How Ethereum Works

Now that we've covered what ethereum is, let's dive deeper into how the platform functions under the hood.

Consider the online notebook application described in "What is Ethereum?"

Using ethereum, the app doesn't require one entity to store and control its data. To accomplish this, ethereum borrows heavily from bitcoin's protocol and its blockchain design, but tweaks it to support applications beyond money.

Ethereum aims to abstract away bitcoin's design, however, so that developers can create applications or agreements that have additional steps, new rules of ownership, alternative transaction formats or different ways to transfer state.

The goal of ethereum's 'Turing-complete' programming language is to allow developers to write more programs in which blockchain transactions could govern and automate specific outcomes.

This flexibility is perhaps ethereum's primary innovation, as explained in the guide "How Ethereum Smart Contracts Work".
The ethereum blockchain
The structure of the ethereum blockchain is very similar to bitcoin's, in that it is a shared record of the entire transaction history. Every node on the network stores a copy of this history.

The big difference with ethereum is that its nodes store the most recent state of each smart contract, in addition to all of the ether transactions. (This is much more complicated than described, but the text below should help you get your feet wet.)

For each ethereum application, the network needs to keep track of the 'state', or the current information of all of these applications, including each user's balance, all the smart contract code and where it's all stored.

Bitcoin uses unspent transaction outputs to track who has how much bitcoin.

While it sounds more complex, the idea is fairly simple. Every time a bitcoin transaction is made, the network 'breaks' the total amount as if it was paper money, issuing back bitcoins in a way that makes the data behave similarly to physical coins or change.

To make future transactions, the bitcoin network must add up all your pieces of change, which are classed as either 'spent' or 'unspent'.

Ethereum, on the other hand, uses accounts.

Like bank account funds, ether tokens appear in a wallet, and can be ported (so to speak) to another account. Funds are always somewhere, yet don't have what you might call a continued relationship.


What is the ethereum virtual machine?
With ethereum, every time a program is used, a network of thousands of computers processes it.

Contracts written in a smart contract-specific programming languages are compiled into 'bytecode', which a feature called the 'ethereum virtual machine' (EVM) can read and execute.

All the nodes execute this contract using their EVMs.



Remember that every node in the network holds a copy of the transaction and smart contract history of the network, in addition to keeping track of the current 'state'. Every time a user performs some action, all of the nodes on the network need to come to agreement that this change took place.

The goal here is for the network of miners and nodes to take responsibility for transferring the shift from state to state, rather than some authority such as PayPal or a bank. Bitcoin miners validate the shift of ownership of bitcoins from one person to another. The EVM executes a contract with whatever rules the developer initially programmed.

Actual computation on the EVM is achieved through a stack-based bytecode language (the ones and zeroes that a machine can read), but developers can write smart contracts in high-level languages such as Solidity and Serpent that are easier for humans to read and write.

As explained in our guide "How Ethereum Mining Works", miners are the ones that are preventing bad behavior – like ensuring that no one is spending their money more than once and rejecting smart contracts that haven't been paid for.

There are a few thousand ethereum nodes out there, and every node is compiling and executing the same code.

But, you might be thinking, isn't that much more expensive than a normal computation? Yes, it is. That's why the network might only be used only for particular use cases.

The official ethereum dev tutorial concedes this inefficiency, stating:

Authored by Alyssa Hertig; images by Maria Kuznetsov; Coindesk
NEXT: WHAT IS A DECENTRALIZED APPLICATION?

INDEX: A BEGINNERS GUIDE TO BITCOIN AND BLOCKCHAIN TECHNOLOGY


What is Bitcoin?
It’s a decentralized digital currency
Why Use Bitcoin?
It’s fast, cheap to use, and secure
How Can I Buy Bitcoin?
From an exchange or an individual
How to Buy Bitcoin in the UK
Buying bitcoin in the UK
How to Store Your Bitcoin
Use a digital or paper wallet
What Can You Buy with Bitcoin?
Spend your bitcoins
How to Sell Bitcoin
A guide on how to sell your bitcoins
How to Accept Bitcoin Payments for Your Store
Learn about bitcoin POS systems
How do Bitcoin Transactions Work?
Bitcoin addresses and private keys
Is Bitcoin Legal?
The current regulation around bitcoin
Who is Satoshi Nakamoto?
The founder of bitcoin
How Bitcoin Mining Works
By confirming transactions
How to Set Up a Bitcoin Miner
Generate bitcoins yourself
What are Bitcoin Mining Pools?
What are pools how and how to join them?
How Does Cloud Mining Bitcoin Work?
Alternative bitcoin mining solutions
How to Calculate Mining Profitability
Can you make a ROI?
How to Make a Paper Bitcoin Wallet
Creating an unhackable bitcoin wallet
Can Bitcoin Scale?
A look at the debate and the tech
What is SegWit?
A new way of storing transaction data
What is the Lightning Network?
Off-chain transaction channels
What is Bitcoin Cash?
Same blockchain, different characteristics.
Hard Fork vs Soft Fork
Why and how do blockchains split?
What is the Difference Between Litecoin and Bitcoin?
It’s the silver to bitcoin’s gold
How to Buy Litecoin
How to buy the bitcoin alternative litecoin
How to Mine Litecoin and other Altcoins
How to generate your own altcoins
Understanding Bitcoin Price Charts
A primer on bitcoin price charts
Bitcoin E-Commerce Services for Merchants
How to accept bitcoin at your business
What is Blockchain Technology?
A system of distributed data and logic
How Does Blockchain Technology Work?
Cryptographic keys, distributed networks and network servicing protocols
What Can a Blockchain Do?
Identity, recordkeeping, smart contracts and more
What is a Distributed Ledger?
A dynamic, independently maintained database
What is the Difference Between Public and Permissioned Blockchains?
Can anyone read or write to the ledger?
What is the Difference Between a Blockchain and a Database?
It begins with architectural and administrative decisions
What Are the Applications and Use Cases of Blockchains?
Tokenization, auditing, governance, settlement and more
How Could Blockchain Technology Change Finance?
Cross-border payments, new asset classes, regulatory compliance and more
What are Blockchain’s Issues and Limitations?
Complexity, size, costs, speed, security, politics and more
Why Use a Blockchain?
To manage and secure digital relationships as part of a system of record
What is Ethereum?
A blockchain application platform and ‘world computer’
What is Ether?
The ‘fuel’ of the ethereum network
How to Use Ethereum
Wallets, trading and ‘dapps’
Who Created Ethereum?
Vitalik Buterin
How Ethereum Mining Works
‘Proof of Work’ and ‘Proof of Stake’
How to Mine Ethereum
GPUs, mining software and pools


How Ethereum Works‘Turing-complete’ programming, ‘state’ and the ‘EVM’
What is a Decentralized Application?A distributed ‘smart contract’ system
What is a DAO?A ‘decentralized autonomous organization’
How Do Ethereum Smart Contracts Work?Code, transaction fees and ‘gas’
How Will Ethereum Scale?‘Sharding’ and ‘off-chain’ transactions
What is an ICO?Initial Coin Offerings refer to the distribution of digital tokens.

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