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More Grayscale research papers and investment theses are available at: www.grayscale.co/insights 07|19 Defining Characteristics of Ethereum The Ethereum network was designed to expand upon the use cases afforded by Bitcoin and serve as a decentralized world computer. While Bitcoin employs a limited scripting language that only permits P2P value transfer, Ethereum was designed to be computationally universal, or Turing-complete, facilitating more advanced types of programmable digital interactions with ETH. With that said, Ethereum and Bitcoin still share some of the following characteristics, though they are at different points on the spectrum for each: • Decentralization: Ethereum currently employs PoW, effectively eliminating the need for a central authority (e.g., governments and financial institutions) to validate transactions or smart contract-based network operations. Buterin asserts that blockchains are politically and architecturally decentralized, but behave in a logically centralized way, in which the nodes hold equal power in the network and must collaborate to validate transactions.17 One caveat is that while governance is designed to be decentralized, there may be risks associated with the level of decentralization of mining pools in the Ethereum network. As of February 12, 2020, the top two largest mining pools controlled over 50% of the hashrate of the network.18 • Permissionless: Anyone can participate in the network. • Secure: In PoW protocols, the network “is secure as long as honest nodes control more [power] than collective attacker nodes.”19 An attacker seeking to make a fraudulent transaction on the blockchain would have to locate the desired block, change the transaction data, then mine each consecutive block until the fraudulent one was accepted by the network, in what is called a 51% attack. The primary deterrent of these attacks is that they are computationally expensive with uncertain payoff, and as a result, are unlikely.20 Though the 2016 DAO hack raised concerns over Ethereum’s security, Atzei et al. (2016) identified that it was vulnerabilities in Solidity, the programming language used to design Ethereum smart contracts, rather than vulnerabilities in the network itself, as the primary reason for the attack.21 However, it is important to note that Ethereum will be 17. Vitalin Buterik. “The Meaning of Decentralization.” Medium. February 6, 2017. https://medium.com/@VitalikButerin/the-mean- ing-of-decentralization-a0c92b76a274. 18. “Top 25 Miners by Blocks.” Etherscan. February 12, 2020. https://etherscan.io/stat/miner?range=7&blocktype=blocks. 19. Satoshi Nakamoto. “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin Project. October 31, 2008. https://bitcoin.org/ bitcoin.pdf. 20. Saravanan Vijayakumaran. “The Security of the Bitcoin Protocol.” Indian Institute of Technology Bombay. May 19, 2018. https:// static.zebpay.com/web/pdf/Bitcoin-Security-White-Paper.pdf. 21. Nicola Atzei, Massimo Bartoletti, and Tiziana Cimoli. “A survey of attacks on Ethereum smart contracts.” Università degli Studi di Cagliari. October 7, 2016. https://eprint.iacr.org/2016/1007.pdf. PLEASE REVIEW IMPORTANT DISCLOSURES & OTHER INFORMATION AT THE END OF THIS PAPER. ©2020 Grayscale Investments, LLCPDF Image | An Introduction to Ethereum
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