Understanding Ethereum

27 Apr 2022
8 min read

I am a huge fan of Naval Ravikant, I follow him on Twitter, and I also like to listen to his Podcast.

Over the weekend, I came across 2 new episodes of his podcast titled Vitalik: Ethereum, Part 1 and Vitalik: Ethereum, Part 2 where Haseeb QureshiNaval, and Vitalik Buterin discussed Ethereum. To those who don’t know,

  • Haseeb Qureshi is a Managing Partner with Dragonfly Capital and he writes a lot about the Blockchain world on his Blog: haseebq.com
  • Naval Ravikant is an Entrepreneur and Investor who co-founded AngelList.
  • Vitalik Buterin: He is one of the co-founders of the Ethereum Blockchain Network.

Both the episodes are a great source to understand how the creators had the idea of the Ethereum network, the philosophy of Ethereum, and how it’s improved. In this post, I would like to share some highlights of this conversation in a simple and easy-to-understand QnA Format. Since the title of this post is “Understanding Ethereum”, I have included only the technical discussions in this summary. And most importantly, even though I am writing this summary, I would highly recommend you all to listen to the podcast episodes. Here are the Links:

For those who prefer reading instead of listening, here are Links to the transcript of the Podcast episodes:

Now that the boilerplate stuff is done, let’s get into the post itself:

Q: How did Vitalik get the idea of Ethereum?

A: When Vitalik came across Bitcoin, he was intrigued because it is a combination of most of his favourite subjects like Mathematics, Cryptography, Computer Programming, and open-source software. He tried to get into the Bitcoin community and learned about projects like:

  • “Covert Coin”: Which was trying to use the blockchain as this database layer to issue other kinds of assets on top (similar to NFTs today)
  • “Master Coin”: Which was trying to create a full-fledged financial system (similar to DeFi today).

After spending time with these communities, Vitalik had his own idea of creating a general-purpose blockchain allowing developers to build applications on the top of this Blockchain and that’s where Ethereum came from.

Q: What is Ethereum?

A: “I think of Ethereum as a general-purpose blockchain. So instead of being a blockchain for one application, it’s a blockchain that you can build an application on top of.” – Vitalik.

Q: How do Ethereum Apps Work?

A: Since it’s an App, you start with writing a piece of code and publishing it. To publish the code one will have to create a Digital Transaction along with the Code. After creating the Digital Transaction, it’s added to a Block on the Blockchain network in the form of an Object. The Object is called a “Smart Contract” which is maintained by the Ethereum Blockchain. And once the Smart Contract is created, anyone on the Ethereum network can communicate with it by creating Transactions. The Data/input required for the smart contract to execute is added to these transactions.

Q: What are the advantages of Ethereum?

A: Ethereum transactions are transparent while following public rules encoded in the smart contracts. There is no way to change those rules and there are no back-doors to alter these transactions.

Once the Ethereum Application is published on the Network, the ownership of the Application is transferred to the network. The Network is then responsible to maintain the application and make sure that it can not be altered.

It’s a trusted computer in the cloud, and each of us can verify all of the activity. We can audit all of it, and we know that nobody cheated.” – Naval.

“Completely neutral, completely transparent, visible, treat everyone equally according to what the rules are.” – Vitalik

Q: What are the disadvantages of Ethereum?

A: “Now, what do you sacrifice for this? One big thing that you sacrifice is efficiency. The way that all of these blockchains, including Bitcoin and Ethereum, work is that you have this network of tens of thousands of computers, each of which helps to verify the transaction. When I broadcast this transaction, that transaction goes out to every single computer on the network and every single computer on the network runs that piece of code. Every single computer on the network verifies it. Every single computer on the network processes it.” – Vitalik.Ethereum works in the form of a Virtual Machine on the cloud known as EVM (Ethereum Virtual Machine). The EVM consists of tens of thousands of computers on the Ethereum Network responsible for verifying the Transactions and executing the code defined in a smart contract.

“The technological complexity comes in scaling this; making this computer faster; keeping it secure; creating incentives, both economic and technological; having an incentive mechanism in there so that people want to add computers to this networkand also having a disincentive mechanism to use the network. You have to pay for it, otherwiseyou can easily overwhelm it.” – Naval.

“Aside from scaling, the other big performance element on it is latency. When I send a transaction, I have to wait maybe about half a minute for the transaction to get included and to get a confirmation back. In the future, this is going to get somewhat more efficient. Maybe like 10 or 12 seconds is going to be real soon. But this isn’t a realtime” – Vitalik

Q: What is Sharding?

A: “Sharding is: Send your transaction. The system randomly chooses 1,000 computers out of 100,000 computers. Those 1,000 computers verify it, and the transaction gets accepted. Instead of all 100,000 computers verifying, there are only 1,000 computers verifying.

When you have lots of transactions being accepted into the system, every single computer in the network, on average, is only going to have to verify maybe 1% of all the activity. You can crank up the efficiency even higher. Eventually, it could say every computer doesn’t even have to verify 1%; every computer maybe only has to verify 0.1%” – Vitalik.

Q: What are the disadvantages of Sharding?

A:  Following are the disadvantages of sharding.

  • It is technically complex to implement, one will have to develop a rule based-system by which the nodes that are responsible for verifying the transaction are selected.
  • The System implemented with the help of Sharding is not completely decentralized.

Q: What is Layer 2?

A: A layer 2 is a separate blockchain that extends Ethereum. It also inherits the security guarantees of Ethereum and it also follows the properties of the Ethereum Network i.e. Decentralised, Secure, and Scalable.

Q: What are Rollups?

A: Rollups are a scaling solution used by Ethereum in which the transactions are executed out of the Ethereum Main Network i.e. Layer 2 and then those transactions are verified on the Ethereum Main Network i.e. Layer 1. Since the execution of the Transactions is happening on the Layer 2:

  • It improves the efficiency of the Ethereum Network.
  • It is fully decentralized.
  • The Data received to Layer 1 is lesser than the data added initially to the transaction. Since the execution happens on Layer 2, the data required for the execution of the smart contract is used by Layer 2 and layer 1 gets the final processed data required for the Transaction.

Q: What is a “Social Recovery wallet”?

A: “social recovery wallets are where you can share your wallet with your friends, or family, or other trusted people so that when you need to recover it, it takes two out of three, or three out of five, or whatever keys.” – Naval.

A social recovery wallet works just like a Regular Crypto wallet, where you have a signing key for verifying transactions, but with some additional keys (3 or more) that you can share with your trusted people (Family, Friends, or anyone) called a “Guardian”. And In case you lose your signing key, you can ask your “guardians” to co-operate and change the signing key of the Account. In the case of 3 guardians at least 2 guardians are required to send the transaction to change the key.

Q: What is the Philosophy of Ethereum?

A: “Ethereum’s philosophy, in general, is to try to be simple at the base and for a lot of those extra features to be something that gets built on top.” – VitalikThese were the technical points I think should be included in this post, but if you think I have missed something or should include any other points in this, feel free to comment, I would love to update those details too.