Ethereum: A few key ideas
How does it all work?
Building on the previous entry in #100DaysOfCrypto, this post, written by Preethi Kasireddy, goes into the details that may have been skimmed over in Vitalik’s ‘Ethereum in 25 minutes’ presentation.
Although the article avoids complex math, it can be a challenge to get through all the details, so I’m providing a mental framework to help navigate this post.
First, there are some commonalities between Ethereum and Bitcoin, which allows us to use our pre-existing knowledge (see here and here) to build our understanding of Ethereum. Ethereum uses blockchain technology, which is a record of transactions independently verified by others in a network and stored on a distributed ledger. The ledger represents a consensus on facts (i.e., single global truth). Like Bitcoin, this consensus is driven (currently) by proof-of-work (to switch to proof-of-stake soon).
But there is an important difference — smart contracts. If the Bitcoin blockchain, with its limited scripting language, is primarily designed to facilitate financial transfers (making it digital money); Ethereum’s digital currency, Ether, allows users to add logic to its transactions via its smart contracts (making it highly programmable digital money). Smart contracts are code that can execute functions without human intervention (note: made possible via built-in programming language).
One example of a function is:
‘transfer real estate ownership (title) from seller to buyer and funds from buyer to seller, once a deal is met’ (and removing third parties such as agents, brokers and lawyers in the process).
The key here point here is once a deal is met, indicating that a transfer of value upon a met condition.
In Ethereum, there two types of accounts: First, Externally Owned Accounts (EOA), owned by people with private keys and have no associated code; Second, Contract Accounts, controlled by code (smart contracts). This is another departure from Bitcoin, where transactions primarily occur between people with private keys (only one type of account).
Given these two account types, there are two types of transactions:
- Transfer of value from one EAO to another [message calls]
- Creation, and calling, of a smart contract (Contract Account) [contract creation]
Each time there’s a transaction (either one of two types), Ethereum‘s state — a consensus on a set of facts, at that time — transitions into a new state.
Those are the big concepts to help digest the rest of Preethi’s article. Smart contracts, account and transaction types, and, state transitions.
Because you can program smart contracts in Ethereum, the transactions that happen on the Ethereum blockchain have certain features. The rest are details including: the fees that transactions incur (gas); the blocks that contain multiple transactions; what has to happen before a transaction is executed; and how transactions execute in the Ethereum virtual machine.
