in Ethereum (ETH)
Ethereum: The World’s Computer
Ethereum is a decentralized smart contract platform that’s the second most popular cryptocurrency in the world. While anything can be built on top of Ethereum, from supply chain tracking systems to decentralized exchanges to digital art marketplaces, currently, the most popular offering is DeFi — Decentralized Finance.
We’ll cover DeFi and more as we look at how Ethereum works, what the project does well, where it fails, and what the future might hold for this exciting and quickly evolving blockchain platform.In this article:
Ethereum Use Cases
Ethereum was created to address some of the shortfalls of Bitcoin. While Bitcoin is great for storing wealth (BTC is the most secure cryptocurrency in the world) it lacks complex functionality. You can send and receive transactions and execute some other essential functions, but smart contracts are not supported. That’s where Ethereum comes in.
Ethereum offers a high level of customization so that developers can create products like,
- Dapps (decentralized applications)
- Complex smart contracts
Since Ethereum is decentralized anyone can build and launch anything. That’s the value of decentralization, and it’s one of the reasons that Ethereum has become so popular.
There are a couple of features that set Ethereum apart from other smart contract platforms.
Ethereum is the second most decentralized cryptocurrency in the world, after Bitcoin. Although there are certain people and organizations, like Vitalik Buterin and ConsenSys, that have a lot of influence over the project, there is no centralized authority with ultimate control.
That’s different from other smart contract platforms like NEO or Tron. The problem with these platforms is that a centralized organization controls the network. If it came down to it, there is a potential for a transaction to be rolled back or an account to be frozen.
Is that likely? No. It’s highly unlikely; however, it’s not impossible. That’s the problem with centralization, and that’s why having a decentralized network like Ethereum is the ultimate safeguard against interference.
2. A Robust Developer Community
Ethereum has the largest developer community in the world, even larger than Bitcoin’s. This gives Ethereum a tremendous advantage over other protocols.
Blockchain-based cryptocurrencies are still a new technology, and there’s a lot of work to do to make crypto useful for the average person. Having so many developers makes it more likely that Ethereum will be the first project to find that product-market fit, which will lead to mass adoption.
When you build an app on Ethereum you can instantly connect it to hundreds of other protocols that already exist. In the Ethereum community, this is known as money legos. While the following video is slightly outdated, it does a good job of showing how protocols can interact with each other.
Recently there have been trendy financial products that have been built and launched on Ethereum in a matter of weeks. That’s only possible because these protocols can connect to existing infrastructure, rather than start from scratch.
As great as Ethereum is, the platform certainly isn’t perfect. Here are three considerable challenges that Ethereum is currently facing.
1. Slow Speeds
As we can see with Bitcoin and Ethereum, decentralized protocols tend to be slow. Bitcoin has average speeds of 7 TPS (Transactions Per Second), while Ethereum has a speed of 15 TPS. That’s double Bitcoin’s speed, but it’s not nearly enough.
Recently the exploding popularity of DeFi, and yield farming, in particular, has caused the Ethereum network to become incredibly congested. For brief periods transaction fees rose to 100x their normal levels or more, leading to outrageous charges.
For example, a simple transaction could cost $5, while a moderately complex transaction involving a smart contract could cost $50 or $100 to execute.
If the network is congested for a day or two, that’s not such a problem. However, as of October 2020, Ethereum has been experiencing high traffic and high fees for more than a month. This can make it uneconomical for people to continue using the platform.
2. Is Ethereum Immutable?
In 2016, when Ethereum was just getting off the ground, a hacker was able to exploit a bug in the MakerDAO smart contract and make off with about $50 million worth of ETH.
Rather than let this happen, the Ethereum community decided to fork the network to “undo” the hack. While that happened almost half a decade ago, the interesting question is, could it be done again? And the answer is *probably* not. Ethereum has grown quite a bit since then, and it would be much more challenging to get all of the influential players to agree to a rollback.
However, to a greater or lesser extent, this rollback lives on in everyone’s mind. There remains a question of how immutable Ethereum is, especially compared to a cryptocurrency like Bitcoin.
3. The Programming Language
Developers who want to create apps and tokens on the Ethereum network need to code in Solidity. This is a new programming language that has some well-known problems.
What that means in practice is that developers need to code smart contracts in a new language that they may be unfamiliar with. The result is that it’s relatively common for smart contracts to be written with vulnerabilities in them. Some of these vulnerabilities are difficult to identify and there are even instances where a smart contract is audited (a third party checks the code to ensure it’s secure) and even after the audit, a hacker can find an exploit!
Other smart contract platforms use programming languages that are designed to be more developer-friendly. For example, Cardano is hoping that their Marlowe programming language will make it easier to create exploit-free smart contracts.
What is Ethereum Gas?
The Ethereum coin that powers the network is officially named Ether and popularly known by its ticker symbol — ETH.
If the Ethereum network is a highway and smart contracts and apps are cars, Ether is the gas that runs everything. Thus, Ethereum Gas, Ether, or simply ETH, is the lifeblood of the Ethereum network.
The best way to think about ETH is that it’s the currency you use to pay for the execution of a smart contract.
- a. A smart contract requires computing power to be executed
- b. Miners have computing power
- c. Ethereum users pay the miners with ETH in exchange for their computing power
A simple Alice to Bob transaction can be relatively cheap. For most of Ethereum’s history, it would cost roughly $0.10. A complex smart contract with dozens of steps will be more expensive since it requires more computing power.
In terms of monetary policy, there is no hard cap on the amount of ETH that can be produced. In contrast, we know that there will only ever be 21 million Bitcoin. Currently, Ethereum has about a 3.3% inflation rate per year. While this number can change, it’s not expected to ever reach a 0% inflation rate, as will happen for Bitcoin.
Determining ETH’s price is different from determining BTC’s price. Bitcoin is viewed as digital gold, a hard asset store of value. Thus, one would expect Bitcoin’s value to rise as central banks inflate fiat currencies and there is uncertainty in the global financial system.
ETH’s price will typically reflect the supply and demand for smart contract usage since ETH is used to pay miners to execute smart contracts. The more people who want to use smart contracts on the Ethereum network, the more Ethereum Gas is needed, the higher the ETH price is likely to go.
What is The Future of Ethereum?
The future for Ethereum is extremely exciting! There’s so much work being done, new projects are being introduced every week and existing projects are starting to gain more traction. Just as an example, in the summer of 2020 it was a big deal when the value locked in DeFi hit $3 billion. Only a few months later and value locked is already at almost $11 billion.
Besides DeFi, here are a few more key developments to look out for in the next couple of years.
- Scaling through the use of ZK-Rollups and other off-chain solutions. A lot of work has gone into developing technologies that will let transactions take place off-chain and then be periodically verified on-chain. A lot of these scaling solutions will start to come online in late 2020 and early 2021, which should help reduce network congestion.
- EY has already spent several million dollars to fund research looking into how to bring privacy to Ethereum. As a consulting firm, EY expects that privacy protection on Ethereum will open up the door to greater levels of institutional adoption. However, everyone can benefit from privacy and we should be looking out for some new privacy solutions in 2021.
- Staking is coming! This will allow Ethereum investors to earn a passive income just for holding and staking Ethereum. When other blockchains like Cardano and Tezos have implemented staking the price of the coin has gone up noticeably.
- Decentralized exchanges have become incredibly popular. At its peak, Uniswap famously did more volume than Coinbase Pro! This preview of what’s to come shows us that we can look forward to the day when decentralized exchanges are competing with centralized exchanges in terms of trading volume.
- Ethereum has had collateralized lending for years, thanks to MakerDAO. However, in the next few years, the next big financial product is going to be uncollateralized lending. Nobody has quite figured it out yet but once it happens it’s almost definitely going to be instantly popular.
For anyone who wants to keep track of what’s happening in the rapidly evolving Ethereum ecosystem, there are many ways to stay up to date. A few of the best sources of information include the Defiant and the Bankless newsletter.
Ethereum for the Win
Whether Ethereum maintains its dominance as the preeminent smart contract platform will depend on two things.
Ethereum has to find a way to scale. At this point, it appears that Zk-Rollups and other sidechain technologies will be able to reduce network congestion. Combine that with sharding, which will go live sometime in 2022, and Ethereum should be able to scale to thousands of transactions per second.
Staking has to work in the technical sense. As in, transitioning from PoW to PoS is a huge technical challenge and there is a risk that something could go wrong.
If there is a bug, if Ethereum is compromised by the upgrade, it could cause a mass exodus of users and developers to a different smart contract platform that’s deemed to be more secure.
However, if Ethereum can scale, and if staking is successfully implemented, the future of Ethereum is bright. Scaling, privacy and staking, that’s a powerful combination that’s going to attract institutional investors and millennial cypherpunks just the same.
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This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.