Cryptocurrency Intermediates:

Understanding Ethereum
Learning Objectives

Define Ethereum and how it differs Compare proof of work and proof Identify the purpose and
from Ether of stake background of Ethereum

Recognize Smart Contracts and Explain the concept of ‘Gas’ and

Dapps how it works with Ethereum

Corporate Finance Institute®

Review

Move Digital values in a By employing a

Blockchain Technology Cryptography
trustless environment Distributed Ledger

This Ledger represents Reduce Costs and Reduces risk of single- Most successful
the blockchain provide pseudonymity point failure/censorship cryptocurrency, Bitcoin

Corporate Finance Institute®

Decentralized Finance
Ethereum – DeFi, Dapps, and Smart Contracts

Decentralized Finance Decentralized Apps Smart

(DeFi) (Dapps) Contracts

Removing the middleman Allows automated A decentralized agreement

in a financial transaction transactions in a trustless between two
by using the internet. environment (no counterparties in a
intermediary). trustless environment
without an adjudicator or
intermediary.

Corporate Finance Institute®

Ethereum vs. Ether

Network of nodes running

Ethereum is NOT a Ethereum software. The actual
Ethereum cryptocurrency cryptocurrency is called Ether
(ETH).

The Ethereum Foundation

Non-Profit Organization located in Switzerland

Ether Ethereum
“ Ether is simply a token useful for paying
transaction fees or building or purchasing
“
is the Cryptocurrency is the Ecosystem decentralized application services on the
Ethereum platform…

Corporate Finance Institute®

Tokens

cryptographic asset

Token
Ethereum network was the first to
Describes any cryptographic asset introduce the allowing of other crypto
that runs on top of another’s assets to ‘piggyback’ another
blockchain blockchain

Blockchain

Rapidly growing number of cryptocurrencies other than Bitcoin and Ether

are called Altcoins

Corporate Finance Institute®

The Origins of Ethereum
Vitalik Buterin

Vitalik Buterin

Attributed to the invention of Published white paper in Public announcement in 2014

Ether and Ethereum November 2013 covering described Ethereum as
BTC. building upon Bitcoin

Corporate Finance Institute®

Alan Turing

Alan Turing

Improvement allowed for Machine could read Complex problems would be

open-sourced platform instructions and begin solved in time using the
requiring minimal coding solving computational program
experience problems

Corporate Finance Institute®

Turing vs. Non-Turing

Bitcoin Ether

• Is Non-Turing Complete • Is Turing Complete

• Cannot run self-executing loops • Runs programs like Solidity and
• Design decision made by Satoshi and Vyper, which allow loops
other developers of BTC • Script Language allowed programs to
recognize and follow rules

Ether would become programable money

Corporate Finance Institute®

Dapps and Smart Contracts
Smart Contracts

Transaction Conditions Decentralized Apps Smart Contracts

• Ability to add conditions to a • First incorporated by the Turing- • A program that runs on the
transaction differentiates Ethereum complete Ethereum platform in Ethereum Blockchain and is a
from Bitcoin. July 2015. type of Ethereum Account.
• Ethereum conceived as a • For Dapps to function, they must • Account balance consists of Ether
decentralized platform upon which follow a set of directions called and any other tokens
applications can be built by other smart contracts.
developers.

Corporate Finance Institute®

Smart Contracts

Miners race to solve Use a cryptographic Successful miner is

the hash algorithm to guess rewarded when block
the valid nonce is solved

When the contract code executes, the smart contract transfers the value to
relevant parties and records the completed transfer on the blockchain

Corporate Finance Institute®

Nick Szabo

Nick Szabo

In the 1990’s envisioned Proposed Smart Contracts Acted as an agreement in

Smart Contracts for automated electronic digital form, which included
commerce on the internet protocols for all parties

Corporate Finance Institute®

Distributed State Machines

Ethereum Virtual
Distributed Distributed State Machine (“EVM”)
Ledger Machine

By running the same contract code,

each computer on the network will
Mining computers
reach the same conclusion.
run Smart Contracts
using EMVs.
CONCLUSION

Corporate Finance Institute®

So Why Dapps and Smart Contracts

Decentralized Applications
Traditional Applications
(Dapps)

• Generally owned by the developer • Runs on a blockchain like Ethereum

• Responsible for hosting data associated with • Exists on a peer-to-peer computer network
application

Similarities to operating system Similarities to the applications built on

software that power devices, such the operating system that would be
as a smartphone available for download on your device
Blockchain Dapps

Corporate Finance Institute®

So Why Dapps and Smart Contracts
Traditional Sports Betting Example

Let’s Go
Canada!
Provide personal
information to company
operating application
Add funds to
account

All information stored on

Locate and download company’s server
betting app to device
Agree to all Privacy and
Terms Conditions

Corporate Finance Institute®

So Why Dapps and Smart Contracts
Dapp Sports Betting Example

No requirement to Nodes compare and

reveal personal info verify logic on all
Digital wallet participating computers
beyond the provided
containing Ether or any
public key
other Dapp token
Consensus mechanisms prevent
defrauding by constantly verifying payment

Bookkeeper provides pre-funds for wallet,

so potential winnings are protected
Dapp is open to all
users, and bets are
not determined by
Link wallet to Dapp, oddsmakers
place wager, then lock in
with smart contract

Corporate Finance Institute®

Other Possible Use Cases
Some other common examples include:

Financial Art & Collectibles Gaming Technology

Imagine a car lease processed by a Dapp and controlled by a smart

contract. A missed payment would result in the smart contract
disabling the car and reporting the location to the lease company.

Corporate Finance Institute®

Benefits of Dapps and Smart Contracts

Reduced Point of Failure Privacy for identity and Censorship

and Zero Downtime data storage Resistance

Systematic Data Difficult to Forge or

Transactions Alter

Corporate Finance Institute®

Limitations of Dapps and Smart Contracts

Maintenance Scalability Network Congestion

Proof of Work Rules

Corporate Finance Institute®

Supply and Demand Factors of Ethereum
The Differences in Bitcoin

In 2015, Ethereum’s ICO was

successful in raising approximately
31,000 BTC in exchange for 80% of
Initial Coin Offering (ICO) the initial Ether created. Supply of Ether

• Ether was distributed by ICOs • Ether supplies fluctuate

• Attracts initial capital by pre-selling • Ethereum’s similar Proof-of-Work
cryptocurrency in exchange for process determines next block
With BTC being limited to 21MM
BTC or ETH writer
and Ether having no supply limit
• Presales are not regulated by any apart from the annual maximum, • Shares same process as Bitcoin for
governing body we could see BTC amounts block rewarding
increase.

Corporate Finance Institute®

The Differences in Bitcoin

Bitcoin is Less Bitcoin Rising value

deflationary in the future of Bitcoin

Transaction
Ethereum is More Ether
costs should
inflationary mined over time
decrease

Corporate Finance Institute®

Gas

Ethereum Network was designed as a Did you know?

Decentralized Finance (DeFi) platform.
Ethereum Gas mechanism was recently
overhauled in 2021 to introduce more
transparency for fees
Transactions fees charged for the following activity on blockchain:

Prior to this improvement, users would

need to bid in a gas price auction

After the ‘Ethereum Improvement

Proposal 1559 (EIP1559)’, users pay a
Creating Dapps Creating Smart Transferring base fee, but ‘tips’ are optional to
Contracts Ownership prioritize

This fee is referred to as ‘Gas’

Corporate Finance Institute®

Gas – The London Upgrade

EIP1559
Computational Effort Security
(The London Upgrade)

Did you know?

The word ‘gwei’ means ‘giga-wei’

= ‘gwei’ and is equal to 1,000,000,000 ‘wei.’

The smallest unit of Ether is 1
Gas Prices are denoted ‘wei,’ named after Dai Wei, a
in ‘gwei’ crypto circles programmer

Corporate Finance Institute®

Gas – The London Upgrade

After EIP1559, the total transaction fee is as follows:

Total Transaction Fee = Gas Limit x (Base Fee + Tip)

Corporate Finance Institute®

Gas – Understanding the Terms

Gas Limit Base Fee Tip (Priority Fee)

Maximum amount of Gas Multiplier based on computing Smart contracts typically

that a user is willing to pay power required to complete have higher Gas limits
for a transaction transactions

+ +
x x x
Gas Limit
Transfer of ETH requires a gas More computing power Higher gas limits send
limit multiplier of 21,000 increases gas limit to 32,000 unused potions to sender

Corporate Finance Institute®

Gas – Understanding the Terms

Gas Limit Base Fee Tip (Priority Fee)

Block Number Included Gas Fee Increase Current Base Fee

Blocks have base fees
regardless of the 1 15M 0% 100 gwei
transaction complexity 2 30M 0% 100 gwei

3 30M 12.5% 112.5 gwei

For inclusion in a block,
Base Fee enough gas must be offered 4 30M 12.5% 126.6 gwei
to the base fee
5 30M 12.5% 142.4 gwei

Corporate Finance Institute®

Gas – Understanding the Terms

Gas Limit Base Fee Tip (Priority Fee)

Prior to EIP1559, total gas Tip was implemented to Optional method for senders to
fees included in blocks provide incentives for prioritize transactions of other
would go to the successful miners to mine empty blocks transactions in the same block
miner
Tip
(Priority Fee)

Corporate Finance Institute®

Alice and Bob

1 2 Things Alice should know… 3

1 ETH

Enter items in the

Gas Limit Base Fee Tip
Alice Bob wallet application

Corporate Finance Institute®

Alice and Bob

The Base Fee is used to gauge the demand of transactions

Base Fee = 28
included in the next Ether block.

Total Transaction Fee = Gas Limit x (Base Fee + Tip)

= 21,000 x (28 gwei + 3 gwei)

= 588,000 gwei + 63,000 gwei

= 651,000 gwei = 0.000651 ETH

Corporate Finance Institute®

Alice and Bob

1 2 Things Alice should know… 3

1 ETH

Enter items in the

Gas Limit Base Fee Tip
Alice Bob wallet application

1 2 3
1.00061
ETH
63,000
+ + gwei
All other combined fees are
Successful miner receives reward burned and removed
1 ETH

Corporate Finance Institute®

Block Rewards

Other comparisons to Bitcoin include:

Block rewards are given

to the successful miners Proof-of-Work (POW) Decreasing Rewards Base Gets Burned
that solve the POW Hash

Valid blocks created simultaneously when successful

blocks are mined

Network latency can cause blocks not to be added

Average time to solve nonce: to the blockchain
Bitcoin: 10 minutes ‘Uncle’ Block A miner could receive 1.75 ETH for an uncle block
Ethereum: 15 seconds

Corporate Finance Institute®

Ethereum 2.0
Proof of Work (POW)
Ethereum's Proof of Work protocol is called Ethash…

Ethereum Hash

Miners race to find the Thousands of dedicated More miners equal more
Ethash
‘Nonce’ computers called ‘Rigs’ guessing and difficulty

Corporate Finance Institute®

The Mining Race

Ethereum Network Difficulty

measured approximately 12.7 P
(12,700,000,000,000,000)
Network Difficulty is measured by:

No. of to find

Corporate Finance Institute®

A “51% attack”

This attack is called a

’51% ATTACK’

Attackers attempting to rewrite

distributed ledgers would require
more than 50% processing power
Network Difficulty is Increases the difficulty
important to and cost for malicious These actions cause the network
cryptocurrency actors to gain control difficulty to increase to the point of
making it harder to gain control

Corporate Finance Institute®

Environmental Impact of Mining

Dedicated mining rigs and farms

operate across the world where
cheaper electricity and
regulations can be found Ethereum’s
Energy Requirements

Ethereum requires an estimated 73.2 terawatt-

hours annually, which is the equivalent of
Austria.

As computing power increases for P.O.W with

the number of nodes needed.

Did you know?

Cambridge University estimates that Bitcoin

miners will consume over 130 terawatt-
hours, more than the country of Sweden

Corporate Finance Institute®

Proof of Stake (POS)
Proof of Stake’s consensus mechanism utilizes a blockchain network to replace POW mechanisms

Validators are responsible for:

The POS replaces the miners with Adding validated

Validating new blocks
nodes called ‘validators’ blocks to blockchain

Corporate Finance Institute®

Proof of Stake (POS)

This process is called

‘Staking’

The node adds cryptocurrency as a

pledge for proper behavior

Pledging entitles the node to be considered but is not guaranteed

because validators are chosen randomly by an algorithm

Corporate Finance Institute®

Validators and Stakers

Creating Testing Minting

Energy Usage 51% Attack

Corporate Finance Institute®

Ethereum 2.0

Proof-of-Work Proof-of-Stake

Validators will need to Random consideration Create or validate blocks

stake 32 Ethereum by the algorithm they did not create

Corporate Finance Institute®

The “Beacon Chain”

The Beacon Chain allows 64 Shard Chain

blockchains to co-exist. Each one
called a ‘Shard Chain’
Beacon Chain Every shard chain block
contains 128 validators
ensuring each block is either
validated or disbanded

Sharding will allow

the running of
mobile devices,
Increasing shard blocks allows expanding the
Ethereum to create more Ethereum network
blocks simultaneously

Corporate Finance Institute®