Cryptogram-01JUL2022

Ethereum: Why we should be excited, but cautious

July 01, 2022

01 July 2022

In this issue

Hello, First off, some great news. Cryptogram is now a community of more than 1,000 subscribers! We are super stoked that in just a few weeks we have grown our mailing list to a healthy number of crypto enthusiasts and investors.

We cannot wait to see more people join in and find ways to engage with you. Thank you, and we promise there’s lots in store for the future.We’ve had quite a few new signs-ups in the past week. If you are one of them, I urge you to read this edition and then scroll back up to check out our past editions here – it is a crypto-basics goldmine. Alright, down to business for this week then. Ethereum. Lots of chatter around this with the upcoming “Merge.” Today, we will start with the basics and make our way down to the pros and cons of the second most-valuable blockchain network and cryptocurrency after Bitcoin. We will try to understand Ethereum, how it works, its ecosystem and what the Merge is all about.

The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio.

Was this newsletter forwarded to you?

THE BIG STORY

Ethereum Analysis: How the future looks, and some concerns

If you are a seasoned crypto investor and fairly familiar with Ethereum, the first few parts below will not be new. But you must have a sound understanding of the basics to realise the potential for Ethereum, and where the risks are. So, we suggest you give the basics a quick read even if it’s not new information for you. As a decentralised finance platform, Ethereum has garnered immense interest over the years and is considered an elite asset among crypto enthusiasts. With the planned Merge upgrade looming over the horizon, Ethereum platform is constantly evolving to address the community needs to enable further security and scalability to its blockchain network. What is Ethereum?It is a blockchain network conceptualised in the late 2013 as a do-it-yourself platform for decentralised programs or applications. Basically, it is like Android Play Store – but for crypto apps. These programs and applications on Ethereum are called DApps (Decentralised Applications). The platform runs on a programming language called “solidity” and has thousands of computers running it, making it fully decentralised. These computers are known as nodes, which ensure that the programs are executed as written, once deployed in the Ethereum platform. While Ethereum is a platform to run the decentralised program, the currency used to incentivise using the network is called as “Ether.” A gas fee is the amount of Ether (ETH) required for an Ethereum blockchain network user to execute a transaction on the network. Gas fees are used to compensate Ethereum miners for their work in verifying transactions and securing the network.The internet that we use today is almost entirely centralised by a group of organisations such as Facebook, Google, Amazon etc. – popularly known as Web 2.0. With Ethereum, users can sell anything directly to others without the need of a middle authority such as Amazon or Uber – and that’s Web 3.0.

Image: ethereum.org

How Ethereum works: Smart contractsEthereum’s language “Solidity” is used to write smart contracts, which are basically the commands that run DApps. In the real world, a contract is a collection of “ifs” and “thens” that determines the set of conditions and actions. For example, a rental contract enables a person to use an apartment, if he pays an agreed upon amount every month. Similarly with Ethereum, developers write the conditions for their decentralised programs, which are executed by the blockchain.

Image credit: Cryptotips.eu

They are referred to as “Smart Contract” as they take care of all the aspects of a contract, such as enforcement, management, performance and payment without manual intervention. In our example, a smart contract checks and validates the payment of the renter and in case of default, takes appropriate action (maybe change the house’s digital key to stop using the apartment).    A smart contract that has been deployed in the Ethereum platform cannot be edited by the original author. The only way to change the contract is to convince the entire Ethereum network that a change should be made.  Ethereum’s ecosystemWith a market cap of $132 billion and trading around $1,100, ETH is the second-largest crypto after BTC today.One of the distinctive features on Ethereum is that the smart contracts are accessible and transparent – like open APIs – so a DApp can even include a smart contract that someone else has written. The number of Decentralised applications on the Ethereum platform started growing from 2015 at a significant pace and stands at 2970 as of May 2022.

DApps on Ethereum over the years.

According to State of the DApps, these decentralised applications are being built on multiple categories ranging from essentials such as energy, health and finance, to enablement services such as social, insurance, marketplaces and media, with daily active users hovering over 46K and transaction volume over 100K, as of  June 28, 2022.Proof-of-Work vs. Proof-of-StakeUnlike Bitcoin blockchain that only needs to process the incoming and outgoing transactions of Bitcoin, the Ethereum blockchain has to process a wide array of DeFi transactions, smart contracts, minting and sales of NFT. These functions are ever expanding as Ethereum remains the first blockchain to support new innovations in the evolving crypto universe.Due to its limitations in scalability and issues with high-energy consumption, Ethereum developers have built a new blockchain called Beacon chain, which is based on “Proof-of-Stake” as opposed to the earlier “Proof-of-Work” concept. Ethereum is a “decentralized network” – there is no one central ledger where all the information is stored. So, what’s the “consensus mechanism” here? How does everyone in the network come to a consensus on who has how many coins and if a transaction is legitimate?“Proof-of-work” (PoW) is a consensus mechanism. It is an algorithm which allows each user in a network to agree on account balances, validity of transactions etc. It also prevents attacks and manipulation by bad actors. PoW is made possible by a group of people, called miners, who compete with each other to do the job and get rewarded accordingly – it’s a bit like a race to win. Now, here’s the problem with PoW – it guzzles energy, and miners need superior hardware to do so. There’s been a lot of criticism against cryptocurrency over the fact that they are energy-inefficient and thus bad for the environment. “Proof-of-stake” (PoS) mechanism comes to rescue here. It is an improvement over PoW in that it is more energy efficient and has reduced hardware requirement. And it does that by distributing the “consensus” process. There are no miners, but only validators. There is no competition, but allocation in an orderly fashion. No race, whoever wants to be a validator “stakes” some cryptocurrency as collateral and is selected randomly. With the new PoS mechanism, Ethereum will become a lot more energy-efficient and transaction costs will go down. Future of Ethereum: Concerns and promisesThis new upgrade when fused to Ethereum in its current form is being termed the “Merge.” Anticipated in Q4 2022, this will enable the transition from PoW to PoS mechanism. 

The Merge

Source: Ethereum.org

Once this is done, there will be significant reductions in gas fees and scalability.It will also lead to optimizations within the blockchain including implementation of “Sharding” – a way to split the blockchain’s data into smaller partitions that can run independently. With sharding, validators on the blockchain will only need to access the data being processed on the ‘shard’ chain and not the entire main chain. This will cut the gas fees significantly. It will also reduce the computing power required. Ethereum 2.0 (the new name to the blockchain post its merge) will likely have 64 shards in the future, each of it will run in parallel to the beacon chain.Points of concernAll of this sounds great, but they are all easier said than done, and there are legitimate concerns over the success of the Merge. For one, all of the above will take some time to play out. The Merge is touted to be the biggest change on Ethereum yet with implications not yet fully understood.Two, while everyone agrees that Ethereum blockchain will benefit by this in the long term, in the short term, this introduces uncertainty in an established and stable network. Thus, we anticipate some volatility in ETH’s pricing too. Delays are inevitable when such an upgrade is being planned, but this leads to speculation from investors.Three, there are challenges such as the introduction of a ‘difficulty bomb’ to ensure current miners are also incentivized to migrate to PoS. If this doesn’t play out as intended, a new hard fork of Ethereum is a possibility. Already, the beacon chain had a brief crisis of confidence with a reorganisation event that knocked out seven blocks of the network in May.Four, some have also questioned the impact on layer-2 networks such as Polygon, which are run on top of Ethereum and aid in its scaling, post the merge. Since layer-2 protocols process transactions independently, they complete more transactions per second at a lower gas fees which are then added to Ethereum network. We have to end, however, by stating that the potential positives outweigh these short-term concerns. The Merge, and then the introduction of Sharding over the years, will lead to an increase in participation on the Ethereum network, a higher utilization of decentralized applications, scalable and fast transaction processing, higher control of individuals on their own assets and a higher degree of decentralization. The future of Ethereum is bright, if the network crosses over to the other side of the Merge without major hiccups.

Was this newsletter forwarded to you?

  THE TOP FIVE 

Stories from this week you cannot miss

1.  Polkadot unveiled  "Gov2" a new on-chain governance model that aims to improve inclusivity and decentralization while increasing the number of decisions Polkadot governance is able to make.2. TRON breaks the 100 million users mark, celebrates Mainnet 4th anniversary, and announces huge hiring push3. SAP has launched a new interactive and immersive ‘cloud on wheels’ platform on the Metaverse to accelerate cloud adoption among Indian enterprises.4. Meta launched its own digital wallet, Meta Pay, to facilitate digital payments in the Metaverse opening access to a wider array of digital goods that will bring along their proofs of ownerships5. Leak: GTA 6 is coming in 2024 and will feature a cryptocurrency system like Bitcoin

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

Since the lede piece was pretty heavy, we will settle for a pretty simple tech explainer. This week, we explain BLOCKCHAIN BRIDGES.It’s pretty simple. Just like physical bridges on the road connect two locations, a blockchain bridge connects two blockchain networks. Bridges facilitate communication between blockchains through the transfer of information and assets. This is useful when you want to use one cryptocurrency, which you hold, on another platform. Let’s say you want to buy a service or an application on Ethereum, but you only hold Bitcoin. Then you can use a bridge, like WBTC or Binance Bridge, to transfer value from the Bitcoin network to Ethereum and perform the transaction on Ethereum.

So, that’s it for this week’s newsletter, see you next week!If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.

Was this newsletter forwarded to you?