Ethereum is a decentralized platform that enables developers to build and deploy smart contracts and decentralized applications (dApps). At its core, Ethereum operates on a blockchain, a distributed ledger technology that records transactions across a network of computers. Here’s an in-depth technical explanation of how Ethereum works:
1. Ethereum Blockchain
- Blockchain Structure: Ethereum’s blockchain consists of a series of blocks, each containing a list of transactions. Each block references the previous block, forming a chain. This ensures the integrity and chronological order of transactions.
- Nodes: The network consists of nodes that validate transactions, execute smart contracts, and store the blockchain’s state. There are full nodes, which store the entire blockchain and validate all transactions, and light nodes, which store only headers and some data for efficiency.
2. Ethereum Virtual Machine (EVM)
- EVM: The EVM is a decentralized Turing-complete virtual machine that executes smart contracts. It ensures that the same contract code produces the same results on every node.
- Bytecode: Smart contracts are written in high-level languages like Solidity or Vyper and then compiled into EVM bytecode, which the EVM can execute.
3. Smart Contracts
- Smart Contracts: These are self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute the terms once conditions are met.
- State Transitions: Smart contracts can update the state of the blockchain. Each transaction that interacts with a smart contract results in a state transition recorded on the blockchain.
4. Consensus Mechanism
- Proof of Stake (PoS): Ethereum has transitioned from Proof of Work (PoW) to Proof of Stake (PoS) with Ethereum 2.0. In PoS, validators propose and validate blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.
- Validators: Validators are chosen to propose new blocks and confirm transactions. They earn rewards for honest behavior and can lose their staked coins for malicious activities.
- Finality: Blocks are finalized through a consensus protocol, ensuring that they are immutable and part of the canonical chain.
5. Transactions
- Types of Transactions: Ethereum supports various types of transactions, including simple transfers of Ether (ETH), deployment of new smart contracts, and interactions with existing smart contracts.
- Transaction Structure: Each transaction includes the sender’s address, recipient’s address, value to transfer, gas price, gas limit, and optional data payload.
- Gas and Fees: Transactions and smart contract executions require computational work, which is paid for using “gas.” The gas price is set by the sender, and the gas limit specifies the maximum amount of gas the sender is willing to pay. Validators receive gas fees as compensation.
6. Accounts
- Externally Owned Accounts (EOAs): Controlled by private keys, EOAs can send transactions and hold Ether.
- Contract Accounts: These are associated with smart contracts and controlled by the contract’s code. They do not have private keys but can execute code when invoked by transactions.
7. State and Storage
- Global State: The state of Ethereum consists of all accounts and their balances, storage, and contract code. It is stored in a data structure called the Merkle Patricia Trie.
- Storage: Each contract has its own storage, a key-value store that persists data across executions. This storage is also part of the global state and is updated with each transaction.
Other Factors
1. Ethereum Improvement Proposals (EIPs)
- EIPs: Changes to Ethereum’s protocol are proposed through EIPs, which can introduce new features or improve existing ones. EIPs go through a review process and must achieve community consensus before implementation.
2. Layer 2 Solutions
- Scalability: Ethereum has various Layer 2 solutions to improve scalability, including rollups (Optimistic and ZK-rollups), state channels, and sidechains. These solutions aim to increase transaction throughput and reduce costs.
3. Ethereum 2.0 and Sharding
- Ethereum 2.0: This major upgrade includes the transition to PoS and introduces sharding to improve scalability. Sharding divides the network into smaller segments (shards), each capable of processing transactions and smart contracts independently.
- Beacon Chain: The Beacon Chain coordinates the network of shards and manages the PoS protocol, ensuring synchronization and security across shards.
Ethereum’s design allows for a highly flexible and programmable blockchain platform, making it a foundational technology for decentralized finance (DeFi), non-fungible tokens (NFTs), and many other decentralized applications.