ETH

Most recent update: [June 26, 2023]

What Is Ethereum? 

Ethereum is the second-largest and second most popular cryptocurrency after Bitcoin. Founded in 2015, Ethereum is described as a blockchain-based, open-source, and decentralized platform, the Ethereum blockchain supports ETH, the second-largest cryptocurrency by market capitalization. Ethereum functions just like other cryptocurrencies and is used by users of the blockchain to send or receive value without intermediary involvement, however, Ethereum is more than just a means to send or receive value.  

Ethereum also supports decentralized applications (dApps), smart contracts and is at the forefront of DeFi, allowing developers to create, test and deploy smart contracts on the Ethereum blockchain. The protocol ensures decentralization through the use of nodes spread around the world, these nodes replace central servers, and it also ensures that the Ethereum protocol is always online.  

Key Highlights in the History of Ethereum 

• November 2013 - Vitalik Buterin publishes the Ethereum whitepaper.  
• January 2014 - Ethereum’s founders publicly announce the development of the Ethereum platform. The development team consisted of Vitalik Buterin, Anthony Di Lorio, Mihai Alisie, and Charles Hoskinson.  
• August 2014 - Ethereum Concludes their ICO, having raised a total of $18.4 Million  

• May 2015 - Ethereum releases the “Olympic” Testnet  
• July 2015 - Ethereum releases Frontier, the first stage of Ethereum’s development  
• March 2016 - Ethereum releases its first stable release. Homestead.  
• June 2016 - The DAO Attack results in $40 Million worth of Ether is stolen.  
• October 2016 - Ethereum undergoes a hard fork after disagreements in the aftermath of the DAO attack. Ethereum Classic is created.  

• October 2017 - Ethereum initiates the Metropolis Byzantium hard fork.  
• February 2019 - Ethereum initiates the Metropolis Constantinople hard fork.  
• September 2022 – Ethereum migrates to Proof-of-Stake, thereby splitting the network into EthereumPoW, which relies on Proof-of-Work, and Ethereum, which relies on Proof-of-Stake.

The Ethereum Virtual Machine 

The Ethereum Virtual Machine or EVM is a quasi-Turing complete machine, a machine is considered Turing complete when it is mathematically able to solve any problem presented to it. Gas limits the EVM’s calculations which makes the EVM only quasi-Turing, It is at the heart of Ethereum’s ecosystem, handling the deployment and the execution of smart contracts. While simple transactions can function just fine without the EVM, all other operations require a state update by the Ethereum Virtual Machine. It contains millions of executable objects, with each object having its data store, the EVM also consists of several data components.  

• Permanent storage that is part of the Ethereum State  
• Volatile memory that is initialized to zero  
• An immutable program code ROM 

Ethereum Smart Contracts 

Ethereum smart contracts run the Ethereum ecosystem. Smart contracts are lines of code that reside on the Ethereum blockchain and make it possible to set certain conditions under which a transaction or any other action can automatically occur when the pre-defined conditions coded into the smart contract are fulfilled. Smart contracts cut out the middlemen or intermediaries that are usually present during an agreement or a transaction. These contracts work just like how a standard contract would, except without the presence of an intermediary.  

The Ethereum Blockchain 

The Ethereum blockchain stores the history and details of all the transactions and smart contracts on the Ethereum network, acting as a public ledger. Anyone who wishes to verify details can do so by accessing the blockchain. Volunteers worldwide have a copy of the Ethereum blockchain stored with them, ensuring the decentralization of Ethereum, these volunteers are also known as nodes. When a smart contract is initiated, this network of nodes, which comprises thousands of computers, ensures that the user follows the rules while executing the smart contract. Ethereum nodes also store the state of each smart contract, ensuring that all information, such as the smart contract code, user balance, etc., are all up to date.  

Proof-of-Stake 

Ever since September 15^th of 2022, Ethereum uses a Proof-of-Stake consensus mechanism to validate transactions, which requires validators to stake some of their ETH tokens. To become a validator on the Ethereum network, an entity must stake 32 ETH at minimum, which enhances the security of the network due to the expenses required to obtain 32 ETH. If a validator exhibits a behavior that is contrary to the wishes of the community at large, the validator could risk the destruction of their staked ETH. Unlike the previous version of Ethereum, EthereumPoW, the former does not require mining. As such, the electricity consumption of Ethereum is substantially less than its Proof-of-Work predecessor, and validators are not rewarded with ETH for their participation.

Ethereum works on a blockchain which is a decentralized public ledger that stores all transactions and processes that have taken place on the Ethereum blockchain, since the blockchain is decentralized, it is free of any central authority influencing it. Instead, it is maintained by the community. The blockchain uses cryptography to secure transactions, while validators process transactions and add them to the blockchain. 

Ethereum runs a computer known as the Ethereum Virtual Machine, with every node on the network keeping a copy of the EVM. All transactions are stored within blocks on the blockchain, with validators verifying the blocks before adding them to the blockchain. Each transaction has a fee attached to it, known as “gas” fees which have to be paid by the user to initiate a transaction.  

History of Ethereum 

Ethereum has become one of the most recognizable platforms in the crypto space and is the second-largest cryptocurrency by market capitalization, second only to Bitcoin. The platform was founded in 2015 by Vitalik Buterin, however, it was first described in 2013 when the Ethereum whitepaper was launched. Ethereum’s ICO concluded in 2014 with the platform raising $18.4 million during their ICO. In September of 2022, Ethereum underwent a major change in the way its blockchain operates, switching from Proof-of-Work to Proof-of-Stake.

Ethereum has eight co-founders in total, with Vitalik Buterin and Gavin Wood the two most essential co-founders. Vitalik Buterin is the most well-known of the founders, and it was he who authored the Ethereum whitepaper. Buterin is still actively involved with Ethereum. After Buterin, Gavin Wood is the second most important individual in Ethereum. It was Gavin who coded the first implementation of Ethereum in C++, he was also behind proposing Solidity as Ethereum’s programming language and was the first CTO of the Ethereum foundation. Wood later moved on to the Web3 Foundation.  

Other co-founders of Ethereum are Anthony Di Lorio, Charles Hoskinson, who later found Cardano, Mihai Elisie, Joseph Lubin, and Amir Chetrit.  

What Makes Ethereum Unique? 

Ethereum has been at the forefront of creating a blockchain-based smart contract platform. Smart contracts are programs that are automatically executed when pre-defined criteria that have been coded in them are met, fulfilling a contract between two parties. Smart contracts remove the need for an intermediary reducing transaction costs and transaction reliability. Ethereum can execute smart contracts on the blockchain, further enhancing the benefits of the contracts. Apart from smart contracts, Ethereum can also use its ERC-20 compatibility standard to host other cryptocurrencies on its blockchain, this interoperability has been the most common use of Ethereum.  

• Smart Contracts - As mentioned earlier, smart contracts allow an agreement between two parties without the need for an intermediary. Smart contracts are immutable, which means that once they are executed, no party can alter them. The contracts are free of any interruptions, and any third party involvement, leaving the parties involved in the agreement or transaction in complete control. They also offer better security by keeping all information only between the parties involved in the transaction.  
• Ethereum Virtual Machine (EVM) - The Ethereum Virtual Machine is at the heart of Ethereum’s ecosystem, allowing for the deployment and execution of smart contracts. Smart contract executions need a state update by the EVM.  

Ethereum also guarantees decentralization and anonymity when users carry out their transactions.  

How Does Ethereum Work? 

Ethereum is similar to Bitcoin in its functions, existing on thousands of computers around the world. It relies on users known as “nodes” instead of relying on a centralized server. This makes Ethereum highly decentralized and nearly immune to any attack. It also ensures that the network is online 24/7. Even if part of the network went down, it would not affect the network because there would be thousands of other nodes running the network. At the heart of the Ethereum network is the Ethereum Virtual Machine. Every node on the Ethereum network maintains a copy of the EVM. All copies of the EVM must be updated for transactions on the network to be verified.  

Transactions on the network are stored in blocks, and validators must reach consensus for all blocks before adding them to the Ethereum blockchain. The Ethereum blockchain uses a Proof-of-Stake consensus mechanism, which means validators have to stake ETH tokens in order to process transactions on the network.

Ethereum Supply Model 

As of July 2021, there are more than 116,878,144.69 ETH in circulation. 72 million ETH were issued in Ethereum’s genesis block, out of which 60 million were allotted to the contributors of the ICO held in 2014, and the remaining 12 million were issued to the development fund. The ETH generated after this number was all generated through block rewards given to miners on the Ethereum network at the time when Ethereum still used Proof-of-Work. In 2015, the reward was 5 ETH, which was lowered to 3 ETH in 2017, and ultimately rewards were phased out upon the switch to Proof-of-Stake

Unlike Bitcoin, Ethereum’s total supply is not capped, instead the network adjusts the issuance of new tokens through consensus.  

How Is the Network Secured 

Currently, Ethereum uses a Proof-of-Stake consensus to secure its network. With the introduction of the Beacon Chain, it became possible to stake on Ethereum. As a validator, you stake at least 32 ETH on Ethereum by sending the ETH to a deposit contract and securing the network. 

Since a minimum of 32 ETH must be staked to become a validator, Ethereum is considered to be relatively secure since a nefarious actor would first need to acquire 32 ETH in order to become a validator. Further, a nefarious actor would need to have a substantial amount of validators to have any meaningful effect on the network. Currently, there are an estimated 422,000 validators on the Ethereum blockchain.

Ethereum Use Cases 

Ethereum is more than just a cryptocurrency and has several use cases.  

NFTs 

NFTs are digital tokens based on Ethereum, each NFT is a unique asset and has its identifying information stored on smart contracts. Because NFTs are unique, you cannot change one NFT for another, making them different from fungible items such a Bitcoin. NFTs are also not divisible, meaning you cannot send a part of an NFT to anyone. On Ethereum, NFTs utilize two types of token standards, the ERC-721, and the ERC-1155 token.  

Decentralized Finance 

Decentralized Finance or DeFi is the newest innovation on Ethereum. It is turning traditional finance and traditional financial services on its head by adding censorship-resistant and decentralized features to existing financial products and services and create new financial products.   

Ethereum Risks 

While Ethereum is one of the most popular projects in the crypto space, it does have its share of problems and risks.  

The Attack On The DAO 

The DAO or Decentralized Autonomous Organization was a smart contract hedge fund created to fund decentralized apps on Ethereum. It allowed users on Ethereum to choose which dApps would get funding. Now, if you wanted to exit from the DAO, you could do so through an exit door known as the split function. The split function returned the Ether invested and gave an option to create a child DAO. The split function exposed a vulnerability that allowed the DAO to be hacked.  

As mentioned earlier, the loophole exposed a vulnerability in the DAO, which allowed a hacker to create a recursive function and make repeated requests for the same DAO tokens. A total of $50 million was stolen by the attacker and sent the Ethereum community into pandemonium. This attack led to the hard fork that resulted in Ethereum Classic.  

The Resulting Hard Fork

While Ethereum has undergone several planned forks, the aftermath of the attack on the DAO was a chaotic time for the platform, it resulted in significant differences within the Ethereum community. A majority of the members proposed a hard fork that would mitigate the impact of the DAO attack. In contrast, some members of the community wanted to stick with the original blockchain, eventually, a hard fork was initiated, with a large number of the community moving to the new blockchain while a section of the community decided to remain with the original blockchain, which took the name Ethereum Classic.  

The Switch to Proof-of-Stake

Since Proof-of-Stake does not require mining, miners will have no role in the new Ethereum ecosystem. For some, mining Ethereum was their source of income. Miners can continue to mine in the EthereumPoW ecosystem instead, but its future viability or popularity is not guaranteed. Since miners are also the recipient of the ETH airdrop, the sudden loss of their source of income through mining could incentivize them to sell some or all their ETH.

Another potential risk is that currently, if a user stakes their ETH, they will not be able to withdraw it until Ethereum’s upcoming Shanghai upgrade, slated to occur by the end of Q2 2023. Additionally, the sharding function, which is slated to reduce congestion and increase transaction throughput, is also not live yet. As such, one could argue that Ethereum’s switch to Proof-of-Stake is still in progress from a technical point of view.

Finally, the switch to Proof-of-Stake has so far not reduced Ethereum’s gas fees, which can at times substantially increase during high network activity on the Ethereum blockchain.

Due Diligence 

Prior to listing Ethereum on the VirgoCX Platform, VirgoCX performed due diligence on Ethereum and determined that Ethereum is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:  

• The creation, governance, and location of Ethereum and/or its primary development team; 

• The supply, demand, maturity and liquidity of Ethereum; and 
• Legal and regulatory risks associated with Ethereum.  

Statutory Rights under Securities Legislation

VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.