Ethereum 101

Featured: Ethereum 101 – a newbie writer for a crypto newbie

Three-sentence version: I first shared how my mindset shifted from original writing only to a learning-sharing attitude. The rest of this featured article explains what Ethereum is, how it works, and what PoS and PoW are. It further shows concerns about the centralization of Ethereum validators and potential censorship.  

“Describing how a process works is valuable for two reasons. It forces you to make sure you know how it works. Then it forces you to take the reader through the same sequence of ideas and deductions that made the process clear to you.” On Writing Well by William Zinsser

I had been reluctant to write explanatory articles as my featured article. While I struggled to come up with a good topic this week, I began to re-read William Zinsser’s classic book on writing. I came to see the light from this quote above: my writing could still be valuable even if it is explanatory, so long as I write it well. 

So this week, I would like to explain Ethereum and how it works. According to Wikipedia, Ethereum is “a decentralized, open-source blockchain with smart contract functionality.” The three key elements of Ethereum are Decentralized Blockchain with smart contract features. “Decentralized” means no central authority facilitating the blockchain. “Blockchain” refers to a distributed database built upon and maintained by the community via the nodes of the computer network. That is, there is an incentive system for the community members to help maintain the database – the Ether (ETH), the native cryptocurrency of Ethereum. Lastly, “smart contract” represents “[a set of computer codes] that automatically executes all or parts of an agreement and is stored on a blockchain-based platform.” 

A visual breakdown is shown below:

The beauty of cryptocurrency like Ethereum is decentralized storage based on peer-to-peer cryptography. Because the whole database is stored in each node (specifically, in a software called Ethereum Virtual Machine, or EVM), malicious cyberattacks or government seizure on any particular node or nodes will not impact the whole database. 

You are probably aware that there are tons of cryptos out there. One of the main distinctions between different cryptos is the consensus mechanism which every crypto is built upon. “consensus mechanism,” at its core, is the consensual rule that a specific community follows. Based on the consensus mechanism, each node (computer) can confirm a piece of specific information in the database (i.e., a block) or reject a request for a record. The node will broadcast its confirmed block to the nodes of the network for validation. Finally, all confirmed blocks form the “blockchain.”

Two main consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS). Simply put, PoW is a first-come-first-serve rule – whichever node correctly confirms the information first takes all the rewards. Because it is a first-come-first-serve rule, it is energy-intensive, or even energy inefficient. In contrast, PoS is like a shareholder-variant rule. The more cryptos (i.e., ETH) a node deposits in the pool, the more likely the node can get the opportunity to validate the information and get a reward, or it may get penalized if such recordation is proved wrong. You can see more comparisons between PoS and PoW here (CoinMarketCap), here (Cointelegraph), and here(Investopedia). 

Ethereum was officially launched on 30 July 2015. The consensus mechanism of Ethereum had been PoW until its recent upgrade called “Merge,” in which Ethereum transitioned from PoW to PoS. 

Since PoS is a shareholder-variant rule, let’s take a look at the shareholder registrar of Ethereum, so to speak: 

The top five ETH Deposited Validators, Lido, Coinbase, Kraken, Binance, and Staked.us, consist of more than 62% ETH deposits. Because “decentralized” is one of the critical elements of Ethereum, many community members are concerned about centralization and potential censorship from government pressure. In response to such concerns, Coinbase CEO Brian Armstrong said that in a hypothetical scenario where regulators compel Coinbase to censor transactions at a protocol layer, it would choose to shut down the staking service.  

The Merge, the Ethereum transition from PoW to PoS, is just the beginning of the Ethereum upgrade. Thus, whether Ethereum can remain decentralized, censorship-resistant, and permissionless is unpredictable. Neither do I know it is the darkness before the dawn or the beginning of the night. I’m glad to witness this historical movement and share my notes with you along the way. 

See you next Wednesday! 

Highlights Worth Your time

• Betterment: Giving an apology only when necessary makes you more powerful. 

• Technology and Web3 Regulations: 

  • European Crypto Regulation is coming, while US regulators show their teeth scaring off DAOs.

  • Should Defi be regulated, and if so, how? – here is the debate between SBF and Erik.

One Question this Week

Robert Schumann said, “To send light into the darkness of men’s hearts––such is the duty of the artist.” 

What light has touched your hearts, or have you sent light to others?

Stay safe & sharp,

Jason J. Lai

Jason's Brief is informative and educational. No accuracy or completeness of the content is guaranteed. This email renders no tax, legal, investment, or any other professional advice.  Please seek a licensed professional's advice for your particular situation should you have any needs.