3. Institutional and Corporate Support: The Enterprise Ethereum Alliance (EEA) is an organization dedicated to promoting enterprise and individual adoption and usage of Ethereum.