Ethereum

Ethereum is a layer-1 blockchain proposed in 2013 by Vitalik Buterin and launched in July 2015. While Bitcoin was primarily designed to be a decentralized currency, Ethereum was created to be a more versatile platform, supporting not only cryptocurrency but also decentralized applications (dApps) through smart contracts. The key motivation behind Ethereum was to enable programmable, self-executing code on the blockchain, allowing developers to build applications that run exactly as programmed without downtime, fraud, or third-party interference.

1. How Ethereum Works

Ethereum is a decentralized, peer-to-peer network based on blockchain technology. Like Bitcoin, it operates on a network of nodes that store the entire blockchain, which is a ledger of all transactions.

Key Technical Elements:

• Blockchain: A chain of blocks, where each block contains a group of transactions. Once verified, each block is linked to the previous one, making it immutable.
• Consensus Mechanism: Ethereum initially used Proof of Work (PoW), where miners competed to solve complex cryptographic puzzles. However, with the Ethereum 2.0 upgrade, it shifted to Proof of Stake (PoS), where validators are chosen based on the amount of cryptocurrency they “stake” as collateral.
• Smart Contracts: Programs stored on the blockchain that automatically execute when certain conditions are met. These contracts power most of Ethereum’s decentralized applications (dApps).
• Gas Fees: Transactions and smart contract executions on Ethereum require users to pay a fee in “gas,” a small amount of Ether, the network’s native cryptocurrency. Gas limits prevent network abuse, while gas prices reflect network demand.

2. Ethereum’s Main Uses in Web3-Supported Games

• Decentralized Finance (DeFi): Applications that provide financial services without intermediaries. This includes game-related economies where players can trade, stake, or lend tokens (e.g. cryptocurrency, NFTs), and utilizing transparent and more accessible funding mechanisms for game development.
• Non-Fungible Tokens (NFTs): Represent unique in-game assets like characters, items, or land. NFTs can be traded and may be used across games that support them, offering players ownership and the ability to transfer value between games.
• Decentralized Decision-Making: Transparent blockchain-powered governance structures meant to empower players (token holders) to vote on key decisions’ including game (e.g. game updates, treasury allocation).
• Play-to-Earn (P2E): Players earn tokens or rewards for completing in-game activities or achievements. These tokens can be traded for real-world value or used across other blockchain-based games, offering income opportunities through gameplay.

3. Types of Ethereum Tokens: ERC-20, ERC-721, and Beyond

Ethereum allows developers to create tokens on top of its blockchain. ERC tokens are published through the Ethereum community’s peer-review process, and follow standardized rules, enabling seamless integration with wallets and decentralized exchanges. There are many Ethereum-based tokens (full list). The most common ones used in web3 games are:

• ERC-20 (Fungible Tokens): These are tokens that are identical and interchangeable, much like Bitcoin or other cryptocurrencies. They are primarily used for cryptocurrencies and utility tokens in decentralized applications. An example in Web3 games is $AXS from Axie Infinity, a fungible token used for governance and in-game rewards.
• ERC-721 (Non-Fungible Tokens, NFTs): ERC-721 tokens are unique and cannot be exchanged on a one-to-one basis like ERC-20 tokens. NFTs are commonly used in gaming and digital art. For example, in Web3 games like The Sandbox, ERC-721 NFTs represent unique in-game assets, such as land parcels or rare items.
• ERC-1155 (Multi-token Standard): This standard supports both fungible and non-fungible tokens within the same contract. It is often used in Web3 gaming. For example, Gods Unchained uses ERC-1155 to handle both in-game assets (NFTs) and fungible tokens (currency).

How These Tokens Relate to Ethereum: All these tokens are built using smart contracts deployed on Ethereum’s core blockchain. Ethereum provides the underlying infrastructure and security, while developers create custom functionalities by writing smart contracts. These tokens are integral to Ethereum’s ecosystem, as they can interact with decentralized applications, marketplaces, and wallets, all running on the same Ethereum infrastructure.

4. Layer 1 and Layer 2 Chains: How They Interact and Why

Ethereum is a Layer 1 blockchain, meaning it is the foundational layer that processes transactions, executes smart contracts, and secures the network. However, Ethereum’s success has led to scalability issues, including high gas fees and slower transaction speeds during periods of congestion.

To address this, Layer 2 solutions were developed to offload some of Ethereum’s transactional burden while still leveraging Ethereum’s security and decentralization.

Layer 2 Solutions (e.g., Polygon, Arbitrum, Optimism): These are separate blockchains that sit on top of Ethereum, interacting with the main Ethereum chain but handling transactions independently to reduce congestion. Layer 2s use various techniques, such as rollups (batching multiple transactions into a single one) or sidechains (parallel blockchains that can communicate with Ethereum).

Benefits of Layer 2 Chains: For example, Polygon is a Layer 2 solution frequently used in Web3 gaming to reduce costs associated with minting NFTs or executing in-game transactions. It interacts with Ethereum by periodically submitting a batch of transactions back to the Ethereum mainnet for final validation, preserving the security of Ethereum while offering a more scalable solution.

Ethereum website: https://ethereum.org/

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