Examining Ethereum Under A Microscope: Is There Really a Method to the Madness?

tldr; Below is a hefty and yet still somehow high-level overview of Ethereum. The roughly 5-year-old project has emerged as one of the most exciting and proven projects in the cryptocurrency space while somehow still encompassing the most risk and arguably, upside of any crypto-project. This dichotomy has allowed Ethereum to act as a sort of magic mirror for those in the industry. Fanboys and detractors alike can look into the project and see what they want to see: the 2nd-most successful crypto-project with product-market fit and an army of developers behind it or a nascent, experimental Frankenstein so complicated it would make Rube Goldberg blush.

This article looks to dig into the enigma known as Ethereum and tease apart the different aspects that comprise the whole. We’ll step through 10 parts that of the project, combing through the numbers and claims, hoping to provide some nuance and context to the many claims read in the news and Reddit boards. In doing so, it is my hope that everyone (including me) comes out with a clearer picture as to what Ethereum is, what it is not, and what it hopes to become. Hopefully, by the end, everyone comes out a more empowered crypto-user and less scared of the Frankenstein because regardless of where you stand, Ethereum continues to “push the envelope” and should not be ignored!

Ethereum is an open-source public blockchain network founded in 2015 by Vitalik Buterin in conjunction with Charles Hoskinson, Anthony Di Iorio, Mihai Alisie, and Joe Lubin. The original vision behind Ethereum was to create “a platform for deploying and executing smart contracts” on a sort-of decentralized world computer capable of fostering a new parallel, permissionless digital economy. The goal was to extend beyond Bitcoin’s functionality to a decentralized Turing-complete computing platform for smart contracts, programmable money, and decentralized applications (dApps). These dApps would use the native Ethereum currency, Ether.

Ethereum has an intriguing and polarizing history that has had a profound influence on the broader cryptocurrency space. In July 2016, Ethereum split into Ethereum and Ethereum Classic as a result of the intense debate following the infamous DAO incident. Since then, Ethereum has solidified its place in the cryptocurrency mainstream as the second largest cryptocurrency – behind Bitcoin – and boasts the largest portion of the developers in the space due to its Turing-completeness and smart contract functionality. 

Ethereum has established itself as one of the most groundbreaking technological innovations in recent years not just in the cryptocurrency space, but in all of technology writ large. The months and years ahead will prove incredibly critical as Ethereum begins a multi-year upgrade that will fundamentally change how the network operates. The success/failure of the upgrade will eventually determine its ultimate sustainability and the direction of cryptocurrency platforms outside of Bitcoin.

What is Ethereum?

The primary use of the platform and the reason for its proliferation is the ability to code and run smart contracts on the network. Smart contracts were proposed by cryptocurrency pioneer Nick Szabo and are programs that run autonomously on the network, exactly as programmed, without any possibility of downtime, censorship, fraud, or third-party interference. They are computer code that allows for the exchange of money, ownership, or anything of value in a trustless, automated manner without the need of a middleman. Aggregations of smart contracts built to function within a specific design are known as decentralized applications (dApps). Ethereum is the leading dApp platform by a substantial margin. 

The Turing-completeness of the platform theoretically allows for any type of computer program, website, or app that can be created on the centralized web to also run on the decentralized, global Ethereum network of computers. This has led to the creation of dApps such as the Augur prediction market, P2P marketplaces such as OpenBazaar, and Open Finance tools like Dai and Compound (discussed in Network Effects). 

The major advantages of building dApps on Ethereum are that they are decentralized, permissionless, uncensorable, have removed the need for intermediaries, and can be integrated with open standards for creating provably scarce virtual items. As an example, Peepeth is Ethereum’s version of Twitter; however, since it is built on Ethereum’s decentralized blockchain, it is not controlled or backed by any company. Instead, it runs autonomously through smart contracts that interact with each other. As a result, it is uncensorable and permissionless, two features Twitter lacks and has sparked controversy. 

Once blockchains can effectively scale, the potential of dApps to revolutionize the application landscape is enormous. Future iterations of Ethereum may see numerous sidechains and dappchains connected to it, while the main chain functions as the permanent distributed database and consensus layer for the various chains attached to it. Ethereum can perhaps best be visualized then as a massive tree, with individual dApps and sidechains tethered to it as branches.

Secondary Use Case 

The primary use case of Ethereum is straightforward; however, evaluating its secondary use case requires more nuance, as its history, novelty, and recent developments with the platform all provide unique insights into its potential uses. Breaking down Ethereum’s secondary use cases requires evaluating two significant trends: 

1. Innovation/experimentation with rapid evolution

2. Open standards of a decentralized protocol 

Today, Ethereum’s governance has a similar off-chain model to Bitcoin’s, but, unlike Bitcoin, implements changes much more regularly. Ideological positions aside, the result has been that Ethereum has become known as a rapidly evolving experiment in innovation on a decentralized computing platform. It should be stated that comparing the development process and number of updates across projects is not an ‘apples to apples’ comparison. Protocols like Bitcoin get their value from their stability and resistance to change, whereas a project like Ethereum – who’s ultimate vision and product has yet to be completed in full – requires innovation and updates to eventually achieve the goal of building a decentralized financial stack of programmable money, unstoppable contracts, and digital autonomous organizations (DOAs).

Specifically, this dexterity in development comes into view when examining Ethereum’s pending transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) in its upcoming ETH 2.0 release. PoS is yet to be proven as a sustainable consensus mechanism on a large-scale network, and Ethereum will be the fascinating case study that attempts to do precisely that. Furthermore, changes to Ethereum’s protocol in the form of other upgrades such as the Difficulty Bomb delay and reducing miner block rewards are also representative of a more rapidly-evolving platform. Comparatively, Bitcoin takes a much more conservative approach to changes and focuses on slow and steady innovation and implementation. 

One area of experimentation that so far has been a success for Ethereum is the emerging DeFi (Decentralized Finance) or Open Finance movement within the crypto ecosystem, enabling projects to build a stack of financial primitives in a decentralized and open-to-anyone fashion. Inarguably, the biggest success from the DeFi space is MakerDao, a financial system for decentralized, collateralized loans as well as the stablecoin, Dai. As of Q1 2020, a little over 2% of all Ether (2.4 million Ether) is locked into loans on MakerDao, who in their first year issued $200 million in loans. Other notable Ethereum DeFi projects include money market protocols like Compound, lending tools like Dharma, decentralized synthetic assets on Synthetix, and derivative products like dYdX. DeFi/Open Finance is still in its infancy, but the idea looks to be a solid use case for smart contract platforms, and is drawing a good deal of attention and dollars moving into 2020.

(Figure 1. List of blossoming DeFi products produced in <2 years)

The other secondary use case of Ethereum pertains to its development of open standards. The proliferation of open standards on Ethereum cannot be understated. Open standards are the basis of the Internet and are proven to drive open-source success. Token standards from ERC-20 to ERC-1155 are built to facilitate a standardized interface for smart contracts to interact and exchange value. The ERC-20 standardization made running an Initial Coin Offering (ICO) on Ethereum so easy, which led to billions of dollars raised in 2017 and 2018 that helped to build out the ecosystem. Ethereum is currently the leading project in the crowded genre of smart contract platforms for many reasons but the network infrastructure built since 2015 and the standards around their tokens serve as a moat against competitors and helps recruit developers looking to easily build their dApp or product.

Discussions on open standard proposals through the Github for Ethereum Improvement Proposals (EIPs) are thoughtful, innovative, and nuanced. The future implications of open standards further developing on the platform are difficult to project, but have promising potential. Other resources for learning or discussing the more technical components of EIPs and all things Ethereum include eth.research, EthHub.io, ethereum-magicians.org, and Ethereum Gitter.

Future Use Cases 

Stretching beyond 2021 and ETH 2.0, things become less certain for Ethereum and the crypto ecosystem as a whole. The goal of ETH 2.0 and the reason for such a dramatic overhaul is to improve scalability without sacrificing security or decentralization. Instead of the entire network being capable of ~15 transactions per second, ETH 2.0 will process thousands of transactions per second across 64 shards.  

Ethereum’s root blockchain (ETH 1.0) could potentially function as the backbone of a network of dappchains, sidechains, and other contracts that exist within their own consensus inside of the larger network (ETH 2.0). Such an Ethereum network would then function ideologically as a global jurisdictional settlement layer for the state transitions of the applications connected to it. However, these developments depend heavily on future upgrades to Ethereum and only the initial idea has begun to be discussed and researched. 

Competitive Advantage 

Ethereum derives its primary competitive advantages over other smart contracts platforms from its profound network effects in several forms. First, Ethereum’s developer community dwarfs any other smart contract platform community. In fact, according to GitHub’s recent 2018 Annual Octoverse Report, Ethereum is the 5th fastest growing open-source project on the platform. Activity on Ethereum’s GitHub repositories is also only rivaled by Bitcoin among all other cryptocurrency networks. In 2019, almost 900+ developers contributed 27,000+ commits to the ETH project across 200 different Github repositories. 

Additionally, Ethereum benefits greatly from the ubiquity of Solidity as the go-to smart contract programming language. Solidity is designed to compile down to Ethereum Virtual Machine (EVM) bytecode, and it is currently the primary choice when coding smart contracts. Solidity has its problems though, and other languages like Vyper and Scilla for coding more secure and auditable smart contracts are on the rise. Despite this, Solidity’s syntactic similarity to JavaScript – one of the most popular programming languages in the world – affords it the unique advantage of having a less prohibitive learning curve compared to other languages. 

The notable leaders within the Ethereum community are also a primary advantage of the platform. Vitalik Buterin is the well-respected and innovative creator of the platform, and other figures like Vlad Zamfir and Joe Lubin hold a large amount of influence in the broader community. Joe Lubin heads up one of the largest blockchain companies in the world – Consensys – an Ethereum-based distributed development company. Vlad Zamfir is the primary Casper researcher at the Ethereum Foundation and prominent figure-head for Ethereum’s ultimate upgrade dubbed Serenity. The various forms and the combined power of Ethereum’s network effects help sustain its lead over other smart contracts platforms despite its scalability concerns.

Challenges to Adoption 

Ethereum’s main challenge to adoption stems directly from its current iteration’s well-known scalability problems. Unlike new generation blockchains focusing on high-throughput capacity at all costs, Ethereum is grappling with how to scale the network without compromising decentralization or security. This is commonly known as the Scalability Trilemma, where sacrificing one of the three properties is necessary for the other two to be viable. Ethereum has clearly taken the path of decentralization and security over scalability in the short-term. 

Scaling concerns only continue to increase as the network gains adoption and more projects are built. Gas costs for the entire network can at times become prohibitively high when a new dApp launches or gains a large audience in a short amount of time i.e CryptoKitties or FCoin. However, overall dApp usage remains low compared to its centralized counterparts and bouts of network congestion typically subside in a matter of days. 

The eventual transition of Ethereum to PoS via Casper and then to sharding, outlined in the roadmap, will provide a useful gauge as to the long-term viability of Ethereum as a dApp and smart contract network. However, while that remains the goal, Ethereum’s actual situation garners more competition by the quarter. Considering that interoperable framework projects for interconnected blockchains – like Cosmos and Polkadot – have either recently launched or are on the horizon, respectively, it is challenging to predict Ethereum’s position in the future ecosystem. 

Ethereum has the potential to bridge with both Polkadot and Cosmos, but its future use case may be as more of a worldwide settlement layer than a full-scale dApp platform. Ethereum’s scalability concerns are real (although recent promising solutions are emerging), and its pending transition to PoS consensus is undeniably a huge gamble. If it works, Ethereum will be able to scale to support a vast network of dApps and value transfers. If not, then the system will need to re-integrate PoW or transition to another model. Regardless, the failure would be a massive blow to the 5 year old network and project sentiment would take a massive hit. 

That said, because of Ethereum’s slow but measured total overhaul, some developers and users are looking to build and interact with dApps on other platforms, with some even migrating to them. EOS is the largest present competitor to Ethereum as a smart contracts platform, but it has severe decentralization and mutability concerns stemming from its Delegated Proof of Stake (DPoS) consensus. Despite the mounting issues, EOS dApps that require little need for decentralization, such as games and gambling apps, tout high user counts although there’s evidence to suggest these numbers are forged/manipulated. 

Finally, Ethereum’s continually shifting narrative and expanding timeline – see its recurring Plasma problems – regarding scalability and upgrades may prove too much for many users and developers to tolerate. Scaling Ethereum has turned into a highly complicated issue that has progressed slower than anticipated. For now, speculation runs rampant, but it is impossible to predict how the ETH 1.0 migration to ETH 2.0 will play out at scale.

Ethereum Technology 

Consensus Mechanism 

Ethereum is a decentralized blockchain platform for building and running autonomous smart contracts over a network of nodes, secured by Proof-of-Work (PoW), cryptography, and reaching consensus via Nakamoto Consensus. The most popular implementation of the protocol is written in Go, and the most widely-used smart contract language on the platform is Solidity. Ethereum is home to the most flourishing developer community of any cryptocurrency, except for arguably Bitcoin.

Ethereum utilizes an optimized version of Nakamoto Consensus and employs the use of gas – a derivative of its native cryptocurrency Ether – for mitigating spam and allocating resources on the network. Transactions within the Ethereum network require a fee (gas) paid for in ether similar to a Bitcoin transaction. Ethereum’s network is known as the Ethereum Virtual Machine (EVM) which is a set of thousands of public nodes running the client software that execute the computations (i.e., programs or transactions) on the network. 

Nakamoto Consensus is a specific block-leader selection implementation of PoW consensus that is used in Bitcoin to ensure all the participants agree on the state of the public ledger (blockchain) and solve for the “double spend” problem. Specialized computers across the globe are all responsible for updating and maintaining the ETH blockchain, thereby creating a distributed consensus system. More specifically, these operations are collectively known as mining: a process by which transactions are verified and added to the public blockchain ledger. These highly specialized supercomputers (miners) compile the transactions into the blocks and compete to solve computationally-intense puzzles. If they are successful in solving the puzzle, they are rewarded with a certain amount of ETH (currently 2 ETH). Upon solving the puzzle, the miner will broadcast their success to the other miners and thus prove that they have done the work (Proof of Work) and can be trusted. 

Decentralization at this scale is costly because every node around the world has to cross-check all the other node’s work on the network to ensure all participants obey the rules laid out by the protocol. Because the nodes are globally distributed, there are high communication latencies and time costs associated with this amount of verification and redundancy. 

The cryptography involved each transaction plays a very important role in making the puzzle difficult to solve yet very easy to validate. The easier and quicker it is for each node to verify the veracity of a block, the faster the overall network can move.

In addition to the time, the work in PoW has real world costs in the form of electricity, hardware, and resources. The significant costs (electricity to run the calculations) inherent to solving for a block make it cost-prohibitive for a bad actor to act dishonestly in the system. Trying to harm the blockchain would require the cost of acquiring 51% of the network computing power, and then, if successful, degrade the integrity of the ETH blockchain by creating false transactions. This attack would soon be realized by the network users and cause the price to plummet, leaving little to no reward for the attacker. PoW is thus so successful because of the application of game theory in the use of incentives. This will all change once the network transitions to a Proof-of-Stake model in 2020 and thus the potential attack vectors and vulnerabilities will change, too.

In the proposed ETH 2.0 PoS architecture, instead of new ether being mined, validators now play the role of miners and are responsible for processing transactions and securing the network by locking up (staking) their ether. Security of the network as a whole is dependent on the amount/percentage of ether staked. Attackers or malicious validators in the system are subject to having their ether slashed (destroyed) thus disincentivizing any behavior outside the protocol rules. This slashing mechanism is meant to serve as a financial deterrent much in the same way a PoW attacker would have to risk billions of dollars by buying mining hardware and electricity to try and overtake the network to perform a 51% attack. 

(Figure 2. PoW vs PoS)

ETH 1.0 optimizes its PoW consensus mechanism by using the Ethash mining algorithm rather than Bitcoin’s SHA-256, and aims for a block time of ~12 seconds as opposed to 10 minutes in Bitcoin’s case. Shorter block times lead to more orphaned and stale blocks but also helps with frequent state transitions on Ethereum’s account-based model, as opposed to Bitcoin’s UTXO model. Ethhash was originally designed to be ASIC-resistant, allowing less expensive and more abundant GPUs to also mine on the network. This was meant to help preserve decentralization in the network but in April 2018 Bitmain released the first Ethhash ASIC miners. Since then, ASICs have dominated all mining on Ethereum although recent discussions have emerged about potentially upgrading the network to “brick” (make obsolete) the current iteration of ASICs to reduce their advantage in the mining process.

Ethereum is planned to transition to a Proof-of-Stake (PoS) consensus mechanism with its pending Casper upgrade in 2020. Casper has been delayed several times, but seems to be slated for a mid-2020 release as part of the latter half of the more sizable Metropolis upgrade called Constantinople. Casper Friendly Finality Gadget (FFG) is the first implementation of Casper, and will set up the network to integrate sharding: a scaling solution for horizontally partitioning data within a database. Each shard acts like a standalone blockchain with its own unique block producers and validators but in actuality, each shard is connected to and capable of communicating to the other shards. This also means that each shard shares the security of the system as a whole. In order to compromise a single shard, the attacker would need to breach the security of the entire system. This is in stark contrast to sharding competitors like Cosmos.

Second Layer Solutions

Ethereum has several second layer solutions for scalability and privacy that are live, in development, or in the research phase. “Second layer” refers to technology built “on top of” the Ethereum base layer which does not interact with (or risk) the protocol layer. Anything built for “layer 2” solely consists of smart contracts that interact with other software not involving Ethereum’s main chain. Developments on second layer scaling solutions on the main PoW Ethereum chain (not the ETH 2.0 version) are typically referred to as ETH 1.x. Mirroring Bitcoin’s Lightning Network is Ethereum’s Raiden Network for bidirectional, off-chain payments. Raiden comes in several releases, with MicroRaiden and Raiden Network Red Eyes already live. Eventually, Raiden’s aim is to achieve generalized state channels rather than just payment channels. However, such technology is exceptionally sophisticated and currently under intensive research and development. 

Other layer two scaling solutions for Ethereum include Plasma and dappchains, which are childchains tethered to the Ethereum main chain. Plasma has received significant attention following the release of the corresponding paper by Justin Poon and Vitalik Buterin in August 2017. Nonetheless, the increasing complexities around the practical challenges when it comes to implementing Plasma have become a significant concern and led to a delay in implementation and adoption. 

Dappchains function similarly to Plasma as childchains of Ethereum and were proposed by the gaming platform, Loom Network. Loom offers a software development kit (SDK) – among other tools – to build scalable dApps on Ethereum – a major problem for developers at the moment. Dappchains have their own DPoS consensus for non-vital components of contracts, and retain the settlement, finality, and state transition of the larger Ethereum network. 

Privacy Tech 

Ethereum has been researching zero-knowledge proof (ZKP) implementations for several years. Forms of ZKPs – such as Bulletproofs and zk-SNARKS – are employed in Monero and ZCash, respectively. Following the proliferation of ZKPs is the interest in zk-SNARKS. The interest centers not only on privacy, but also scaling, as transactions can be aggregated into batches using the technology.

zk-SNARKS are a method of obfuscating all of the details of a transaction (i.e., the amount transferred, sender identity, receiver identity) without compromising the ability to verify that the transaction is valid. The concept is predicated on extremely complex mathematics but has shown such promising potential that even banks and governments are beginning to research its advantages. 

In late 2018, a new zero-knowledge privacy protocol entitled AZTEC was introduced. The new privacy technique keeps the values in a transaction encrypted and private from outsiders while still allowing the logic and validity of the transaction to be validated by all. While most Ethereum transactions do not utilize this technology currently, the AZTEC  multi-purpose zero knowledge exchange implementation has been released. 

Privacy on Ethereum took many steps in 2019 with the launches of several privacy mixers, Ernst and Young’s release of “Nightfall” code, and the alpha launch of the decentralized exchange Starkdex. Privacy is also inherent in bidirectional payment channels with Raiden, so users who transact off-chain can be assured a level of privacy not seen with other standard on-chain Ether transfers. 

The sheer size and fluidity of developments on Ethereum can be somewhat confusing. Currently, privacy developments are secondary in priority to scaling improvements, but the eventual integration of zk-SNARKS into ether transactions could effectively enhance both properties concurrently. Platforms built on Ethereum – such as Gnosis – are researching zk-SNARKS further, and it is likely that their implementation will happen at an isolated level before launching network-wide. Regardless, private transactions on Ethereum look like they will become a reality in 2020 with the completion of AZTEC’s ceremony and full launch slated for January 2020, Starkdex expected in Q3 2020, and the proliferation of mixer options like Tornadocash. 

Economics 

Ethereum is unique in its economics for a multitude of reasons: one being its status as the platform of choice for launching ICOs. ICOs raised $5.6 billion in 2017 and $11.4 billion in 2018 but their reduced prevalence throughout 2018 has had some well-documented effects on the larger cryptocurrency markets, including putting downward pressure on ETH’s price. ICOs are forced to cover their operating costs by selling portions of their treasury, typically ether, which creates massive sell-side pressure, especially when prices are declining and market sentiment is negative. ICO treasury balances reduced significantly throughout 2018-19. In 2019, ICOs sold over 1.1 million ETH while continuing to hold ~1.9 million ETH on their books.

Another reason ether remains unique is that in the future, once ETH 2.0 is implemented, it will seemingly serve as three different sorts of assets: a capital, consumable, and store of value asset. Ether will work as a capital asset by earning a return during staking, a consumable asset when used as gas for executing transactions, and a store of value when used as collateral for financial instruments like Dai or Set Protocol. This will certainly present a unique mix of value capture opportunities as it pertains to Ethereum’s tokenomics but also may create its own set of regulatory challenges down the road.

ETH was hit particularly hard by the extended bear market in 2018, with the price falling roughly 90 percent from its all-time high of about $1,400 to less than $100 between January and December 2018. Ethereum’s mining profitability also started tumbling significantly in 2018 in response to lower market prices and a reduction in the mining rewards in 2019. ASIC mining profitability remains near all time lows as of Q1 2020. However, a recent uptick can be attributed to the latest Ice Age delay. Research by firm Susquehanna has shown Ethereum GPU mining profitability falling to nearly zero in November 2018. 

Ethereum, as of Q1 2020, has a market cap of roughly $20 billion and a circulating supply of about 109,000,000 ETH. In contrast to Bitcoin’s hard-cap approach, the Ethereum community supports a non-hard-cap supply in support of the smallest amount of inflation necessary to secure the chain in the future. The issuance rate once Ethereum transitions to PoS is not concrete, but rough consensus estimates it will be in the range of 0.5 - 2.0 percent or block reward at 0.22 ETH/block. This inflation will accrue proportionally to the ETH holders participating in the PoS consensus. Conversations and research regarding Ethereum economics now and in the future are open to the community. Currently, the block reward for Ethereum is 2 ETH, issued on average every 12 seconds. 

(Figure 3. Ethereum issuance)

Ethereum’s ICO took place in the summer of 2014, and the platform went live in July 2015 with 72 million ETH pre-mined and sold to early investors. While the premine turns some cryptocurrency purists off for ethical reasons or the centralizing nature of it, Ethereum’s wealth concentration and thus Gini Coefficient (~0.62) has been declining since launch. From 2016 to 2019, the top 376 holders of Ethereum have owned 47% down to 33% of circulating supply. 

Because Ethereum’s future use cases are ultimately unknowable and that the monetary policy is not definitive (Figure 4), it is more difficult to concretely assess its viability as a long-term investment compared to the simpler set monetary policy and use case of Bitcoin as “digital gold”. Interestingly, Ethereum’s PoS implementation may mean that existing investors can prevent dilution without having to purchase new coins.

(Figure 4. ETH 2.0 proposed validator staking reward specs)

Gas is the allocative internal pricing mechanism in Ethereum, and can reach exceptionally high price levels during periods of network congestion. Gas is a derivative of Ether designed to mitigate spam attacks on the network, efficiently allocate computational resources, and pay transactional fees. Etherscan provides useful metrics on Gas and other components of the Ethereum network.

Governance 

Voting System and Influential Players 

Ethereum’s governance mechanism is one of its more polarizing characteristics. The community is led by prominent developers, chief among them being creator Vitalik Buterin. Overall, consensus follows an off-chain model similar to Bitcoin since there is no direct on-chain voting baked into the protocol.

The lead developers have the most influence in the governance structure of Ethereum and are primarily responsible for making decisions as to the future direction of the network. This is a divisive aspect of Ethereum depending on your outlook. To some, it is an unavoidable consequence that a relative few hold a disproportionate amount of influence in the direction of Ethereum since only a handful of people in the world are knowledgeable enough to make an informed decision on certain hyper-technical matters. Regardless of an individual’s preference, Ethereum has core teams that lead most of the conversation around protocol upgrades with 9 separate teams working towards ETH 2.0. The teams try to keep the community informed and act in lockstep with public opinion, holding open developer calls, publishing weekly updates, and sharing most technical conversations at ethresear.ch. 

Developers can submit improvement proposals off-chain in the form of Ethereum Improvement Proposals (EIPs) on GitHub. EIPs often entail detailed design documents that provide suggestions on improving the protocol by addressing certain existing services, adding new features, and/or by improving any discovered bugs. This process makes certain that all of the views are given a platform, taken into consideration based on merit, and then can be progressed with community votes, audits, etc. 

The Ethereum Foundation – a Swiss non-profit – oversees the promotion and support of the platform in conjunction with organizations like Consensys, mining pools, developer teams, and other influential leaders. Anthony Di Orio, Joseph Poon, and Jeffrey Wilcke also contribute heavily to investing/promoting, innovating and developing, and leading the Go implementation team, respectively. Ethereum is also an open-source project, so development proposals for improvements and open standards can be submitted to the community to integrate into the platform. 

In a test of their own technology, and also to help fund the base layer infrastructure of the Ethereum protocol, Ameen Soleimani created the Moloch DAO to crowdsource funding for further open-source development. The DAO reached over $1 million in funds in May 2019. The community also has the option of “voicing their opinion” by donating to projects they find valuable and want to see built via Gitcoin Grants.

Decentralization 

Decentralization is a fundamental benefit of using Ethereum. As one of the most decentralized digital assets based on metrics like node count, miners, and wealth distribution, Ethereum has clearly emphasized decentralization and security over scalability. 

The network hash rate as of Q1 2020 is about 190,000 GH/s, with roughly 7,700 active nodes on the network. This is down from all-time highs of ~290,000 GH/s in July 2018. The drop in ETH hash rate could be explained by several factors since 2018, some planned, some not. These include falling price, ETH’s recent decrease in block rewards, or a less general willingness by miners to invest in mining due to Ethereum’s future transition to Proof-of-Stake. 

Out of those 7,700, approximately 1,500 run a Parity client and ~6,100 a Geth client with a majority of node operating systems running Linux. About 49 percent of all current nodes are based in the United States and in a September 2019 report it was revealed that, unfortunately, nearly ~25% of all Ethereum nodes run on Amazon Web Services (AWS). This number is expected to have increased by Q1 2020. These metrics are subject to change and are rough estimates based on the available data. 

Ethereum’s established network effects, and Ethash-based PoW consensus are large factors driving its decentralization. Its primary advantage over competing smart contracts platforms like EOS is its more robust decentralization and security; however, the eventual transition to PoS creates some uncertainty about the future of the platform. PoS consensus is still not proven practically at scale, meaning unforeseen game theoretical or attack vectors could be exploitable.

Vulnerabilities 

Quality of Development Process 

Ethereum is an open-source and permissionless cryptocurrency network, which results in a diverse and robust development process. The lead developers are some of the brightest and most innovative minds in the industry (i.e., Buterin, Poon, Zamfir, Ryan), and the open standards through the EIP proposal system are a testament to the network’s strength. 

The community is very transparent about developments, issues, and accomplishments. Moreover, Ethereum’s GitHub is the 5th fastest growing open-source project on GitHub. Ethereum has always been an active project in development, rolling out multiple upgrades in its short history including Frontier (2015), Homestead (2016), Byzantium (2017), Constantinople (2019), and Istanbul (2019). This activity is reflected in its Github with nearly 1,000 developers having contributed over 25,000 commits across 200+ Github repos. 

Ethereum’s main smart contract programming language is Solidity and its repo is where the majority of commits from 2019 occured. Solidity has helped launch the smart contracts craze, but is subject to some logical ambiguities and critical function issues that led to contract exploits and several high-profile hacks. A 2017 research report identified 34,200 trace (i.e. critical) vulnerabilities in Solidity smart contracts out of 1 million analyzed. 

Luckily, the Ethereum community understands Solidity’s shortcomings and leading developers – like Buterin – are now mainly using an experimental and stripped down programming language called Vyper. In fact, Casper FFG is actually coded in Vyper rather than Solidity. Vyper is designed to be more straightforward than Solidity, to improve auditability of code, and reduce instances of security vulnerabilities. 

Potential Weaknesses 

Like all PoW consensus blockchain networks, Ethereum is theoretically vulnerable to a 51% attack; however, this is highly unlikely, as the network is sufficiently decentralized to mitigate such an attack and make it cost-prohibitive to most would-be attackers. Second in cost only to Bitcoin, the cost to launch a 51% attack on Ethereum is calculated to be about $360,000 per hour as of Q1 2020. This does not account for the tens of millions in cost theoretically needed to purchase the necessary ASIC mining hardware.  For comparison, Ethereum Classic – which recently was the victim of a successful 51% attack – costs only about $10,500 per hour to attack. However, hash rate on Ethereum declined steadily beginning in September 2018 and remains ~50% of all-time highs.

Other weaknesses stem from severe network congestion that occasionally has made the network functionally unusable due to high gas costs. In early 2018 a gas attack by FCoin caused gas prices across the network to spike drastically, rendering many dApps prohibitively expensive to use. There have been proposals to remedy these vulnerabilities, but such gas attacks still pose a risk moving forward as seen by the September 2019 Chinese ponzi scheme on Ethereum that yet again congested the network and drove up gas prices.

Another issue that Ethereum suffers due to in part its success as a popular blockchain and in part its complex smart contract capabilities is “chain bloat” or the incredible amount of data stored in the blockchain. Depending on the type of node, fast sync requires ~230 GB of storage while a full archival node requires ~3.5 TB of storage, taking weeks to sync. Due to the increasingly sophisticated and highly performant hardware required to run a node, many new teams “bypass” this issue by using Infura who allow developers and their dApps access to the network without running their own node. These node cluster services, in particular Infura, have become an ever growing point of centralization for Ethereum with 50+% opting to connect through Infura rather than running their own node. 

The migration of ETH 1.0 to ETH 2.0 is the biggest project overhaul the cryptocurrency industry has seen thus far in its early existence. The magnitude, both in scope and dollars, are incredibly daunting with much of the risk hiding in the unknown. Beyond technical risks within the code are the much less predictable actions of the humans interacting with the new chain while the old chain still still exists. Both versions (1.0 and 2.0) will exist concurrently for years before a full migration can be completed. All unforeseen manipulation, exploits, or simply market confusion among the users simply cannot be anticipated by a few project designers. Vitalik Buterin, Danny Ryan, and Justin Drake are the leaders spearheading the bulk of the ETH 2.0 work in addition to the 9 different teams currently working on clients and testnets for 2.0.

More of a vulnerability inherent to smart contracts than the Ethereum protocol itself, smart contract exploits are an outsized reason why hackers have stolen massive sums. According to CipherTrace’s report over $4 billion in cryptocurrencies has been stolen through Q2 2019 although the majority of those funds come from exchange hacks. However, dApp and smart contract hacks do happen and are typically a result of manipulating irregularities in smart contract critical functions, such as the recursive send exploit in the DAO hack and backdoor ‘transferFrom’ or ‘mint’ functionality in token contracts such as the batchOverflow exploit.

Network Effects 

Ethereum has the most extensive network effects of any cryptocurrency except for Bitcoin. Ethereum’s sizable network effects should afford it extended sustainability despite scalability concerns that other platforms do not have to address. Additionally, Ethereum holds the market lead in active developers. The sheer size of the development community for Ethereum – many of which programmed their first smart contracts on the platform – should provide a pool of talent to help propel it into the next generation of cryptocurrencies. 

Ethereum’s subreddits (ethereum, ethfinance, ethtrader) are also one of the most active out of any cryptocurrency, with 444k members in the largest case. Ethereum’s Twitter has ~450k followers and the term “ethereum”, while well behind Bitcoin, ranks top among altcoins in Google Searches rankings. Ethereum is one of the few cryptocurrencies mentioned in the mainstream media besides Bitcoin and other leading cryptocurrencies (in market cap terms) such as Litecoin, Ripple, and Bitcoin Cash. 

Due to its popularity, liquidity, and compatibility with ERC-20 tokens, Ethereum is listed not only on the most well known exchanges like Coinbase, Binance, Bittrex, Kraken, Bitmex, Gemini, etc. but on nearly every exchange across the globe. The average buyer would have no trouble finding an exchange that lists it. In addition to being listed, it is typically a base trading pair for most tokens including ERC-20 coins which helps provide liquidity where many other assets suffer. Arguably the number one statistic that displays Ethereum’s popularity over its relatively short history is that typically 80+ of the top 100 tokens listed by market cap are built on the Ethereum network. In the list of top 10 coins is the stablecoin Tether that in 2019 switched from being primarily hosted on Bitcoin’s OMNI layer to an Ethereum-based iteration.

Ethereum transactions per day average ~600k, nearly twice as much as Bitcoin, and an order of magnitude ahead of any other altcoin. Much of the recent drive in daily transactions can be attributed to the rise of the DeFi (Decentralized Finance) movement on Ethereum. DeFi began gaining real traction in 2018 and has become Ethereum’s top dApp category with leading names like MakerDao, Compound, dYdX, and Uniswap. Total ETH held in DeFi currently is ~3 million (~3% of ETH supply) or nearly $800 million and continues to grow quarter over quarter.

Aside from strictly crypto-centric companies utilizing the Ethereum blockchain, traditional mega-corporations are also building atop the protocol. Ethereum, and more precisely the Enterprise Ethereum Alliance, is home to some of the world’s biggest companies researching (and actively deploying) ways to implement the Ethereum blockchain into their existing business. Some of the most well-known names include Samsung, Ernst and Young, JP Morgan, Deloitte, Microsoft, CitiGroup, and Overstock. Ethereum’s flexibility and leading SDK’s have made it the market leader in traditional enterprise adoption. 

Vitalik Buterin is one of the most well-known figures in the cryptocurrency realm, and his influence dominates that of any other developer in the cryptocurrency space. Community resources available for Ethereum are also extensive, with everything from comprehensive documentation on the protocol, an active Ethereum Improvement Proposal (EIP) repository, technical research discussions, and a community driven forum for all things Ethereum including the future ETH 2.0 specs. Additionally, there are at least nine funded independent development teams working on Ethereum 2.0. 

Team 

Ethereum’s team is an amalgamation of its lead developers, business leaders, researchers, and other influencers. Starting with the Ethereum Foundation and its leader – Vitalik Buterin – Ethereum has a vibrant community of contributors. The leadership exhibited by the major participants in Ethereum’s ecosystem is also a major advantage for the platform. 

Vitalik Buterin is the primary creator of Ethereum and is widely considered one of the brightest minds in the industry. He leads development on numerous projects and actively participates in sharding and PoS research. He is part of the Ethereum Foundation Council. His blog and Twitter are must-reads for anyone in the industry.  

Joe Lubin co-founded EthSuisse which was a heavy early contributor to Ethereum. He also co-founded Consensys – which he now heads – which is one of the most influential companies in the Ethereum and blockchain space as a whole with over 50+ companies under its helm. He was also involved in the creation of the Ethereum Foundation. 

Gavin Wood is the creator of the Solidity programming language and is a co-founder and CTO of Ethereum. He is also the author of the Polkadot white paper, which is now his primary focus.

Anthony Di Iorio is a crypto evangelist and co-founder of Ethereum. Di Iorio was there in the early stages of development with Buterin and others. He is a major investor in several cryptocurrency platforms and currently the Founder and CEO of Decentral and Jaxx.  

Ethereum is home to a number of high-profile developers spanning several different projects. Joseph Poon proposed both the Lightning Network for Bitcoin and Plasma for Ethereum. Joseph is a leading researcher, developer, and innovator in the cryptocurrency field. Vlad Zamfir proposed Casper and is leading its development. Vlad provides in-depth analysis of governance and other technical concepts in the industry through his blog. Fabian Vogelsteller is the author of the ERC-20 token standard interface, as well as several others including ERC-725 for decentralized identity. He is an active and well-respected developer that has made significant contributions to Ethereum. Jeffrey Wilcke is another founder of Ethereum and the head developer of Ethereum’s Go implementation since 2013 when he created the first Go implementation of the protocol. 

The Enterprise Ethereum Alliance is also composed of some high-profile firms including Consensys, CME Group, Toyota Research Institute, Microsoft, Intel, J.P. Morgan, Deloitte, and Accenture. Additionally, there are at least nine funded independent development teams working on Ethereum 2.0. 

There are innumerable more contributions from developers on Ethereum not mentioned here. The community has achieved an impressive amount since Ethereum’s inception, despite the split from Ethereum Classic and difficult project overhaul facing the platform today. 

User Experience 

Storing 

Along with Ethereum’s established network effects, vast community, and a robust team of leaders and developers comes an unprecedented user experience in the cryptocurrency sphere. Ethereum is typically the next cryptocurrency that casual users discover and learn how to use after Bitcoin. The main driver of this is the availability and functionality of its wallet experience. The vast majority of altcoins are ICOs launched on Ethereum, and are compatible with the ERC-20 fungible standard and ERC-721 non-fungible standard that is implemented in nearly every wallet interface. 

The primary node software and wallet clients implementations of Ethereum include Ethereum, Go (Geth) and Parity Wallet. Popular web wallets include MetaMask and MyEtherWallet, while Trezor and Ledger are the most popular hardware wallets. Other wallets of note are Jaxx, Balance Manager (Web Wallet MetaMask Extension), and Exodus. Newer, promising wallets include Argent and Burner wallet although both should be considered in alpha stage and come with some risk due to their unproven track record.

The variety of options to store ETH and associated altcoins is overwhelming; however, it is important to research each wallet you plan on using and make sure it fits your security and usability standards. Other wallets for Ethereum include dApp explorers like Coinbase Wallet (formerly Toshi Wallet) and Cipher Browser. 

Ease of Use 

Various blockchain and network metric tools such as Etherscan, the #1 block explorer, are useful for analyzing the network’s state, exploring different smart contracts, and tracking and verifying your on-chain transactions. Ethereum transactions are considered final after 12 confirmations and generally take less than 5 minutes. Because ETH is the second largest digital asset and so easily-integrated with other ERC-20 tokens, the user experience of sending and receiving ETH is one of the best in the industry. Users can choose from almost any wallet, exchange, or custodial service that fits their needs.

With the proliferation of the DeFi movement, users now need useful tools to track their lending, spending, and network liquidity. Luckily, there are numerous sites that help showcase the status of the overall DeFi economy like DefiPulse, LoaScan, DefiScore, and others. 

Other tools such as Dapp Radar and StateofThedApps provide insightful metrics on dApp user numbers and amounts transferred. More obscure tools like NonFungible.com and SANbase (from Santiment) provide real-time analysis of non-fungible tokens and ICO project wallets, respectively. 

For developers, there are a wealth of resources available. The most popular include the Truffle Suite frameworks and smart contract training games like CryptoZombies.

Regulation 

While the situation is far from settled and the legal status of cryptocurrencies widely varies around the globe, it appears most US government agencies are taking a cautious “wait and see” approach towards the new, unconventional digital currency sector. The SEC has already commented on Ethereum (twice) – in conjunction with Bitcoin – saying that it is not a security. In addition to those preliminary comments, the CFTC Chairman publicly stated in October 2019 that ether is viewed as a commodity by the U.S. regulatory body. Ethereum will likely still be subject to any blanket regulation imposed on cryptocurrencies but regulatory restrictions that target Ethereum specifically are unlikely. As such, Ethereum will not be subject to as much intense regulatory scrutiny as the many ICOs that were launched on its platform. A recent landmark case by the SEC sets a precedent for them to evaluate ICOs as securities retroactively, but this does not affect Ethereum itself, even though it had an initial token sale in 2015.

ETH can be deemed a security if it satisfies certain properties based on the common definition and interpretation of the Howey Test, the most common legal test applied to securities. The four component questions of the test are listed below:

1. Is there an investment of money?
2. Is there an expectation of future profits?
3. Is the investment of money in a common enterprise?
4. Do any profits come from the efforts of a promoter or third party? 

Many digital assets lack clear utility and thus have no purpose other than for retail investors to speculate on price (e.i. invest). ETH has a clear-cut utility case on the platform in the form of gas. Gas performs the role of a utility in the form of an internal pricing mechanism for allocating computational resources on the network. Since it is derived from but not the same thing as the native token Ether, discerning the functionality of Ether on the network is difficult to tease apart.  

Tokenized assets are also gaining steam within the broader financial system, and many companies, exchanges, and regulators have their eyes fixed on Ethereum as the potential medium for facilitating a future of tokenized securities and other non-fungible assets such as real estate. Still, a token-based landscape of financial instruments is a long way off, and requires a much more nuanced approach from the SEC, CFTC, and IRS than what they have demonstrated so far. 

Regulations could also play into Ethereum’s status as the preferred status for launching ICOs. Security token offerings are potentially going to replace ICOs as the next big token offering, but it is unclear what the medium or context for launching them will be.

Roadmap 

There is no official roadmap for Ethereum, as it is predicated more on rough community consensus. However a high-level, noncontroversial plan stretching into 2023 is generally regarded as the agreed upon outlook for the project. Specific developments are tied to future upgrades and always subject to change. A general overview of Ethereum’s past upgrades, as well as those that are on the horizon (including new technical implementations) are as follows: 

Frontier - The initial and experimental release of Ethereum debuted in July 2015. It included initiation of smart contracts and dApps on the live network, miners joining to secure the network, and issuance of ETH as mining reward. Originally intended to be a Beta version but turned out to be much more robust than anyone had expected. 

Homestead - The first significant upgrade to Ethereum was released in March 2016. It was the first release considered to be stable and focused on optimized gas pricing, transaction processing, and security. 

Metropolis - Includes Byzantium and Constantinople as its two phases.

Byzantium – Included privacy and security improvements and took place last year.

Constantinople – Recently completed in February 2019, included EIPs 145, 1052, 1283,1014, and 1234 – all of which are designed to make Ethereum faster and cheaper, with negligible changes to the end-user experience. Despite not being a complete overhaul, Constantinople is instrumental as its upgrades are necessary before the next developments can progress. Its successful roll-out was a big win for a development team that is often criticized for moving too slowly.

Istanbul – The last hard fork between Constantinople and Serenity, Istanbul will be released in two phases. The first phase was executed on the mainnet in December 2019 and included six EIPs. The second release (dubbed “Berlin”) is planned for Q1 2020 and will include 8 additional EIPs, most significantly ProgPoW, a mining algorithm change meant to broaden mining participation and improve efficiency.

Once both upgrades have been successfully implemented, Ethereum will experience significantly faster speeds and finally switch from PoW to PoS.  Other benefits from the Istanbul upgrade include initial steps for sharding functionality, reduced gas costs, and improved chain interoperability with privacy coin Zcash.

Serenity - The pure PoS and sharding-complete implementation also known as Eth 2.0. Serenity will be introduced in 4 phases, to be completed approximately in the year 2023. The first phase (Phase 0) will introduce the PoS Beacon Chain that will coexist next to the original Ethereum 1.x chain utilizing PoW. The Beacon chain will act as the central command point for the entire network of shards by organizing validators and ensuring communication between shards. A testnet for this phase went live in March 2019, specifications have since been frozen, and implementation is expected in Q2 2020. More information about Ethereum 1.x and the team behind its continued improvements and upgrades can be found here and here.

Phase 1 is set to be rolled out in 2020 (or 2021) and will address finality and consensus on shard chains. The shards will each have their own random validator assigned to that specific shard (64 total shards) while the Beacon Chain will monitor all shards. This phase is primarily to ensure the proper set up and communication of the different shards.

Phase 2 introduces a new virtual machine: eWASM. This will enable cross-shard communication and true functionality to the shards. It also will enable smart contracts to be written in multiple languages, not just Solidity.

Phase 3 is only tentative and less defined as it is most likely not to be deployed until 2021 at the earliest. At the moment, the idea will be to continue improving the new infrastructure with new optimizations and technology. 

Ethereum’s roadmap is constantly evolving; however, the flagship upgrades in the pipeline are focused on integrating PoS and sharding to help the network scale. These were supposed to be accompanied by Plasma, but that is now uncertain, and the implementation of zk-SNARKs for improved scalability and privacy seems like a blossoming development. 

Fin.

This post is a repurposed version of the full-length Ethereum report that can be found (among many others!) at CryptoEQ.io. It was originally written by Brian Curran and Michael Thoma with edits and modifications along the way by the team at CryptoEQ. It is solely for entertainment and educational purposes and is not considered financial advice. Special thanks to many, many in the Ethereum community whose links are sprinkled in throughout.

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