Ethereum: the world’s computer

Launched in 2015, Ethereum is a blockchain that enables anyone to run decentralized and open applications on it. This network is fueled by Ether, the currency used to pay miners for verifying transactions on the blockchain. Ethereum’s immutability and transparency make it an ideal platform for products and applications that need to run on an open network.

Through its ground-breaking combination of features like smart contracts, Ethereum is used for a variety of innovative applications in finance, web browsing, gaming, advertising, identity management, and supply chain management. While Bitcoin pioneered blockchain technology as the first cryptocurrency, Ethereum has expanded on Bitcoin’s decentralized digital currency by building a global network that undergirds an interconnected marketplace of decentralized applications (dApps) — from decentralized autonomous organizations (DAOs) to Initial Coin Offerings (ICOs), stablecoins, decentralized finance (DeFi), and non- fungible tokens (NFTs). Ethereum’s use cases are vast and expanding fast, offering blockchain projects enhanced efficiency and security to industries across the globe.

Ethereum is the network of choice for innovation in the blockchain and cryptoassets space. With its flexibility and robustness, new applications continue to emerge and increased scalability in the future will continue to support development. From DAOs to Enterprise Ethereum to DeFi, the future of Ethereum looks more exciting than ever.


In 1994 Kolomna, Russia, Vitalik Buterin was born to Dmitry Buterin and Natalia Ameline. He first heard of Bitcoin1 from his father at the age of 17, who himself had a software background. He didn’t get into it straightaway. Moreover, he initially thought that the cryptocurrency space would inevitably going to fail, as it had no intrinsic value.

Vitalik ended up spending his time on various Bitcoin-related forums, researching the Bitcoin network where he eventually began writing for a publication called Bitcoin Weekly in order to earn some spare bitcoin. The owner offered five bitcoin (about $3.50 at the time) to anyone who would write articles for him so he took the job as a part-time while gaining an understanding of the virtually unlimited potential of the technology behind Bitcoin.

With his ever growing interest, Vitalik aspired to create a Turing-complete programming language2that Bitcoin and Distributed Ledger Technologies could benefit from as he envisioned them as more than just payment systems. Initially, he presented his idea to already existing cryto projects without success nor appeal, stating that ”it wasn’t the right time to execute such grand things”. So, he decided to do it himself.


In November 2013, Buterin wrote the whitepaper proposing Ethereum,

“(…) What Ethereum intends to provide is a blockchain with a built-in fully edged Turing-complete programming language that can be used to create “contracts” that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.” [1]

Like Bitcoin, no one controls nor owns Ethereum – it is a project built by many people around the world designed to be adaptable and flexible with regards to composability. Think of if as LEGO blocks.

Ethereum Network

Ethereum is a permissionless3 , non-hierarchical network of computers which build and come to consensus on an ever-growing series of “blocks”, or batches of transactions, known as the blockchain. Each block contains an identifier of the previous block. Whenever a node adds a block to its chain, it executes the transactions therein in their order, thereby altering the Ether balances and other storage values of Ethereum accounts. The network comes to consensus on the blockchain by following the “longest-chain rule”, which states that the chain with the most blocks at any given time is the “main” chain. This rule achieves consensus because miners do not want to expend their computational power trying to add blocks to a chain that will be abandoned by the network, hence categorized as a Proof-of-Work chain.

What differentiates Ethereum from Bitcoin is the ability to write and deploy computer programs called smart contracts for the whole network to use, processed by all the computers on the network, all without a central coordinator. The goal is to create an unstoppable censorship-resistant self-sustaining decentralized world computer. It is an extension of the blockchain concept of data, which validates, stores, and replicates transaction data on many computers around the world. If Bitcoin is the abacus, Ethereum is Microsoft Excel.


Ether (ETH or Ξ) is the native cryptocurrency of the Ethereum blockchain that is generated as a reward to miners in its Proof-of-Work computations for adding blocks to the blockchain. It is the only currency accepted in the payment of transaction fees. When a user or developer wants to interact with the Ethereum Blockchain, through the emission of transactions, executing a smart contract or interacting with a DApp5, they will need to pay the miners a fee for their transaction’s broadcast, known as gas. Gas is the measure of the computational effort that will be required to perform said actions. The higher level of computation you need, the more Ξ will be required.

To draw an analogy, running a real-world car for X miles may require Y gallons of fuel, or moving X amount of money from your bank account to your friend’s credit card account may cost you Y dollars in a processing fee. In both cases, X indicates the utility value, while Y indicates the cost of performing the process of the car trip or financial transaction. Similarly, a contract or transaction on Ethereum may be worth 50 ETH (X value), and the gas price to process this transaction at that particular time might be, say, 10-5 ETH (Y value).

The block reward together with the transaction fees provide an incentive to the miners to keep the blockchain growing, i.e. to keep processing and validating new transactions, making ETH fundamental to the operation of the network. Unlike bitcoin, there is no fixed supply of tokens. The maximum supply of bitcoin is capped at 21 million whilst the amount of newly minted Ether decreases over time.

Each Ethereum account/address has a balance and may send ETH to any other account. The smallest sub-unit of ETH is known as a Wei, with 1 Wei = 10-18 Ξ, making this asset highly divisible. Ether is also considered to be a commodity by authorities at the Commodity Futures Trading Commission and the Securities and Exchanges Commission, coining the term crypto-commodity .

Figure 1: Ether’s Proof-of-Work Annual Issuance, Coin Metrics

Gas and Blockspace

Gas fees are required to successfully broadcast a transaction or execute a contract on the Ethereum Network. Every transaction has a fee attached that signals the desire to purchase blockspace, which allows the transaction to be processed and included in a certain block. The exact gas price is determined by supply and demand between the network’s miners, who can refuse to process the transaction/execution of a smart contract if the gas price does not meet their threshold, and the users of the network who seek processing power. Gas prices are denominated in gwei, with 1 Gwei = 10 Ξ.

When building blocks, there is a limit to how many operations miners can log into a single block before adding it to the blockchain. Blockspace is the term used for defining how much information, measured in gas, can be stored in a single block, with the current limit being around 15,000,000 gas. Unlike Bitcoin, Ethereum’s blocktime is much faster, around 10-20 seconds, but the demand for blockspace is at all-time highs, with the explosion of the DeFi space and NFT craze. [3][7]
The image shows Ethereum’s Blockspace used, via Coin Metrics.

The Ethereum protocol allows miners to adjust the block gas limit, up or down, by roughly 0.1% in each new broadcasted block.

Since the size of each block is capped, there is a limited number of transactions that can go through at a given time, thereby giving blockspace an implicit time-value. The fee users pay, reflects their willingness to bid for its spacetime. The blockspace market connects the miners and users together. Users can offer a higher gas price to incentivize miners to pick their transactions first. When there’s high traffic in the network, gas prices increase, and can fluctuate rather drastically. This can be considered as one of the main problems with the gas system. [4]

Consider for instance that User1 wants to broadcast a transaction that will be recorded on the blockchain, and said operation will expend 30,000 gas. User1 sets an enticing price of 25 gwei per gas so that Miner1 can quickly validate his transaction. If User1 set this transaction’s gas limit at 35,000, his maximum expenditure of gas to process the transaction, then Miner1 will include User1’s operation in the block, and would return the additional 5,000 gas to User1, totaling a cost of (25 × 30,000) × 10 = 0.00075-9Ξ. On the other hand, if User1 had set a price of 10 gwei per gas, and User2 had offered a higher price, Miner1 would give preference to the highest bidder and validate their transaction first. This mechanism is defined as Priority Gas Auction. [5]

Smart Contracts and dApps

Smart Contracts are computer programs written in Solidity, an object-oriented programming language inspired from Javascript and Python, that live on the Ethereum blockchain. The term Smart Contracts was first conceived by Nick Szabo, an American computer scientist that defined it as digital vending machines that execute “contract” terms, i.e, with the right inputs, a certain output is guaranteed.

Anyone can write a smart contract and deploy it to the Ethereum network. The only requirements are coding expertise in Solidity and enough ETH to deploy your contract. Deploying a smart contract is technically a transaction, so you need to pay your gas in the same way that you need to pay gas for a simple ETH transfer. By deploying it on Ethereum you buy some storage space on the blockchain with Ether, in order to cache the code and any additional data of the smart contract. Users can then interact with that smart contract by submitting transactions that execute certain functions defined on the smart contract and thereafter enjoy its output. [6]

Figure 3: User Execution of a Smart Contract

The Ethereum Virtual Machine 7 (EVM) achieves Turing Completeness by enabling an economy that charges per software instruction executed instead of per financial transaction executed like Bitcoin does. Instead of a transaction fee, you have a fee for running programs, hence the name gas.

Decentralized computer programming also brought innovation in the application software sector. A standard web app, such as Instagram or Twitter, runs on a computer system which is owned and operated by an organization, giving it full authority over the app and its workings. There may be multiple users on one side, but the back-end, the data access layer, is controlled by a single organization. If this organization experiences downtime, you wouldn’t be able to access your influencer’s latest posts.

On the other hand, decentralized applications, or dApps in short, are digital applications built on a decentralized network that combines a smart contract and a frontend user interface. Once the smart contract at the core of an app is deployed and onto blockchain, the network as a whole will always be able to serve clients/users looking to interact with the contract. Malicious actors therefore cannot launch denial-of-service attacks targeted towards individual dApps. These dApps are censorship resistance, no single entity can block users from submitting transactions or reading data from the blockchain.

ERC-20 and ERC-721 Standard

Ethereum Improvement Proposals

Ethereum Improvement Proposals (EIP) play a central role in how changes happen and are documented on Ethereum. Their aim is to upgrade or modify certain technical aspects of the network, proposed and debated by the Ethereum community members. Anyone within the Ethereum community has the ability to create an EIP, so no single entity controls its development. If there’s consensus around an EIP and it gets accepted by the community, it will be implemented to Ethereum.

Fungible Tokens

The ERC-20 (Ethereum Request for Comments 20) token standard was devised on the EIP-20, introducing a standard for Fungible Tokens, i.e, the ability to be interchanged with other individual’s assets of the same type. The goal was to design a standard that promotes compatibility between tokens and improvements in the Ethereum ecosystem that allow developers to build token applications that are interoperable with other products and services.

ERC-20 tokens are digital assets that can be created by anyone whilst having a sub-accounting parallel to Ethereum’s main book, through their own unit of account. The standard is a smart contract with a set of special traits, that mints theses tokens and makes them transferable to anyone. Each token has its own specific utility, such as granting users the right to vote on decisions impacting the future of a certain project, rewarding user for performing certain tasks, representation of lottery tickets or even fiat currency like the dollar or euro. At the time of writing there are over 450,000 tokens living on Ethereum.

ERC-20 tokens are digital assets that can be created by anyone whilst having a sub-accounting parallel to Ethereum’s main book, through their own unit of account. The standard is a smart contract with a set of special traits, that mints theses tokens and makes them transferable to anyone

Each token has its own specific utility, such as granting users the right to vote on decisions impacting the future of a certain project, rewarding user for performing certain tasks, representation of lottery tickets or even fiat currency like the dollar or euro. At the time of writing there are over 450,000 tokens living on Ethereum.
The Uniswap token (right) grants the right to govern the largest Decentralized Exchange (DEX) on Ethereum.

Non-Fungible Tokens

A Non-Fungible Token (NFT) is a unit of data stored on the blockchain, that certifies a digital asset to be unique. Officially called ERC-721 tokens9, these special type of tokens can be held in one’s wallet, and no other user can be in the possession of the same token. They are uncounterfeitable since it is not possible to mint an exact replica of an NFT due to how the information contained inside that token is logged on the blockchain. Moreover, they are indivisible as it cannot be split.

NFTs can represent ownership over digital assets such as virtual collectables or physical assets such as house deeds.

These tokens made headlines when GIFs, digital artwork and basketball short-clips were being sold for large amounts of money, but in fact ERC-721 tokens can have a plethora of other use cases. [8]

They can also represent “negative value” assets such as loans, burdens and other responsibilities. Suppose User1 wants to borrow an ERC-20 token from a friend, User2, but does not have any collateral to put upfront. Both users can define the terms of the agreement in a smart contract and effectively emit debt of the ERC-20 borrowed.

Both users can define the terms of the agreement in a smart contract and effectively emit debt of the ERC-20 borrowed. This newly minted debt is in the format of an ERC-721 that can later be transferred or sold to a new friend, User3. There is no legal obligation for User3 to repay User1 since this was a contract between friends (and we assume friends are to be trusted) but illustrates the endless possibilities of this token standard.

Ethereum 2.0


Due to the Proof-of-Work consensus mechanism’s inner workings, each block has a size limit, meaning that users are obliged to engage in Priority Gas Auctions in order to have their transactions validated. These PGAs not only increase the gas price but also congest the network making users pay a premium for blockspace which translates in high gas prices.

Suppose that you wanted to send a message to a friend through Whatsapp and it got stuck on ”sending”. Now imagine that the only way for it to go through was by paying a variable and high fee. You would probably not use that service anymore. That is why for a growing number of Ethereum users, the ”rent is too damn high”.


As Ethereum has grown in popularity, estimating appropriate ETH gas fees has become complicated, and users often encounter transaction confirmation delays. The EIP-1559 is a proposal to make Ethereum transactions more efficient by using a hybrid system of base fees and tips to more evenly incentivize miners in periods of high and low network congestion.

In the proposal, a base fee is the algorithmically determined price you pay for a transaction on Ethereum which will be burned rather than going directly to the miners. Tips are defined as optional fees that you may include to speed up transactions. By having a two-tiered system that uses a base fee and tips, EIP- 1559 creates dynamic and adjustable block sizes that expand and contract depending on demand. When Ethereum blocks get more than 50% full, the gas costs for inclusion will increase. When blocks get to less than 50% full, the gas costs decrease.

On the 5th of August 2021, at block height10 12,965,000, Ethereum’s latest hard fork upgrade, dubbed “London,” officially activated on the network, introducing the EIP-1559. At the time of writing, the newly minted Ether supply decreased by 54.21%. At times of major network affluence, Ξ has been a deflationary asset, meaning that more Ξ was burned in base fees than minted as rewards to miners for validating blocks. [9]


The Beacon Chain is a Proof–of-Stake blockchain that marks the beginning of Ethereum 2.0. It is an ambitious multi-year network upgrade of Ethereum. The upgrade to Ethereum 2.0 attempts to achieve better scalability, security and decentralization. Ethereum has miners who compete to solve a difficult math problem. The quickest solver is then able to add a new block to the longest observed chain. The amount of electricity and hardware that go into mining Ethereum is substantive, creating a high barrier to entry. It makes zero economic sense to mine Ethereum at home.

Figure 7: The validators receive the information from the different shards and produce a block

Proof-of-Stake, the new consensus mechanism proposed in Ethereum 2.0, implements a more energy efficient way to add new blocks while also lowering the entry barrier for new block producers. As a validator you’ll need to have 32Ξ staked in order to propose a block. Validators take turns proposing blocks and voting on what blocks they believe to be correct, which means that every block producer has the same change of receiving the block reward. Newly issued ETH will be rewarded to honest validators while those who act maliciously will see their 32 ETH balance reduced.

The Beacon Chain also introduces new cryptographic technology that allows the network to scale. Instead of storing all the information on a hash like Bitcoin does, it only processes and stores small shards12, enabling a path towards higher scalability. Imagine if from the different shards and produce a block.

The Merge

The Merge is an upgrade to Ethereum that swaps out the current Proof-of-Work consensus mechanism with a more eco-friendly, efficient, and secure Proof-of-Stake consensus mechanism. When the merge occurs the current PoW consensus mechanism will be fully deprecated and all blocks on Ethereum will be produced via PoS.

Phase 0: Beacon Chain

Eventually the Beacon Chain will be the main coordinator of all the shards that will be deployed in Phase 1. It will run alongside the Proof of Work Ethereum blockchain (also referred to as Ethereum 1.x). Ether holders will be able to move their ETH over to the Beacon Chain using a one-way deposit contract from Ethereum and start running validators. No other actions aside from validating will be possible during this Phase.

Phase 1: Sharding

Sharding will be turned on. There will be 64 shards (blockchains) that will run in parallel, coordinated by the Beacon Chain. Ethereum 1.x will be merged with Ethereum 2.0 at some point during this Phase. This upcoming merge is also referred to as Phase 1.5.

Phase 2: Execution

Ethereum 2.0 will start functioning very similarly to Ethereum today with smart contracts enabled. PoS does not require the same energy-intensive hardware as PoW. Any relatively recent consumer laptop should be capable of running the software required to operate a 32 ETH staking node. Most estimates put the expected energy savings from the switch to PoS to be around 99%.

Figure 8: Ethereum’s Upgrade Path: The validators receive the information from the different shards and produce a block

Network Activity


Network effects are often referred to as one of the main factors that facilitated Big Tech to become so, well… big. For example, you might have heard how Google’s search algorithm gets better after every user query, or that the value of social media networks like Instagram grows the more users that it brings on. Both of these aspects perfectly encompass the idea of network effects, whereby the value of a network increases the more users it has.

Crypto usage can be tricky to measure. Although all transaction data is public, it can be difficult to tell how many unique users are behind the transacting addresses. A single Ethereum address may be owned by many individuals, such as an exchange address. But an individual may also own many addresses for security, privacy, or other purposes. CoinMetric’s13 data showed that there are a total of 62.5 million addresses with a balance on the Ethereum network. However, of those 62.5 million addresses, only 550,000 are active daily and 7,000,000 are active monthly. Ether holders has surged since the summer, adding over 2.5M addresses since May 1st.

The number of daily active addresses on the Ethereum network tends to be closely related to Ether’s price. This makes sense as users of Ether can derive more value out of Ethereum if there are more users or applications using it. As a smart contract platform, Ethereum’s role as the infrastructure for a decentralized ecosystem has the potential to further amplify these network effects as more developers working on improving Ethereum’s base layer leads to more projects or decentralized applications building on top of it, attracting more end users and in turn bringing more protocol developers; thus creating a network effects cycle similar to those seen in Big Tech.

Value Settled

Ethereum miners have generated since 2015 about $20.7 billion in revenue adjusted for the Ether price. On average, over 67% of that revenue was from block rewards with the remaining 33% attributed to gas fees payed by the users. The month of August saw on average $4.1 billion on value settled on-chain in transactions. This means that this monstrous value was exchanged between users and smart contracts in the form of Ether and ERC-20 tokens. On the first quarter of 2021, the cumulative value settled was $1.6 trillion on transactions alone.

The Rise of DeFi

DeFi or Decentralized Finance is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party.

Financial primitives are the basic decentralized financial capabilities and technologies that can be combined or built on top of by others in order to create more complex and/or specific applications. These financial primitives and the applications built on top function a bit like LEGOs. Money LEGOs stacked on top of money LEGOSs creates an interwoven, interconnected financial structure that is both strong and customizable.

These money LEGOs reached critical mass in late 2020, hurling us into 2021 and taking DeFi from the status of “amazing toy” to the early stages of a critical tool for reimagining our financial infrastructure. It is currently estimated that over 3.3 million users14 have deposited and ”locked” $80 billion worth of Ether and ERC-20 tokens in smart contracts earning yield or as collateral in DeFi protocols.

Figure 9: Amount of Ether locked in DeFi Smart Contracts

Our Thesis

Ethereum is the network that underpins the decentralized finance (DeFi) movement, where users transact peer-2-peer without 3rd parties like banks. It also underpins the non-fungible token (NFT) movement, which creates digital scarcity for objects like art and certificates. All activity on Ethereum results in the generalized scarcity of Ether. The privileged role that Ether has as the native asset of Ethereum creates an inextricable link between the economic activity of all assets and financial applications on Ethereum, and the scarcity of Ether. Its sustained network activity growth combined with a huge TAM 15 make a compelling case for this new technology.

Despite its features it also displays problems. Its inhibitively high gas fees (transaction cost), slow transaction time (time taken to complete a transaction), and low transaction throughput (amount of transactions per second) difficults any scaling attempt since it needs to balance the scalability, with staying secure and decentralized – the scalability trilemma16.

Growth in the Ethereum ecosystem → more transactions → more demand for blockspace → more gas usage → more demand for Ξ → higher Ξ price → pricing out new users → less TAM.

To compete with centralized alternatives, Ethereum needs to at least be as fast, as cheap, and able to handle as much data. Will it be able to scale whilst facilitating many, frequent and complex transactions? Well, yes! Ethereum 2.0 plus rollups17 not only cuts gas fees to viable levels, but also improves transaction size, latency and frequency that outcompete payment processors and infrastructure providers. [10]

The rollout of Ethereum 2.0 and the scaling solutions being built will get Ethereum to a competitive level within the next 12-18 months, making it one step closer to world adoption.


1 – Bitcoin with an upper “B” is referred to the network whereas a lower “b” denotes the cryptocurrency.
2 – In computer science, a Turing-complete programming language is something that enables a computer to solve any problem, given the appropriate algorithm and necessary amounts of time and memory.
3 – An open network for anyone to interact and participate in consensus validation. Fully decentralized across unknown parties.
4 – Nodes are computers connected to a network that validates the blockchain by following a number of rules.
5 – Check section on Smart Contracts and dApp.
6- General term used to describe a tradable or fungible asset that may represent a commodity, utility, or a contract in the real- or virtual-world through exclusive tokens on a blockchain network.
7 – Virtual machines are based on computer architectures and provide functionality of a physical computer. This simply means that Ethereum’s VM enables execution of code exactly as intended.
8 – CryptoPunks were released in June 2017 as one of the first NFTs on the Ethereum blockchain. On May 12th, they were auctioned for $17 million dollars. See reference [7].
9 – Note that NFTs also enjoy an official token standard called ERC-721, devised in early 2018, it standardizes a class of unique tokens.
10 – The block height of a particular block is defined as the number of blocks preceding it in the blockchain.
11 – Definition of Proof-of-Work
12 – Sharding is a method for distributing data across multiple machines. See:
13 –
14 – Users = unique addresses. Since a user can have multiple addresses the numbers below are overestimates.
15 – Total addressable market
16 –
17 – Rollups are solutions that perform transaction execution outside the main Ethereum chain (layer 1) but post transaction data on layer 1. As transaction data is on layer 1, rollups are secured by layer 1. Inheriting the security properties of layer 1 while performing execution outside of layer 1 is a defining characteristic of rollups.

[1] Vitalik Buterin; Ethereum Whitepaper

[2] The Verge; NFTs Explained

[3] Wharton University of Pennsylvania; DeFi Beyond the Hype: The Emerging World of Decentralized Finance

[4] Annica Research; Ethereum Blockspace: Who Gets What and Why

[5] Philip Daian, Steven Goldfeder, Tyler Kell, Yunqi Li, Xueyuan Zhao, Iddo Bentov, Lorenz Breidenbach and Ari Juels (2019); Flash Boys 2.0: Frontrunning, Transaction Reordering, and Consensus Instability in Decentralized Exchanges

[6] Ethereum Foundation; Introduction to Smart Contracts

[7] Tech Crunch; CryptoPunks NFT bundle goes for $17 million in Christie’s auction

[8] The New York Times; How ‘Put That on Top Shot!’ Became a New N.B.A. Mantra

[9] Watch the Burn; Ethereum Tool

[10] Vineyard Holdings; Monopolies with Growth: Ethereum

Published by lisboninvestmentsociety


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