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Because SHA is designed to be a completely unpredictable pseudorandom function, the only way to create a valid block is simply trial and error, repeatedly incrementing the nonce and seeing if the new hash matches. In order to compensate miners for this computational work, the miner of every block is entitled to include a transaction giving themselves 25 BTC out of nowhere. Additionally, if any transaction has a higher total denomination in its inputs than in its outputs, the difference also goes to the miner as a "transaction fee".

Incidentally, this is also the only mechanism by which BTC are issued; the genesis state contained no coins at all. In order to better understand the purpose of mining, let us examine what happens in the event of a malicious attacker. Since Bitcoin's underlying cryptography is known to be secure, the attacker will target the one part of the Bitcoin system that is not protected by cryptography directly: the order of transactions.

The attacker's strategy is simple: Send BTC to a merchant in exchange for some product preferably a rapid-delivery digital good Wait for the delivery of the product Produce another transaction sending the same BTC to himself Try to convince the network that his transaction to himself was the one that came first. Once step 1 has taken place, after a few minutes some miner will include the transaction in a block, say block number After about one hour, five more blocks will have been added to the chain after that block, with each of those blocks indirectly pointing to the transaction and thus "confirming" it.

At this point, the merchant will accept the payment as finalized and deliver the product; since we are assuming this is a digital good, delivery is instant. Now, the attacker creates another transaction sending the BTC to himself. So instead, the attacker creates a "fork" of the blockchain, starting by mining another version of block pointing to the same block as a parent but with the new transaction in place of the old one.

Because the block data is different, this requires redoing the proof-of-work. Furthermore, the attacker's new version of block has a different hash, so the original blocks to do not "point" to it; thus, the original chain and the attacker's new chain are completely separate. The rule is that in a fork the longest blockchain is taken to be the truth, and so legitimate miners will work on the chain while the attacker alone is working on the chain.

Merkle Trees Left: it suffices to present only a small number of nodes in a Merkle tree to give a proof of the validity of a branch. Right: any attempt to change any part of the Merkle tree will eventually lead to an inconsistency somewhere up the chain. An important scalability feature of Bitcoin is that the block is stored in a multi-level data structure.

The "hash" of a block is actually only the hash of the block header, a roughly byte piece of data that contains the timestamp, nonce, previous block hash and the root hash of a data structure called the Merkle tree storing all transactions in the block. A Merkle tree is a type of binary tree, composed of a set of nodes with a large number of leaf nodes at the bottom of the tree containing the underlying data, a set of intermediate nodes where each node is the hash of its two children, and finally a single root node, also formed from the hash of its two children, representing the "top" of the tree.

The purpose of the Merkle tree is to allow the data in a block to be delivered piecemeal: a node can download only the header of a block from one source, the small part of the tree relevant to them from another source, and still be assured that all of the data is correct. The reason why this works is that hashes propagate upward: if a malicious user attempts to swap in a fake transaction into the bottom of a Merkle tree, this change will cause a change in the node above, and then a change in the node above that, finally changing the root of the tree and therefore the hash of the block, causing the protocol to register it as a completely different block almost certainly with an invalid proof-of-work.

The Merkle tree protocol is arguably essential to long-term sustainability. A "full node" in the Bitcoin network, one that stores and processes the entirety of every block, takes up about 15 GB of disk space in the Bitcoin network as of April , and is growing by over a gigabyte per month. Currently, this is viable for some desktop computers and not phones, and later on in the future only businesses and hobbyists will be able to participate.

A protocol known as "simplified payment verification" SPV allows for another class of nodes to exist, called "light nodes", which download the block headers, verify the proof-of-work on the block headers, and then download only the "branches" associated with transactions that are relevant to them. This allows light nodes to determine with a strong guarantee of security what the status of any Bitcoin transaction, and their current balance, is while downloading only a very small portion of the entire blockchain.

Alternative Blockchain Applications The idea of taking the underlying blockchain idea and applying it to other concepts also has a long history. In , Nick Szabo came out with the concept of " secure property titles with owner authority ", a document describing how "new advances in replicated database technology" will allow for a blockchain-based system for storing a registry of who owns what land, creating an elaborate framework including concepts such as homesteading, adverse possession and Georgian land tax.

However, there was unfortunately no effective replicated database system available at the time, and so the protocol was never implemented in practice. After , however, once Bitcoin's decentralized consensus was developed a number of alternative applications rapidly began to emerge. Namecoin - created in , Namecoin is best described as a decentralized name registration database.

Ideally, one would like to be able to have an account with a name like "george". However, the problem is that if one person can create an account named "george" then someone else can use the same process to register "george" for themselves as well and impersonate them. The only solution is a first-to-file paradigm, where the first registerer succeeds and the second fails - a problem perfectly suited for the Bitcoin consensus protocol.

Namecoin is the oldest, and most successful, implementation of a name registration system using such an idea. Colored coins - the purpose of colored coins is to serve as a protocol to allow people to create their own digital currencies - or, in the important trivial case of a currency with one unit, digital tokens, on the Bitcoin blockchain.

In the colored coins protocol, one "issues" a new currency by publicly assigning a color to a specific Bitcoin UTXO, and the protocol recursively defines the color of other UTXO to be the same as the color of the inputs that the transaction creating them spent some special rules apply in the case of mixed-color inputs.

This allows users to maintain wallets containing only UTXO of a specific color and send them around much like regular bitcoins, backtracking through the blockchain to determine the color of any UTXO that they receive. Metacoins - the idea behind a metacoin is to have a protocol that lives on top of Bitcoin, using Bitcoin transactions to store metacoin transactions but having a different state transition function, APPLY'.

This provides an easy mechanism for creating an arbitrary cryptocurrency protocol, potentially with advanced features that cannot be implemented inside of Bitcoin itself, but with a very low development cost since the complexities of mining and networking are already handled by the Bitcoin protocol. Metacoins have been used to implement some classes of financial contracts, name registration and decentralized exchange.

Thus, in general, there are two approaches toward building a consensus protocol: building an independent network, and building a protocol on top of Bitcoin. The former approach, while reasonably successful in the case of applications like Namecoin, is difficult to implement; each individual implementation needs to bootstrap an independent blockchain, as well as building and testing all of the necessary state transition and networking code.

Additionally, we predict that the set of applications for decentralized consensus technology will follow a power law distribution where the vast majority of applications would be too small to warrant their own blockchain, and we note that there exist large classes of decentralized applications, particularly decentralized autonomous organizations, that need to interact with each other. The Bitcoin-based approach, on the other hand, has the flaw that it does not inherit the simplified payment verification features of Bitcoin.

SPV works for Bitcoin because it can use blockchain depth as a proxy for validity; at some point, once the ancestors of a transaction go far enough back, it is safe to say that they were legitimately part of the state. Blockchain-based meta-protocols, on the other hand, cannot force the blockchain not to include transactions that are not valid within the context of their own protocols.

Hence, a fully secure SPV meta-protocol implementation would need to backward scan all the way to the beginning of the Bitcoin blockchain to determine whether or not certain transactions are valid. Currently, all "light" implementations of Bitcoin-based meta-protocols rely on a trusted server to provide the data, arguably a highly suboptimal result especially when one of the primary purposes of a cryptocurrency is to eliminate the need for trust.

Scripting Even without any extensions, the Bitcoin protocol actually does facilitate a weak version of a concept of "smart contracts". UTXO in Bitcoin can be owned not just by a public key, but also by a more complicated script expressed in a simple stack-based programming language. In this paradigm, a transaction spending that UTXO must provide data that satisfies the script. Indeed, even the basic public key ownership mechanism is implemented via a script: the script takes an elliptic curve signature as input, verifies it against the transaction and the address that owns the UTXO, and returns 1 if the verification is successful and 0 otherwise.

Other, more complicated, scripts exist for various additional use cases. For example, one can construct a script that requires signatures from two out of a given three private keys to validate "multisig" , a setup useful for corporate accounts, secure savings accounts and some merchant escrow situations. Scripts can also be used to pay bounties for solutions to computational problems, and one can even construct a script that says something like "this Bitcoin UTXO is yours if you can provide an SPV proof that you sent a Dogecoin transaction of this denomination to me", essentially allowing decentralized cross-cryptocurrency exchange.

However, the scripting language as implemented in Bitcoin has several important limitations: Lack of Turing-completeness - that is to say, while there is a large subset of computation that the Bitcoin scripting language supports, it does not nearly support everything.

The main category that is missing is loops. This is done to avoid infinite loops during transaction verification; theoretically it is a surmountable obstacle for script programmers, since any loop can be simulated by simply repeating the underlying code many times with an if statement, but it does lead to scripts that are very space-inefficient. For example, implementing an alternative elliptic curve signature algorithm would likely require repeated multiplication rounds all individually included in the code.

Value-blindness - there is no way for a UTXO script to provide fine-grained control over the amount that can be withdrawn. This would require an oracle to determine the value of 1 BTC in USD, but even then it is a massive improvement in terms of trust and infrastructure requirement over the fully centralized solutions that are available now.

However, because UTXO are all-or-nothing, the only way to achieve this is through the very inefficient hack of having many UTXO of varying denominations eg. Lack of state - UTXO can either be spent or unspent; there is no opportunity for multi-stage contracts or scripts which keep any other internal state beyond that.

This makes it hard to make multi-stage options contracts, decentralized exchange offers or two-stage cryptographic commitment protocols necessary for secure computational bounties. It also means that UTXO can only be used to build simple, one-off contracts and not more complex "stateful" contracts such as decentralized organizations, and makes meta-protocols difficult to implement. Binary state combined with value-blindness also mean that another important application, withdrawal limits, is impossible.

Blockchain-blindness - UTXO are blind to blockchain data such as the nonce, the timestamp and previous block hash. This severely limits applications in gambling, and several other categories, by depriving the scripting language of a potentially valuable source of randomness. Thus, we see three approaches to building advanced applications on top of cryptocurrency: building a new blockchain, using scripting on top of Bitcoin, and building a meta-protocol on top of Bitcoin.

Building a new blockchain allows for unlimited freedom in building a feature set, but at the cost of development time, bootstrapping effort and security. Using scripting is easy to implement and standardize, but is very limited in its capabilities, and meta-protocols, while easy, suffer from faults in scalability. With Ethereum, we intend to build an alternative framework that provides even larger gains in ease of development as well as even stronger light client properties, while at the same time allowing applications to share an economic environment and blockchain security.

Ethereum The intent of Ethereum is to create an alternative protocol for building decentralized applications, providing a different set of tradeoffs that we believe will be very useful for a large class of decentralized applications, with particular emphasis on situations where rapid development time, security for small and rarely used applications, and the ability of different applications to very efficiently interact, are important.

Ethereum does this by building what is essentially the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions. A bare-bones version of Namecoin can be written in two lines of code, and other protocols like currencies and reputation systems can be built in under twenty.

Smart contracts, cryptographic "boxes" that contain value and only unlock it if certain conditions are met, can also be built on top of the platform, with vastly more power than that offered by Bitcoin scripting because of the added powers of Turing-completeness, value-awareness, blockchain-awareness and state. Ethereum Accounts In Ethereum, the state is made up of objects called "accounts", with each account having a byte address and state transitions being direct transfers of value and information between accounts.

An Ethereum account contains four fields: The nonce, a counter used to make sure each transaction can only be processed once The account's current ether balance The account's contract code, if present The account's storage empty by default "Ether" is the main internal crypto-fuel of Ethereum, and is used to pay transaction fees. In general, there are two types of accounts: externally owned accounts, controlled by private keys, and contract accounts, controlled by their contract code.

An externally owned account has no code, and one can send messages from an externally owned account by creating and signing a transaction; in a contract account, every time the contract account receives a message its code activates, allowing it to read and write to internal storage and send other messages or create contracts in turn.

Messages and Transactions The term "transaction" is used in Ethereum to refer to the signed data package that stores a message to be sent from an externally owned account. Transactions contain: The recipient of the message A signature identifying the sender The amount of ether to transfer from the sender to the recipient An optional data field A STARTGAS value, representing the maximum number of computational steps the transaction execution is allowed to take A GASPRICE value, representing the fee the sender pays per computational step The first three are standard fields expected in any cryptocurrency.

The data field has no function by default, but the virtual machine has an opcode using which a contract can access the data; as an example use case, if a contract is functioning as an on-blockchain domain registration service, then it may wish to interpret the data being passed to it as containing two "fields", the first field being a domain to register and the second field being the IP address to register it to. The contract would read these values from the message data and appropriately place them in storage.

In order to prevent accidental or hostile infinite loops or other computational wastage in code, each transaction is required to set a limit to how many computational steps of code execution it can use. The fundamental unit of computation is "gas"; usually, a computational step costs 1 gas, but some operations cost higher amounts of gas because they are more computationally expensive, or increase the amount of data that must be stored as part of the state. There is also a fee of 5 gas for every byte in the transaction data.

The intent of the fee system is to require an attacker to pay proportionately for every resource that they consume, including computation, bandwidth and storage; hence, any transaction that leads to the network consuming a greater amount of any of these resources must have a gas fee roughly proportional to the increment.

Messages Contracts have the ability to send "messages" to other contracts. Messages are virtual objects that are never serialized and exist only in the Ethereum execution environment. A message contains: The sender of the message implicit The recipient of the message The amount of ether to transfer alongside the message An optional data field A STARTGAS value Essentially, a message is like a transaction, except it is produced by a contract and not an external actor.

A message is produced when a contract currently executing code executes the CALL opcode, which produces and executes a message. Like a transaction, a message leads to the recipient account running its code. Thus, contracts can have relationships with other contracts in exactly the same way that external actors can.

Note that the gas allowance assigned by a transaction or contract applies to the total gas consumed by that transaction and all sub-executions. For example, if an external actor A sends a transaction to B with gas, and B consumes gas before sending a message to C, and the internal execution of C consumes gas before returning, then B can spend another gas before running out of gas.

If not, return an error. Subtract the fee from the sender's account balance and increment the sender's nonce. If there is not enough balance to spend, return an error. Transfer the transaction value from the sender's account to the receiving account.

If the receiving account does not yet exist, create it. If the receiving account is a contract, run the contract's code either to completion or until the execution runs out of gas. If the value transfer failed because the sender did not have enough money, or the code execution ran out of gas, revert all state changes except the payment of the fees, and add the fees to the miner's account.

Otherwise, refund the fees for all remaining gas to the sender, and send the fees paid for gas consumed to the miner. For example, suppose that the contract's code is: if! Suppose that the contract's storage starts off empty, and a transaction is sent with 10 ether value, gas, 0.

The process for the state transition function in this case is as follows: Check that the transaction is valid and well formed. If it is, then subtract 2 ether from the sender's account. Subtract 10 more ether from the sender's account, and add it to the contract's account.

Run the code. In this case, this is simple: it checks if the contract's storage at index 2 is used, notices that it is not, and so it sets the storage at index 2 to the value CHARLIE. If there was no contract at the receiving end of the transaction, then the total transaction fee would simply be equal to the provided GASPRICE multiplied by the length of the transaction in bytes, and the data sent alongside the transaction would be irrelevant.

Note that messages work equivalently to transactions in terms of reverts: if a message execution runs out of gas, then that message's execution, and all other executions triggered by that execution, revert, but parent executions do not need to revert. This means that it is "safe" for a contract to call another contract, as if A calls B with G gas then A's execution is guaranteed to lose at most G gas. Finally, note that there is an opcode, CREATE, that creates a contract; its execution mechanics are generally similar to CALL, with the exception that the output of the execution determines the code of a newly created contract.

Code Execution The code in Ethereum contracts is written in a low-level, stack-based bytecode language, referred to as "Ethereum virtual machine code" or "EVM code". The code consists of a series of bytes, where each byte represents an operation. In general, code execution is an infinite loop that consists of repeatedly carrying out the operation at the current program counter which begins at zero and then incrementing the program counter by one, until the end of the code is reached or an error or STOP or RETURN instruction is detected.

Unlike stack and memory, which reset after computation ends, storage persists for the long term. The code can also access the value, sender and data of the incoming message, as well as block header data, and the code can also return a byte array of data as an output. The formal execution model of EVM code is surprisingly simple.

For example, ADD pops two items off the stack and pushes their sum, reduces gas by 1 and increments pc by 1, and SSTORE pushes the top two items off the stack and inserts the second item into the contract's storage at the index specified by the first item. Although there are many ways to optimize Ethereum virtual machine execution via just-in-time compilation, a basic implementation of Ethereum can be done in a few hundred lines of code.

Blockchain and Mining The Ethereum blockchain is in many ways similar to the Bitcoin blockchain, although it does have some differences. The main difference between Ethereum and Bitcoin with regard to the blockchain architecture is that, unlike Bitcoin, Ethereum blocks contain a copy of both the transaction list and the most recent state.

Aside from that, two other values, the block number and the difficulty, are also stored in the block. The basic block validation algorithm in Ethereum is as follows: Check if the previous block referenced exists and is valid. Check that the timestamp of the block is greater than that of the referenced previous block and less than 15 minutes into the future Check that the block number, difficulty, transaction root, uncle root and gas limit various low-level Ethereum-specific concepts are valid.

Check that the proof-of-work on the block is valid. Let TX be the block's transaction list, with n transactions. If it is, the block is valid; otherwise, it is not valid. The approach may seem highly inefficient at first glance, because it needs to store the entire state with each block, but in reality efficiency should be comparable to that of Bitcoin.

The reason is that the state is stored in the tree structure, and after every block only a small part of the tree needs to be changed. Thus, in general, between two adjacent blocks the vast majority of the tree should be the same, and therefore the data can be stored once and referenced twice using pointers ie. A special kind of tree known as a "Patricia tree" is used to accomplish this, including a modification to the Merkle tree concept that allows for nodes to be inserted and deleted, and not just changed, efficiently.

Additionally, because all of the state information is part of the last block, there is no need to store the entire blockchain history - a strategy which, if it could be applied to Bitcoin, can be calculated to provide x savings in space. A commonly asked question is "where" contract code is executed, in terms of physical hardware. This has a simple answer: the process of executing contract code is part of the definition of the state transition function, which is part of the block validation algorithm, so if a transaction is added into block B the code execution spawned by that transaction will be executed by all nodes, now and in the future, that download and validate block B.

Applications In general, there are three types of applications on top of Ethereum. The first category is financial applications, providing users with more powerful ways of managing and entering into contracts using their money. This includes sub-currencies, financial derivatives, hedging contracts, savings wallets, wills, and ultimately even some classes of full-scale employment contracts. The second category is semi-financial applications, where money is involved but there is also a heavy non-monetary side to what is being done; a perfect example is self-enforcing bounties for solutions to computational problems.

Finally, there are applications such as online voting and decentralized governance that are not financial at all. Token Systems On-blockchain token systems have many applications ranging from sub-currencies representing assets such as USD or gold to company stocks, individual tokens representing smart property, secure unforgeable coupons, and even token systems with no ties to conventional value at all, used as point systems for incentivization.

Token systems are surprisingly easy to implement in Ethereum. The key point to understand is that all a currency, or token system, fundamentally is, is a database with one operation: subtract X units from A and give X units to B, with the proviso that i A had at least X units before the transaction and 2 the transaction is approved by A. All that it takes to implement a token system is to implement this logic into a contract.

The basic code for implementing a token system in Serpent looks as follows: def send to, value : if self. A few extra lines of code need to be added to provide for the initial step of distributing the currency units in the first place and a few other edge cases, and ideally a function would be added to let other contracts query for the balance of an address.

But that's all there is to it. Theoretically, Ethereum-based token systems acting as sub-currencies can potentially include another important feature that on-chain Bitcoin-based meta-currencies lack: the ability to pay transaction fees directly in that currency. The way this would be implemented is that the contract would maintain an ether balance with which it would refund ether used to pay fees to the sender, and it would refill this balance by collecting the internal currency units that it takes in fees and reselling them in a constant running auction.

Users would thus need to "activate" their accounts with ether, but once the ether is there it would be reusable because the contract would refund it each time. Financial derivatives and Stable-Value Currencies Financial derivatives are the most common application of a "smart contract", and one of the simplest to implement in code. The simplest way to do this is through a "data feed" contract maintained by a specific party eg. NASDAQ designed so that that party has the ability to update the contract as needed, and providing an interface that allows other contracts to send a message to that contract and get back a response that provides the price.

Given that critical ingredient, the hedging contract would look as follows: Wait for party A to input ether. Wait for party B to input ether. Such a contract would have significant potential in crypto-commerce.

Up until now, the most commonly proposed solution has been issuer-backed assets; the idea is that an issuer creates a sub-currency in which they have the right to issue and revoke units, and provide one unit of the currency to anyone who provides them offline with one unit of a specified underlying asset eg.

The issuer then promises to provide one unit of the underlying asset to anyone who sends back one unit of the crypto-asset. This mechanism allows any non-cryptographic asset to be "uplifted" into a cryptographic asset, provided that the issuer can be trusted. In practice, however, issuers are not always trustworthy, and in some cases the banking infrastructure is too weak, or too hostile, for such services to exist.

Financial derivatives provide an alternative. Here, instead of a single issuer providing the funds to back up an asset, a decentralized market of speculators, betting that the price of a cryptographic reference asset eg. ETH will go up, plays that role.

Unlike issuers, speculators have no option to default on their side of the bargain because the hedging contract holds their funds in escrow. Whenever a node receives a block, it checks the validity of the block and of all of the transactions therein and, if it finds the block to be valid, adds it to its blockchain and executes all of those transactions.

Since block creation and broadcasting are permissionless, a node may receive multiple blocks competing to be the successor to a particular block. The node keeps track of all of the valid chains that result from this and regularly drops the shortest one: According to the Ethereum protocol, the longest chain at any given time is to be considered the canonical one. Ether Ether ETH is the cryptocurrency generated in accordance with the Ethereum protocol as a reward to miners in a proof-of-work system for adding blocks to the blockchain.

This is known as the block reward. Additionally, ether is the only currency accepted by the protocol as payment for a transaction fee, which also goes to the miner. The block reward together with the transaction fees provide the incentive to miners to keep the blockchain growing i.

Therefore, ETH is fundamental to the operation of the network. Ether may be "sent" from one account to another via a transaction, which simply entails subtracting the amount to be sent from the sender's balance and adding the same amount to the recipient's balance.

Both types have an ETH balance, may send ETH to any account, may call any public function of a contract or create a new contract, and are identified on the blockchain and in the state by an account address. For a transaction to be valid, it must be signed using the sending account's private key, the character hexadecimal string from which the account's address is derived. Importantly, this algorithm allows one to derive the signer's address from the signature without knowing the private key.

Contracts are the only type of account that has associated code a set of functions and variable declarations and contract storage the values of the variables at any given time. A contract function may take arguments and may have return values. In addition to control flow statements, the body of a function may include instructions to send ETH, read from and write to the contract's storage, create temporary storage memory that vanishes at the end of the function, perform arithmetic and hashing operations, call the contract's own functions, call public functions of other contracts, create new contracts, and query information about the current transaction or the blockchain.

In hexadecimal, two digits represent a byte, and so addresses contain 40 hexadecimal digits, e. Contract addresses are in the same format, however, they are determined by sender and creation transaction nonce. It includes a stack , memory, and the persistent storage for all Ethereum accounts including contract code.

The EVM is stack-based, in that most instructions pop operands from the stack and push the result to the stack. The EVM is designed to be deterministic on a wide variety of hardware and operating systems , so that given a pre-transaction state and a transaction, each node produces the same post-transaction state, thereby enabling network consensus. Each type of operation which may be performed by the EVM is hardcoded with a certain gas cost, which is intended to be roughly proportional to the amount of resources computation and storage a node must expend to perform that operation.

When a sender creates a transaction, the sender must specify a gas limit and gas price. The gas limit is the maximum amount of gas the sender is willing to use in the transaction, and the gas price is the amount of ETH the sender wishes to pay to the miner per unit of gas used. The higher the gas price, the more incentive a miner has to include the transaction in their block, and thus the quicker the transaction will be included in the blockchain. The sender buys the full amount of gas i.

If at any point the transaction does not have enough gas to perform the next operation, the transaction is reverted but the sender is still only refunded for the unused gas. Difficulty bomb The difficulty bomb is an Ethereum protocol feature that causes the difficulty of mining a block to increase exponentially over time after a certain block is reached, with the intended purpose being to incentivize upgrades to the protocol and prevent miners from having too much control over upgrades.

As the protocol is upgraded, the difficulty bomb is typically pushed further out in time. The protocol has included a difficulty bomb from the beginning, and the bomb has been pushed back several times.

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The fundamental unit of computation is "gas"; usually, a computational step costs 1 gas, but some operations cost higher amounts of gas because they are more computationally expensive, or increase the amount of data that must be stored as part of the state. There is also a fee of 5 gas for every byte in the transaction data.

The intent of the fee system is to require an attacker to pay proportionately for every resource that they consume, including computation, bandwidth and storage; hence, any transaction that leads to the network consuming a greater amount of any of these resources must have a gas fee roughly proportional to the increment. Messages Contracts have the ability to send "messages" to other contracts. Messages are virtual objects that are never serialized and exist only in the Ethereum execution environment.

A message contains: The sender of the message implicit The recipient of the message The amount of ether to transfer alongside the message An optional data field A STARTGAS value Essentially, a message is like a transaction, except it is produced by a contract and not an external actor. A message is produced when a contract currently executing code executes the CALL opcode, which produces and executes a message.

Like a transaction, a message leads to the recipient account running its code. Thus, contracts can have relationships with other contracts in exactly the same way that external actors can. Note that the gas allowance assigned by a transaction or contract applies to the total gas consumed by that transaction and all sub-executions. For example, if an external actor A sends a transaction to B with gas, and B consumes gas before sending a message to C, and the internal execution of C consumes gas before returning, then B can spend another gas before running out of gas.

If not, return an error. Subtract the fee from the sender's account balance and increment the sender's nonce. If there is not enough balance to spend, return an error. Transfer the transaction value from the sender's account to the receiving account. If the receiving account does not yet exist, create it. If the receiving account is a contract, run the contract's code either to completion or until the execution runs out of gas.

If the value transfer failed because the sender did not have enough money, or the code execution ran out of gas, revert all state changes except the payment of the fees, and add the fees to the miner's account.

Otherwise, refund the fees for all remaining gas to the sender, and send the fees paid for gas consumed to the miner. For example, suppose that the contract's code is: if! Suppose that the contract's storage starts off empty, and a transaction is sent with 10 ether value, gas, 0. The process for the state transition function in this case is as follows: Check that the transaction is valid and well formed.

If it is, then subtract 2 ether from the sender's account. Subtract 10 more ether from the sender's account, and add it to the contract's account. Run the code. In this case, this is simple: it checks if the contract's storage at index 2 is used, notices that it is not, and so it sets the storage at index 2 to the value CHARLIE. If there was no contract at the receiving end of the transaction, then the total transaction fee would simply be equal to the provided GASPRICE multiplied by the length of the transaction in bytes, and the data sent alongside the transaction would be irrelevant.

Note that messages work equivalently to transactions in terms of reverts: if a message execution runs out of gas, then that message's execution, and all other executions triggered by that execution, revert, but parent executions do not need to revert.

This means that it is "safe" for a contract to call another contract, as if A calls B with G gas then A's execution is guaranteed to lose at most G gas. Finally, note that there is an opcode, CREATE, that creates a contract; its execution mechanics are generally similar to CALL, with the exception that the output of the execution determines the code of a newly created contract.

Code Execution The code in Ethereum contracts is written in a low-level, stack-based bytecode language, referred to as "Ethereum virtual machine code" or "EVM code". The code consists of a series of bytes, where each byte represents an operation. In general, code execution is an infinite loop that consists of repeatedly carrying out the operation at the current program counter which begins at zero and then incrementing the program counter by one, until the end of the code is reached or an error or STOP or RETURN instruction is detected.

Unlike stack and memory, which reset after computation ends, storage persists for the long term. The code can also access the value, sender and data of the incoming message, as well as block header data, and the code can also return a byte array of data as an output. The formal execution model of EVM code is surprisingly simple. For example, ADD pops two items off the stack and pushes their sum, reduces gas by 1 and increments pc by 1, and SSTORE pushes the top two items off the stack and inserts the second item into the contract's storage at the index specified by the first item.

Although there are many ways to optimize Ethereum virtual machine execution via just-in-time compilation, a basic implementation of Ethereum can be done in a few hundred lines of code. Blockchain and Mining The Ethereum blockchain is in many ways similar to the Bitcoin blockchain, although it does have some differences.

The main difference between Ethereum and Bitcoin with regard to the blockchain architecture is that, unlike Bitcoin, Ethereum blocks contain a copy of both the transaction list and the most recent state. Aside from that, two other values, the block number and the difficulty, are also stored in the block.

The basic block validation algorithm in Ethereum is as follows: Check if the previous block referenced exists and is valid. Check that the timestamp of the block is greater than that of the referenced previous block and less than 15 minutes into the future Check that the block number, difficulty, transaction root, uncle root and gas limit various low-level Ethereum-specific concepts are valid.

Check that the proof-of-work on the block is valid. Let TX be the block's transaction list, with n transactions. If it is, the block is valid; otherwise, it is not valid. The approach may seem highly inefficient at first glance, because it needs to store the entire state with each block, but in reality efficiency should be comparable to that of Bitcoin.

The reason is that the state is stored in the tree structure, and after every block only a small part of the tree needs to be changed. Thus, in general, between two adjacent blocks the vast majority of the tree should be the same, and therefore the data can be stored once and referenced twice using pointers ie. A special kind of tree known as a "Patricia tree" is used to accomplish this, including a modification to the Merkle tree concept that allows for nodes to be inserted and deleted, and not just changed, efficiently.

Additionally, because all of the state information is part of the last block, there is no need to store the entire blockchain history - a strategy which, if it could be applied to Bitcoin, can be calculated to provide x savings in space. A commonly asked question is "where" contract code is executed, in terms of physical hardware.

This has a simple answer: the process of executing contract code is part of the definition of the state transition function, which is part of the block validation algorithm, so if a transaction is added into block B the code execution spawned by that transaction will be executed by all nodes, now and in the future, that download and validate block B.

Applications In general, there are three types of applications on top of Ethereum. The first category is financial applications, providing users with more powerful ways of managing and entering into contracts using their money. This includes sub-currencies, financial derivatives, hedging contracts, savings wallets, wills, and ultimately even some classes of full-scale employment contracts.

The second category is semi-financial applications, where money is involved but there is also a heavy non-monetary side to what is being done; a perfect example is self-enforcing bounties for solutions to computational problems. Finally, there are applications such as online voting and decentralized governance that are not financial at all. Token Systems On-blockchain token systems have many applications ranging from sub-currencies representing assets such as USD or gold to company stocks, individual tokens representing smart property, secure unforgeable coupons, and even token systems with no ties to conventional value at all, used as point systems for incentivization.

Token systems are surprisingly easy to implement in Ethereum. The key point to understand is that all a currency, or token system, fundamentally is, is a database with one operation: subtract X units from A and give X units to B, with the proviso that i A had at least X units before the transaction and 2 the transaction is approved by A.

All that it takes to implement a token system is to implement this logic into a contract. The basic code for implementing a token system in Serpent looks as follows: def send to, value : if self. A few extra lines of code need to be added to provide for the initial step of distributing the currency units in the first place and a few other edge cases, and ideally a function would be added to let other contracts query for the balance of an address. But that's all there is to it. Theoretically, Ethereum-based token systems acting as sub-currencies can potentially include another important feature that on-chain Bitcoin-based meta-currencies lack: the ability to pay transaction fees directly in that currency.

The way this would be implemented is that the contract would maintain an ether balance with which it would refund ether used to pay fees to the sender, and it would refill this balance by collecting the internal currency units that it takes in fees and reselling them in a constant running auction. Users would thus need to "activate" their accounts with ether, but once the ether is there it would be reusable because the contract would refund it each time.

Financial derivatives and Stable-Value Currencies Financial derivatives are the most common application of a "smart contract", and one of the simplest to implement in code. The simplest way to do this is through a "data feed" contract maintained by a specific party eg. NASDAQ designed so that that party has the ability to update the contract as needed, and providing an interface that allows other contracts to send a message to that contract and get back a response that provides the price.

Given that critical ingredient, the hedging contract would look as follows: Wait for party A to input ether. Wait for party B to input ether. Such a contract would have significant potential in crypto-commerce. Up until now, the most commonly proposed solution has been issuer-backed assets; the idea is that an issuer creates a sub-currency in which they have the right to issue and revoke units, and provide one unit of the currency to anyone who provides them offline with one unit of a specified underlying asset eg.

The issuer then promises to provide one unit of the underlying asset to anyone who sends back one unit of the crypto-asset. This mechanism allows any non-cryptographic asset to be "uplifted" into a cryptographic asset, provided that the issuer can be trusted. In practice, however, issuers are not always trustworthy, and in some cases the banking infrastructure is too weak, or too hostile, for such services to exist.

Financial derivatives provide an alternative. Here, instead of a single issuer providing the funds to back up an asset, a decentralized market of speculators, betting that the price of a cryptographic reference asset eg. ETH will go up, plays that role. Unlike issuers, speculators have no option to default on their side of the bargain because the hedging contract holds their funds in escrow.

Note that this approach is not fully decentralized, because a trusted source is still needed to provide the price ticker, although arguably even still this is a massive improvement in terms of reducing infrastructure requirements unlike being an issuer, issuing a price feed requires no licenses and can likely be categorized as free speech and reducing the potential for fraud. Identity and Reputation Systems The earliest alternative cryptocurrency of all, Namecoin , attempted to use a Bitcoin-like blockchain to provide a name registration system, where users can register their names in a public database alongside other data.

The major cited use case is for a DNS system, mapping domain names like "bitcoin. Other use cases include email authentication and potentially more advanced reputation systems. Here is the basic contract to provide a Namecoin-like name registration system on Ethereum: def register name, value : if! Anyone can register a name with some value, and that registration then sticks forever. A more sophisticated name registration contract will also have a "function clause" allowing other contracts to query it, as well as a mechanism for the "owner" ie.

One can even add reputation and web-of-trust functionality on top. Decentralized File Storage Over the past few years, there have emerged a number of popular online file storage startups, the most prominent being Dropbox, seeking to allow users to upload a backup of their hard drive and have the service store the backup and allow the user to access it in exchange for a monthly fee. However, at this point the file storage market is at times relatively inefficient; a cursory look at various existing solutions shows that, particularly at the "uncanny valley" GB level at which neither free quotas nor enterprise-level discounts kick in, monthly prices for mainstream file storage costs are such that you are paying for more than the cost of the entire hard drive in a single month.

Ethereum contracts can allow for the development of a decentralized file storage ecosystem, where individual users can earn small quantities of money by renting out their own hard drives and unused space can be used to further drive down the costs of file storage.

The key underpinning piece of such a device would be what we have termed the "decentralized Dropbox contract". This contract works as follows. First, one splits the desired data up into blocks, encrypting each block for privacy, and builds a Merkle tree out of it.

One then makes a contract with the rule that, every N blocks, the contract would pick a random index in the Merkle tree using the previous block hash, accessible from contract code, as a source of randomness , and give X ether to the first entity to supply a transaction with a simplified payment verification-like proof of ownership of the block at that particular index in the tree. When a user wants to re-download their file, they can use a micropayment channel protocol eg. An important feature of the protocol is that, although it may seem like one is trusting many random nodes not to decide to forget the file, one can reduce that risk down to near-zero by splitting the file into many pieces via secret sharing, and watching the contracts to see each piece is still in some node's possession.

If a contract is still paying out money, that provides a cryptographic proof that someone out there is still storing the file. The members would collectively decide on how the organization should allocate its funds. Methods for allocating a DAO's funds could range from bounties, salaries to even more exotic mechanisms such as an internal currency to reward work. This essentially replicates the legal trappings of a traditional company or nonprofit but using only cryptographic blockchain technology for enforcement.

The requirement that one person can only have one membership would then need to be enforced collectively by the group. A general outline for how to code a DAO is as follows. The simplest design is simply a piece of self-modifying code that changes if two thirds of members agree on a change. Although code is theoretically immutable, one can easily get around this and have de-facto mutability by having chunks of the code in separate contracts, and having the address of which contracts to call stored in the modifiable storage.

In a simple implementation of such a DAO contract, there would be three transaction types, distinguished by the data provided in the transaction: [0,i,K,V] to register a proposal with index i to change the address at storage index K to value V [1,i] to register a vote in favor of proposal i [2,i] to finalize proposal i if enough votes have been made The contract would then have clauses for each of these.

It would maintain a record of all open storage changes, along with a list of who voted for them. It would also have a list of all members. When any storage change gets to two thirds of members voting for it, a finalizing transaction could execute the change. A more sophisticated skeleton would also have built-in voting ability for features like sending a transaction, adding members and removing members, and may even provide for Liquid Democracy -style vote delegation ie.

This design would allow the DAO to grow organically as a decentralized community, allowing people to eventually delegate the task of filtering out who is a member to specialists, although unlike in the "current system" specialists can easily pop in and out of existence over time as individual community members change their alignments.

An alternative model is for a decentralized corporation, where any account can have zero or more shares, and two thirds of the shares are required to make a decision. A complete skeleton would involve asset management functionality, the ability to make an offer to buy or sell shares, and the ability to accept offers preferably with an order-matching mechanism inside the contract. Delegation would also exist Liquid Democracy-style, generalizing the concept of a "board of directors".

Further Applications 1. Savings wallets. Suppose that Alice wants to keep her funds safe, but is worried that she will lose or someone will hack her private key. Alice and Bob together can withdraw anything. If Alice's key gets hacked, she runs to Bob to move the funds to a new contract. If she loses her key, Bob will get the funds out eventually.

If Bob turns out to be malicious, then she can turn off his ability to withdraw. Crop insurance. One can easily make a financial derivatives contract but using a data feed of the weather instead of any price index. If a farmer in Iowa purchases a derivative that pays out inversely based on the precipitation in Iowa, then if there is a drought, the farmer will automatically receive money and if there is enough rain the farmer will be happy because their crops would do well.

This can be expanded to natural disaster insurance generally. A decentralized data feed. For financial contracts for difference, it may actually be possible to decentralize the data feed via a protocol called " SchellingCoin ". SchellingCoin basically works as follows: N parties all put into the system the value of a given datum eg.

Everyone has the incentive to provide the answer that everyone else will provide, and the only value that a large number of players can realistically agree on is the obvious default: the truth. Smart multisignature escrow.

Bitcoin allows multisignature transaction contracts where, for example, three out of a given five keys can spend the funds. Additionally, Ethereum multisig is asynchronous - two parties can register their signatures on the blockchain at different times and the last signature will automatically send the transaction. Cloud computing. The EVM technology can also be used to create a verifiable computing environment, allowing users to ask others to carry out computations and then optionally ask for proofs that computations at certain randomly selected checkpoints were done correctly.

This allows for the creation of a cloud computing market where any user can participate with their desktop, laptop or specialized server, and spot-checking together with security deposits can be used to ensure that the system is trustworthy ie. Although such a system may not be suitable for all tasks; tasks that require a high level of inter-process communication, for example, cannot easily be done on a large cloud of nodes.

Other tasks, however, are much easier to parallelize; projects like SETI home, folding home and genetic algorithms can easily be implemented on top of such a platform. Peer-to-peer gambling. Any number of peer-to-peer gambling protocols, such as Frank Stajano and Richard Clayton's Cyberdice , can be implemented on the Ethereum blockchain. The simplest gambling protocol is actually simply a contract for difference on the next block hash, and more advanced protocols can be built up from there, creating gambling services with near-zero fees that have no ability to cheat.

Prediction markets. Provided an oracle or SchellingCoin, prediction markets are also easy to implement, and prediction markets together with SchellingCoin may prove to be the first mainstream application of futarchy as a governance protocol for decentralized organizations. On-chain decentralized marketplaces, using the identity and reputation system as a base. The motivation behind GHOST is that blockchains with fast confirmation times currently suffer from reduced security due to a high stale rate - because blocks take a certain time to propagate through the network, if miner A mines a block and then miner B happens to mine another block before miner A's block propagates to B, miner B's block will end up wasted and will not contribute to network security.

Thus, if the block interval is short enough for the stale rate to be high, A will be substantially more efficient simply by virtue of its size. With these two effects combined, blockchains which produce blocks quickly are very likely to lead to one mining pool having a large enough percentage of the network hashpower to have de facto control over the mining process.

As described by Sompolinsky and Zohar, GHOST solves the first issue of network security loss by including stale blocks in the calculation of which chain is the "longest"; that is to say, not just the parent and further ancestors of a block, but also the stale descendants of the block's ancestor in Ethereum jargon, "uncles" are added to the calculation of which block has the largest total proof-of-work backing it.

To solve the second issue of centralization bias, we go beyond the protocol described by Sompolinsky and Zohar, and also provide block rewards to stales: a stale block receives Transaction fees, however, are not awarded to uncles. It cannot be an ancestor of B An uncle must be a valid block header, but does not need to be a previously verified or even valid block An uncle must be different from all uncles included in previous blocks and all other uncles included in the same block non-double-inclusion For every uncle U in block B, the miner of B gets an additional 3.

This limited version of GHOST, with uncles includable only up to 7 generations, was used for two reasons. First, unlimited GHOST would include too many complications into the calculation of which uncles for a given block are valid. Second, unlimited GHOST with compensation as used in Ethereum removes the incentive for a miner to mine on the main chain and not the chain of a public attacker.

Fees Because every transaction published into the blockchain imposes on the network the cost of needing to download and verify it, there is a need for some regulatory mechanism, typically involving transaction fees, to prevent abuse. The default approach, used in Bitcoin, is to have purely voluntary fees, relying on miners to act as the gatekeepers and set dynamic minimums.

This approach has been received very favorably in the Bitcoin community particularly because it is "market-based", allowing supply and demand between miners and transaction senders determine the price. The problem with this line of reasoning is, however, that transaction processing is not a market; although it is intuitively attractive to construe transaction processing as a service that the miner is offering to the sender, in reality every transaction that a miner includes will need to be processed by every node in the network, so the vast majority of the cost of transaction processing is borne by third parties and not the miner that is making the decision of whether or not to include it.

Hence, tragedy-of-the-commons problems are very likely to occur. However, as it turns out this flaw in the market-based mechanism, when given a particular inaccurate simplifying assumption, magically cancels itself out. The argument is as follows. Suppose that: A transaction leads to k operations, offering the reward kR to any miner that includes it where R is set by the sender and k and R are roughly visible to the miner beforehand. An operation has a processing cost of C to any node ie. A miner would be willing to process a transaction if the expected reward is greater than the cost.

Note that R is the per-operation fee provided by the sender, and is thus a lower bound on the benefit that the sender derives from the transaction, and NC is the cost to the entire network together of processing an operation.

Hence, miners have the incentive to include only those transactions for which the total utilitarian benefit exceeds the cost. However, there are several important deviations from those assumptions in reality: The miner does pay a higher cost to process the transaction than the other verifying nodes, since the extra verification time delays block propagation and thus increases the chance the block will become a stale. There do exist nonmining full nodes. For a transaction to be valid, it must be signed using the sending account's private key, the character hexadecimal string from which the account's address is derived.

Importantly, this algorithm allows one to derive the signer's address from the signature without knowing the private key. Contracts are the only type of account that has associated code a set of functions and variable declarations and contract storage the values of the variables at any given time.

A contract function may take arguments and may have return values. In addition to control flow statements, the body of a function may include instructions to send ETH, read from and write to the contract's storage, create temporary storage memory that vanishes at the end of the function, perform arithmetic and hashing operations, call the contract's own functions, call public functions of other contracts, create new contracts, and query information about the current transaction or the blockchain.

In hexadecimal, two digits represent a byte, and so addresses contain 40 hexadecimal digits, e. Contract addresses are in the same format, however, they are determined by sender and creation transaction nonce. It includes a stack , memory, and the persistent storage for all Ethereum accounts including contract code. The EVM is stack-based, in that most instructions pop operands from the stack and push the result to the stack. The EVM is designed to be deterministic on a wide variety of hardware and operating systems , so that given a pre-transaction state and a transaction, each node produces the same post-transaction state, thereby enabling network consensus.

Each type of operation which may be performed by the EVM is hardcoded with a certain gas cost, which is intended to be roughly proportional to the amount of resources computation and storage a node must expend to perform that operation. When a sender creates a transaction, the sender must specify a gas limit and gas price.

The gas limit is the maximum amount of gas the sender is willing to use in the transaction, and the gas price is the amount of ETH the sender wishes to pay to the miner per unit of gas used. The higher the gas price, the more incentive a miner has to include the transaction in their block, and thus the quicker the transaction will be included in the blockchain.

The sender buys the full amount of gas i. If at any point the transaction does not have enough gas to perform the next operation, the transaction is reverted but the sender is still only refunded for the unused gas. Difficulty bomb The difficulty bomb is an Ethereum protocol feature that causes the difficulty of mining a block to increase exponentially over time after a certain block is reached, with the intended purpose being to incentivize upgrades to the protocol and prevent miners from having too much control over upgrades.

As the protocol is upgraded, the difficulty bomb is typically pushed further out in time. The protocol has included a difficulty bomb from the beginning, and the bomb has been pushed back several times. Comparison to Bitcoin Additionally, bitcoin has a fixed supply of 21,, coins, whereas ether has no supply cap.

Contract source code Ethereum's smart contracts are written in high-level programming languages and then compiled down to EVM bytecode and deployed to the Ethereum blockchain. They can be written in Solidity a language library with similarities to C and JavaScript , Serpent similar to Python , but deprecated , Yul an intermediate language that can compile to various different backends—EVM 1.

There was also[ when? One issue related to using smart contracts on a public blockchain is that bugs, including security holes, are visible to all but cannot be fixed quickly. The standard provides functions that include the transfer of tokens from one account to another, getting the current token balance of an account, and getting the total supply of the token available on the network. Numerous cryptocurrencies have launched as ERC tokens and have been distributed through initial coin offerings.

The idea is to satisfy regulators who need seamless access to financial goings-on while protecting the privacy of parties that don't wish to reveal their identities nor the details of their transactions to the general public. As of January [update] , the Ethereum protocol could process about 25 transactions per second.

In comparison, the Visa payment platform processes 45, payments per second.