Ethereum: Smart Contracts and Nodes

Introduction to Ethereum

• Proposed in 2013 by Vitalik Buterin.
• First production release was in 2015.
• Ethereum is an open source, public, decentralized computing platform.
• It's popular due to the features of its smart contracts.

Smart Contracts and Solidity

• Bitcoin scripts are not Turing-complete, and Bitcoin scripts have limited functionalities making complex scripts difficult to write
• Ethereum makes writing complex smart contracts easy.
• Solidity: Turing-complete language used for writing smart contracts.

Nodes

• Full nodes maintain the complete blockchain ledger data structure.
• Full nodes verify every block and transaction using defined consensus rules.
• Lightweight nodes verify transactions using Simple Payment Verification (SPV).
• SPV doesn't require downloading the entire blockchain because it only downloads header info.
• Miners execute and verify transactions.
• Miners contribute computing/storage resources and receive block rewards and transaction fees.

Blocks

• The blockchain maintains a series of blocks, linked together.
• The first block is called the "genesis block."
• Blocks contain multiple transactions
• Blocks are generated using a consensus algorithm.
• Each block is generated in approximately 15 seconds.
• Miners who generate blocks are rewarded.
• Each block has a defined gas limit.
• Transactions in a block cannot exceed the block's gas limit. The blockheader contains metadata about the block and the previous block.

Block Header Fields

• Parent Hash: Points to the previous block.
• Nonce: Number found that solves the cryptographic puzzle
• Timestamp: The time the block was added to the blockchain.
• Transactions Root: Keccak 256-bit hash of the root node of the tree structure (populated with each transaction).

Ethereum Virtual Machine (EVM)

• EVM: Runtime environment for smart contracts.
• Ethereum supports multiple scripting languages.
• Smart contracts compile/convert to EVM bytecodes.
• Bytecodes are executed by EVM to perform smart contract operations.

Ether (ETH)

• Ether is a fungible coin, and is divisible into smaller units.
• 1 ETH has a maximum of 18 decimal places and the smallest value is called wei.
• Ether fuel for the Ethereum network.
• Gas is paid in ether, which is consumed when a transaction is executed
• Transaction fees go to the miners.
• Solidity supports wei, finney, szabo, and ether units.

Gas

• Gas is the fuel used on the Ethereum blockchain and it is paid in ether.
• Gas price and limit must be specified for each transaction.
• The network calculates the transaction fee based on gas price and limit.
• Each EVM bytecode operation has fixed gas units.
• Executing operations consumes a fixed quantity of gas.
• If a transaction uses less gas than the limit, excess gas is refunded.
• Transactions consuming all gas that need more, will fail and gas will be consumed as part of the transaction fees.
• Gas price is the cost per gas unit is defined in gwei.
• Miners process transactions based on gas price.
• An ETH transfer requires 21,000 gas limit per transaction.

Accounts

• Two account types exist: Externally Owned Accounts (EOA) and Contract Accounts (CA).
• Both EOAs and CAs can hold ETH balances.
• Account addresses are written in hexadecimal (starting with "0x") and are 20 bytes (160 bits) long.
• Ethereum wallets can hold multiple EOAs.
• New private keys are generated using specific algorithms by wallet creation services.
• Public keys are derived from private keys.
• The combination of public and private keys is an EOA.
• EOAs are controlled by private keys, which are used to start transactions.
• Wallets are created via off-chain wallet generation algorithms.
• Contracts only have public addresses, and their code logic controls funds' flow
• An EOA account is necessary to create/interact with a contract.
• Contract accounts have Solidity code that defines behavior.
• Contract accounts can only be created on-chain.
• Contract bytecode is included in block during successful deployment.

Transaction

• Transactions transfer ETH from EOA for smart contracts.
• They can change state, perform actions, or read contract states.
• Transactions can only be initiated from an EOA and then initiate other internal transactions.
• Users first complete required fields to create a tx.
• Then they sign the transaction with the EOA's private key.

Transaction Fields

• From: Public address of EOA initiating the transaction.
• Transactions initiated by contracts are internal transactions.
• To: Public address of an EOA or contract.
• Value: Transactions can have zero or nonzero value.
• Set to nonzero when sending ETH to an EOA.
• When initiating a transaction to a contract, the value field either has a zero or nonzero based on the contract function.
• Gas limit and gas price must be specified
• Nonce: Starts at zero for an EOA and increases by one for each transaction, specifying execution order.
• Data: It will be empty when transferring ETH one EOA to another EOA.
• To execute another method the data field will hold hexadecimal value of the method and its arguments.
• Transaction Hash is the SHA-256 hash of the signed transaction data.
• The transaction can be tracked with this ID and dropped before it gets executed.

Transaction Status

• A transaction can have below statuses:
• Pending: Waiting to be executed; may take longer if gas price is too low.
• Transaction initiators are allowed to change transaction fields by sending a new transaction with the same nonce.
• Successful: Executed successfully w/o failure.
• Fail: Executed with a contract method execution error or due to low gas limit.
• Dropped: Transactions get dropped for different reasons that includes pending status and low gas price.
• Gas and ETH are returned to wallets with a dropped transaction.

Pending Transaction Operations

• To change initiated transaction fees/ fields, the value can be changed and keeping the same gas price.
• A transaction can be canceled by initiating self transaction.
• New transactions must have higher gas to be given priority over older one.

Testnets

• Testnets replicate the mainnet (production) Ethereum blockchain.
• Ether is required to deploy and test contracts on testnets.
• Testnet ethers can be acquired from a faucet for free.
• Contracts can locally tested by Private Testnet setup or Ganache.

Smart Contracts

• Nick Szabo coined the term "smart contract" in 1994.
• Smart contracts eliminate intermediaries, allowing direct P2P transactions.
• They automatically enforce some obligations.
• Smart contract code is immutable once deployed.
• A different mindset is required for smart contract creation.

Immutable Code

• Smart contract code cannot be changed. However, states and variables can be.
• Smart contract code behavior changes based on states and variables.
• There is no way to the reverse a state change of a smart contract.

Storage and Gas

• Smart contract storage is costly.
• The ethereum blockchain cannot handle large amounts of data.
• Execution of transactions is limited by gas limit per block.
• Every transaction that sends ether consumes gas.
• Transaction initiators must pay gas in ether for executing smart contract logic

Hacks

• DAO Smart Contract hack that occurred in June 2016, which lead to 3.6 million ETH theft worth $50 million.
• The hack lead to Ethereum (ETH) and Ethereum Classic (ETC).
• Parity Multisignature Wallet Hack that happened in 2017 resulted in millions of dollars lost, due to vulnerability in the Parity wallet.

Consensus

• Ethereum's consensus algorithm is Proof of Stake (PoS), specifically Gasper - effective as of July 2024.
• To become a validator lock up 32 ETH.
• Operate a Beacon Chain and Execution Layer client.

Block Time and Block Reward

• Ethereum's block time (PoS) is about 12 seconds.
• Blocks must be finalized after 12.8 minutes.
• Block reward in PoS is dynamic and is based on the amount of ETH staked and validator participation.
• The base reward is estimated as ~0.025 ETH per block (dependent upon total ETH staked).

Gas Limit

• This is a consensus parameter defined to limit the amount of computation that can be included in a block, it's known as Gas Limit per Block.
• The gas limit is defined in a range of 30 millio gas (as of 2024).
• The gas limit per block is defined to balance network throughput, resource usage, and decentralization.
• This can be manually adjusted by Miners/validators that can vote increase or decrease it.

Transaction Fee

• Gas for ETH Transfer: is estimated 21,000 gas.
• Extra gas for data or smart contract interactions is defined as Additional Costs.
• Gas Costs for Opcodes such as EVM operations are also components that increase the amount of gas required
• In order to ensure fair pricing, prevent abuse, as well as maintain network stability gas is measured as a fee.
• Opcodes in general have variable costs based on input size or context which also affect gas consumption.