Ethereum is the second-largest cryptocurrency network after the Bitcoin network with more programmability, allowing smart contract developers to build decentralised applications (dapps) on it. Ethereum has a large vision - becoming the “world’s computer”. Pretty much anything that can be written as code and run by smart contracts on Ethereum could be created.
Vitalik Buterin is the creator of Ethereum. After writing Ethereum’s whitepaper in 2013, he was joined by other co-founders: Anthony Di Loria, Charles Hoskinson, Miha Alisie, Amir Chetrit, Joseph Lubin and Gavin Wood. Ethereum launched its ICO (Initial Coin Offering). A total of about $5.2 million was raised for the development of the platform by selling more than one million ether tokens and 12,000 bitcoins used to pay for the tokens. At the current rates, those tokens would be worth nearly 400 million dollars.
How is Ethereum different from Bitcoin?
One of the first questions that comes to mind if you’re just hearing of Ethereum for the first time is: how is it different from Bitcoin? Agreed they are both cryptocurrencies operating in the Web3 economy but they are still fundamentally different in some ways. Ethereum uses the same technology behind Bitcoin, a blockchain, which is a shared, public ledger to decentralize the network so it’s not under the control of just one entity. While Bitcoin is focused primarily on payments and being used as a store of value (touted as the digital gold), Ethereum is disrupting how our regular applications work. From social media networks to more complex financial agreements, Ethereum allows these apps to be hosted on its network, knocking off single control through its decentralised node of validators on its network. These decentralised applications are what we now refer to as dapps.
The EEA (Enterprise Ethereum Alliance) describes the different positions with the following:
“Ethereum is different from Bitcoin in that the network can perform computations as part of the mining process. This basic computational capability turns a store of value and medium of exchange into a decentralized global computing engine and openly verifiable data store.”
How does it work?
Ethereum operates via a global network of computers that work together as a supercomputer. The network assembles and runs smart contracts. These are applications that are, in theory, independent from any third party interference or censorship, since blockchain is resistant to tampering. Smart contracts run exactly as programmed, greatly reducing the risk of fraud. They are self-executing, like an automated teller machine or vending machine that carries out the contract terms digitally. Once certain conditions are proven to have been met, such as the transfer of payment, then the merchandise is conveyed or made accessible to the buyer.
What can you do with Ethereum?
So far we have discussed what Ethereum is and its incredible powers as a decentralised network. But what can you do with it? Remember that Ethereum is an open-source platform that uses blockchain technology to create and run dapps. These dapps by design bypass middlemen as obtainable in conventional applications. Using dapps built on Ethereum, users are able to make agreements and conduct transactions directly with each other to buy, sell and trade goods and services without a middle man. For instance, a typical DeFi (decentralised finance) lending app allows a user to bypass banks in search of loans or borrowing money. A smart contract application can skip using a lawyer to draw up a sales contract or even an ICO, STO and now IDO launched on Ethereum can help startups and established companies raise funding via crowdsale rather than going through a crowdfunding internet site, or the traditional IPO or equity financing approach. These are just a few of the applications of Ethereum.
See how Ethereum powers the DeFi ecosystem
DeFi has quickly solidified itself as the strongest use case of blockchain networks and not just Ethereum. The DeFi industry exploded in 2020 after DEXs - decentralised exchanges kickstarted a new revolution on how assets can be swapped using a non-custodial approach. Uniswap is perhaps the best name that comes to mind. Within two years of its launch, it quickly grew to become a Unicorn with its codebase forked multiple times by other exchanges like 1inch, SushiSwap and even non-Ethereum based DEXs like PancakeSwap.
A look at DeFiPrime website shows some solid 209 DeFi dapps spawned across several sectors. From asset management tools like Dharma, Enjin, Instadapp, Metamask etc., to alternative saving apps including Linen app, Voluto and Pooltogether, Ethereum dapps are disrupting the mainstream financial sector through DeFi. There are other sectors of Ethereum dapps worth looking into. For instance, DeFi derivatives platforms like Synthetix control over $1B worth of synthetic assets, which mimic the prices of real-world assets and commodities like real estate, precious metal, fiat currencies and more. Other DeFi derivatives platforms include mStable, Hegic, DeFiPulse Index etc. Other areas include yield aggregator platforms like yearn finance, Frontier, Plasma.Finance etc., DeFi infrastructure and dev tooling like Chainlink, The Graph, Bancor Protocol, Ren etc.
Ethereum-based DAO, DeFi Insurance, Asset Tokenization, KYC & Identity, Decentralised lending, Marketplace, Prediction markets, Stablecoins, Analytics etc., are more of the areas Ethereum is currently impacting with innovators building breath-taking applications.
Criticisms against Ethereum
Ethereum has been growing, but not without hiccups. The largest smart contract blockchain network has experienced high and low moments since its creation. One of the strongest criticisms against Ethereum is the fact that it does not scale. Ethereum can only facilitate as much as 15 transactions per second (tps), a far cry compared with Visa which can reach up to 20,000 tps. As soon as the Ethereum network reaches maximum capacity, gas charges (which are transaction fees paid by the network’s users such as dapp developers or ordinary users in Ether ETH - Ethereum’s native coin just like BTC is the native coin of the Bitcoin network) spikes to unreasonable levels. Ethereum’s critics argue that Ethereum cannot achieve its “world computer” aim when in fact it cannot rival payment networks like Visa talk more of powering heavy platforms like Google, Facebook, YouTube and other mainstream platforms.
The Future of Ethereum
Ethereum irrespective of its shortcomings as explained above does have huge prospects. It is already making plans to transition from proof-of-work consensus to proof-of-stake dubbed Eth. 2.0. Upon successful transition, it is said that Ethereum will be able to process up to 100,000 tps and network fees crashing abysmally.
However, with or without Eth 2.0, several other platforms called Layer 2 have been working to help scale transactions on the Ethereum network. One such exampleis Polygon formerly called Matic network. Polygon layers on Ethereum making it the settlement layer with transactions on it as low as $0.00005 compared to the sometimes $100 transactions cost on Ethereum. Other Layer 2 solutions like rollups and Arbitrum are also actively exploring options on how to help Ethereum scale and hence solidify its World computer goal.