If Bitcoin (BTC) is the alleged future of money, then what is Ethereum? For someone new to the cryptocurrency space, that’s the logical question to ask, However, it’s not exactly fair to consider Ethereum to be in direct competition with Bitcoin. It has different goals, features and even technology.
Ethereum is a decentralized blockchain network powered by the Ether token that enables users to make transactions, earn interest on their holdings through staking, use and store nonfungible tokens (NFTs), trade cryptocurrencies, play games, use social media and so much more.
It’s currently a proof-of-work (PoW) blockchain but is making the move to proof-of-stake (PoS) with Ethereum 2.0 for scalability purposes and for a more environmentally friendly approach.
History of Ethereum
Ethereum wasn’t always the second-largest blockchain project in the world. Buterin published the Ethereum white paper in 2013, detailing smart contracts. While DApp development already existed in the blockchain space, platforms weren’t interoperable. Buterin intended Ethereum to unify them.
Thus, Ethereum 1.0 was born. Think of it as Apple’s App Store: one space for tens of thousands of different applications, all abiding by the same ruleset. There isn’t a central party, like with Apple changing and enforcing regulations. Instead, the power is in the hands of the people who act as a community.
The group also founded the Ethereum Foundation in Switzerland, with the mission to maintain and develop the network. Soon after, Buterin announced the foundation would run as a nonprofit, which caused some co-founders to leave.
Over time, developers came to Ethereum with their own decentralized ideas. In 2016, these users founded The DAO, a democratic group that voted on network changes and proposals. The organization was backed by a smart contract and circumvented the need for a CEO heralding power over Ethereum. Instead, a majority needed to vote on changes for them to be implemented.
How does Ethereum work?
Ethereum is essentially a single, decentralized system that runs a computer called the Ethereum Virtual Machine (EVM). Each node holds a copy of that computer, meaning that any interactions must be verified so everyone can update their copy.
Also like Bitcoin, all Ethereum transactions are entirely public. Miners broadcast completed blocks to the rest of the network, confirming the change and adding the blocks to everyone’s copy of the ledger. Confirmed blocks cannot be tampered with, serving as a perfect history of all network transactions.
A special gas is used for to mine Ethereum. Unfortunately for many, Ethereum gas fees can run quite high based on network activity. This is because a block can only hold so much gas, which varies based on transaction types and amounts.
Ethereum vs. Bitcoin
While Bitcoin is the most mainstream cryptocurrency, the Ethereum community has the ambition to expand the project. The former is meant to be digital money, and it serves that purpose reasonably well. But Bitcoin has its limitations. It’s a PoW network that’s struggling to scale, leading some to believe that it’s more of a store of value, similar to gold. Bitcoin also has a hard cap of 21 million coins, lending itself more to that argument.
Ethereum, on the other hand, intends to overtake our current internet infrastructure. It plans to automate many processes that still require intermediaries, such as using an app store or working with fund managers. ETH is used more as a way to interact with the network than as a way to transfer money, though it can do that too.
What has been achieved on Ethereum?
Decentralized finance has arguably been the Ethereum network’s biggest achievement. DApps that can perform several functions within the ecosystem popped up around 2019 to 2020 and are growing in popularity by the day. Artists, for example, are making millions of dollars by bringing their work to the blockchain via nonfungible tokens, or NFTs.
Developers have built uncensorable social media apps, allowing users to tip one another for content. Games allow users to invest in assets, play to grow them and then sell for a profit, extracting actual value from their game time.
Advantages of Ethereum
Aside from decentralization and anonymity, Ethereum also has various other benefits, such as a lack of censorship.
There are smart contracts, which automate many of the steps taken by central authorities on the traditional web. A freelancer on, for example, Upwork must use the platform to find clients and set up payment contracts. Upwork’s business model takes a percentage of each contract to pay its employees, server costs, etc.
Disadvantages of Ethereum
While it sounds like the perfect platform, Ethereum has a few key issues that need to be worked out.
The first is scalability. Buterin envisioned Ethereum the way the web is now, with millions of users interacting at once. Due to the PoW consensus algorithm, however, such interaction is limited by block validation times and gas fees. Furthermore, decentralization is a hindrance; a central entity, like Visa, manages everything and has perfected the transaction process.
Second, there is accessibility. As of the time of writing, Ethereum is expensive to develop on and challenging to interact with for users unfamiliar with its technology. Some platforms require specific wallets, which means that one must move ETH from their current wallet to the required wallet. That’s an unnecessary step for users ingrained in our current financial ecosystem and not beginner-friendly in the slightest.