What is Ethereum? 

Ethereum was created by programmer Vitalik Buterin and launched in 2015. It is an open-source, decentralised blockchain platform.

Picture a piece of land. Over time, people build houses and skyscrapers. Then, they launch businesses and trade. More people come, and more buildings are built. More money enters the space, and a bustling city emerges. Picture New York. 

Ethereum is the land. The users are people. Decentralised Apps are the businesses.

Ether (ETH) is the native token of Ethereum. It is the currency that powers every engagement in the city - it’s used to pay for transactions and interact with services.

The Merge

Originally, Ethereum was secured by the Proof of Work (PoW) consensus mechanism (like Bitcoin). However, on September 15, 2022, it moved to the Proof of Stake (PoS) mechanism as part of ‘The Merge’. 

Note: if you’re unfamiliar with consensus mechanisms, we suggest you check out module 4 (link). 

In simple terms, a consensus mechanism validates transactions and keeps a network secure. PoW is extremely energy-intensive and involves a lot of computational work. This means it has a bad environmental impact.

On the other hand, PoS allows blockchains to run more energy-efficiently. At the same time, it ensures decentralisation is maintained. Each style has trade-offs and is suitable for different purposes.

With PoS, holders stake their ETH to validate transactions and create new blocks. The network rewards validators for processing transactions. It also ‘slashes’ their stake for dishonest actions, ensuring good behaviour. 

At the core of Ethereum’s PoS system is the Beacon Chain. This chain originally existed separately from the main Ethereum network. They were officially ‘merged’ or connected on September 15, 2022. 

Smart contracts and decentralised applications 

Ethereum’s value comes from developers being able to build their own decentralised applications (dApps) on top of the Ethereum blockchain. Ethereum was the first programmable blockchain. It enabled the creation of smart contracts. 

Smart contracts are on-chain agreements. They are made up of computer code and perform a set of predetermined instructions on a blockchain. For example, a smart contract could send 1 ETH to a particular address every 24 hours:

• IF 24 hours have passed (the trigger), THEN send 1 ETH (the execution). 

Smart contracts can get very complex and facilitate an almost endless list of transactions. This is just one simple example.

The Ethereum network acts like a virtual machine that executes smart contracts. Smart contract details and wallet balances are recorded on Ethereum’s distributed ledger. 

A smart contract is a contract – there is no room for negotiation. If the contract conditions are met, and all parties have agreed to those conditions, the contract will carry out its task as intended. 

As smart contracts are recorded on the blockchain, it’s impossible to change the outcome of a smart contract agreement. This is referred to as “Code is Law.” If it’s not in the smart contract code, it will not happen. Conversely, if it is in the code, then it will happen. Here, technology is being used to enforce the rules. It removes the need for an intermediary. This is the whole premise behind decentralised finance. 

However, smart contracts are not without risks. For example, as smart contracts cannot be changed once launched if there’s an issue, all locked funds may be locked forever. 

Several smart contracts can be combined to create decentralised applications. The innovation and versatility of Ethereum paved the way for decentralised finance (DeFi) as we know it today. 

Countless decentralised applications run on Ethereum, with a range of use cases, from finance (e.g. Aave and Uniswap) to art and collectables (e.g. OpenSea). DApps are at the core of DeFi. The possibilities for innovation and use cases are endless.

The Ethereum Virtual Machine 

The Ethereum Virtual Machine (EVM) is a processing engine and software platform. It’s often referred to as the “heart of Ethereum.” It’s responsible for executing smart contracts and computing each new block added to the Ethereum blockchain. The EVM is also what enables developers to create and launch Ethereum-based dApps.

‘EVM-compatible networks’ are simply networks that run an instance of the EVM. As these networks speak the same language as Ethereum, they have access to the large range of dApps and DeFi services that the Ethereum ecosystem offers.

Developers can launch applications on any EVM chain without making many changes. They would have to entirely rewrite the code if it weren't EVM compatible. 

In addition, Ethereum dApps can be easily migrated over to EVM-compatible networks.

Ethereum Gas fees

Simply put, gas fees are payments made by users during a transaction to compensate for the computing power used by validators. 

ETH validators run computer software to verify transactions and add blocks to the blockchain. This process requires them to use electricity. The gas fee is paid to the validators as a reward to compensate for the cost of the electricity used. Part of the fee is also burned, which removes it from circulation.

Ethereum gas prices are dynamic and can move up and down. The cost of a gas fee depends on the demand on the Ethereum network. If there’s more demand, gas fees are higher. 

Ethereum users can set what’s known as a ‘tip’ to reduce the gas fee for a transaction. A tip indicates the priority of a transaction. Validators will process transactions with higher tips and will be less likely to process those with lower tips. 

You can monitor gas prices using tools such as Etherscan https://etherscan.io/gastracker

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What is Gwei? 

Ethereum gas fees are paid in the blockchain’s native currency, ETH or ether. ETH gas fees are denoted in gwei, a denomination of ETH. One gwei equals 0.000000001 ETH. So, if your gas price costs 0.000000001, it costs 1 gwei. 

What is Maximal Extractable Value MEV? Ethereum’s invisible tax

MEV refers to profits that can be made by extracting value from Ethereum users through reordering transactions within blocks produced. Hence, you get the most payment possible as people pay a premium to get faster transactions. 

MEV was initially used in the context of Proof of Work (PoW). It was first referred to as “Miner Extractable Value.” 

Before Ethereum transitioned to Proof of Stake, miners were responsible for selecting and arranging transactions into blocks. This meant miners had complete control over which transactions to include. This allowed them to manipulate transactions so that they could extract additional profits. 

Since Ethereum’s transition to Proof of Stake (PoS) in 2022, mining is no longer part of Ethereum. However, the value extraction method still exists. It is accrued by validators (who confirm the validity of blocks added to the Ethereum blockchain).

A group of individuals called ‘searchers’ are responsible for the majority of MEV activity. Searchers seek out and identify MEV opportunities using automation tools and bots. Once they spot an opportunity, they assemble a bundle of transactions that will extract the desired profits once the bundle is executed. 

Ethereum has evolved significantly since its inception, and it continues to evolve to this day.