Ethereum Basics in 5 Minutes

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Ethereum Basics in 5 Minutes

Almost all smart contract L1 blockchains(Solana, Ethereum L2s[Polygon, Optimism etc]) follow the account based model. Notable exceptions include Bitcoin and Cardano with follow a UTXO model.

Accounts: https://ethereum.org/en/developers/docs/accounts/

  • Externally-owned account (EOA) – controlled by anyone with the private keys
  • Contract account – a smart contract deployed to the network, controlled by code. Learn about smart contracts

TLDR; Wallets are EOAs. Private key == wallet. Smart contracts are just wallets controlled by code.

Transactions: https://ethereum.org/en/developers/docs/transactions/

  • Transactions are state changes:
    • Basic: Send Ethereum
    • Smart contract interaction: Change data in a smart contract(Update a variable or an array) e.g. Update array so that NFT “1” is owned by wallet xxx(Public wallet hash)
    • Contract deployments: Publishing a smart contract so others can use

TLDR; Everything on the blockchain is a transaction. A transaction is just a data update.

**Blocks: ** https://ethereum.org/en/developers/docs/blocks/

  • Blocks are just batches of transactions
  • A block is a group of transactions every ~12s slot
  • Validators check a block by checking the hash
  • Magic computer science, lets you check 1 hash to verify the entire history(Merkle trees)
  • Other validator attest that your validation is correct(attestations, Proof of stake) i.e. double-checking your work to keep you honest
  • Block is “set in stone” after finality: https://ethereum.org/fil/roadmap/single-slot-finality/
  • Blocks are like timestamps of the state of the chain at a certain point-in-time

TLDR; Blocks are groups of transactions that get verified together. The magic of blockchain is you can verify the entire history of the chain by checking a single hash. It keeps everyone honest.

Advanced Ethereum

Bridges: https://ethereum.org/en/developers/docs/bridges/

  • Bridges transfer assets across chains.
  • Types of bridges:
    • Lock and mint – Lock assets on the source chain and mint assets on the destination chain
    • Burn and mint – Burn assets on the source chain and mint assets on the destination chain
    • Atomic swaps – Swap assets on the source chain for assets on the destination chain with another party(Needs a 3rd party sometimes)
  • Bridges can create additional risk and spread risk to other chains

**TLDR; ** Bridges can expand economic value to other blockchains but there is a innate risk

**Maximal Extractable Value(MEV): **https://ethereum.org/en/developers/docs/mev/

  • Validators can maximize the value from a block by transaction ordering
  • Arbitrage: Buy from one DEX sell to another DEX to take advantage of price differences
  • Liquidations: Cash out gamblers that are over-leveraged. I.e. Margin call speculators borrowing too much against their assets to make more bets
  • **Sandwich trading(Pump and dump in a single block): **
    1. Pump the price
    2. Let others buy at the higher prices
    3. Sell right after
    4. Occurs within a single block(So on one can react, it happens all at once)
  • MEV is good AND bad for the ecosystem depending on how evil the validator is

TLDR; MEV helps optimize the DeFi Ecosystem but bad actor validators can take advantage of others

Oracles: https://ethereum.org/en/developers/docs/oracles/

  • Everything in a blockchain happens in a black box, a constrained environment(EVM) i.e. Smart contracts can’t natively pull info from outside the blockchain
  • Everything transaction has to be repeatable(deterministic) by every other node using the same set of data i.e. Each node needs the same set of data to start
  • Data from outside the blockchain, stock prices, weather, etc. needs to come from an oracle
  • Oracles like chainlink verify and make data available to smart contracts
  • Smart contracts rely on Oracles for price feeds and other external data

**TLDR; ** Blockchain based smart contracts are closed systems that can’t pull data from outside the chain without oracles. Oracles verify and make external data available to smart contracts.

Scaling: https://ethereum.org/en/developers/docs/scaling/

  • Sharding: Split up work so every node doesn’t have to process everything. https://ethereum.org/en/roadmap/danksharding/
  • Layer 2 scaling: Have another chain process multiple transactions and batch them up into a single L1 transaction i.e. L2 Optimism processes 100 transactions and then commits it to L1 Ethereum Mainnet as a single transaction
  • Optimistic vs ZK Rollups is a whole rabbit hole you can dig into.
    • Both just roll up, or batch up multiple transactions into one

TLDR: There’s not enough throughput(transactions per second, TPS) for 8 billion people to use Ethereum. There are clever ways of batching up transactions, or reducing the total amount of work to increase TPS.

Ethereum Smart Contract Basics

Solidity: Smart contract language

TLDR: Solidity is #1. Don’t learn Vyper or anything else unless you have a good reason

Dev Framework: Compile, test and deploy smart contracts

TLDR: Helps your development workflow like deploying to testnet and testing your smart contract

Node Provider: Allows you to talk to the blockchain without running your own node

TLDR: Helps you talk to the blockchain like Goerli, Ethereum testnet, or Ethereum mainnet. Also, helps you talk to IPFS to store files and other things

Base Implementations: Don’t start from scratch. Use battle-tested smart contract templates as a starting point.

  • OpenZeppelin is industry standard
  • ERC-20: Basic token i.e. Basic Attention Token, BAT or any token on Ethereum
  • ERC-721 or ERC-1155: Non-fungible Tokens, NFTs

TLDR: Industry standard, secure implementations of tokens and NFTs and other common contracts to build on.

Smart Contract Testing and Auditing: Test your contract for vulnerabilities so you don’t get rekt

**TLDR: **For advanced Smart contract developers that are ready to deploy to mainnet and risk real money.

Ethereum Smart Contract Front-end Basics

Front-end UI frameworks: Ethereum dapps, decentralized applications use the same front-end technologies as other web apps. HTML, CSS, Javascript, ReactJS, Tailwind

  • There are tons of existing tutorials on how to do front-end development for building UIs if that is your focus
  • Learn this first if you are a new developer

Ethereum Client Library: Allows your Front-end UI to talk to your wallet and the blockchain

Wallet: Browser plugin or mobile app that contains a browser to view dapps and also contains your private key to sign transactions

Decentralized finance (DeFi) Basics(Primitives)

Basic building blocks(financial legos) for building DeFi applications.

Stablecoins: https://ethereum.org/en/stablecoins/

  • ERC-20 token pegged to fiat currency like USD or EURO
  • Can be pegged to a basket of currencies i.e. 25% USD, 25% EURO, 25% YEN, 25% YUAN
  • Provides trading pair for cryptocurrencies on DEXs i.e. ETH/USDC or ETH/DAI
  • Provides access to more stable fiat for citizens of countries with high inflation _e.g. Argentina _
  • Provides opportunity to earn interest/yield by loaning, providing liquidity e.g. Loan USDC to traders that want leverage on their assets
  • Can be used with prepaid cards to directly spend crypto with a swipe e.g. Coinbase Card
  • You can borrow USDC against your crypto for leverage or other DeFi opportunities in exchange for additional risk
  • International transfers and remittance

Types of Stablecoins

Fiat-backed

Crypto-Collateralized

  • Example: DAI
  • Overcollateralized i.e. if the price of ETH drops a lot there’s a big buffer that there’s still enough ETH to back the DAI
  • Collateral is public domain on blockchain: https://daistats.com/#/
  • Stats: https://dune.com/hagaetc/maker-dao—mcd
  • Decentralized DAO run by MakerDAO holders

Don’t mess with algorithmic stablecoins. RIP TERRA & UST

Money Markets(Liquidity Protocols): https://docs.aave.com/hub/

  • Examples: Aave, Compound
  • Allow you to deposit crypto to earn interest(yield)
  • Allows you to borrow against your deposited crypto as collateral for a fee(APR)
  • No credit check, pseudo anonymous, just need a wallet
  • **Example use case: **
    • Deposit ETH
    • Borrow USDC against ETH collateral
    • Buy more ETH with USDC
    • Gain increased exposure to ETH(leverage)
    • Sell if capital increases in price to magnify gains(AND losses)
  • Can pull USDC(fiat stablecoin) out to spend IRL without selling crypto collateral
  • Can be integrated into other DeFi protocols
  • Variable APR changes based on total amount borrowed in ecosystem. I.e. as more of a asset reserve is borrowed, interest rate increases to incentivize deposits
  • If your crypto collateral drops dramatically, you may be liquidated
  • **Advanced use case: ** Flash loans

Decentralized Exchanges(DEXs): https://docs.uniswap.org/concepts/overview

  • Examples: Uniswap
  • Allows swaps of asset pairs without centralized order box and matching engine

Next Page: Solidity Primitives