Top Ten Cryptocurrencies – Ethereum (ETH)

The blockchain cryptocurrency Ethereum is now three years old.

Since it’s inception in 2015, the Ethereum network has now grown to become the second largest blockchain platform after Bitcoin in terms of total market capitalization.

Ethererum was the brainchild of Vitalik Buterin, Gavin Wood, and several other developers, who conceived of a new kind of blockchain which would be more multi-purpose in terms of usage possibilities than the original Bitcoin blockchain which is solely used to operate a cryptocurrency.

Ethereum Price: $210.28
Total Market Cap: $21.6bm

(Data as at 16 October 2018)

How Does Ethereum Differ From Bitcoin?

Ethereum is an open-source blockchain network that facilitates so-called smart contracts and which uses its own digital currency called Ether. It’s developed and maintained by a worldwide team of passionate developers for the Ethereum Foundation, a Swiss nonprofit organization.

Ethereum is unique in that it enables developers to build and run decentralized apps on the system.

Ethereum and Bitcoin may appear similar from the cryptocurrency angle, but they are in fact two entirely different projects with very different intentions.

Bitcoin serves solely as a cryptocurrency for transactions and as a store of value. Ethereum meanwhile is a multipurpose virtual computer network which provides access for running applications and automated smart contracts on the system.

The Ethereum network can also be used to create what are called Decentralized Autonomous Organizations (DAO), which are automated collections of smart contracts which effectively form an entire “organization” which operates completely automatically and independently of any intervention.

The Ether or Ethereum currency token is intended to be used by developers building apps that will run on the Ethereum blockchain as well as by users who want to access smart contracts running on the system.

A smart contract is a computer program which manages the contractual exchange of money, goods, property, shares, commodities, or other assets. It ensures the contract will operate and be enforced for both parties exactly as programmed, handling management, enforcement, performance, and payment and eliminates the risk of any fraud.

Strictly speaking Ethereum is the name of the network and Ether is the token used. But many people commonly tend to use the term Ethereum for both or “Ethereum blockchain” or “Ethereum network” for the system. The term “gas” is used for the Ether or Ethereum that is used to pay for access to the Ethereum network in order to run applications.

Ethereum has also gained popularity as a store of value and as a transactional currency by traders and investors. Many cryptocurrency exchanges now quote altcoin prices in Ethereum as well as Bitcoin. This is an offshoot use for Ethereum which was not originally intended by the developers of the system.

This interest in Ethereum led to a sudden big rise and peak in the Ethereum price by early 2018. Since then however, this price peak has subsequently collapsed and the Ethereum price has been mostly stuck in a downward spiral.

This downward spiral however is not exclusive to Ethereum. Much of the altcoin market as well as Bitcoin have seem similar falls in their value over the same period.

Ethereum has significantly smaller block sizes than Bitcoin which allows for faster transaction speeds. Another important difference between the two systems is that Ethereum allows for both permissioned and permissionless transactions, whereas Bitcoin only provides public transactions.

At the moment Ethereum uses the Proof of Work system of mining similar to that used by Bitcoin, although Ethereum mining is not quite so energy-intensive as Bitcoin’s.

As well as providing paid-for access to its blockchain for users and applications, Ethereum can be used to launch and run other cryptocurrencies. A token standard known as ERC20 provides a standardized basis for this. It’s estimated that as many as 200,000 developers are now working on Ethereum-based projects throughout the world.

Unlike Bitcoin and some other tokens, the supply of Ethereum is not limited. The amount of new Ethereum is restricted to a maximum of 18 million per year, around 25% of the initial supply. This effectively means that relative inflation of Ethereum is restricted and gradually decreases year by year.

The Ethereum network runs a giant distributed computer known as the Ethereum Virtual Machine (EVM). The EVM enables anyone to run any program on it provided they pay for the usage with the necessary Ether or Ethereum tokens.

This means applications can be written to utilize the Ethereum blockchain without having to build a completely new and separate blockchain for each application. In other words, a form of “Blockchain as a Service“.

Ethereum can be accessed by developers in a number of ways. One method is to use the native Ethereum Mist browser. This provides an easy-to-use interface to the system. You can use Mist to write and deploy decentralized applications and smart contracts, as well as using the digital wallet to trade and store Ethereum tokens.

Another way to access the network is to use the MetaMask web-browser extension. This is available for Firefox, Google Chrome and the Brave web-browser.

Applications at present have to be programmed using Ethereum’s own custom programming language known as Solidity. However this is set to change – see below.

Some of the Problems With Ethereum

A number of disadvantages have been identified with the Ethereum system to date.

First of all, the programming code used for writing smart contracts and DAO systems, like all programming code, can contain bugs. As a result of this, one particular DAO, called in this case simply “The DAO”, launched in 2016 suffered a hacker attack in which over 3.6 million Ether tokens were stolen.

In order to provide compensation to those whose funds were hacked, the Ethereum blockchain was forked into two. Remnants of the original Ethereum blockchain who did not join the newly forked blockchain still operate their own (much small) blockchain, using the name Ethereum Classic.

So there are now effectively two Ethereum systems in existence, each with their own cryptocurrency token: Ethereum (ETH) and Ethereum Classic (ETC). ETH is by far the biggest system and currency by total market cap and also has the largest number of application and smart contract users.

Secondly, Ethereum at present has serious scaleability and capacity problems. The sudden Cryptokitties craze imposed a serious burden on the network which was shown to be unable to cope with the greatly increased traffic volume, with more serious applications suffering heavy deterioration in their operational performance.

Thirdly, the issue of centralization. Currently, the Ethereum system has around 70 miners, which means Ethereum is a relatively centralized blockchain system. Mining centralization is a risk to the integrity and security of a blockchain network, as it can lead to what is known as a 51% attack.

A 51% attack is a blockchain control vulnerability that can occur if one individual or group of individuals or organizations manage to get control of 51% or more of the blockchain network’s mining (or hashing) power.

This would then enable them to manipulate the blockchain for their own purposes. This could involve legitimizing fraud such as double-spending coins, falsifying blockchain records, and with that destroying the blockchain’s integrity.

Ethereum now faces increasing competition from newcomers to the blockchain-as-a-service sector. Notable competitors at present include EOS, NEO, Cardano, VeChain, Tron, IOTA and others.

What Technological Innovations are Planned for Ethereum?

The Ethereum Foundation plans a number of technological improvements and innovations to deal with the problems outlined above. These are intended to make the system fit for future expansion by boosting the processing capacity and efficiency to accomodate a much greater volume of users and applications.

Let’s take a look at the main changes planned right now.

Proof of Stake (Casper)

Ethereum intends to abandon the mining system in favor of the much more energy-efficient and with that environmentally friendly Proof of State system for generating new coins.

Proof of Stake or PoS requires miners to invest or “stake” money on the network itself. Ethereum users interested in mining Ethereum will in future be required to stake 32 ETH. This will also entitle them to a say and a vote in Ethereum blockchain network management.

PoS also eliminates the high electricity usage that the existing PoW mining system requires. It will also make it easier for more individuals to get involved in mining Ethereum as the cost of joining the network as a miner will be lower under PoS than with the current PoW system.

No expensive hardware or electricity charges will be required. More participants will in turn ensure the Ethereum network maintains its integrity and is secure.

Casper is currently provisionally scheduled to go live in late 2019. From that date Casper will fully implement the new Ethereum Proof of Stake system and with that the old PoW mining system will be switched off.

However the implementation date for Casper has already been rescheduled a number of times and it’s not certain that it will actually take place in 2019.

A hard fork of Ethereum code-named Constantinople is planned for the end of October 2018. This will introduce an initial version of the planned Proof of Stake system to run alongside the existing Proof of Work mining algorithm.

Mining rewards on Ethereum will reduce from 3 ETH per block to 2 ETH while preparations continue for the implementation of the full Proof of Stake system.

Sharding

The second big upcoming innovation planned for Ethereum is a scaling solution known as sharding.

Sharding refers to the process of splitting the blockchain up into smaller segments called shards. Each shard is effectively a small blockchain in itself. All the shards communicate with each other and with the main Ethereum blockchain.

This allows for multiple transactions to be processed in parallel without having to wait for the ones before them to complete. At present, Ethereum is able to process a maximum of around 15 transactions per second which constitutes a serious bottleneck.

Sharding will make possible a massive increase in processing capacity, with many thousands of transactions per second being possible as the system expands.

eWASM

eWASM is a standardized piece of software which Ethereum is now going to adapt as a replacement instruction set for the present EVM or Ethereum Virtual Machine.

The EVM or Ethereum Virtual Machine is the software module which is responsible for running and managing the third-party tokens, dapps, smart contracts, and DAOs which run on the Ethereum blockchain. This replacement of the present EVM is sometimes referred to as EVM 2.0.

eWASM is a derivation of Web Assembly which in turn is a development of major companies such as Google, Apple, Microsoft, Facebook and Mozilla.

EVM 2.0 will operate in a broadly similar way to the existing EVM but eWASM will enable better performance and will also support standard existing computer programming languages to build applications, such as C++ and Java, rather than just Ethereum’s own Solidity language as is the case at present with the EVM. eWASM will make the Ethereum platform more attractive for developers.

In implementing eWASM into EVM 2.0 Ethereum will be following in the footsteps of other blockchain as a service competitor networks such as Cardano, EOS and Tron who are already deploying or plan to switch to eWASM-based virtual machine code for their systems.

My Assessment of Ethereum

Ethereum has grown in popularity in a very short space of time to become the number two cryptocurrency in terms of total market cap. Ethereum is without doubt the main player in the decentralized app blockchain-as-a-service sector.

However, the technical architecture of the system was poorly conceived at the start as regards projected levels of future usage and the blockchain processing capacity which would be required. This now has to be rectified and a catch-up process is now underway, with the implementation of various innovations such Casper, Sharding, eWASM and so on.

These innovations should help make Ethereum fit for the future. However, Ethereum  no longer has the sector to itself since the growth of powerful competitor blockchain networks many of whom already have the technical edge over Ethereum.

The splitting of the system into Ethereum and Ethereum Classic also made little sense, but this was largely outside of the control of the founders.

Finally, the Ethereum price has since collapsed, by over 70% from its all time high of just under a year ago and the trend is still downward. This fact may not especially bother Vitalik Buterin but it is a concern to traders and investors in the currency.

Ethereum was not conceived of to serve as a cryptocurrency for transactions outside of Ethereum network use, but the fact is this role has now come to account for a very large part of total Ethereum token activity. This has consequences for the usage of the Ethereum network, affecting the price of the Ethereum token.

However in the short term at least, the Ethereum price is now at much lower levels than a year ago and this may help encourage usage of the system.

Other competitor networks such as EOS, Cardana and others are definitely worth watching. These competitors have the potential to overtake Ethereum in terms of technical innovation if not necessarily immediately capturing large market share.

Investment disclosure of author: The author holds investments in the asset or assets mentioned in this article.

Disclosures: The above article may include affiliate links for products and services for which this site may receive remuneration. The author or authors may hold investments in the assets mentioned in this article.

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