What exactly is Ethereum?
Remember your first time stumbling into a cryptocurrency exchange wanting to buy the fabled Bitcoin (BTC)? You were excited to make your first purchase yet you couldn’t help but notice something called ‘Ether’ (ETH) right below it.
>>>Read more: ETH 2.0: What to expect from EIP 1559<<<
What Exactly is Ethereum?
That’s because Ether (ETH) is the second-largest cryptocurrency by market capitalisation. It’s the currency of the Ethereum network— a decentralised public ledger sometimes known as the “world’s programmable blockchain” because of its utility beyond peer to peer transactions.
An easy way to understand Ethereum is by comparing it with Bitcoin. While both Ether and Bitcoin run on blockchain technology, Bitcoin is merely a store of value; a cryptocurrency used for financial transactions. Think of it as digital cash without the controlling authority like a central bank.
Ether also facilitates transactions, but it’s Ethereum’s smart contract technology and ‘permissionless’ nature that makes it more than just a blockchain with a native cryptocurrency.
Ethereum is a platform; the underlying infrastructure for a range of new applications including decentralised finance (DeFi), and non-fungible tokens (NFTs).
In case you’re wondering: Smart contracts are digital contracts that can be automatically executed without the need for a human intermediary (e.g. a banker or lawyer). This explains how DeFi projects (e.g. Bank-less financial activities like loans, insurance, and savings in cryptocurrencies) can be run on the Ethereum network.
ERC-20 (Fungible) and ERC-271 (Non-fungible) tokens are also made possible with smart contract standards — Look out for our upcoming guide on NFTs!
Decentralised applications (dApps) can be built on the Ethereum blockchain
What’s next for the world’s programmable blockchain?
As mentioned in our previous articles, Ethereum is currently using the Proof of Work (PoW) consensus mechanism which requires a substantial amount of time and energy. Ethereum 2.0 will transition to the Proof of Stake (PoS) mechanism therefore reducing transaction time and costs. It’s also more environmentally sustainable – a characteristic which has quickly attracted institutional investors.
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The Ethereum Improvement Protocol — EIP 1559 will introduce a base fee for transactions on the Ethereum network. This will overcome the issue of having inconsistent and sometimes extremely high gas fees (transaction costs).
More importantly, the base fee (in Ether) will be burned — permanently removed from circulation, hence creating scarcity and enabling Ether to rival Bitcoin as a store of value asset. This is a significant development which will also accelerate institutional interest.
It’s reported that Ethereum generated approximately 600 million dollars worth of fees in 2020; 83% more than Bitcoin. Therefore, while it’s evident that Bitcoin will continue being a valuable commodity (Bitcoin is often described as “digital gold”), it’s Ethereum’s broad utility that might attract more investors into the blockchain industry.
In short, it’s important to realise that cryptocurrencies are not merely speculative assets.
The practical applications of the Ethereum blockchain across existing and emerging industries is a testament to the fact that cryptocurrencies will be a catalyst for a highly efficient and digitalised world economy.
Keep Tokenizing! Till next week.
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