Will ERC 7265 be a game changer for DeFI? | Credit: Shutterstock
In 2009, Satoshi Nakamoto introduced a groundbreaking alternative to fiat currency using cryptography to form a sound medium of exchange, called Bitcoin, which became the first cryptocurrency that offered a decentralized alternative to centralized traditional currencies.
Bitcoin’s creation opened the door to a new era of financial freedom and innovation. The potential of blockchain technology was swiftly realized, explored, and admired by numerous individuals. As a result, developers and cryptography enthusiasts began to contemplate whether blockchain had more untapped potential.
When he was merely nineteen years old, Vitalik Buterin, one of the founders of the Ethereum blockchain, embarked on an audacious new venture with a mission to push the boundaries of Bitcoin’s capabilities.
Bitcoin, due to its limited design, lacked the versatility to support various functionalities, prompting Vitalik to conceive Ethereum. The latter aimed to establish a platform where developers could construct decentralized applications using smart contracts.
To realize this vision, a team of individuals such as Gavin Wood (creator of Polkadot and Kusama), Charles Hoskinson (creator of the Cardano blockchain), and Joseph Lubin (founder of ConsenSys), among others, worked assiduously to bring Ethereum to fruition.
Launched in 2015, Ethereum was initially built on a proof of work (PoW) consensus mechanism, much like its predecessor, Bitcoin. However, the network was designed to be more than just a cryptocurrency exchange platform and switched to proof of stake (PoS) consensus mechanism in 2022. As Ethereum’s story continues to unfold, its community eagerly awaits the many innovations and developments that lie ahead.
As of Q2 2023, Ethereum blockchain holds the second spot on CoinMarketCap as the largest cryptocurrency with a market capitalization of $220 billion. The project offers a total and leading technology with a vision to change the world in a variety of interesting and debatable ways.
Ethereum is an attempt at a decentralized blockchain platform that offers unique features centered around the provision of smart contracts, decentralized finance (DeFi), and decentralized applications (dApps).
A smart contract can be likened to a digital vending machine. When you insert the precise amount of coins into the machine and select your desired beverage, you’re essentially entering into a smart contract with the vending machine.
This is because the vending machine acknowledges your payment, identifies the specific drink you’ve chosen, and fulfills its end of the deal by dispensing the beverage. Fundamentally, a smart contract functions on the same principle as a vending machine: it is straightforward and reliable.
Smart contracts serve as the foundation of Ethereum’s vision, enabling the development of DeFi and dApps on its platform. These self-executing contracts have terms of the agreement directly written into code and are immutable once deployed on the Ethereum network. This means once the contract is entered it cannot be changed.
Ether (ETH), the native cryptocurrency of Ethereum, powers these smart contracts and is used as a fuel for transactions and computational services on the network.
Ethereum, like Bitcoin, has a rich history, and has faced many challenges, such as its infamous DAO attack in 2016. The decentralized autonomous organization (DAO) was a blockchain-based venture capital fund that utilized smart contracts to allow investors to fund projects and receive returns on their investments. However, the smart contract code contained a flaw that enabled the attacker to drain a significant amount of ETH from the DAO’s funds into a child DAO.
The DAO attack ultimately led to a hard fork of the Ethereum network, which involved rolling back the blockchain to a previous state to undo the damage caused by the attack. This fork resulted in the creation of two separate Ethereum networks, the current Ethereum blockchain (resulting forked blockchain) and Ethereum Classic (the original version of the Ethereum blockchain).
It is important to note that Ethereum Classic still uses the PoW consensus method, whereas Ethereum moved to a PoS consensus mechanism, commonly known as the Merge upgrade. The decision to switch to a PoS method is driven by the environmental concerns surrounding the PoW mining method.
Prior to the planned Merge, a hard fork of the Ethereum network known as ETHW was created, still employing the PoW consensus mechanism. This resulted in a victory for ETH miners. Chandler Guo, a Chinese miner who opposed the PoS consensus method, launched the PoW-based Ethereum blockchain.
Technical Alert! – Ethereum holds different ERC tokens (Ethereum Request for Comment) that are akin to different types of digital items or assets created on the Ethereum platform. Ethereum token standards are guidelines that dictate how new tokens should be created on the Ethereum blockchain. Here’s A brief on these token standards:
By offering a comprehensive suite of solutions, Ethereum strives to decentralize the internet, creating a network of computers that combine into a powerful decentralized supercomputer, enabling transparent and secure transactions without intermediaries such as banks or escrow services.
Whereby this means a neutral or impartial third party whose role is to retain funds, assets, or documents until all pre-established terms are fulfilled, documented in a contract, ensuring that the agreement between the involved parties is honored.
Ethereum is more than just a cryptocurrency because of the many features it can provide its network users. At its origin, Ethereum’s PoW consensus mechanism relied on miners to secure the network and validate transactions; this gave it a highly decentralized image.
As mentioned, Ethereum has migrated away from PoW to PoS. The reasoning behind this shift includes issues related to high energy consumption and centralization as stated by the media. BUT by sheer coincidence or not it also helped the Ethereum community scale, as this would not be possible on a PoW system like Bitcoin when operating smart contracts.
Here’s an overview of Ethereum’s PoS consensus mechanism in six steps:
Although Ethereum and its smart contracts are designed to be immutable, there are situations where contracts may need to be reversed due to errors or mistakes, including human error during the programming phase or incorrect data inputs. This has raised concerns about the immutability of smart contracts and sparked debates in the community.
Bitcoin and Ethereum are the most well-known cryptocurrencies, yet they hold notable differences in their underlying objectives and architectural design. The following points highlight some of these key differences::
Ethereum is a decentralized network of computers that work together to execute code or smart contracts. To interact with these contracts, users need Ethereum wallets , which are software or hardware tools that hold private keys and provide public addresses for sending and receiving Ether, the native cryptocurrency used on the Ethereum network.
There are two types of Ethereum wallets: full nodes and light nodes. Full nodes are also known as “full client” wallets and hold the entire blockchain history and verify transactions, while light nodes rely on third-party full nodes to get information when needed. They are often referred to as “lightweight” or “thin client” wallets and are typically faster to sync and use less storage space.
Hardware wallets are the physical devices that store a user’s private keys offline. They are the most secure way to store Ether; however, unlike smart contract-powered wallets, hardware wallets can only send and receive Ether and ERC-20 tokens. Some examples include Ledger Nano and Trezor.
Software wallets are digital wallets that run on a computer (e.g, desktop wallets like Exodus and web wallets like MetaMask ) or mobile device (e.g., MyEtherWallet ) that stores the private keys for accessing cryptocurrencies online.
Additionally, there are paper wallets, which are simply a printed copy of your private and public keys, which are then stored offline. While paper wallets are considered one of the most secure options, they are not as convenient for frequent transactions and require careful handling to avoid loss or theft.
dApps, or decentralized applications are software programs that run on the Ethereum blockchain. They are designed to be decentralized which means they operate on a distributed network of computers rather than being controlled by a central authority.
dApps can be used for a variety of purposes, including creating marketplaces, managing digital assets, and executing complex financial transactions through the integration of smart contracts.
Uniswap is a decentralized exchange (DEX) built on the Ethereum blockchain that allows users to trade cryptocurrencies without the need for intermediaries. It uses an automated market-making (AMM) system and enables users to trade any ERC-20 token pair, earn rewards, and provide liquidity to the platform.
AMMs use a mathematical algorithm to determine the price of assets based on the ratio of the available tokens in a liquidity pool. Instead of relying on order books like centralized exchanges, AMMs automatically adjust the price based on the amount of assets being traded, providing liquidity to the platform and enabling decentralized trading without the need for intermediaries.
The Aave protocol which enables users to borrow and lend from a selection of over 30 Ethereum-based assets. Offering flexibility to choose between stable and variable interest rates, based on their preferences and market conditions. Whereby users can also obtain flash loans. In addition to traditional assets, Aave also offers pools for real-world assets such as real estate. The platform’s governance token, AAVE, allows users to participate in voting on Aave Improvement Proposals (AIPs).
OpenSea is a peer-to-peer (P2P) marketplace for buying, selling, and discovering non-fungible tokens, including digital art, gaming items, collectibles, and other unique digital assets, using cryptocurrency.
Ethereum is a blockchain-based decentralized platform that has several benefits compared to traditional centralized systems. These include:
Ethereum, like any other technology, has its share of disadvantages including:.
Since Ethereum’s inception in 2015, questions have been asked about the future evolution of the protocol, particularly in addressing significant challenges such as scaling. Phase one known as the The Merge took place on September 19, 2022, and was an essential part of the development of Ethereum as it transitioned away from PoW to PoS consensus. By making this leap, the Ethereum Foundation is actively envisioning the state of Ethereum a decade from now.
Ethereum’s development is undergoing a complex and lengthy transition to become a more robust, secure, and powerful version of its former self, ultimately enhancing its capabilities and potential impact to deliver scalability. Ehereum’s development roadmap, outlined by Vitalik Buterin, consists of five key phases that begin with the Merge.
The second phase, called the Surge, aims to enhance Ethereum’s scalability through sharding, allowing it to process more data and become more cost-effective. The Verge phase involves the adoption of Layer 2 solutions, such as Optimism and zkRollups, to compete with traditional financial systems in terms of transaction throughput and efficiency.
The Purge phase involves cleaning up Ethereum’s chain state to improve efficiency and reduce storage requirements, making it more accessible for individuals to run nodes. The final phase, the Splurge, focuses on improving the user experience for developers, attracting more innovative applications and solutions to the Ethereum platform.
The future of Ethereum is rich with innovation, development and promise. These advancements, whilst challenging, aim to address some of the network’s current limitations and transform Ethereum into a more scalable, efficient, and user-friendly platform for developers and users alike. As Ethereum continues to innovate, it will likely remain a dominant force in the blockchain and cryptocurrency space over the next decade.
What is Ethereum?
Ethereum is a decentralized blockchain platform that enables the creation of smart contracts and decentralized applications.
What is a smart contract and how does it function on the Ethereum network?
A smart contract is a self-executing agreement with the terms directly written into code. On the Ethereum network, these contracts are immutable, meaning once deployed they cannot be changed.
Why did Ethereum switch from proof of work to proof of stake, and how does it work?
Ethereum switched to proof of stake to address environmental concerns and scalability issues associated with proof of work. In proof of stake consensus mechanism, validators, who hold and stake Ether, propose and validate blocks. Rewards are given for participation, while penalties are imposed for malicious behavior.
What are the examples of popular dApps on Ethereum?
dApps, or decentralized applications, are software programs that operate on the Ethereum blockchain. They are autonomous and operate on a network of computers, which prevents central control. Examples of popular Ethereum DApps include Uniswap, a decentralized exchange; Aave protocol, a lending platform; and OpenSea, a peer-to-peer marketplace for non-fungible tokens (NFTs).
What are some advantages and disadvantages of Ethereum?
Advantages of Ethereum include its versatility, cost and time efficiency, enhanced performance due to its PoS consensus mechanism, and ongoing improvement. Some disadvantages include rising transaction costs, Ether volatility, scalability concerns, and the challenges posed by continuous development.