A Comprehensive Guide to Ethereum and Layer 1 Blockchains

While Bitcoin is regarded as electronic gold, a shield against inflation, or virtual cash, alternative cryptocurrency pioneers sought to push boundaries further. A few years after Bitcoin emerged, Ethereum established the framework for smart contracts, decentralized applications, and fresh financial architectures. This overview breaks down Ethereum’s core premise, network, benefits, and the obstacles that Layer 1 blockchains encounter.

What you’ll learn

The lesson summaries underneath provide a brief glance at the complete course material. Complete the entire interactive Ethereum & Layer 1s 101 course to investigate every lesson more thoroughly through guided explanations, examples, and exercises.

Course introduction

Positions Ethereum as the subsequent evolution following Bitcoin, incorporating smart contracts, decentralized applications, and novel methods for Layer 1 architecture.

Lesson 1 – Introduction to Ethereum

Outlines how Ethereum introduced programmability to blockchains via smart contracts and decentralized applications.

Lesson 2 – The Ethereum Model

Addresses externally owned accounts, contract accounts, account balances, the contrast with Bitcoin’s UTXO mechanism, and the Ethereum Virtual Machine.

Lesson 3 – The Rise of DeFi

Demonstrates how Ethereum powers automated financial services including trading, lending, borrowing, and collateral management.

Lesson 4 – Ethereum Basics

Introduces ETH, gas, gwei, network congestion, base and priority fees, along with the function of EIP-1559.

Lesson 5 – Proof of Stake

Details Ethereum’s transition away from Proof of Work and highlights the duties of validators, staking, and slashing.

Lesson 6 – Ethereum Improvement Proposals

Illustrates how EIPs progress from a documented concept through public evaluation and eventual network adoption.

Lesson 7 – Ethereum’s Competition

Evaluates Ethereum against other Layer 1 and Layer 0 structures using the blockchain trilemma.

Lesson 8 – Blockchain Economics

Connects native tokens and blockspace to validator incentives, digital wallets, RPC nodes, oracles, and broader Web3 infrastructure.

Lesson 9 – Scaling and Conclusion

Presents the scalability dilemma and explains why Layer 2 solutions represent the logical next subject.

What Ethereum added after Bitcoin

Bitcoin demonstrated that a decentralized network could sustain currency and a transaction ledger absent any central authority. Ethereum built upon that concept by rendering the blockchain programmable. Rather than solely transferring value, Ethereum enabled the execution of code directly on the chain.

The foundational innovation is the smart contract: a segment of code operating on a blockchain that automatically triggers predefined actions whenever specific criteria are fulfilled. Using the vending machine metaphor, you insert cash, and the device releases your snack without requiring human intervention.

Smart contracts give rise to decentralized applications, commonly known as dApps. These programs operate without traditional middlemen, featuring use cases stretching from financial services to gaming.

How Ethereum tracks balances

To grasp how a vending machine can exist inside a blockchain, one must examine Ethereum’s accounts. Ethereum features two primary account categories. Externally owned accounts, or EOAs, are user-managed accounts secured through a private key. They can send and receive ETH, engage with smart contracts, and instigate transactions.

Contract accounts are governed by smart contract code rather than private keys. They cannot initiate transactions independently. Instead, they react to transactions dispatched by EOAs or alternate contracts, running prearranged code upon activation.

Ethereum additionally employs an account-based structure, where balances reside directly within accounts, akin to a banking ledger. This diverges from Bitcoin’s UTXO design, which follows isolated transaction outputs. The account-based method simplifies the process for smart contracts to verify balances and interface with users or other contracts.

The platform driving smart contracts

Smart contracts run inside a virtual environment named the Ethereum Virtual Machine, or EVM. The EVM functions similarly to a universal translation service: just as a translation service helps participants in a multilingual gathering understand a shared message, the EVM supplies a framework where smart contracts execute identically across every node on the network.

This consistency matters because every participating node needs to reach consensus regarding the outcome of the smart contract’s execution. Ethereum’s application-driven account setup and the EVM jointly drive decentralized applications, encompassing the broader landscape of decentralized finance.

How Ethereum enabled DeFi

Ethereum’s infrastructure was not designed this way by coincidence. The objective was to move past decentralized currency and broaden the scope of financial operations. This is where decentralized finance, or DeFi, enters the picture.

DeFi seeks to substitute or restructure financial processes such as lending, borrowing, trading, and earning yield through blockchain-based protocols. Instead of depending on a bank or broker, participants interact with smart contracts that enforce protocols automatically.

ETH and gas fees

ETH, or Ether, acts as the fuel or incentive driving the Ethereum network. Every interaction, from transferring tokens to launching smart contracts, demands ETH to cover gas fees.

Gas fees represent the expense tied to every transaction or smart contract interaction. They fulfill two key functions: compensating validators for maintaining network operations and discouraging spam by attaching a cost to every network action.

Gas fees operate similarly to a toll booth system. Ethereum possesses finite blockspace, and when a surge of users attempts to access the network simultaneously, the expense to secure a spot in the upcoming block can increase.

Gas rates are frequently measured in gwei. Per EIP-1559, a transaction fee incorporates a network-mandated base fee and may include a priority fee designated for the validator. This provides users with a more transparent fee layout, although the overall price continues to fluctuate based on demand and required computational work.

Proof of Stake and validators

Ethereum initially functioned via Proof of Work, where miners validate transactions by solving complex computational equations. It subsequently migrated to Proof of Stake through an upgrade referred to as The Merge.

Proof of Stake operates differently. Instead of miners competing using specialized hardware, validators are selected to generate new blocks, with their participation tied to ETH committed as collateral. Staking serves as a financial pledge to abide by the rules, seeing as malicious activity can jeopardize a validator’s locked capital through slashing.

How Ethereum upgrades

Ethereum Improvement Proposals, or EIPs, constitute formal proposal documents detailing prospective modifications to the Ethereum network. They are comparable to blueprints for remodeling a municipal bridge: a concept is drafted, reviewed, debated, and, assuming approval, deployed as a network update.

Alternative Layer 1s and the blockchain trilemma

Ethereum served as one of the earliest major highways constructed for smart contracts, yet as usage surged, traffic congestion and elevated tolls grew prevalent. That paved the way for alternative blockchain platforms to arise featuring distinct architectural decisions.

Networks like Bitcoin and Ethereum are designated as Layer 1 chains because they represent foundational, standalone networks that do not depend on another blockchain to function. Other Layer 1s might prioritize speed, affordability, decentralization, developer utility, or niche use cases.

The universal obstacle is the blockchain trilemma: enhancing two of the primary pillars typically compromises the third.

Native tokens and Web3 infrastructure

Layer 1 assets such as ETH are not solely traded instruments. They fulfill operational duties by paying for blockspace, incentivizing validators, and securing the network via rewards and fees.

Additional vital subjects involve Web3 infrastructure: digital wallets functioning as user access gates, middleware like RPC nodes and oracles, and security or auditing services assisting applications in interfacing with blockchain networks. These auxiliary tools fulfill essential functions surrounding the core blockchain.

Why scalability comes next

Balancing the blockchain trilemma poses a significant challenge. To facilitate broader adoption, scalability morphs into a critical issue: absent effective scaling frameworks, blockchains risk becoming excessively sluggish or costly for routine utilization.

Using a city roadway analogy, a single-lane street functions adequately when only a few individuals drive, but if everyone commences driving simultaneously, the corridor encounters gridlock. Blockchains encounter a similar obstacle when demand accelerates past the capacity of the base layer to process activity.

Key takeaways

Ethereum expanded blockchain applications by introducing smart contracts and decentralized applications.
Ethereum utilizes EOAs, contract accounts, an account-based structure, and the EVM to maintain uniform smart contract execution across the network.
ETH is the native asset utilized for settling gas fees, which price computation and help thwart spam.
Proof of Stake substitutes miners with validators who lock up ETH and face penalties for malicious conduct.
EIPs deliver an organized methodology for proposing and coordinating Ethereum upgrades.
Alternative Layer 1s execute distinct compromises across decentralization, scalability, and security.
Scaling constitutes the logical next subject because base-layer blockchains encounter throughput and expense thresholds as adoption expands.

Before you start

This 101 module is tailored for readers possessing a foundational familiarity with Bitcoin and blockchain terminology. It helps to comprehend what a blockchain is, why decentralization matters, how wallets and private keys function, and why blockchains necessitate consensus prior to delving into Ethereum and Layer 1 architecture.

Glossary

Ethereum: A Layer 1 blockchain engineered to support smart contracts and decentralized applications.

Layer 1: A foundational blockchain network that does not depend on an external chain for its core functioning.

Smart contract: Code executing on a blockchain that automatically triggers predefined actions upon condition fulfillment.

dApp: A decentralized application leveraging smart contracts rather than depending solely on traditional intermediaries.

EOA: An externally owned account governed via a private key.

Contract account: An Ethereum account managed by smart contract code.

EVM: The Ethereum Virtual Machine, where smart contract logic runs consistently throughout the network.

Gas fee: The expense paid in ETH to execute a transaction or smart contract interaction.

Gwei: A minor denomination of ETH employed to price gas.

Proof of Stake: A consensus mechanism where validators lock up ETH and engage in block creation and validation.

Slashing: A punitive protocol capable of reducing a validator’s stake due to malicious or defective conduct.

EIP: An Ethereum Improvement Proposal outlining a potential network alteration.

Blockchain trilemma: The trade-off balancing decentralization, scalability, and security.

Web3 infrastructure: Wallets, RPC nodes, oracles, and related utilities assisting users and applications in connecting with blockchains.

Continue learning

Following Ethereum & Layer 1s, beneficial follow-up subjects comprise Scaling & Layer 2s, DeFi, Market Structure, alongside the more advanced Ethereum & Layer 1s 201 guide.