Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud, or third-party interference. Ethereum is also the second-largest cryptocurrency by market capitalization, after Bitcoin. In this article, we will explain some of the key features of Ethereum's structure, burn mechanism, and staking.
Structure
Ethereum consists of a network of nodes that communicate with each other using a peer-to-peer protocol. Each node stores a copy of the entire blockchain, which is a ledger of all transactions that have ever occurred on the network. The blockchain is divided into blocks, which are batches of transactions that are validated by the nodes. The blocks are linked together by a cryptographic hash function, which ensures the integrity and immutability of the data.
The nodes also execute the smart contracts that are deployed on the network. Smart contracts are pieces of code that define the rules and logic of an application or agreement. They can be written in various programming languages, such as Solidity, Vyper, or Yul. Smart contracts can interact with each other and with external data sources, such as oracles or APIs.
Ethereum uses a consensus algorithm called Proof-of-Work (PoW) to secure the network and prevent malicious attacks. PoW requires the nodes to solve a mathematical puzzle in order to create new blocks and earn rewards. The difficulty of the puzzle adjusts dynamically according to the network's hash rate, which is the combined computing power of the nodes. PoW ensures that no one can tamper with the blockchain or create fake transactions.
Burn Mechanism
Ethereum has recently implemented a major upgrade called London, which introduced several changes to the network's fee structure and monetary policy. One of the most significant changes is the introduction of a burn mechanism, which reduces the supply of Ether (ETH), the native currency of Ethereum.
The burn mechanism works by destroying a portion of the fees that are paid by the users to execute transactions and smart contracts on the network. The fees are composed of two parts: a base fee and a priority fee. The base fee is determined by an algorithm that adjusts according to the network's congestion level. The priority fee is set by the users themselves to incentivize the miners to include their transactions in a block.
The base fee is burned, meaning that it is permanently removed from circulation. The priority fee is paid to the miners as a reward for their work. The burning mechanism creates a deflationary pressure on ETH, which could increase its value over time. It also makes the fees more predictable and transparent for the users.
Staking
Ethereum is in the process of transitioning from PoW to a new consensus algorithm called Proof-of-Stake (PoS). PoS aims to improve the scalability, security, and sustainability of the network. PoS does not require the nodes to perform energy-intensive computations to create new blocks and earn rewards. Instead, it requires them to stake their ETH as a collateral and act as validators.
Validators are randomly selected by the protocol to propose and attest new blocks. They receive rewards for their service, but they also risk losing their stake if they act dishonestly or go offline. PoS creates an incentive for the validators to behave in the best interest of the network and maintain its integrity.
Ethereum's PoS system is called Ethereum 2.0 or Eth2, which is being developed and launched in multiple phases. The first phase, called Beacon Chain, was launched in December 2020 and established the foundation for Eth2. The second phase, called Shard Chains, will introduce parallel chains that will increase the network's capacity and throughput. The final phase, called Docking, will merge Eth2 with Eth1 (the current PoW network) and complete the transition to PoS.
Conclusion
Ethereum is a dynamic and innovative platform that offers many possibilities for developers and users alike. Ethereum's structure enables decentralized applications that run without intermediaries or censorship. Ethereum's burn mechanism creates a deflationary effect that could enhance its value proposition as a store of value and a medium of exchange. Ethereum's staking system promises to make the network more scalable, secure, and sustainable than ever before.
Comments