Overview
In the world of blockchain and cryptocurrencies, Ethereum stands out as a groundbreaking protocol that goes beyond mere digital currency. It serves as a decentralized protocol for building various applications using blockchain technology. At its core, Ethereum facilitates smart contracts, enabling developers to create decentralized applications (dApps) and execute automated agreements without the need for intermediaries.
How it works
A blockchain is a public database that is updated and shared across many computers in a network. “Block” refers to data and state being stored in consecutive groups known as “blocks”. “Chain” refers to the fact that each block cryptographically references its parents. The data in a block cannot change without changing all precedent blocks, which would require the consensus of the entire network.
The Ethereum network is a public, permissionless blockchain that functions like an enormous, worldwide computer, powered by thousands of interconnected nodes. It uses a proof-of-stake-based consensus mechanism, where anyone who wants to add new blocks to the chain must stake ETH – the native currency in Ethereum – as collateral and run validator software.
Ethereum vs Bitcoin
Ethereum and Bitcoin, while both pioneers in the cryptocurrency space, diverge in consensus mechanisms, transaction models, and purposes. Bitcoin utilizes Proof-of-Work (PoW) for consensus, ensuring security through computational work, whereas Ethereum has transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS), which secures the network via validators’ stakes. Ethereum does not have a capped supply whereas Bitcoin has a maximum supply of 21 million BTC.
Figure 1: Summary of Ethereum vs Bitcoin
Architecture
Ethereum’s architecture is built around the Ethereum Virtual Machine (EVM), enabling decentralized applications through smart contracts that execute autonomously based on their code.
Ether (ETH): Ether (ETH) is the native cryptocurrency of Ethereum, serving as the primary means to facilitate a market for computation. This market incentivizes participants to contribute computational resources for verifying, executing, and recording transactions on the blockchain.
Consensus Mechanism: At the heart of Ethereum’s security is the PoS consensus mechanism, dubbed Gasper. This innovative approach requires participants to “stake” a portion of their Ether, creating a system where the network’s consensus on the blockchain’s state is achieved through economic commitment rather than the energy-intensive computational work typical of PoW systems.
Gas Mechanism: Ethereum introduces a unique gas system to quantify and limit the computational effort necessary for performing tasks like executing smart contracts and processing transactions. The amount of gas required for a transaction depends on the complexity of the operation and the current network demand. When the network is congested and experiencing high demand, gas fees tend to rise significantly. Users pay for this gas in Ether, compensating miners (or validators in PoS) for their role in transaction validation and network maintenance. This system serves as a safeguard against spam and ensures the efficient allocation of network resources.
Ethereum Virtual Machine (EVM): The EVM stands as a pivotal element of the Ethereum infrastructure, providing a sandboxed environment for the execution of smart contracts. As a Turing-complete virtual machine, the EVM facilitates the creation and operation of dApps and smart contracts, guaranteeing their execution as programmed, free from external interference. This capability transforms Ethereum into a versatile, programmable blockchain platform, extending its application beyond simple transactions to encompass a broad range of digital agreements and applications.
Smart Contracts: The essence of Ethereum’s innovation lies in smart contracts—contracts that self-execute according to the terms embedded within their code. These contracts autonomously enforce and carry out the stipulations of an agreement upon the fulfillment of predefined conditions, eliminating the need for intermediaries.
Decentralized applications (dApps): dApps are applications that run on a decentralized network rather than a single server. They leverage blockchain technology to provide transparency, security, and censorship resistance. dApps built on Ethereum utilize smart contracts to automate processes and execute transactions without the need for intermediaries.
Ethereum Ecosystem
The Ethereum ecosystem is a vibrant and rapidly evolving landscape, particularly with regard to the narratives of DeFi and Layer 2 solutions. DeFi offers financial services (e.g. lending, borrowing, trading) on the blockchain, removing intermediaries and aiming for greater accessibility and transparency. Layer 2 solutions, such as rollups and sidechains, operate on top of Ethereum to increase transaction speed and reduce costs, essential for widespread DeFi adoption. Together, they form a core part of Ethereum’s strategy to build a more accessible and scalable financial ecosystem.
Figure 2: Ethereum ecosystem protocols
Ethereum as a Deflationary Asset
EIP-1559, arguably the most significant Ethereum improvement proposal to date, was implemented as part of the London hard fork in August 2021. This proposal introduced a new transaction fee mechanism that includes a base fee for transactions to be included in the next block, and an optional tip to miners. The most notable aspect of EIP-1559 is that the base fee is burned, removing ETH from circulation.
In September 2022, Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. Known as “The Merge”, this transition further contributed to Ethereum’s potential to become deflationary, as the issuance rate of ETH in PoS is lower than it was under PoW.
Combining the effects of EIP-1559’s burning mechanism with the reduced issuance rate post-Merge, Ethereum became a deflationary asset for the first time in October 2022, one month since the merge, as more ETH was burned verifying transactions than was created in the same period (CoinDesk, 13 October 2022).
Since then, Ethereum has continued to experience healthy deflationary trends. As of 12 March 2024, the circulating supply of ETH decreased by almost 32,700 in the span of a week. Consequently, the circulating supply is projected to decrease at a rate of 1.419% per year (Ultra Sound Money, 12 March 2024).
The table below provides a comparative analysis of Ethereum’s supply dynamics under two scenarios: the current trend and the hypothetical scenario where Ethereum continues operating under a PoW consensus mechanism.
Figure 3: Supply trend showing post-Merge Ethereum’s deflationary nature
*Issuance, burn, and supply growth is annualized based on the 7-day average
Ethereum’s Present and Future
Currently, Ethereum reigns as the largest blockchain by Total Value Locked (TVL)1 at $64.12B, which takes up roughly 35% of the market share and market cap at $458.01B with 1048 protocols on its blockchain. According to coinmarketcap, ETH is trading at a price close to 4000 USD, with an impressive daily volume of 22 billion USD as of 14 March 2024.
As of writing this article, there have been an increasing number of exciting developments on Ethereum. The Dencun upgrade, which prioritized scalability, efficiency, and security through various Ethereum Improvement Proposals, notably EIP-4844 for proto-danksharding, went live on 13 March 2024. The upgrade marks the beginning of “The Surge” era in Ethereum’s roadmap, paving the way for achieving mass scalability through layer-two rollups. After the upgrade, layer-two rollups are expected to see a fee reduction of 90-95% (CoinDesk, 13 March 2024). Another exciting development is the potential approval of Ethereum spot-ETFs by the Securities and Exchange Committee (SEC). The success of Bitcoin spot-ETFs approval by the SEC in January opened the door for the possibility of other crypto spot-ETFs, including Ethereum’s. According to Standard Chartered, the ETFs could be approved on 23 May 2024 (Yahoo Finance, 8 February 2024).
With major developments underway, Ethereum’s vibrant ecosystem will continue to grow from 2024 and beyond.
Conclusion
Looking ahead, Ethereum continues to be at the forefront of blockchain innovation, with ongoing developments focused on improving scalability, interoperability, and usability. More than just a digital currency, it’s a blockchain that empowers developers to build the next generation of applications, revolutionizing various industries and reshaping the future of finance, governance, and beyond. The adoption of Layer 2 solutions, through EVM sidechains (e.g. Polygon PoS), optimistic rollups, and ZK rollups, are expected to address the scalability issues currently facing the network, paving the way for broader adoption and further innovation in the decentralized space. DigiFT prides itself on being the first regulated exchange for on-chain real-world assets, approved as a Recognised Market Operator with a Capital Markets Services license by the Monetary Authority of Singapore. Building the platform on Ethereum, DigiFT allows asset owners to issue blockchain-based security tokens and investors can trade with continuous liquidity via an Automated Market Maker.
1“TVL” stands for total value locked, which is a metric used in the cryptocurrency sector to determine the total U.S. dollar value of digital assets locked, or staked, on a particular blockchain network via DeFi platforms or dApps.
關於 DigiFT
DigiFT is the first and only regulatory-compliant exchange for on-chain real-world assets enrolled in the Monetary Authority of Singapore (MAS) FinTech Regulatory Sandbox.
Built on the Ethereum blockchain, DigiFT provides regulatory-compliant services for primary market origination and distribution as well as secondary market trading of asset-backed tokens. The assets backing these tokens include digital assets and real-world assets like bonds, equities, and units in collective investment schemes. DigiFT’s exchange provides liquidity through various channels, including the Automatic Market Maker (AMM) trading mechanism.
DigiFT’s founding team is a globally diverse group of executives with prior experience in the finance and fintech sectors at companies such as Citi, Bank of America, and Morgan Stanley. They also possess extensive knowledge of blockchain technology and a track record of successfully developing digital asset exchanges and products in the past.
For more information, please contact:
Disclaimer:
This article and its contents are prepared solely for informational purposes only and do not replace independent professional judgement. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. The content of this presentation is proprietary and no part of it may be reproduced or redistributed without the prior written consent of DigiFT Tech (Singapore) Pte. Ltd. (“the Company”). This article contains public information as of the specified date, and may be stale thereafter. No representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the article and the information contained herein and no reliance should be placed on it. None of the Company, its advisers, connected persons or any other person accepts any liability whatsoever for any loss howsoever arising, directly or indirectly, from this article or its contents. All information, opinions and estimates contained herein are given as of the date hereof and are subject to change without notice. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment.
