Many people who hear ‘Ethereum’ for the first time often compare it to Bitcoin, thinking it’s just another cryptocurrency. However, this view only scratches the surface. The truly revolutionary aspect of Ethereum is that it is a global, open-source public blockchain that not only processes transactions but also serves as a platform for developers to build and deploy ‘decentralized applications’ (DApps). Simply put, if Bitcoin is the ‘calculator’ of the blockchain world, then Ethereum is the ‘operating system’.
Bitcoin’s primary function is to serve as a peer-to-peer electronic cash system. Its scripting language has limited functionality, mainly used for processing monetary transactions. In contrast, Ethereum introduces a key innovation—programmability. This means developers can write more complex and flexible code on the Ethereum blockchain, which we often refer to as ‘smart contracts’.
A simple analogy:
Imagine Bitcoin as a single-function calculator that can only perform addition, subtraction, multiplication, and division.
Ethereum, on the other hand, is like a computer with Windows or macOS installed, on which you can run a variety of software (Word, Photoshop, games), unlocking infinite possibilities. This is the power of Ethereum’s programmability.
In the Ethereum whitepaper published in 2013, founder Vitalik Buterin laid out a grand vision: to build a ‘World Computer.’ This computer would not be controlled by any single entity but would be maintained by thousands of nodes worldwide, capable of securely executing applications without ever going down and free from censorship. This vision aims to solve the problem of power being overly concentrated in the hands of a few tech giants in the traditional internet.
To understand the magic of Ethereum, you must grasp these two core concepts:
💡 Recommended Article
Want to dive deeper into how smart contracts work? Recommended reading:
A Simple Guide to Ethereum Applications: Understand Smart Contracts, dApps, DeFi & NFTs in Minutes
Ethereum’s powerful functionality stems from its sophisticated technical architecture. We can understand it as a layered system, with each layer working closely together to maintain the operation of this decentralized network. Understanding Ethereum’s architecture is key to grasping how it works.
Ethereum’s modern architecture is primarily divided into three layers:
The Ethereum protocol is a set of formal rules that define how the entire system operates. This protocol ensures that tens of thousands of nodes worldwide, even if they don’t trust each other, can collectively maintain a single, reliable ledger. Key components of the protocol include:
Ethereum has two different types of accounts, with distinct functions and control mechanisms:
| Account Type | Full Name | Controlled By | Primary Function |
|---|---|---|---|
| Externally Owned Account (EOA) | Externally Owned Account | Private Key | Held by real users to initiate transactions, hold ETH, and interact with contracts. |
| Contract Account (CA) | Contract Account | Smart Contract Code | Is a smart contract itself; its code is executed passively only when it receives a transaction. |
In short, an EOA is the initiator of a transaction, while a Contract Account is the executor. You must use your EOA (e.g., a MetaMask wallet) to trigger the code execution of a contract account.
If Ethereum is the ‘World Computer,’ then the Ethereum Virtual Machine (EVM) is its central processing unit (CPU). It is one of the most core and magical parts of Ethereum’s technical architecture.
The EVM is an abstract, fully isolated sandbox environment that exists within every Ethereum node. All smart contract code is executed inside the EVM. Because every node runs the same EVM and processes the same transactions, they can stay in sync and collectively maintain a consistent ledger state. This brings the concept of ‘decentralized computation’ to life.
When a transaction is sent to the Ethereum network, it is broadcast to all nodes. Each node’s EVM executes the smart contract code triggered by the transaction. The EVM reads the contract’s ‘opcodes’ one by one and, based on these instructions, changes account balances, modifies the contract’s internal data, or interacts with other contracts. After the computation is complete, the node bundles the results into a new block.
A key feature of the EVM is that it is ‘Turing Complete.’ This is a computer science term that, in simple terms, means that with enough time and resources (memory), the EVM can perform any computable task. It is this Turing completeness that gives Ethereum its infinite programmability, allowing developers to create extremely complex DApps that go far beyond the transaction-only functionality of Bitcoin.
In a decentralized network without a central server, how can all participants be ensured to keep honest records and agree on the transaction history? This is the problem that a ‘consensus mechanism’ solves. The evolution of Ethereum’s consensus mechanism is one of the most important milestones in its development history.
Initially, like Bitcoin, Ethereum used the Proof of Work (PoW) consensus mechanism. In PoW, ‘miners’ compete for the right to add new blocks by solving complex mathematical problems, which requires a massive amount of electricity. While secure, this mechanism led to enormous energy consumption and performance bottlenecks.
To address these challenges, Ethereum underwent a historic upgrade in September 2022 known as ‘The Merge,’ officially transitioning from PoW to Proof of Stake (PoS). This upgrade drastically reduced Ethereum’s energy consumption by about 99.95%, laying the foundation for its future sustainable development and scalability.
Under the PoS mechanism, network security no longer relies on computational power but on capital. Here’s how it works:
The switch to PoS brought three core advantages to Ethereum:
Performing any operation on Ethereum, from transferring funds to interacting with a smart contract, requires paying a fee known as ‘Gas.’ At the same time, the network’s transaction processing speed (TPS) is a key metric for its performance. Understanding both is crucial for any Ethereum user.
Gas is the unit used to measure the amount of computational effort required to execute specific operations on the Ethereum network. You can think of it like the gasoline consumed when driving a car. Simple operations (like a transfer) consume less Gas, while complex operations (like executing a sophisticated DeFi protocol) require more Gas.
Paying Gas fees serves two main purposes:
The total fee for an Ethereum transaction (Gas Fee) is determined by these three components:
Total Transaction Fee = Gas Units (Gas Limit) * (Base Fee + Priority Fee)
TPS (Transactions Per Second) refers to the number of transactions a network can process per second. After the transition to PoS, the Ethereum mainnet’s TPS is around 10-15. This relatively low number can lead to transaction delays and high Gas fees during periods of high network activity. The main factors affecting TPS are block size and block time.
To solve the performance bottlenecks of the mainnet (Layer 1), the Ethereum ecosystem has developed ‘Layer 2 scaling solutions.’ Layer 2 solutions are auxiliary networks built on top of the Ethereum mainnet. They process and bundle large numbers of transactions off-chain and then submit only the final results back to the mainnet for settlement.
This approach dramatically improves transaction processing efficiency, increasing TPS by hundreds or thousands of times while reducing the Gas fee for a single transaction to just a few cents. Prominent Layer 2 solutions include Rollups (like Arbitrum, Optimism) and ZK-Rollups (like zkSync, StarkNet).
Starting from the grand vision of a ‘World Computer,’ Ethereum has become the absolute core of the decentralized world, thanks to its innovative programmability, the powerful Ethereum Virtual Machine (EVM), and its ever-evolving PoS consensus mechanism. This article has delved into Ethereum’s technical architecture, core protocols, and the Gas and TPS mechanisms that affect user experience.
Mastering this foundational technical knowledge will not only help you interact with DApps more safely and efficiently but also give you insight into the development trends of the entire Web3 industry. The story of Ethereum is still unfolding. With the maturation of Layer 2 solutions and the future implementation of sharding, a faster, cheaper, and more scalable decentralized future is approaching. Now is the perfect time to embark on this journey of exploration!
CashbackIsland continuously updates trading educational resources. Traders can visit the “CashbackIsland Learning Hub” section to master more forex knowledge and investment skills.
A: In theory, Ethereum is designed to be highly decentralized, with its network maintained by thousands of independent nodes worldwide, and no single entity has control. However, in practice, ‘decentralization’ is a matter of degree. Factors such as the geographical and cloud provider distribution of nodes, and the concentration of ETH in large staking pools, can affect its level of decentralization. Overall, Ethereum is one of the most decentralized smart contract platforms available today.
A: That depends on your learning goals. If you just want to be a user or investor, understanding the concepts covered in this article (like Gas, PoS, DApps) is sufficient, and no programming background is needed. However, if you aspire to become a smart contract developer, learning Solidity (Ethereum’s primary programming language) and its associated development tools is essential.
A: This is a complex and widely debated topic in the industry. Both provide different types of security. PoW’s security relies on immense energy consumption and hardware costs, making it very robust against pure computational attacks. PoS’s security is based on economic incentives, where an attacker must risk a huge amount of capital, and malicious behavior results in the loss of their staked assets. Many experts believe that a well-designed PoS mechanism offers equivalent or even higher economic security and is far more environmentally friendly and efficient.
A: A Gas fee is the transaction fee you pay to network validators for executing transactions or operations on Ethereum to compensate them for the computational resources consumed. Gas fees become expensive primarily due to network congestion. When many users are trying to make transactions at the same time (e.g., during a popular NFT mint or high market volatility), block space becomes a scarce resource. Users bid up the ‘priority fee’ (tip) to have their transactions processed first, which drives up the overall Gas price.
A: Ethereum’s future roadmap is very clear, focusing on enhancing its ‘scalability,’ ‘security,’ and ‘sustainability.’ After the transition to PoS, the next major milestone is the implementation of ‘sharding,’ which will horizontally partition the database into multiple parts, allowing nodes to process only a fraction of the data, thereby dramatically increasing the network’s TPS. Combined with the ongoing development of Layer 2 scaling solutions, Ethereum aims to become a decentralized application platform capable of serving billions of users worldwide.
“Trading in financial derivatives involves high risks and may result in the loss of funds. The content of this article is for informational purposes only and does not constitute any investment advice. Please make decisions carefully based on your personal financial situation. CashbackIsland assumes no responsibility for any trading derivatives.”
