Why Ethereum Matters

Aditya VempatySeptember 06, 2017

Even if you’re not a cryptocurrency nerd, you’ve probably heard of Bitcoin, the digital currency whose price has soared in 2017.

But if you’re outside of the cryptocurrency crowd, you may not have heard of Ethereum. It’s another cryptocurrency that has been secretly growing rapidly in 2017. In fact, its price has increased at a much faster rate than Bitcoin this year — roughly 4000% vs. 300%.

Bitcoin vs Ethereum Price Chart

Ethereum Price 2017

Source: Coindesk

It’s impossible to know how this price trajectory will play out since Ethereum’s technology is new and largely unproven. It was launched only two years ago in 2015, and its applications have mainly been at small scale or pilot levels.

But Ethereum shows serious promise. Not only are its prices soaring, but its application of blockchains would significantly reduce the need for third-party control in major agreements and transactions. With this underlying technology, Ethereum could completely change the structure of political and economic institutions.

Given this level of potential, it’s likely that Ethereum’s price growth may have less to do with a quick bubble and more to do with its groundbreaking technological advantages over other cryptocurrencies.

Why #Ethereum Matters

How is Ethereum different from Bitcoin

To understand what sets Ethereum apart from Bitcoin, you have to know what they share in common — both are distributed public blockchain networks, or digital ledgers of transactions. These ledgers work by being shared across a network of computers instead of being stored in a single location, so they can’t be corrupted (there’s no centralized version of the data to hack) and they’re accessible by anyone on the Internet.

Differences in purpose

Both networks use blockchain technology, but they were created for separate reasons. Bitcoin was designed to be a single application of the blockchain technology — a digital cash system to facilitate payments.

Ethereum, on the other hand, uses blockchain technology for the creation and deployment of decentralized applications (DAPPs). DAPPs are software programs that use blockchain technology to autonomously facilitate transactions. While Bitcoin is itself a DAPP that is used to exchange money, Ethereum is a DAPP that developers use to build their own DAPPs.

Differences in programming

These networks’ differences in functionality make sense given the differences in their programming languages. Both Bitcoin and Ethereum are scriptable, meaning that users can add code in both networks to automate tasks. But due to differences in programming, developers are able to code more efficiently and creatively on Ethereum than on Bitcoin.

Ethereum uses two programming languages, Solidity and Serpent, that are easy for developers to build with. These languages are advanced enough to be described as “Turing complete,” which means that they can solve any computational problem. They are also clear and readable, so developers can quickly use the advanced tools to create DAPPs. Here’s an example of Ethereum script in its Solidity language.

Bitcoin’s lower level of scriptability can be attributed to its restrictive language. Developers can only use it to do basic things, plus its scripting language is practically unreadable. For example, the ScriptPubKey, the short script that identifies Bitcoin recipients, is an incomprehensible bundle of numbers and letters.

Considering these restrictions, it takes a while to build an app with Bitcoin’s scripting language. For example, it took ex-Google developer Mike Hearn 8 months to write a basic crowdfunding application in Bitcoin.

It should be said that Bitcoin’s scripting language is limited because it doesn’t need to be complex. Keeping its scripting simple allows developers to know when and how programs will end, eliminating the concern of these programs getting stuck and crashing the software.

Ethereum, on the other hand, does require complex scripting because it’s a network with more capabilities. It can fulfill Bitcoin’s primary role as a digital currency while also allowing developers to create their own decentralized applications.

Potential for competition

As it stands now, Bitcoin is the network where people are most comfortable storing their money. Which makes sense — Ethereum is younger and less tested.

Having said that, Ethereum’s rapid growth makes it impossible to ignore. On top of its soaring 2017 prices, it can be used in more industries and offers developers more tools than Bitcoin. With this wider applicability, the possibility of Ethereum surpassing Bitcoin seems plausible, though definitely too soon to predict.

Ethereum as a software platform

Ethereum functions by running DAPPs that have smart contracts, which is code that is stored, verified, and executed on the blockchain.

Some people find the term “smart contract” misleading since this technology can be used to complete a number of activities that involve exchanging something of value. For example, a smart contract could be a poll or a financial transaction, not just a legal agreement. The broad range of smart contract applications is why Ethereum can be used in so many different industries.

Ether, the currency of Ethereum, can be used as a digital, tradable form of money like Bitcoin, but that’s only one example of its larger purpose — running smart contracts on the Ethereum blockchain.

Smart contracts were designed to require ether as a way of preventing buggy scripts that run forever. The script is set with a limit of ether to spend in it, and the ether is consumed as the script runs. If the script can’t complete before the ether has run out, then it is halted, avoiding a potential endless loop that could shut down the entire blockchain.

These ether-fueled smart contracts can be used for a wide variety of purposes in the three types of DAPPs:

1. Financial applications

The first category of DAPPs includes those that manage money. An example of a financial DAPP is Weifund, a crowdfunding platform that uses smart contracts to not only raise capital, but also handles the issuance of shares for contributors.

With smart contracts automatically facilitating transactions and enforcing agreement rules, Weifund organizers can spend more time improving other areas of their projects. Weifund’s application of Ethereum smart contract capabilities also benefits contributors by ensuring transparency and allowing customizable agreements that expand the ways users can contribute.

Looking ahead, the big Ethereum crowdfunding question will be determining which blockchain-based assets are affected by securities laws. After an $150 million Ethereum crowdfunding project lost $50 million last year due to a hack, the Securities and Exchange Commission (SEC) intervened. It determined that the organization raising the funds broke the law by offering public shares without following security laws. Though the SEC decided not to prosecute the group, the case signals Ethereum crowdfunding needing regulation in the future, which could clash with the autonomy of the blockchain technology.

2. Semi-financial applications

The second category of DAPPs are those that involve money but also include non-monetary information outside of the blockchain. An example of a semi-financial DAPP is Flight Delay, which in its limited run provided users payouts for flights that are delayed or cancelled. You applied for a policy by sending Ether to the DAPP and received instant compensation if your flight was delayed or cancelled.

Based on the results of Flight Delay’s launch, developers learned that semi-financial DAPPs that offer payouts like this will most likely require regulatory approval as a form of insurance. Regulatory compliance could prove to be a complicated issue for DAPPs, like Flight Delay moving forward since this oversight is somewhat at odds with the autonomy of blockchain technology.

3. Non-financial applications

The third category of DAPPs are those that don’t involve money at all. An example of a non-financial DAPP is Provenance, which uses blockchains to help businesses track their products and make their supply chains transparent. The smart contracts in this DAPP allow product identities and attributes to be confirmed so that tracking remains accurate.

Non-financial DAPPs can also be used to store personal identity data, a capability that raises interesting privacy questions. It might seem dangerous to have all of your digital identity data on a distributed record, but sensitive information is actually quite secure on blockchains with the use of a “key,” or a personal password. Your sensitive information on the network is tied to this “key” so that only people with it can access the data.

Besides offering security, non-financial DAPPs that store and track private identity data would save people time and energy. Organizations like banks and hospitals could use these DAPPs to easily recall an individual’s information, rather than making them fill out forms or provide physical proof of identification.

With the varied applications of each of these DAPP types, Ethereum technology has the potential to radically change the world. If successful, the technology could not only automate agreements across a number of fields, but also would make a large amount of information decentralized and accessible.

Pros and cons of Ethereum

Ethereum’s ability to facilitate smart contracts without external authority is innovative and exciting, but there are downsides that come with its core concept of decentralization. Here are the network’s pros and cons:

Pros

Ethereum can be used in more industries than other cryptocurrencies because of its smart contract capabilities. These smart contracts can exchange anything of value, not just money, so companies and organizations in many industries can utilize them.

The blockchain technology that runs the Ethereum programming code is immutable and reliant upon consensus, making censorship impossible. This accurate reporting is invaluable considering that third-party interference in data, both financial and non-financial, is a major issue globally.

Cons

Unlike blockchains, the code of smart contracts can have bugs because it is written by people. Worse, these buggy smart contracts can’t be upgraded or changed given the immutable aspect of the blockchain technology. This dilemma played out last year with the Ethereum DAO hack, which could only be resolved by creating a new version of Ethereum with the same code.

The development of Ethereum depends on how these pros and cons are addressed moving forward. Achieving mainstream adoption will mean quickly adapting the network to reduce issues, like bugs in smart contracts, and foreseeing how more cryptocurrencies might implement smart contracts, in which case Ethereum will need to refine its competitive edge.

What is the future of Ethereum?

Judging from Ethereum security issues that have already emerged, more lessons will need to be learned before this network reaches long-term stability.

With that said, there are legitimate reasons to be excited about the future of Ethereum. By decentralizing agreements across a number of industries, Ethereum could be used to fix any number of world problems — the UN has even announced that they plan to use Ethereum to distribute World Food Program funds to refugees.

In terms of leadership, Ethereum’s decentralization of agreements could mean companies, governments and other organizations shifting away from single entity control. Cutting out this need for central authority would lead to a number of improvements worldwide — reducing costs, increasing efficiency, and establishing trust in global agreements.