How Does Ethereum Work?

The purpose of this article is to explain how Ethereum works by providing a general and non-technical overview of its logic and inner mechanics. Please keep in mind that what is described below is a simplified version of what actually happens, but it should be technical enough to give you a general understanding of how it works. Should you have any questions please write them as comments or private notes, it would help me refine this article over time and make it much clearer for future readers.


We can see Ethereum as a stack of few layers built on top of each other. The first, basic layer that makes everything else possible is a large network of computers that process transactions and keep a shared database updated over time (the Ethereum blockchain). The second, is the software layer that allows developers to run programs called smart contracts on the Ethereum blockchain, using a programming language called Solidity. The third layer is made of applications that offer different services (from governance to identity management) to Ethereum users. The remarkable feature of this platform is that by leveraging the Ethereum hardware and software layers these applications are decentralised, lack a central point of failure and are somehow “unstoppable”. You just can’t switch them off.

1. Ethereum hardware layer: blockchain

Most of what you see on the web, including this article, is hosted by a server in a data center somewhere on the planet. When you open your browser and browse the web, your computer (client) connects to such servers and downloads the content that you’re looking for. This client-server infrastructure was intended for an internet with few centralised repositories (servers) that would distribute content to many users (clients). However, today’s internet connects many clients to other clients as we are all both creators and users of content.

2. Ethereum software layer: Solidity

The flexibility of Ethereum platform is what made it popular among the early Bitcoin and blockchain enthusiasts. In fact, while Bitcoin has been designed as a currency to transact value between different actors, Ethereum has been developed to extend the use of Bitcoin underling technology and build a broader, general purpose blockchain.

Ethereum software layer has been built to allow the transaction of value in any shape or form, being it a currency, a house, an identity, the rights to use or reproduce a song or any other asset you can think of.

3. Ethereum application layer: dApps

The combination of the hardware and software layers described above enable Ethereum to work as a global, decentralised super-computer on which third party applications can be executed.

Even if many early adopters leveraged the “token emission” function of Ethereum to fundraise capital to launch new projects (Initial Coin Offerings) the applications of Ethereum extend way beyond the financial sector. There are more than 900 applications built on Ethereum, about 30% of them are live while the other 70% are still under development.

Notes:

  1. Unstoppable because in order to prevent those application to run you would need to take down the whole Ethereum network that is made of hundreds of computers spread around the world. So let’s say they are virtually unstoppable, or just very hard to stop.
  2. Ethereum and Bitcoin blockchains had several differences already at concept stage, and their evolution is bringing them in different directions as they aim at different goals.

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