PYMNTS Blockchain Series: What Is Ethereum?

In the course of this series of articles, we will look at the top blockchains of cryptocurrencies, what they are, how they work, what they do, and what their strengths and weaknesses are. The purpose is to help you understand.

You will come out of this series as well as a better sense of what cryptocurrencies are. Understand why tokens work, that is, how the blockchain handles transactions, is the key to success or failure as a digital asset.

reference: PYMNTS Blockchain Series: What is Cosmos?

So what is Ethereum?

Ethereum is where cryptocurrencies end and blockchain begins.

That may be a bit exaggerated, but in reality, before Ethereum, blockchain was like a one-trick pony. They are decentralized digital ledgers that provide immutable time-stamped transaction records that can be traded by two parties without the risk of double payments and without trusting third parties or each other. It was very good to create.

In other words, starting with the launch of Bitcoin’s “Genesis Block” on January 3, 2009, the cryptocurrencies were all about currencies-peer-to-peer payments.

It changed on July 30, 2015, when Ethereum’s mainnet went live on its own block zero and changed blockchain technology from a digital ledger to what Ethereum’s lead creator Vitalik Buterin calls the “computer of the world.” I did.

reference: PYMNTS Crypto Basics Series: What is a blockchain? How does it work?

That’s because Ethereum is more than a store of value or a record of an event.

Ethereum is a smart contract platform. That is, it can be used to create self-executive contracts that are written to the immutable blockchain. When the conditions specified in the smart contract are met, the smart contract runs automatically and meets the conditions without the control or supervision of an outsider.

reference: PYMNTS DeFi Series: What is a smart contract?

In fact, Ethereum trades options and futures, sells videos and cars, tracks lettuce heads from shipping containers and farms to the table around the world, bets on football games, and when automatically paid crop insurance. It means it can be used to create plans. Temperatures go below freezing — essentially anything that involves any form of commerce or supply chain management can be done cheaper, faster, and more accurately.

If / Then World

Smart contracts are written in what computer coders call “if / then” statements. It is the heart of almost any commercial transaction or contract. “When John pays Mary $ 5,000, Mary gives him a car,” or “In the case of the National Weather Service, the service reports that temperatures have dropped below freezing on Steve’s farm for three consecutive days. Acme Crop Insurance pays him the value of damaged agricultural products. “

The important thing is that almost every computer programming language consists of if / then statements. That is, the Ethereum if / then statement can be used to create an entire decentralized application, called a DApp, if it is complex enough. Therefore, cryptocurrency exchanges, video games, and even the entire Metaverse virtual world can be built with Ethereum’s Solidity smart contract programming language.

This is why Decentralized Finance (DeFi) is being built on Ethereum or blockchain to become a better, faster, or more scalable version of Ethereum. Smart contract programming is sophisticated enough that DApps can be built complex enough to run without the input of all sorts of centralized humans, including owners, administrators, and governance personnel.

Read again: PYMNTS DeFi Series: What is DeFi?

Buterin’s idea of ​​”computers in the world” came from it — Ethereum can be used as a decentralized computer.

One twist of this is that smart contracts do not run correctly on the Ethereum blockchain. Ethereum has what is called an Ethereum virtual machine (EVM). This is a virtual environment separate from the core transaction record portion of the blockchain where smart contracts exist and can interact.

ether token

Ethereum, the native token of Ethereum, is the second blockchain by market capitalization. This clearly means that many people are investing in ETH, as Ethereum is known for crypto exchange.

That said, ether is one of the two cryptocurrency tokens agreed by the US Securities and Exchange Commission, not a security, but a “utility token” that serves a specific purpose within the crypto ecosystem. That is, it gives the owner the right or ability to use the service or product on the blockchain.

In the case of ether, the purpose is to create smart contracts.

To self-execute, the contract must be paid automatically when the specified conditions are met. The way this works is for the buyer to “lock” a certain amount of Ethereum to the contract once the smart contract is agreed.

Because smart contracts, like everything else on the blockchain, are immutable, that is, they cannot be modified, the parties can trust that payments have already been made. If properly written, the contract will only be executed when the terms are met or expired (which is the case) and will return the locked ether to the person who deposited it.

Open wide

One of Ethereum’s greatest strengths is the ability to build DApps or protocols without using Ethereum tokens. Instead, developers can create their own tokens using a technical specification called ERC-20, and those tokens work just as effectively, but only for that DApp or protocol. ..

In fact, ERC-20 tokens are much more common, but there are many other technical specifications that are compatible with Ethereum. Another thing that has received a lot of attention is ERC-721. This is the standard for non-fungible tokens (NFTs).

Read again: PYMNTS NFT Series: What is an NFT? Why are they the latest “next big thing” in cryptography?

Most of the top “Ethereum Killer” blockchains aiming for an improved version of Ethereum, which has some Achilles tendons, use the Ethereum token standard and are compatible with EVM.

The latter is because it can be written in the same Solidity programming language. This makes it easier for DApp developers to encourage projects to be ported to the blockchain.

reference: PYMNTS DeFi Series: What is the top DeFi blockchain?

Achilles tendon

Ethereum has two major issues: scalability and power consumption.

Scalability is why Ethereum killer blockchains such as Polkadot, Solana, Cardano and Polygon are eating at least a little Ethereum lunch.

Read here: PYMNTS Blockchain Basic Series: What are Polygons?Ethereum killer hedges that bet

Simply put, Ethereum isn’t fast enough. It can only process 12 to 15 transactions per second, which is too little to threaten Visa’s top speed of 65,000 TPS.

And because it’s by far the most popular blockchain platform, it’s being crushed by the weight of its own success, trading is delayed at peak times and transaction fees are skyrocketing. At the time of this writing, it has averaged nearly $ 11 and has skyrocketed to $ 70.

read more: PYMNTS Crypto Basics Series: What is the consensus mechanism? Why does it destroy the planet?

Next is power and pollution — not as bad as Bitcoin, but Ethereum uses a proof of work consensus mechanism (see link above) to mine new ETHs and write new transactions to the blockchain — This requires a huge amount of power. Again, at the time of this writing, it’s almost the same as in the Netherlands.

However, there is a solution: Ethereum 2.0. But that’s a different story.

Another story: Can Proof of Stake solve crypto ESG issues?