At its core, the EVM is a highly specialized software that processes smart contracts on Ethereum.
Unlike Bitcoin (BTC), Ethereum's developers didn’t focus on creating a peer-to-peer (P2P) digital payment network. Instead, they used blockchain technology to "decentralize" all aspects of the web. Developers Vitalik Buterin and Gavin Wood introduced self-executing commands called smart contracts. Once a smart contract meets a set of conditions, it automatically executes preprogrammed orders.
The EVM stores, processes, and broadcasts these Ethereum-based smart contracts. Whenever smart contracts change on the Ethereum blockchain, the EVM analyzes new transaction data and posts the latest information on upcoming blocks.
Although the EVM has traits of a physical "machine," it's not a device. Instead, the thousands of nodes running the Ethereum blockchain sustain this "virtual" computer. Everyone running a node on Ethereum automatically participates in the EVM. Developers who build on Ethereum also use the EVM to code new projects across industries such as DeFi (decentralized finance) and play-to-earn gaming.
Since the EVM records the current "state" of the Ethereum blockchain, some refer to it as a "distributed state machine." All transactions on Ethereum's dApps and wallets go through the EVM. Not only does the EVM process these transactions, but it also stores this data in the cloud. It’s impossible to record and process Ethereum's numerous smart contract functions without the EVM.
The EVM only understands binary code instructions (i.e., combinations of 1s and 0s). Therefore, the code developers use to build on Ethereum should convert into a more machine-friendly "bytecode." Ethereum's co-founder Gavin Wood created a unique coding language called "Solidity" to easily communicate smart contract data to the EVM. Once the Solidity smart contract instructions convert to bytecode, the EVM broadcasts this data to all the nodes on the Ethereum blockchain. If there's a "state change" in any of these smart contracts, the EVM automatically updates transaction data in succeeding blocks.
For example, suppose someone pays off a crypto loan on Ethereum-based dApp Aave. Once the smart contract recognizes a specific wallet meets its interest payment requirements, the contract instantly returns the collateral on Aave to the user's crypto wallet. The EVM interprets all these data changes on Aave and posts this transaction data on the Ethereum blockchain.
As the EVM processes and posts crypto transactions, it estimates the Ethereum blockchain price. Better known as gas fees, these transaction costs go to Ethereum's thousands of node operators. Users who transfer Ethereum-based tokens or leverage a smart contract pay a variable gas fee in ETH. The amount of ETH per transaction depends on the smart contract’s complexity and current network congestion. The EVM calculates these gas fees and distributes them to the blockchain's node operators.
From data storage to payment processing, the EVM performs many essential functions in the Ethereum ecosystem.
Ethereum wouldn't have become the second-largest cryptocurrency by market cap without the EVM. The intricate architecture behind the EVM made decentralized web applications possible. Thanks to the revolution of smart contract technology, developers could create dApps with novel use cases such as decentralized crypto lending, borrowing, and trading. The EVM's architecture also powers popular crypto sectors such as NFT collectibles and play-to-earn games.
Besides contributing to crypto innovation, the EVM makes Web3 more accessible to the global developer community. In fact, except coding proficiency, there are no prerequisites to join the Ethereum community. The EVM's accessibility and flexibility make it more attractive to developers, driving innovation and growth in Ethereum's ecosystem.
Another benefit of the EVM is that it's easy to duplicate on other blockchains. Many new crypto projects use EVM software to seamlessly connect to the Ethereum network. These "EVM-compatible" blockchains expand the reach of Ethereum-based dApps.
Due to Ethereum's massive influence in Web3, many new blockchains want to integrate with the EVM. These "EVM-compatible chains" make it easy for dApp developers on Ethereum to port their projects to other blockchains. EVM compatibility makes it simpler for Ethereum-based dApps to expand their user base and offer potential benefits on competing blockchains. Many popular Ethereum dApps, such as Uniswap and Aave, are already available on many EVM-compatible chains.
Some EVM-compatible chains, such as Avalanche and the BNB Smart Chain, differ from Ethereum. However, there are chains built on top of Ethereum's main chain. These "layer-2" blockchains often offer lower gas fees and faster transaction speeds than Ethereum. A few layer-2 EVM-compatible chain examples include Polygon, Optimism, and Arbitrum.
Despite the many benefits of using the EVM, Ethereum still deals with scalability issues. Most notably, the Ethereum blockchain often has high gas fees and slow transaction throughput, especially during high network congestion. To address these concerns, ETH developers changed Ethereum's central consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in 2022 to reduce energy consumption. Although the switch to PoS doesn't change how the EVM works, it may pave the way for future upgrades.
For instance, some in the Ethereum community have proposed changing EVM to a new execution layer called Ethereum-flavored WebAssembly (eWASM). According to eWASM enthusiasts, this proposed software upgrade may improve the speed of smart contracts and support more programming languages.
Besides eWASM, more competing blockchains are adopting the EVM functionality. As EVM compatibility grows, dApp users will have more options to interact with the Ethereum ecosystem. EVM-compatible chains, such as Polygon, offer a fast and low-fee experience on many of Ethereum's top dApps. The attractive features of EVM-compatible chains may increase Web3 adoption as Ethereum works on scaling solutions.
Lastly, some crypto supporters believe the "EVM standard" could address the "interoperability" problem in the blockchain space. Interoperability refers to communication between separate blockchain networks. As more chains adopt EVM compatibility, sending crypto across multiple blockchains may be easier. More EVM-compatible chains might encourage developers in separate blockchain communities to collaborate on future projects.
The EVM’s launch was a pivotal moment in cryptocurrency history. Before Ethereum went live, blockchain tech was solely associated with P2P payment networks such as Bitcoin. However, with the success of smart contracts and the EVM, more developers began to appreciate the revolutionary potential of Web3. As EVM adoption grows, it will likely lead to further innovations in decentralized web development.
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