A Brief History Of Ethereum
By Elliot Koss, Founder of Future Mints
The reason we learn about history is because there is key information that helps us understand today and what the future can bring. Today, we’re going to look at Ethereum’s history so that next week we can explore Ethereum’s future. This one’s double the 1K words we’re targeting, so apologies in advance, but it felt important to give a solid history here - and there’s plenty I likely left out, too. Also, as we’re writing this, we’re realizing that we will definitely be editing this all further before we publish the book (for instance, we didn’t touch on side chains in this newsletter), so PLEASE let us know if you see something that’s incorrect or missing. Hopefully you’ll find this as interesting as we did.
Bitcoin established the first decentralized currency, but it had a few limitations, most notably a framework to build and scale on top of the blockchain. Vitalik Buterin recognized this, envisioned a better way, and started his journey with the foundational Ethereum Whitepaper published in Nov 2013. If you’re planning to be a builder or investor in blockchain, you should read it. At 36 pages, it’s not long, and the concepts he explores are both critical and complex. A casual blockchain user may find it too technical and boring - but as a self-declared nerd, I found it fascinating. I’ll summarize it a bit since it’s key to understanding Ethereum’s history.
Vitalik, he’s often referred to by his first-name, spends the first third of the paper explaining the central concepts of Bitcoin and expressing an admiration for the groundbreaking technology. He was, afterall, the co-founder of a Bitcoin magazine in 2011 (read more about his background here). You may have heard that his writing is succinct and vivid, but until you’ve read it, you can’t appreciate his ability for distilling complex technical language into accessible examples. As the paper progresses, it becomes increasingly technical, but the beginning is solid reading for anyone.
After praising Bitcoin, though, Vitalik makes it clear that the critical limitation is the inability to script complex logic which Ethereum solves. Throughout, he acknowledges that he’s building on concepts that others have created as he explains Decentralized Organizations (DO), Decentralized Autonomous Organizations (DAO), smart contracts, multisig (a way for funds to be accessed only when multiple wallets give authorization), and more. While these are now common knowledge terms, at the time, Vitalik was establishing the foundation that we’re all now building upon. Like Citizen Kane, the groundbreaking Orson Welles film that established the modern film with an auteur director, broke the studio model, and now seems unimpressive when you watch it today without understanding it’s history and importance, the Ethereum Whitepaper may seem basic, and it is anything but.
One key characteristic of Ethereum that is different from Bitcoin is that ether (as Vitalik calls it) will continue to be created every year, albeit at lower volumes as the blockchain ages. Bitcoin has a 21 million cap. The reasoning is that Ethereum is meant to be used to do things vs Bitcoin which is more a store of value. Because of this, Ethereum will be spent at a higher rate which also means that more Ethereum will be burned, and there’s an expected loss of Ethereum (never to be recovered again) that will be removed from the ecosystem for a variety of reasons (sent to bad addresses, lost access to wallet, etc). While this is an intriguing difference, we’ll save exploring this further until next week when we talk about Ethereum’s future.
Before we go too much further, Ethereum’s token is also commonly referred to as ETH (pronounced ‘ee-th’). I tried to find a YouTube video that simply pronounced ETH, but the only ones I found did NOT pronounce it correctly. Oh, the irony. I guess we’ll have to create a video at some point.
Vitalik was only 19 when he wrote the Ethereum Whitepaper, and shortly thereafter, he became a recipient of the $100K Thiel Fellowship, a grant provided to high potential high school graduates with funding to build something groundbreaking instead of going to college (here’s a Silicon Valley clip poking fun at it). One story about Vitalik’s inspiration is that there was an element Vitalik had in the World of Warcraft ecosystem that one day simply disappeared from his cache of artifacts. He was angry that the game creator could arbitrarily take something back that he had worked hard to earn. The concept of an immutable artifact served as the foundation of the smart contract.
While the Ethereum Whitepaper was published in Nov 2013, it wasn’t until 2015 that the Ethereum blockchain went live. Throughout 2014, Vitalik was recruiting a team of top notch engineers as well as launching one of the most successful Initial Coin Offerings (ICO) to fund their operations. It’s useful to know that the Ethereum ICO raised funds in Bitcoin. In fact, they raised more than 31,000 BTC which was valued around $18M at the time (today, that would be worth $600M+). This provided a solid foundation for the team, and it’s a model that many other blockchains attempted for the next few years, leading to crazy speculation that culminated in the 2017 Bull market (where Bitcoin reached $20K for the first time) and the subsequent 2018 Bear market (when Bitcoin crashed to $3K).
Anyway, Ethereum began its journey to develop and build its vision in the real world. Along the way, there were two big events which you should know about. The first was the split between Ethereum and Ethereum Classic, and the second was an event known as The Merge where Ethereum was upgraded from Proof of Work (PoW) to Proof of Stake (PoS).
Ethereum and Ethereum Classic Split
In 2016, The DAO was created as one of the first decentralized autonomous organizations (DAO) - remember, it was one of the new concepts that Ethereum would enable. A DAO is a smart contract that uses technology to help govern an organization so that voting and other operations can be done openly and in a decentralized manner. In this instance, The DAO raised ~$150M for a venture capital fund, and it was one of the best-known projects at the time.
Unfortunately, hackers were able to exploit The DAO’s smart contract and steal ~$70M.
This caused an uproar in the Ethereum community, and it raised the question of what to do in response. In nearly each proposal, a ‘fork’ to the Ethereum blockchain was proposed. This is a way of changing the blockchain software so that it works differently than before. There are soft and hard forks. Soft forks are backwards compatible and ‘miners’ / ‘validators’ in the blockchain (the various machines that keep everything working) don’t require an upgrade to recognize the changes. Hard forks can change transactions in the blockchain and require ‘miners’ / ‘validators’ to upgrade.
While Vitalik proposed a soft fork that would render the hackers unable to make further transactions along with a couple other measures, the Ethereum community voted to execute a hard fork where the hacker transactions would be reversed.
This led to the blockchain splitting in two with the reversed hacker transactions being in the Ethereum blockchain (the one we use today) and then Ethereum Classic where there were no changes and the hacked funds were preserved.
If you’re confused, I don’t blame you. The entire point of blockchains is that they’re decentralized with no single authority who can make unilateral decisions. Like reversing transactions. That is what the most hardcore blockchain supporters wanted to see, and it’s why Ethereum Classic (basically the continuation of the blockchain with the hack intact) was left as is.
What’s fascinating is that the community rallied around the hard forked blockchain that punished the hackers but also sort of undermined the entire blockchain concept. Granted, this was clearly a more fair way of dealing with the situation.
Today, Ethereum is the dominant blockchain, with far less activity being done on Ethereum Classic. I feel that it’s critical to understand that we are still in the early stages of building decentralized technologies, and as a result human intervention is often required. This will come up again when we start talking about the lack of refunds or reversing transactions which makes common experiences of returning goods substantially more difficult on the blockchain.
If you care to read more about the Ethereum vs Ethereum Classic hard fork, the Gemini history provides great context while the Geeks for Geeks history goes into detail over the various proposals.
The Merge
On Sept 15, 2022, Ethereum completed The Merge. The details are below, but the high level is that Ethereum changed from being Proof of Work (PoW) to being Proof of Stake (PoS), and this critical change ’[reduced] energy consumption by ~99.95%.’ This upgrade to Ethereum was delayed by years, and introduced substantial risk to the blockchain if it failed. But the Ethereum working group pull off this upgrade flawlessly. As an owner of Ethereum tokens, you wouldn’t have known that there was a change - 1 ETH is still 1 ETH. There was no change to your holdings.
Ok, now the details for what happened and why.
One of the biggest complaints about blockchain is that the power required for a blockchain to operate is a massive drain on our energy grid as well as a major consumer of fossil fuels. There are definitely solid arguments against this viewpoint, but it’s a valid concern nonetheless. Which is why The Merge was such an important event for Ethereum.
Blockchains consume a lot of energy, because the vast majority of them build off the core mechanics of Bitcoin where transactions are grouped into a block and then the blocks are cryptographically encoded. Each block increases in complexity, meaning that each block requires a little more computer power to secure.
One of the critical components of Bitcoin is that ‘miners’ compete against each other to cryptographically encode each block, and the faster miner (ie the first to complete the block’s security) receives the miner fee (which is the fee paid to whoever creates the Bitcoin block). So there’s an incentive to be first, and the more powerful your computers, the more likely you are to get paid.
That is Proof of Work.
Proof of Stake is where the same cryptographic encoding is done, but instead of everyone competing, there are ‘validators’ who all hold a certain amount of the cryptocurrency (in this case 32 ETH) and they are randomly assigned blocks to validate. This approach introduces some security risk of a ‘51 percent’ attack (again, Silicon Valley does a great spoof of this - spoiler alert, but if you haven’t seen it by now, I consider that your own choice), but the likelihood is considered small. Granted, the phrase ‘famous last words’ comes to mind each time I think of this scenario being unlikely.
Ethereum has an explainer on The Merge that you should check out and Investopedia breaks down PoW and PoS in more detail in case we failed to get the point across.
Ethereum 2.0
The Merge is one half of a critical upgrade to Ethereum, and the second one will complete the upgrade to Ethereum 2.0. It’s called Sharding with an estimated launch in 2024 (and you can learn more about it here). The key thing to know is that once Ethereum 2.0 is completed and launched, Ethereum is expected to be able to process up to 100K transactions per second, or more than Visa’s current 65K transactions per second. And, transaction costs (ie gas fees) may go down due to the increased number of transactions that can be processed.
Wrapping It Up
In only 8 years of existence, Ethereum has already accomplished some major milestones and experienced several challenges that have made it even more resilient. As the groundbreaking blockchain that introduced a decentralized way to use technology, in addition to finances, it’s poised to continue growing, iterating, and dominating the conversation as blockchain technology becomes increasingly more prevalent.
Next week, we’ll explore the exciting future of Ethereum.
News of the Week
The Super Bowl is finally here! While last year we saw ads from Coinbase, FTX, Crypto.com and more, this year won’t be the same. There will be "zero representation" of crypto companies in the lineup for this year's championship game on Sunday, according to Fox Sports.
BTC Ordinals absolutely boomed this week, and there are now nearly 50,000 total inscriptions created. For more information on the topic, check out threads by FRWC founder Dotta on buying Ordinals and creating inscriptions.
Twitter made some massive changes to their public API access. The social media platform will now require third-party software developers who use API data to purchase a “paid basic tier.”