To understand Ethereum, we need a mental picture of three software constructs:
The Ethereum Blockchain Network, the interoperability layer and the Protocol Layer.
First, the Ethereum Blockchain Network.
The Ethereum Blockchain Network is the base layer for decentralized finance.
This Network is like the Operating System that makes it possible for Decentralized Applications to function, because it provides all the needed support functions.
The Ethereum Blockchain Network 3 Parts:
First, the Ethereum Virtual Machine.
Second, the Smart Contract Functionality.
Third, the Ethereum Blockchain or record of transactions.
What the 3 Parts do and how they interact.
First, the Ethereum Virtual Machine or EVM.
The Smart Contracts contain the code that makes up or comprises the logic functions used in Decentralized Applications or Dapps.
For example: A Smart Contract performs what are called in software coding language Conditional Tasks; the if-then statements, *if you provide item X, then you get item Y.
These are transaction terms*; actions that are actually executed or done by the EVM or Ethereum Virtual Machine across all the nodes in the Ethereum blockchain, and distributed network of nodes.
‘The Distributed Network of Node, which are the computers all over the world running a copy of the Ethereum Network Software and keeping an up to date, verified and immutable, as in unalterable copy of the ledger of all transactions since the very first one.
These computers are called miners, and they are an integral part of the consensus mechanism that processes, verifies and records transactions on the Ethereum blockchain. Which is also the ledger or record of all transactions on Ethereum.
The Ethereum blockchain provides the settlement layer for all transactions.
While some protocols take the computation to a separate layer, they will always return the result to the main network that stores the data on the blockchain.
It is on the blockchain that transaction data is immutably stored as proof or verification.
The above construct is referred in spatial reference terms as a base or first layer.
This designation has intrinsic meaning as above, but it also serves to help provide a mental image of the way three constructs interact.
Second, the 3rd part of the Ethereum Network; the Protocol Layer.
In DeFi, the protocols function by transferring value, swapping tokens, fetching external feeds, and providing liquidity.
These functions or actions are performed by Protocols, which are also referred to as Applications.
These protocols (applications) are the actual components that interoperate as financial instruments for users.
Popular examples are the Automated Market Maker Exchange Uniswap, and other Protocols/Applications like Curve, Yearn, Bancor, and Compound.
The above construct is referred in spatial reference terms as a top or third layer. This designation has intrinsic meaning as above, but again, it also serves to help provide a mental image of the way three constructs interact.
While dApp means decentralized, in actuality these Protocols can be decentralized or centralized, in terms of actual governance or control.
The Second Layer: Interoperability Layer.
It is this layer of computer code or software, sometimes called “Middleware” that connects the various protocols and smart contract functionality together.
It is also here that the following functions occur;
First, payment for use of the blockchain:
DApps use the Ethereum blockchain Network and as a platform for DApps and they and their users are required to use the Ethereum’s native token Ether (ETH).
A smaller denomination of Ether called Gwei (0.000000001 ETH) is used to pay for units of computation on the network called gas.
The gas costs are part of the fees paid in order to process transactions that are validated by nodes called miners (or stakers in ETH2).
Additionally, many investors use capitol or assets which are not Ethereum blockchain tokens or Ether.
In fact, most DeFi tokens which are used in the Protocols or Applications which run on top of the Ethereum network are not native tokens, but instead, they are value exact representations of those non-native tokens called ERC20 tokens.
These are also called Wrapped Tokens.
The standards and functionality that allows this lives here in the interoperability layer.
Putting it all together.
As you can see from the foregoing discussion, connecting all three layers, and their various functions together and the ability to produce various protocols or applications, which access all that Ethereum has to offer, is called Composibility
The Ethereum Blockchain Network, which encompasses all three layers, has this property or characteristic, which makes the DeFi or decentralized applications like Uniswap and the MakerDao, the most famous and largest applications operating on Ethereum possible.
Last Words Binance Smart Chain
Binance showed the world it was possible to clone the Ethereum blockchain, and the three components of it’s Network.
This replication of the three components of the Ethereum Blockchain Network, and the preservation of Composibility, that makes the DeFi ecosystem on Binance Smart Chain possible.
But Binance Smart Chain uses a POS variant concensus mechanism instead of Ethetrum’s original Proof of Work consensus mechanism.
This POS consensus mechanism allows Binance to achieve cheaper transaction costs (gas fees) and greater transaction speed, plus greater transactional volume.
Additionally, the close association of Binance Smart Chain, to Binance Exchange, one of the largest cryptocurrency exchanges world wide, with a diversity of coins and wallets makes it easy to transfer assets there, and by using a software construct called the Binance Bridge, you can quickly transform cryptocurrency assets on Binance into wrapped tokens on the Binance Smart Chain.
These wrapped tokens are the equivalent of ERC-20 tokens on Ethereum, and they are called BEP-20 tokens.
These BEP-20 tokens all investors to invest in DeFi projects on Binance Smart Chain, just like ERC-20 tokens all investors to invest in applications on the Ethereum Blockchain Network.
Summary
Ethereum was the birthplace of decentralized finance, which owes its existence to the Etheteum Virtual Machine, Smart Contracts and Protocols called Decentralized Applications.
‘It is where computer technology, internet technology and blockchain technology.
‘We are early in the history of this new technology, and it may develop faster the internet, and like the internet makes possible things never before imagined, the blockchain May hold many surprises too.
Don't sleep on this technology, early adopters and early investors could make life changing money.
But remember the edge of technology and society is a dangerous place to live.
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