Ethereum’s Architecture

1. Overview of Ethereum
2. The EVM – Ethereum Virtual Machine
3. The Ethereum blockchain & consensus method
4. ETH & its Tokenomics
5. Smart Contracts, Gas & dApps
6. Nodes 
7. Clients & Networks
8. Accounts & Transactions

1. Overview of Ethereum

Ethereum is a distributed computing network that rents out its processing power through something called the Ethereum Virtual Machine (often abbreviated to EVM). 

Given the analogy of Ethereum as a world computer, the EVM is the processor, providing a runtime environment for the execution of Smart Contracts, code based instructions called by digital applications – dApps – which pay for the service using the native currency of the Ethereum Network, Ether. The computational effort required is measured in something called Gas. 

The Ethereum network consists of Nodes following a set of rules, the Ethereum Protocol, with the sole purpose of maintaining the correct state of the EVM, which includes Accounts holding Ether and Smart Contracts.

2. The Ethereum Virtual Machine

The EVM isn’t part of a network or filesystem, it simply receives and executes Smart Contracts requests updating its state. That state is recorded in each block of the Ethereum blockchain, along with any changes to balances of Accounts holding Ether (ETH).

It is crucial that Ethereum has only one ‘canonical’ state, and the EVM provides the rules for computing a valid state for each new block depending on what Smart Contract changes, or Account transactions have been requested.

The EVM state is stored in blocks that are chained together using cryptography into a blockchain maintained by the Network of Nodes running the rules through an Ethereum Client.

Ethereum Clients are specific pieces of software that implement the instructions set out in the original blueprint written by Vitalik Biterin, known as the Ethereum yellow paper.

3. The Ethereum Blockchain

Agreement on the accuracy of transactions stored in the blockchain is reached through a consensus mechanism called Proof of Work, copying the general approach taken by Bitcoin, but with specific adaptations that make a significant difference to Ethereum’s tokenomics – how ETH is created, distributed and incentivises owners . 

Mining Nodes run a specific algorithm called EthHash, an arbitrary mathematical calculation that produces new blocks of the state changes every fifteen seconds, giving a reward of two Ethereum to the Miner that produces a ‘certificate of legitimacy’ proving the required work has been completed, along with the fees paid by Accounts and dApps for transactions and Smart Contract execution.

The new block will be broadcast to the rest of the Network, and once other Miners see the certificate of legitimacy they must accept it as being the latest block in the chain.

The timing of blocks is set by the Protocol and the difficulty adjusted programmatically to keep block production time consistent.

Blocks are limited in size based on the amount Gas required to execute all transactions. The upper limit is set at 30 million Gas, but block size will vary depending on demand.

Ethereum’s use of Proof of Work is planned to end in 2022, changing to Proof of Stake, in order to improve scalability and to address concerns around the environmental impact of Proof of Work mining. 

A separate Beacon Chain already exists, holding staked funds, which will eventually merge with the mainnet and apply a new consensus mechanism called Casper the Friendly Finality Gadget.

4. Ether & its tokenomics

Unlike Bitcoin, the supply of Ethereum is uncapped, growing via the reward of two ETH paid to Miners for producing new blocks. 

Transactions are paid for by the sender in something called Gas. By charging for the work done by the EVM it incentives the minimum amount of calculation and charges the sender.

Gas is paid for in Gwei, which as a micro-unit of Ether makes fees much easier to represent.

1 ETH = 1,000,000,000 Gwei.

In response to the concerns around Ethereum’s inflationary tokenomics changes were made to the Mining process through an Ethereum Improvement Proposal, EIP1559, implemented on August 5th, 2021.

The changes mean that a portion of the fees which are included in newly mined blocks are burned, rather than going to Miners. The objective is to burn enough ETH on a regular basis to decrease the supply, and turn into a deflationary coin.

The imminent changes to the Consensus Method mentioned above are already impacting Ethereum’s tokenomics by providing tangible incentives for ETH holders to stake their funds and support the network. 

At present close to 8% of ETH’s circulating supply is locked in the ETH2 Deposit Contract, equivalent to 9.25 million tokens or about $23bn, making it the largest single ETH holder in existence.

$23bn
The value locked in Ethereum's Proof of Stake 
deposit contract