One look at the headlines and one would think that the only cryptocurrency out there is Bitcoin. Its price’s meteoric rise in 2017 drew massive amounts of attention both to Bitcoin and the larger cryptocurrency and blockchain space as a whole.
While Bitcoin is the first and most well-known cryptocurrency, right next to it is the #2 cryptocurrency by market capitalization, Ethereum. As of February 7, 2018, the total market capitalization of Ethereum is $80.3 billion, which means that it has a bigger market capitalization than renowned companies including CVS Health ($75.9 billion), Time Warner ($74.4 billion), and BMW Group ($57.9 billion).
What is Ethereum? The Basics
Simply put, Ethereum is a decentralized platform for applications that run as programmed without the need for human interference. The Ethereum platform is “hosted” on computers across the world and hence, decentralized.
Each of these computers (“nodes”), records all activity on the Ethereum platform in an immutable ledger or record book known as the blockchain.
By developing on Ethereum, application developers can benefit from increased efficiency (applications that can run themselves) and freedom from censorship, fraud, or other forms of third-party interference (decentralized blockchain, or a record book that is both immutable and spread across the globe on thousands of computers).
The cryptocurrency, Ether (ETH), which is also commonly referred to as Ethereum, is used by application developers to pay for transaction and service fees on the Ethereum platform (as well as by traders and investors who want to speculate on ETH price). These transaction and service fees are paid to the owners of nodes that host and execute Ethereum-based applications on the Ethereum blockchain.
History of Ethereum
In late 2013, Vitalik Buterin, a young, Russian-born, Canadian programmer, who was also the co-founder of Bitcoin Magazine, described the idea for Ethereum in a whitepaper.
Buterin had previously argued that Bitcoin needed a programming language for application development on its network along with its main feature of peer-to-peer (p2p) digital transactions. However, others in the Bitcoin community didn’t agree with Buterin, who then decided to develop a new platform, Ethereum, for his idea of decentralized application development.
When the Ethereum project was initially announced in January 2014, the core Ethereum team included Buterin, Mihai Alisie, the other co-founder of Bitcoin Magazine, Charles Hoskinson, who went on to found IOHK (responsible for Ethereum Classic and Cardano, the #5 cryptocurrency by market capitalization as of February 7, 2018), and Anthony Di Iorio, who went on to found Jaxx, one of the most popular cryptocurrency wallets.
Ethereum development was funded via an online public crowd sale, which lasted from July 2014 to August 2014. During the crowd sale, participants bought Ether using Bitcoin.
It wasn’t until a year later on July 30, 2015 that Ethereum went live. This initial release, known as Frontier, was followed by Homestead, considered the first stable release of the Ethereum platform, on March 14, 2016.
In May of 2016, a decentralized autonomous organization called The DAO, which was a set of smart contracts developed and deployed on the Ethereum platform, raised a mindboggling $150 million in crowdfunding via a token sale. At the time, it was the largest crowdfunding campaign in history.
The purpose of The DAO was to act as a decentralized venture capital fund, with smart contracts taking the place of directors and fund managers and investors voting on proposals and receiving investment profits proportionate to their amount of DAO tokens.
Unfortunately, The DAO was hacked in June 2016 due to faults in its code, which led to $50 million in ETH being stolen. Ethereum community members were at odds with one another with regards to what to do, which eventually led to a hard fork, or split, in Ethereum into Ethereum and Ethereum Classic (ETC).
The Ethereum network agreed to “revert” the hack to return stolen ETH to their rightful owners whereas Ethereum Classic argued that doing so went against a core principle of cryptocurrency and blockchain technology (unchangeable transactions, even if they are hacks) and split from the rest of the Ethereum community.
In March 2017, some blockchain-based companies, Fortune 500 companies, and research consortiums collaborated to create the Enterprise Ethereum Alliance (EEA), which helps businesses learn about Ethereum and leverage its technology for industry-specific use cases. EEA includes members like Microsoft, Intel, J.P. Morgan, Deloitte, Samsung SDS, UBS, and more.
On October 16, 2017, Byzantium, the current Ethereum version, was released.
How Ethereum Works: Smart Contracts and Blockchain 2.0
Ethereum-based applications are able to run as programmed without the need for people or centralized authorities and organizations due to the use of smart contracts. On Ethereum, smart contracts are written using Ethereum’s native programming language, Solidity.
Smart contracts can be thought of as self-executing contracts written with computer code. For example, when people normally rent a property, they have to pay their landlord the monthly rent in order to continue living in the property.
If the renter does not pay the monthly rent, the landlord may have to begin a long and arduous eviction process to remove the renter from the property.
Through the use of a smart contract, a landlord could build a decentralized “renter application” that issues a digital key to the property if and only if the renter pays the rent by a specified date every month.
Moreover, receipt of payment would also be recorded on the blockchain, which is hosted on computers across the world, meaning that records can never be tampered with (without everyone else on the network knowing), forever be accessible (assuming that there will always be nodes hosting copies of the blockchain), and not prone to degradation or loss as with paper records or electronic records stored on a single server or system.
Ethereum vs. Bitcoin
While Bitcoin and its blockchain originally focused on the immutable recording of financial transactions and how much Bitcoin users of Bitcoin held in their wallets, Ethereum’s blockchain goes beyond the exchange of value (money) in the form of cryptocurrency (though that is also a use of Ethereum as people buy, trade, and sell Ether in exchange for other cryptocurrencies, fiat currencies, goods, services, and more).
Ethereum’s focus on programmable transactions in the form of decentralized applications (dApps), has led to the coining of the term Blockchain 2.0 and emergence of numerous, similar projects trying to come up with similar offerings, the same way that various cryptocurrencies have emerged trying to copy Bitcoin or offer something even better. Thus, while people like to think of Bitcoin and Ethereum as competitors, they aren’t, as they focus on two entirely different things.
Examples of Ethereum Applications
Since Ethereum merely acts as a platform for decentralized applications, use cases for Ethereum are only limited by the imagination.
A few, prominent, real-world examples of Ethereum-based dApps or projects that are being built include OmiseGO, Golem, and Populous.
One of last year’s hottest initial coin offerings (ICOs), or sales of new cryptocurrencies where new crypto-based projects sell some of their cryptocurrency to investors in exchange for funding in the form of Bitcoin, Ethereum, USD, or other currencies, OmiseGO is the brainchild of parent company Omise, a Southeast Asian payment management services company.
OmiseGO aims to develop a decentralized payment platform that will allow value exchange and payment services across different assets and currencies (both crypto and fiat) without needing a bank account or having to pay fees, such as international transaction fees.
Though payment services like Alipay and Wechat Pay already exist in Asia, where Omise is based, these services depend on centralized infrastructure and middlemen, which leads to inefficiencies like high fees, long settlement times, lack of transparency, and more, all of which OmiseGO looks to solve with its technology.
OmiseGO is one of the more promising Ethereum-based projects, as Omise itself is a successful company that has over 130 employees with offices all throughout Asia and has received recognition, such as being named a “Fintech Rockstar” by Forbes in November 2016.
OmiseGO itself also has partnerships with established businesses, such as McDonald’s Thailand, and boasts an advisory board that includes blockchain luminaries like Vitalik Buterin and Joseph Poon, the creator of Bitcoin’s Lightning Network.
Also built on Ethereum, Golem aims to offer an open-source, decentralized “supercomputer” that can be used by anyone.
Golem itself does not have a supercomputer that they lend out to people. Instead, users on Golem’s network who have extra computing power can lend that computing power out to others for a fee. This model has led to some calling Golem the “Airbnb of computing.”
Golem could prove to be useful in any scenario where heavy computing power is needed but not necessarily available due to high costs. Scenarios that come to mind are medical research, CGI rendering, artificial intelligence development, and more.
Populous is another disruptive project built on Ethereum. While OmiseGO and Golem deal with payment services and computing power respectively, Populous aims to improve the world of loans.
Populous provides a decentralized, peer-to-peer platform that makes getting loans easier for small- and medium-sized businesses. Instead of having to go through banks and other financial institutions, businesses can turn to Populous, where they upload their invoices and lenders on Populous’ platform can bid on the opportunity to loan the businesses money.
By cutting out the middleman (banks and other financial institutions) through the use of blockchain technology like smart contracts, businesses can get loans both easier and faster and lenders can earn money on excess capital.
While these 3 projects are impressive uses of Ethereum’s platform, they only scratch the tip of the iceberg: hundreds if not thousands of dApps live on the Ethereum network. For a more comprehensive list of dApps or Ethereum-based projects, visit State of the dApps, which lists 1,025 curated (in other words, only those they have handpicked) dApps as of February 7, 2018.
Current State of Ethereum
Even though Ethereum is 5 years younger than Bitcoin, it has already surpassed Bitcoin in terms of daily transactions (818,625 Ethereum transactions vs. 213,719 Bitcoin transactions – February 7, 2018) as more and more people find a use for Ethereum as well as Ether.
Yet, despite a higher transaction count, the Ethereum network seems to be handling the issue of scaling, or an increasing amount of transactions, better than Bitcoin. Ethereum’s transaction time averages seconds or minutes whereas Bitcoin’s averages hours or even days.
Moreover, Ethereum’s average transaction fees are significantly lower (less than $1 – February 7, 2018) than Bitcoin’s, which are $4.59 (February 7, 2018) and have gone as high as $54.90 (December 21, 2017), rendering Bitcoin useless for its original purpose as a peer-to-peer digital currency for everyday transactions.
Unlike Bitcoin, which users and developers alike have been moving away from largely due to scalability issues, tons of Ethereum-based projects launched in 2017 and that trend doesn’t show signs of stopping.
Though Ethereum has gained massive amounts of popularity, the development team isn’t resting on its laurels. For instance, while Ethereum transaction times and fees are still low, they have increased relative to before, making scalability an issue for Ethereum as well.
Ethereum plans to address scalability in 2018, along with other challenges it outlined in its 2018 roadmap.
Sharding in particular is Ethereum’s proposed solution for the scalability problem. While Ethereum can currently only process 20 transactions per second, sharding will enable it to process thousands of transactions per second.
Sharding will split the blockchain into pieces, or “shards.” Instead of every node on the Ethereum network having to store a copy of the entire blockchain, which is updated one block, or series of transactions, at a time, sharding would allocate different shards, or pieces of the blockchain, to different nodes on the network.
Ethereum transactions would then be sent to different nodes depending on which shard they affect. Instead of all Ethereum nodes working on adding the same block to the blockchain at any given time, sharding would allow for different nodes to process different transactions simultaneously, increasing the amount of transactions the Ethereum network can process per second drastically.
The other big change that Ethereum seeks to implement is transitioning from a Proof-of-Work model to a Proof-of-Stake model. Currently, Ethereum, like Bitcoin and many other cryptocurrencies, uses a Proof-of-Work system to verify transactions.
The problem with Proof-of-Work is that it requires a large amount of computing power and thus, electricity. In 2017, Bitcoin used 36 terawatt hours of energy, which puts it on par with the country of Qatar in terms of electricity use.
By transitioning to Proof-of-Stake, Ethereum seeks to lower its energy footprint.
Another improvement that Ethereum is implementing is privacy features in the form of zero-knowledge proofs (zk-Snarks) that allow users to make their transactions private if desired.
Lastly, critics have questioned the safety and security of Ethereum-based smart contracts. To address this, the Ethereum team will introduce formal verification for its smart contracts as well as a new smart contract programming language, called Viper, which will allow for the development of safer smart contracts.
While Bitcoin has been around since 2009, it is still quite early when it comes to the blockchain and cryptocurrency spaces. It’s only since 2017, when Bitcoin’s price exploded, that many have become interested in cryptocurrency and blockchain technology as a whole.
With new projects seemingly sprouting up daily, it’s hard to say which crypto-based projects are here to stay and which will forever fade into obscurity.
In the case of Ethereum, the future outlook for the project looks promising.
As stated, Ethereum has now surpassed even Bitcoin in number of transactions, and that number seems poised to grow even further, as more and more apps are built on Ethereum’s platform, and ETH the currency grows in popularity both as a currency to fuel the variety of Ethereum-based apps but also as an investment vehicle for cryptocurrency traders and investors.
Furthermore, the Ethereum community and developers seem to be united and tackling problems like scalability head-on as opposed to the Bitcoin community and developers, for example, who have been slow to address Bitcoin’s scalability issues, which has led many to seek greener pastures as the original cryptocurrency shows little sign or hope of improvement.
Indeed, Bitcoin, which prior to 2017 dominated cryptocurrency and held upwards of 80% of total cryptocurrency market capitalization at any given time, has seen its share of the crypto market decrease significantly to 35% (February 7, 2018).
Ethereum, on the other hand, has seen its share of the total cryptocurrency market capitalization increase tremendously from nothing to as high as 32%. Today, it sits in second place at 21% (February 7, 2018).
In fact, many believe that Ethereum will be the cryptocurrency to fulfill “The Flippening,” which is the cryptocurrency community’s way of saying that Bitcoin will be dethroned by another cryptocurrency.
While no one can say with fair certainty whether or not Ethereum will overtake Bitcoin as the #1 cryptocurrency, it’s fair to say that Ethereum is here to stay – at least for a while.