Blockchain & Decentralized Finance (Defi) | How blockchain technology is coupled with the Second largest Bitcoin - Ethereum

The Decentralized finance-Cryptocurrency is mitigating the traditional banking with Bitcoin & Ethereum merging the Blockchain technology, Smart Contracts, DAO, and Proof of Work are crucial features in Ethereum

Blockchain & Decentralized Finance (Defi) | How blockchain technology is coupled with the Second largest Bitcoin - Ethereum

The Internet is rapidly changing and introducing us new systems daily which in return changes the channels we use daily. This next generation Internet technology is using Blockchain which offers economical and social innovations such as digital currencies, distributed ledgers and decentralized systems that will transform various industries from finance, insurance to energy and cyber security.

Bitcoin & Blockchain: Ethereum

In simple terms, Ethereum is the network where a network of computers are connected to each other and all are working in one platform- Ethereum Blockchain.

The goal of the blockchain is to allow digital data to be distributed and recorded, but it is not edited by anyone. In Ethereum, when the bitcoin protocol is built on blockchain, blockchain forms the strong groundwork for cryptocurrencies. Under the central government, the user's data of its finances are technically controlled by them, and for suppose if any bank got hacked, the user's private information is at peril, or if the bank collapses, the value of the currency is at risk. Take the example of the 2008 financial crisis, where the bank ran out of money. Therefore, it is very imperative to change the financial systems to decentralization.

After the bitcoin, Ethereum is the second-largest cryptocurrency that uses the blockchain-based software by market capitalization. It is called "Decentralized" because no third-party is watching or stepping in. Ethereum  features the most popular concept Smart Contracts, DAO & Proof of Work. In Ethereum, to access every decentralized applications and using the Ethereum platform, we need the digital currency called Ether which is a native currency of the platform.

Ethereum was first proposed by the 21-year old college dropout, Vitalik Buterin, he was inspired by Bitcoin which has a goal of disrupting online banking and day to day transactions, but the Ethereum aim was to use the same technology to replace internet third parties, those that stores data and keep track of complex financial handles. But they have been accused and hackings that question the reliability of Ethereum.

What exactly happens in the Ethereum Blockchain?

The blockchain allows people to exchange the token called "ether", and the most updated feature of Ethereum is to use the smart contract which is an agreement between two people in the form of a Computer Code on the blockchain, therefore they are stored in a public database and cannot be altered. And the transactions that happened in smart contracts are processed in blockchain without third-party access or permission, but the transactions only met when the conditions of the Ethereum system are met.

And second, come to DAO- Decentralized Autonomous Organization is created by the developers to automate the decision power. The major crucial feature of cryptocurrency is Decentralization, which means they are not controlled by the government, or central bank, but are divided by a variety of computers, nodes, and networks. But, the concept of decentralization status attains the level of privacy that creates the risks of security.

First, understand the Intermediaries:

Before digging into Ethereum, first, we need to understand the intermediaries- which help us to accomplish all sorts of digital tasks like Gmail help us send emails, and Paytm help us send payment to any friend. This means our personal data, financial information and so forth all are stored in some other people's computers- in clouds and servers owned by companies like Google or Facebook, Paypal.

This third-party structure was ambiguous, complicated, and has also various risks, which means less direct controls to the users. Therefore, the idea of Ethereum was to change how the applications work on Internet today, replacing the intermediaries with smart contracts that execute rules automatically.

Ethereum being referred to as “world computer” because many professionals believe it can decentralize the Internet because all the centralized servers would be replaced by thousands of so-called "nodes" runs by developers, engineers all over the world.

How do Ethereum works?

Before Ethereum was introduced, developers had to write and build complex codes and software, therefore, Ethereum maintained a specific generic programmable layer that subtracted this whole mediocre process and enabled developers to build only decentralized applications that just have to write the application's core logic.

Ethereum Important terminologies to understand the working of the Ethereum system :

Ethereum Virtual Machine:

EVM is a system that makes the following transactions or any smart contracts follow the regulations.

Smart contracts:

The crucial rules & regulations are composed of what conditions the money will flow.

Ethereum Blockchain:

Entire track record of Ethereum from every transaction to smart contracts calls, all are reserved in the technology of blockchain.

Proof-of-work model:

This is a prime and important model of Ethereum, which holds the system altogether that makes sure everybody on the network is following the regulations.

Ether :

It is the native token of Ethereum, required to make transactions and process the smart contracts on Ethereum.

Now we will understand the most important features of Ethereum :

Smarts Contracts:

Smart contracts platform executes the encryption in which the conditions are encrypted, by which the money can flow without any involvement of an Intermediary. For instance, Bitcoin validates the transactions directly between one person to another without any third party watching the transactions making the process smooth & easy. Before cryptocurrencies, it was not implemented on the Internet.

While talking about Ethereum, its aim is to expand the smart contracts platform by reforming the bitcoin design to utilize the technology above the simple transactions like Ethereum company "Compound", With the Smart Contracts, it allows users to get a loan by just processing the money instead of a company. But, this type of flexibility received criticism from many people, arguing that it will create security issues.

DAO (Decentralized Autonomous Organization):

Its goal is to code the rules which are decided by Ethereum platforms and automating the decision making, eliminating the need for documents and governance.

How DAO works?

  • The group of developers writes the smart contracts programs that will run the Ethereum organization
  • In the initial payment process, the people add funds to the DAO by purchasing the tokens that give them ownership.
  • When the funding period finishes, the DAO operates after that
  • People then create proposals to the DAO on how they will spend the money in the proposals and the members who have bought that will vote for the approval.

Ethereum Blockchain System:

The System of Ethereum Blockchain is akin to the bitcoin- sharing the record of transaction history & smart record.  Thousands of volunteers store the copy which stores in Ethereum blockchain, each of these makes "Decentralized Ethereum". Ethereum network consists of "nodes", in which every time a smart contract in Ethereum is utilized, a network of computers process it and makes sure it follows the rules. In relative to bitcoin, the Ethereum node stores more than just keeping track of the transactions records of the "state" or live information of all the information.

Keeping track of the transactions records

What features are stored in the node?

  • Ethereum Account, Smart contract state, and smart contract code

What are the Ethereum Accounts?

An Ethereum account consists of an address in which it stores the "state" of ether tokens and processes the transition from one state to another, which has 4 fields:

1. A counter for each transaction to ensure it has processed only one time, called a nonce

2. The account owner's ether balance

3. The account’s code of the smart contract

4. The storage of account

Ethereum has Two kinds of Account:

1.) The 1st is the external owner's account where the owner has access to controlling private keys which gives access to the account.

2.) The other one is a contract account. The 2nd one is evolved one of bitcoin's feature in which bitcoin's only needed the external account, but in Ethereum, it needs a contract account to execute the smart contract transaction. Whenever the contract account receives the message, the code is activated.

Ethereum Transactions:

For accessing the Ethereum applications & smart contracts, it needs cash in the form of the Ether- which is the token of Ethereum, which means Ether is required to excess anything on the platform. It is called "gas" when it is used to process the Smart Contracts in the network.

Understanding the transactions at the technical level:

The transaction goes in a series of level:

1.) Ethereum blockchain inspects if the transactions contain valid data & have a secured signature.

2.) Nonce-"A counter for each transaction to ensure it is only processed once", It matches the nonce if it matches, the transaction proceeds to the next step

3.) In this step, transaction fees are calculated, in which,

( Start gas * gas price value ) + one gas per computation

Once it is calculated, the fees are applied to the sender's external account.

4.) If all the above conditions are fulfilled, the state of ownership is converted from sender to recipient.

Proof-of-work in Ethereum:

In the Ethereum network, every node maintains a copy of every transaction and the records of the smart contracts. The algorithm of the proof-of-work was first coined by Bitcoin, and to prevent any unethical activities in the network, the miners are introduced to ensure that no other person is disbursing their money twice at a time.

PoW has proven the extremely secure network in the emerged technology- Blockchain, the basic components of Proof of Work are miners and energy. Miners are entities that maintain the network by managing nodes.

The nodes and miners take control for traversing from one state to another state, instead of third party involvement. The Miners validates the shifting of ownership from one node to another. EVM executes the contract according to the rules of the developer firstly initialized programmed.


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