Is Ethereum More Important Than Bitcoin?
Blockchain technology, the distributed ledger system that underpins the digital currency Bitcoin, is getting a lot of attention from Wall Street lately. With uses ranging from cross-border payments to settlements and clearing of over-the-counter derivatives to streamlining back office processes, the potential for disruption in the financial industry and elsewhere is growing more real each day. While bitcoin is the most widely used and well known use case of blockchain, Ethereum may be the killer app that allows for this disruption to finally take place. (For related reading, see also: How Will Bitcoin 2.0 Change the World.)
The token native to the Ethereum blockchain, Ether (ETH), has recently risen to over $10 per ETH, and the market capitalization of all ether is nearly $800 million, making it the second most valuable blockchain behind bitcoin (which represents approximately $6.5 billion of value). What is Ethereum and why is it interesting?
A Brief Overview of Ethereum
Ethereum was developed to augment and improve on bitcoin, expanding its capabilities. Importantly, it was developed to feature prominently “smart contracts:” decentralized, self-executing agreements coded into the blockchain itself. Ethereum was first proposed by Vitalik Buterin in 2013 and went live with its first beta version in 2015. Its blockchain is built with a turing-complete scripting language that can simultaneously run such smart contracts across all nodes and achieve verifiable consensus without the need for a trusted third party such as a court, judge or legal system. According to its website, Ethereum can be used to “codify, decentralize, secure and trade just about anything.” In late 2014, Ethereum raised over $18 million in bitcoin by way of a crowd sale to fund its development.
The ‘Ethereum Virtual Machine’ (EVM) is capable of running smart contracts that can represent financial agreements such as options contracts, swaps or coupon-paying bonds. It can also be used to execute bets and wagers, to fulfill employment contracts, to act as trusted escrow for the purchase of high value items, and to maintain a legitimate decentralized gambling facility. These are just a few examples of what is possible with smart contracts, and the potential to replace all sorts of legal, financial and social agreements is exciting.
Currently, the EVM is in its infancy, and running smart contracts is both “expensive” in terms of ether consumed, as well as limited in its processing power. According to its developers, the system is currently about as powerful as a late 1990s-era mobile phone. This, however, is likely to change as the protocol is developed further. To put this into perspective, the computer on the Apollo 11 lander had less power than a first-generation iPhone; it is certainly plausible that in a few short years, the EVM (or something like it) will be able to handle sophisticated smart contracts in real time.
Within the Ethereum ecosystem, ether exists as the internal cryptocurrency which is used to settle the outcomes of smart contracts executed within the protocol. Ether can be mined for and traded on cryptocurrency exchanges with bitcoin or fiat currencies such as US Dollars, and is also used to pay for computational effort employed by nodes on its blockchain. (For more, see: What is Ethereum?)