When Bitcoin was first launched in January 2009, it was virtually worthless.
In fact, it took two years for Bitcoin to reach $ 1. It took years after cryptocurrencies spread the concept of blockchain assets and paved the way for other types of blockchain networks.
The most important alternative to Bitcoin is Ethereum. But it’s not really an alternative, it’s a completely different proposal. Unlike Bitcoin, which was designed as form digital money, Ethereum is a network that allows software developers to create decentralized programs called dApps and smart contracts that automate contracts. Ethereum, the native token of Ethereum, is an essential part of its operational program.
Description of Ethereum vs Bitcoin
Like other blockchain networks, Ethereum relies on multiple computers called nodes to maintain a distributed database on the Internet. Not only is this public ledger synchronized with other nodes for data redundancy, but each record in the database is chained and time stamped. This creates an immutable data blockchain because records cannot be forged without creating another blockchain branch.
That’s why blockchain platforms are generally regarded as immutable public ledgers that provide unique value, even though they are just “parts of the code.” Over time, Bitcoin has undoubtedly proved that such peer-to-peer (P2P) networks can guarantee value without the control of central authorities.
However, Bitcoin is a conservative network and its data blocks only serve to record transactions. After all, the original Bitcoin white paper describes it as a P2P payment network. In other words, cryptocurrencies are electronic money, but they are decentralized and cannot be tampered with.
Specifically, Bitcoin smart contracts developed in the script programming language determine the amount of Bitcoin locked and the amount spent. Between these two conditions, a unit called BTC is created. In other words, every transaction on the Bitcoin network only executes smart contracts.
So how does Ethereum stand out?
Running a program when the conditions are met is nothing new. Since the invention of the first computer, it has been an integral part of digital technology. However, when the code runs on the blockchain (as a smart contract), it opens up a whole new landscape.
Second, two important processes can occur.
- For users to interact directly over the network without a mediator.
- Due to the blockchain-specific immutability, its interactions need to be verified in a safe way.
These two components effectively create conditions that will bring about evolutionary changes in the way money is recognized and the way financial services are delivered. Ethereum accomplishes this using the Solidity scripting language and the Ethereum Virtual Machine (EVM). The latter is a platform for executing smart contracts.
EVM is a computational engine that executes smart contracts. In practice, this means that Ethereum can change the behavior of the Internet itself.
A good example: When people use YouTube, they are accessing a computer network operated by Google. Their accounts are managed by traditional companies and leveraged for new products. In contrast, when people access Ethereum, they access the network maintained by others.
Because Ethereum is open source, you can run Ethereum nodes that synchronize with other nodes to validate and update your blockchain (a public ledger consisting of smart contracts).
Therefore, a single entity does not execute the network or the smart contracts it supports. Users interact with Ethereum smart contracts through decentralized applications (dApps). Anyone can create and launch a dApp in the Solidity programming language without asking for permission.
The DApp runs on the blockchain and the backend code is associated with the smart contract, so the supervisor cannot intercept or block the use of the dApp. For example, vending machines do not put small people in boxes to deliver drinks and snacks. Instead, there is an electronic mechanism that automatically detects payments. If this payment condition is met, the vending machine will provide the result of your choice.
Adding the security and immutability aspects of the blockchain to the mix, this basic principle applies to the entire Ethereum network. Similarly, Ethereum’s “vending machines” can replace a vast range of intermediaries such as bankers, fund managers, market makers, brokers, realtors, ticket booths and auction houses.
What kind of dApp does Ethereum offer?
Thanks to its open source nature, anyone can deploy dApps on Ethereum. In addition, Ethereum was one of the first smart contract blockchains, so it gained the advantage of a starter. This made Ethereum a dApp King, offering 2,970 dApps from 4,073 dApps on all blockchains.
In the meantime, 989 DApps have been abandoned. Still, this represents a 73% advantage of Ethereum DApp. Similarly, Ethereum holds the majority of smart contract-locked totals (TVLs), which is $ 45.3 billion out of a total of $ 69.2 billion.
The most popular Ethereum dApp is spreading between blockchain games and decentralized finance (DeFi). For example, the Axie Infinity Marketplace running on the Ronin sidechain has over 300,000 users on a regular basis. Play-to-Earn (P2E) blockchain games made $ 1.3 billion in revenue last year and made huge fortunes virtually overnight.
This was not a coincidence. For decades, gamers have been able to play video games with their own internal economy, but have not been able to export the assets in them and exchange them for real money. Axie Infinity is a very successful proof of concept that shows what happens when an in-game asset is tradable as a blockchain asset.
Specifically, Axie has its own AXS token that works with NFTs to monetize the P2E experience. This is an irreplaceable token. The latter is either an in-game fantasy creature (Axies) or a virtual parcel. Alongside NFT marketplaces such as blockchain games and OpenSea, Ethereum’s most popular dApps are decentralized exchanges (DEX) such as Uniswap and Curve.
Similarly, lending and borrowing dApps such as Aave, Maker and InstaDApp recreates basic banking services without a bank. The principle is the same whether you are dealing with decentralized exchanges or bank dApps.
- Smart contracts create liquidity pools.
- Users add liquidity to these pools by locking the tokens.
- When other traders use these pools, they will automatically provide a liquidity provider (LP) with transaction fees, whether borrowing or exchanging tokens.
This is why liquidity providers are commonly referred to as liquidity miners or yield farmers. When it comes to pricing, decentralized platforms essentially need incentives to work.
Why Ethereum can’t be free
Ethereum runs on thousands of nodes, so why is someone motivated to adopt their computer as an Ethereum node? Anyone can run the node as needed, but only those who are minors or validators will be charged when the user executes the transaction. For Ethereum, things get more complicated because we are currently in a temporary stage between the Proof of Work (PoW) and Proof of Stake (PoS) consensus (which is Ethereum 2.0).
As a good example, Bitcoin uses PoW consensus. In this consensus, miners solve crypto puzzles, validate transactions, and add them to the blockchain as new data blocks. In return, they receive a reward. PoS blockchain works on the same principle, but uses staking instead of computational power.
That is the PoW blockchain evidence Transaction with CPU power (as electricity) work), PoS blockchain proves a transaction with an economic interest. That is, the user locks the token as a stake to validate and add new transactions.
Ethereum monetizes its network with financial bets
Ethereum has a minimum of 32 ETH requirements to become a validator. With these bet funds, users install an Ethereum run / consensus client that connects to the Internet to maintain a network with other validators / nodes.
Based on the total amount of ETH bet, network validators can earn up to 5% annual interest (APY). In contrast, if you deposit money in a traditional bank savings account, APY is limited to 0.05-0.08%.
Currently, Ethereum has over 406,000 validators and is betting 13.6M ETH at a 4.2% APR rate (annual interest is the same as APY, but no compound interest). Conversely, according to the Stakeing Rewards calculator, a modest $ 1,000 stake is $ 40.89 per year.
Ethereum DApp payment
On the other side of the network’s monetization scope, users are required to pay the transaction fee as an ETH gas fee.
Just as a cent is one-hundredth of a dollar, so is the face value of one billionth of a penny in ETH. Therefore, 1 Gwei = 0.000000001 ETH.
However, Ethereum gas prices vary greatly depending on traffic volume. This causes a serious “Ouroboros” problem. As Ethereum grows in popularity, it becomes exorbitantly expensive to use.
Suffice it to say that this is a decentralized platform issue that is to build a new financial infrastructure. After all, if it’s more expensive to exchange or transfer cryptocurrencies on Ethereum, why not use a traditional platform like Western Union instead?
Ethereum addresses this issue by relying on a Layer 2 (L2) network.
Layer 2 network reduces the traffic load on Ethereum
It is never possible to create a friction-free network that you can use freely. This is because there are always costs associated with computing power, internet bandwidth, and storage. Therefore, every PoS blockchain has its own way of dealing with the balance between transaction fees and traffic load.
For example, ALGO has a two-tier network architecture. One network layer handles simple transactions (such as token transfers) and the second layer handles complex transactions. Usually associated with DeFidApps such as yield farming. Ethereum was designed in a different way.
Ethereum does not essentially hold two types of highways, but relies on external highways that link to the main chain (Layer 1) to offload network traffic. One such Ethereum side chain has already been mentioned — Ronin in the Axie Infinity blockchain game. Other L2 networks are more universal, each with its own imported DApp.
This makes using Ethereum more cumbersome, but it saves a lot of gas bills. For example, Arbitrum, the most popular L2 network, has a 52% L2 market share and reduces transaction fees to a completely negligible level.
What is the future of Ethereum?
Contrary to popular belief, the future migration of Ethereum from PoW to PoS is called Merge and is not believed to have a direct impact on network gas prices.
However, there is no doubt that Ethereum is poised to significantly reduce its energy consumption. According to the Ethereum Foundation, network power consumption will be reduced by a factor of 2,000, or 99.95%.
Given the importance of the ESG (Environment, Society, Governance) framework imposed on institutional investors, it is easy to see Green Ethereum opening the door to investment. As a good example, BlackRock, the world’s largest asset manager with a $ 10 trillion AUM and investing in almost every company, is pursuing ESG across its investment portfolio.
After the greening merge, the next major upgrade of Ethereum will take the form of sharding. This is the update most likely to swipe with a volatile gas charge. In combination with the L2 network, sharding divides the Ethereum network into smaller chunks (shards). To be exact, to 64 shards.
Sharding is not new in the field of networking, as video game companies are using this method to make online games faster and cheaper. Finally, the Ethereum merge reduces the issuance of native ETH tokens, making them a rarer asset. According to the basic laws of supply and demand, resources that are in short supply gain value.
After all, this is because Bitcoin has its 21M hard cap<$1から>It’s a different way to $ 40,000. Ethereum does not have such strict coin limits, but the ETH burning mechanism introduced in the EIP-1559 update will continue to reduce ETH supply as the network is used. Ethereum is ready to significantly increase its value if the merge is done without major code abuse.