What is Ethereum?
While Bitcoin is seen as the star of the show, Ethereum, the second largest cryptocurrency by market capitalization, actually does a lot of the heavy lifting.
Cryptocurrency is more than just Bitcoin. While Bitcoin is seen as the star of the show, Ethereum, the second largest cryptocurrency by market capitalization, actually does a lot of the heavy lifting. For now, Bitcoin holds the most wealth in the industry but Ethereum operates at the cutting edge of cryptocurrency technology, challenging what developers thought could be possible and reimagining what services and tools can be offered in the digital realm.
Vitalik Buterin: Ethereum mastermind
A pseudonymous individual called Satoshi Nakamoto launched Bitcoin and then disappeared without a trace. Ethereum, the world’s second most popular cryptocurrency, was the brainchild of another brilliant mind that decided to stick around: Vitalik Buterin.
From childhood, Buterin’s story was different. Buterin was born in Kolomna, a small city outside Moscow, peppered with the golden cupolas of orthodox churches and monasteries. Kolomna produced a high number of Red Army generals and, at the time of Buterin’s birth, was a closed city due to its role in developing missiles and other sensitive military equipment. Little did the world know it, but just over twenty years later, one man from the secretive city would go on to become one of the foremost innovators of the digital age.
Buterin’s life changed when his parents moved to Canada. His teachers immediately recognised his talent for mathematics, programming and economics. Buterin excelled at school and was encouraged by his father, himself a computer scientist, to dive into the world of programming. Buterin’s father then introduced him to a concept that would change his life forever: Bitcoin.
From here on, cryptocurrency became the centre of Buterin’s life. His career began as a writer for a publication called Bitcoin Weekly, a job he took up to earn Bitcoin. When Bitcoin Weekly folded, Buterin launched Bitcoin Magazine in 2012. The print publication was the first to publish serious, high quality content about cryptocurrencies and is still operating today.
Ethereum: Programmable Bitcoin
After a few years, Buterin knew both Bitcoin and blockchain technology like the back of his hand. He realized that this technology could change the world. He also knew that it could be better. In 2013, aged only 21, Buterin published the whitepaper for Ethereum. Ethereum took Bitcoin’s cryptocurrency and blockchain technology and reimagined it as programmable. Some have described it as a kind of decentralized supercomputer.
With Ethereum, anyone can use digital money without banks or central authorities. Ethereum was designed to be a digital landscape where people are free to create tools to solve the economic, technological and philosophical problems of today. From financial services to games and apps, Ethereum is an adaptable environment that champions innovation.
Other than producing the world’s second largest cryptocurrency, Ether, Ethereum is probably best known for decentralized applications, otherwise known as dapps. Dapps are applications that run on a blockchain instead of being hosted on a single computer. Buterin wanted to develop dapps because they are open source, decentralized and free from control from any single authority.
In less than five years, Ethereum developed into a global network of thousands of connected computers and even more enthusiastic developers. Just like Bitcoin, the Ethereum Network consists of connected miners and nodes all around the world. They provide the computational power for smart contracts and dapps built on Ethereum.
Cryptocurrency miners are incentivised by the block reward paid in Ether. If you imagine Ethereum as a huge, decentralized supercomputer, Ether is the fuel that powers it. Any transaction that passes through Ethereum needs some amount of Ether in order to be executed.
Despite its ambitious goal of improving the underlying technology of cryptocurrency and blockchain, Ethereum itself too came to the stage that it needed upgrading. Bitcoin produces around 7 transactions per second. The first incarnation of Ethereum could support 30. But even this was not enough.
As Ethereum’s user base grew, demand clogged the system. Users began to experience long delays and the network fees soared. Ethereum 2.0, sometimes known as serenity, is a supercharged upgrade to the Ethereum blockchain. After the update, Ethereum’s transaction processing rate skyrockets to over 100,000 per second.
True to its innovative nature, Ethereum 2.0 will also change the way that Ether is mined. Cryptocurrencies are currently created when miners race to verify transactions and solve complex computational puzzles to add new blocks to the blockchain. They are rewarded with cryptocurrencies for each new block. This system is called proof-of-work (PoW).
Ethereum 2.0 shifts to a system called Proof of stake (PoS). Under PoS, miners validate block transactions dependent on how many coins they hold. The more coins a miner holds, the more power they have. The process is called ‘minting’ instead of ‘mining.’ This process not only streamlines the creation of cryptocurrencies and the growth of the Ethereum network but also tackles one of cryptocurrency’s most significant problems: Environmental impact.
Mining cryptocurrency requires huge computational power. The largest mining operations use entire warehouses full of large, expensive and powerful computers. But, aside from creating large profits, cryptocurrency miners also create a huge carbon footprint from the energy used up by the computer. Ethereum’s use of PoS greatly reduces the energy consumption, making it both cheaper and more environmentally friendly to mint new coins and secure the blockchain.
Bitcoin is for purists, Ethereum is for mavericks
Bitcoin was the digital manifesto of Satoshi Nakamoto, who believed a better world could be created using his technology. For many, the principles of Nakamoto’s software have taken on an almost sacred quality and should be followed to the letter. Others recognised that Bitcoin was just the beginning and the possibilities for innovation were endless. Ethereum created a protean view of a future where games, tools, products and solutions to the world’s biggest problems could be created free of censorship.
Bitcoin might be experiencing a wave of wider adoption but Ethereum is where the most exciting breakthroughs are taking place. Ethereum has even started overshadowing Bitcoin in the midst of the industry’s greatest ever bull run as people realise the true potential for Ethereum to change the digital world in ways never seen before.
The watershed moment for Ethereum and the general public came with the creation of Decentralized Finance. Also known as DeFi, Decentralized finance is a revolutionary financial ecosystem where services like lending, payments and staking run on a blockchain. Ethereum has powered the DeFi revolution, offering interest rates 20 times higher than traditional finance, slashing costs of remittances by up to 50%, as well giving the world’s 1.7 billion unbanked people access to a brighter financial future.
But that’s not all. Ethereum is also the backbone of new technology that completely reimagines the concept of digital ownership: NFTs. NFTs, or non-fungible tokens, are tokens that represent ownership of unique items. They can represent ownership of anything that is not interchangeable for something else because they have qualities that make them unique. Consequently, NFT tokenisation can apply to a huge variety of things such as collectibles and real estate. But NFTs have mostly shaken up the digital art world.
For years, digital art was considered a lower life form by artists creating in the physical world. Besides the snobbery you find elsewhere in the art world, this was not as undeserved as you might think. Digital art had a lower value because it could so easily be reproduced. It was impossible to show ownership of something that could pop up elsewhere on the internet.
But NFTs can only have one official owner at a time and this information is documented and secured by the Ethereum blockchain. From character skins on your favourite game to digital art created by your artist of choice, NFTs help beautiful creations stay unique and improve their value. The possibilities for NFTs to spread value are endless, with Rick and Morty co-creator Justin Roiland selling a digital doodle for over 1 million dollars and a businessman buying Twitter founder Jack Dorsey’s first tweet for $2.9 million.