Ethereum and Smart Contract Platforms
The World Computer
Introduction
If Bitcoin proved that decentralized digital money was possible, Ethereum asked: what else could we decentralize? Launched in 2015 by Vitalik Buterin and others, Ethereum extended blockchain beyond simple transactions to support programmable logic, opening entirely new categories of applications.
Ethereum is often called a "world computer"—a decentralized platform for running programs that no single entity controls. Unlike traditional applications running on company-owned servers, Ethereum applications run on a global network where no one can unilaterally change the rules, censor users, or shut things down.
This lesson explores Ethereum: its design, how it differs from Bitcoin, and the ecosystem of applications it has enabled.
Ethereum's Vision and Design
The Limitation Vitalik Saw:
Vitalik Buterin recognized that Bitcoin's scripting language was intentionally limited. It could handle simple conditions but couldn't support complex logic. In late 2013, he proposed a blockchain with a Turing-complete programming language—one capable of running any computation.
Key Innovations:
Ethereum launched in July 2015 after an early crowdfunded token sale, introducing:
- Smart Contracts as First-Class Citizens: Programs that live on the blockchain
- Accounts Holding Both Currency and Code: Not just value storage
- Ethereum Virtual Machine (EVM): Executes programs deterministically across all nodes
- Turing-Complete Language: Enables complex applications
Ether (ETH):
Ethereum's native cryptocurrency serves multiple purposes:
- Gas: Pays for computation (transaction fees)
- Native Asset: The ecosystem's primary currency
- Staking: Secures the network in Proof of Stake
Unlike Bitcoin's sole purpose as money, ETH is the "fuel" for a computing platform.
The Transition to Proof of Stake
Ethereum launched with Proof of Work (like Bitcoin) but always planned to transition to Proof of Stake.
The Merge (September 2022):
After years of development, "The Merge" transitioned Ethereum from PoW to PoS:
- Energy consumption reduced by over 99%
- Mining ended; staking began
- Same user experience; different underlying consensus
How Ethereum PoS Works:
Instead of miners competing through computation:
- Validators stake 32 ETH as collateral
- Validators are randomly selected to propose blocks
- Other validators attest to block validity
- Dishonest behavior results in "slashing" (losing stake)
Changed Economics:
The transition affected ETH supply dynamics:
- Block rewards reduced significantly
- Combined with EIP-1559 fee burning (2021)
- ETH supply growth slowed dramatically
- Periods of net deflation have occurred
Staking Participation:
Staking has grown substantially:
- Millions of ETH staked
- Liquid staking protocols (Lido, Rocket Pool) make staking accessible
- Users can stake less than 32 ETH through pooling
The Ethereum Ecosystem
Decentralized Finance (DeFi):
DeFi represents Ethereum's most significant application category:
- Uniswap: Pioneered automated market maker (AMM) trading
- Aave/Compound: Decentralized lending and borrowing
- MakerDAO: Created DAI, a decentralized stablecoin
- Curve: Optimized for stablecoin trading
DeFi recreates financial services—trading, lending, derivatives—without traditional intermediaries. We'll explore DeFi extensively in Module 5.
Non-Fungible Tokens (NFTs):
NFTs use Ethereum for unique digital item ownership:
- Art and Collectibles: CryptoPunks, Bored Apes
- Gaming Items: In-game assets with real ownership
- Domain Names: Ethereum Name Service (ENS)
- Credentials and Certificates: Proof of completion, membership
The NFT market exploded in 2021, though has since cooled significantly. The technology's long-term applications extend beyond art to any unique digital asset.
DAOs (Decentralized Autonomous Organizations):
DAOs use smart contracts for governance:
- Token holders vote on proposals
- Treasury managed by code
- Decisions execute automatically
- Examples: MakerDAO governance, Gitcoin, Constitution DAO
Enterprise Applications:
Beyond public Ethereum, private/consortium versions exist:
- Supply chain tracking
- Trade finance
- Identity verification
- Though these often use permissioned variants
Scaling Ethereum
Success has strained Ethereum's capacity, leading to high fees during demand periods.
The Problem:
Base layer Ethereum processes ~15-30 transactions per second:
- Popular applications cause congestion
- Gas fees spike (sometimes to hundreds of dollars)
- Small transactions become uneconomical
- Mainstream adoption limited
The Solution: Rollups:
Ethereum's scaling strategy centers on rollups:
- Process transactions off-chain
- Post compressed data to Ethereum
- Inherit Ethereum's security
Layer 2 Ecosystem:
Major Layer 2 networks have emerged:
- Arbitrum: Leading optimistic rollup by TVL
- Optimism: Major optimistic rollup, focus on governance
- zkSync: ZK rollup with EVM compatibility
- StarkNet: ZK rollup with its own language
Adoption Progress:
Layer 2 usage has grown significantly:
- Combined L2 transaction volume exceeds mainnet
- Major applications deployed on L2s
- Fees dramatically lower (often under $0.10)
The Roadmap:
Ethereum's future development includes:
- "Danksharding" for more data availability
- Account abstraction for better UX
- Continued rollup-centric scaling
Competition and Ethereum's Position
Alternative Layer 1s:
Ethereum faces competition from blockchains claiming better performance:
- Solana: High throughput, low fees, but outages have occurred
- Avalanche: Subnet architecture for custom chains
- Cardano: Research-first approach, slower development
- BNB Chain: Binance-associated, lower decentralization
Ethereum's Advantages:
Despite competition, Ethereum maintains:
- Largest Developer Ecosystem: More developers than all competitors combined
- Most DeFi Liquidity: Where most value is deployed
- Network Effects: Users, applications, and developers attract more of each
- Decentralization: More validators than most competitors
- Track Record: Longest history (after Bitcoin) without major failures
Multi-Chain Future?:
The future may involve multiple chains:
- Different chains optimizing for different use cases
- Bridges connecting ecosystems
- Ethereum potentially serving as settlement layer
Key Takeaways
- Ethereum extended blockchain beyond transactions to support programmable smart contracts
- The 2022 Merge transitioned from Proof of Work to Proof of Stake, reducing energy by over 99%
- DeFi protocols recreate financial services like lending and trading without traditional intermediaries
- NFTs enable ownership of unique digital items, though markets have been volatile
- Scaling through Layer 2 rollups is central to Ethereum's strategy
Summary
Ethereum created a platform for decentralized applications through smart contracts, spawning DeFi and NFT ecosystems. The Proof of Stake transition addressed environmental concerns. Scalability remains the key challenge, with Layer 2 rollups providing the primary solution. Despite competition from alternative blockchains, Ethereum maintains the largest ecosystem and strongest network effects.