The Allure of Ethereum
We hope you found value in the last few newsletters detailing Bitcoin and its utility. There’s plenty more to talk about regarding Bitcoin…but it’s important to know that everything discussed so far also lays a foundation to better understand the second largest crypto asset, one that has grown in popularity since its public launch in 2015: Ethereum.
This piece will kick off a four-part series on Ethereum and its related services and applications. It’s a tall order, but I’m going to try — and if you have any suggestions or questions, please don’t hesitate to reach out in the comments or email me directly at stevie.stacks.sats@gmail.com.
While Bitcoin is championed by many enthusiasts (often called Bitcoin maximalists, or maxis) as the one truly decentralized cryptocurrency, it’s still not the only crypto in town. In order to grasp the wider landscape of this digital ecosystem, familiarity with Ethereum is key. If you’ve wondered what NFTs are all about or what altcoins like Aave or Polygon bring to the table, this is the place to start.
Ethereum’s Early Days & What Makes It Unique
Our story begins with Ethereum’s co-founder, Vitalik Buterin — a Canadian-Russian programmer and all-around genius. He wrote for several publications in the crypto space and co-created Bitcoin Magazine in 2011. Just a few years later, he published a white paper that outlined the importance of a distributed software platform built on blockchain technology.
The Ethereum developers set out to achieve this by offering, in Buterin’s words, “a universal programmable blockchain and packaging it up into a client that anyone can use.” This “world computer” would follow in the footsteps of BitTorrent and Bitcoin by establishing a digital platform built on transparency and trust.
Using the coding language Solidity, it would serve as a hub of growth for decentralized applications (dApps) by extracting points of failure and restricting censorship, as well as offering a haven for peer-to-peer messaging, browsing and networking. The long-term picture? Distributed governance and enhanced technological collaboration — sparking unlimited potential.
How Bitcoin & Ethereum Differ
There are similarities here to Bitcoin; namely, they’re both networks built on top of blockchain technology. In both networks, miners are rewarded for transactions that are cryptographically signed, but Ethereum miners are paid in tokens called Ether (ETH). So while Ethereum itself is a platform, Ether is the currency that provides the incentive to keep it running efficiently.
There are, however, many differences. First, we’ve learned that Bitcoin as a currency is scarce because its supply is capped at 21 million. Ether, on the other hand, has no limit. The monetary implications of both networks are thus very distinct.
The most important technical distinction comes down to a concept called Proof of Stake. In contrast to Bitcoin’s Proof of Work function (in which miners solve a puzzle in order to produce new blocks), Ethereum aims to follow an algorithm that will allow validators to vote for the outcome. The more you have staked means the greater the power of your vote. However, Buterin knew he couldn’t create a Proof of Stake network right away — he had to start with the Proof of Work foundation and build from there. Currently, Ethereum operates on a proof of work model, but has been gearing towards a gradual shift to PoS.
The transactions on the Ethereum network also require fees to be completed, commonly referred to as gas. Gas fees are essentially the cost to compute or process a miner’s transaction. The account sending the transaction will be debited this amount — and (metaphorically) like the fuel we use to fill our cars, the price of gas can fluctuate. In the case of Ethereum, gas fees can rise and fall a significant amount within a given day.
Network Structures & Forking
As for structural differences: where Bitcoin operates as one distributed, trustless transaction history, Ethereum is more like a single public ledger technology. It’s often referred to as a machine or super computer that can be used to create new programs.
Ethereum runs on thousands of computers spread globally, known as nodes — but it has fewer nodes than Bitcoin (aka less systems of computers in the network). In Ethereum’s case, the software that allows nodes to read blocks on the blockchain is called a “client.” Trustless connections give both networks an extent of decentralization…but where each lies on that spectrum is a topic that we’ll save for another day.
One key attribute that’s the same for Bitcoin and Ethereum, beyond their blockchain foundation, is that they can technically both be altered. When there’s a disagreement on how to proceed given a certain development error or challenge, teams of developers may split into two different networks. In the case that miners decide to upgrade or make a change to the protocol, there will be what’s called a “fork”. This has already happened in 2016, in the case of Ethereum Classic, and there have been further changes implemented and scheduled as Ethereum transitions fully to Proof of Stake.
Up Next: Smart Contracts, DeFi & dApps
Ethereum was designed to allow decentralized applications to be built on top of its infrastructure. This is perhaps the most innovative aspect of Ethereum. It’s a big deal because it provides a space for so many new types of interactions. Current use cases for dApps are decentralized finance (DeFi) and NFTs.
What makes DeFi viable are programmable smart contracts. I’m so excited to talk about these that they deserve a newsletter all their own…next week. DApps, smart contracts and DAOs are some of the most important topics surrounding Ethereum, so it’s tough to wrap this up without explaining them in detail. Of course, all you need to know is available on the web — and we’ll be back soon to discuss more of this in upcoming letters.