Introduction
In this blog, I’m going to be explaining what Ethereum is so that even if you are a complete beginner and have zero understanding of Ethereum, by the end of this blog you should understand what it is and how it works. Most people vastly misunderstand what Ethereum is; even a lot of the people that are heavily involved in the crypto space seem to these days really misunderstand what Ethereum has become and how it works.
The Four Parts of Ethereum
Today, Ethereum in my mind can be broken down into four different parts. At first, if you’re a complete beginner, this might sound really confusing, but I promise I’m going to go into each part and break it down so that you understand it.
1. The Core of Ethereum (Layer Zero)
The first part would be what I call the core of Ethereum or Ethereum’s Layer Zero. This essentially makes up the core security of Ethereum, used for different things like eigen layer and reeking, which we will get into a little bit later in the blog.
2. Ethereum’s Layer One Blockchain
Second, there’s Ethereum’s Layer One blockchain, probably the piece of Ethereum that most people are really familiar with. Ethereum’s Layer One blockchain is debatably the most secure and decentralized blockchain on the planet. Built on top of this blockchain are a ton of things called dApps (decentralized apps) that allow you to do all sorts of things, which we will also get into a little bit later. This is the piece of Ethereum people are talking about when they say that Ethereum has really high fees or it’s really expensive to use. You can vaguely think of blockchains as a different version of the internet. We talk about going online a lot when it comes to the internet, right? Like you go online to go on a website or whatever. Well, when it comes to blockchains, we talk about going on-chain. So you go on-chain to transact or to use a dApp or different things like that. You can vaguely think of blockchains as a different version of the internet.
3. Ethereum’s Layer Two Blockchains
The third piece of Ethereum is its Layer Two blockchains. You may have heard of different chains like Arbitrum, Optimism, ZKSync, Scroll, etc. These are all Layer Two blockchains that are built on top of Ethereum’s Layer One blockchain. Where Ethereum’s Layer One can be really expensive to use, Ethereum’s Layer Two solutions are just pennies to use; they’re really, really cheap.
4. ETH the Asset
Lastly, the final part or piece of Ethereum is ETH the asset, the actual token. ETH plays a huge role in the overall picture of Ethereum because it has some amazing monetary properties that, in my opinion, make it a better store of value and a better form of money than even something like Bitcoin.
Diving into Ethereum’s Layer One Blockchain
To start, let’s dive into Ethereum’s Layer One blockchain. As I just mentioned, Ethereum’s Layer One blockchain is maybe the most secure and decentralized blockchain on the planet. It has tons of these things called dApps or decentralized apps built on top of it, and these apps can do all sorts of things.
Decentralized Exchanges
For example, there are decentralized exchanges like Uniswap where you can buy and sell crypto tokens similar to something like Coinbase but with a lot more tokens. Instead of being run by a company, it’s run by trustless code. A fact that I think most people unaware of this space find mind-blowing is that Uniswap has had trillions of dollars in volume done on the platform.
Lending and Borrowing Platforms
There are also other dApps that are lending and borrowing platforms, allowing you to take out a loan against your crypto or lend it out for some extra yield.
Stablecoins
Stablecoins allow you to send value all over the world in just seconds. A fact that I find really crazy and insane is that stablecoins are the 16th largest holder of US treasuries on the planet. They hold more US treasuries than some countries like Australia or South Korea.
NFT Marketplaces
There are NFT marketplaces that allow people to trade digital collectibles. Think of how baseball cards can be worth millions of dollars even though they’re just essentially printed on pieces of cardboard; it’s kind of like that but with digital assets.
A Universe of dApps
Outside of that, there’s an entire universe of different daps you can use on the Ethereum blockchain. I like to think of Ethereum’s Layer One blockchain as the central hub for the on-chain economy. However, a lot of people complain about Ethereum’s Layer One blockchain because it can be really expensive to use. A single transaction on Ethereum’s Layer One blockchain could cost anywhere from $5 to $800 or more. This, of course, vastly limits the use cases on Ethereum’s Layer One blockchain.
The Design Goal of Layer One
The goal of Ethereum’s Layer One blockchain is to be the most secure, decentralized, and credibly neutral blockchain on the planet. Imagine major Wall Street companies coming on-chain and transacting with hundreds of millions or billions of dollars. When moving around that much money, you’re going to care a lot less about the fees and a lot more about the security, neutrality, and decentralization of the platform.
The Role of Ethereum’s Layer Two Blockchains
Ethereum’s Layer Two blockchains are built on top of Ethereum’s Layer One. They use Ethereum’s Layer One security, so they don’t have to launch and create their own. Anthony Cesano gave a great analogy: think of Ethereum as the United States and Ethereum’s Layer Twos as the states. States don’t need their own security; they get security from the federal government. Similarly, Layer Twos use Ethereum’s Layer One security instead of creating their own.
Advantages of Layer Twos
This is important because most blockchains are incredibly unprofitable, having to print new tokens to pay validators. Ethereum’s Layer One produces over $4 billion in annual revenue and only pays a tiny portion to validators. Layer Twos benefit from this, not needing to print tokens for security, making them easily profitable. For users, Layer Twos are really cheap, often pennies per transaction.
Benefits to Ethereum
Layer Twos benefit Ethereum by paying fees to Ethereum and using ETH as their native gas token. They allow Ethereum to experiment and take risks without compromising Layer One’s security and neutrality. Layer Twos can choose various risk assumptions that Layer One cannot due to the need for security and decentralization.
Ethereum’s Core Security (Layer Zero)
Ethereum’s core security, or Layer Zero, includes projects like Igen Layer and reaking, allowing other blockchains and apps to rent Ethereum’s security. Anthony Cesano likens this to NATO: if a country in NATO is attacked, other NATO countries defend it. Similarly, other chains can rent Ethereum’s security, drastically reducing their token emissions needed to pay validators.
ETH the Asset
ETH the asset is maybe the most important piece of Ethereum. People value Bitcoin not for its network but for Bitcoin the asset, which is seen as digital gold. Ethereum offers similar value with ETH, providing a better store of value and form of money due to its monetary properties.
Conclusion
In conclusion, understanding Ethereum involves breaking it down into its core components: Layer Zero (core security), Layer One blockchain, Layer Two blockchains, and ETH the asset. Each part plays a crucial role in the overall functionality and value of Ethereum, making it a robust and versatile platform in the crypto space.
