When Ethereum came out, many saw it as the second Bitcoin. There was a lot of excitement around Ethereum — which was still worth a few hundred dollars at the time — but many investors didn’t quite understand what it was.
Today, things are different and Ethereum has clasped a significant share of the crypto market. The platform also powers key innovations like decentralized finance and non-fungible tokens.
Ethereum’s fast-growing ecosystem has led to the steady appreciation of its native cryptocurrency — Ether. Many investors now see it as a key rival to Bitcoin.
But despite Ethereum’s impressive growth in the last couple of years, the network has suffered some technical issues that have proven costly for investors. There’s also a flood of newer tokens competing with the Ether.
So what is Ethereum exactly, and does it have the capacity to replace Bitcoin as the king of crypto?
History of Ethereum
Ethereum was brought to life in 2013 by Russian-born computer programmer Vitalik Buterin. He was just 19 years old at the time.
Buterin was a strong proponent of Bitcoin and even advocated for it through his publication: the Bitcoin Magazine. But he soon grew dissatisfied with what he considered a flaw in Bitcoin’s underlying technology.
Blockchain technology entails a network of decentralized computers processing digital currency transactions (i.e., Bitcoin). But Buterin saw the potential for the technology beyond just payment processing. This gave birth to the idea of Ethereum.
While Bitcoin was the first and original implementation of a cryptocurrency, Ethereum is equally — if not more — significant due to the myriad of possibilities it gave birth to.
What is Ethereum?
Bitcoin made it possible to exchange money such that the funds can only be spent once, without a central trusted counterparty. Ethereum allows all of that but with the full capacities of a computer on top of it.
When Buterin conceived Ethereum, he proposed that the platform be capable of supporting two key innovations: smart contracts and decentralized applications.
Smart contracts are lines of code executed on the blockchain. They allow you to program the actions you want to execute once a set of conditions are met.
Smart Contracts
Say I want to pay for a car using crypto, but I don’t have enough funds. I could create a smart contract and program it to pay the dealer when my balance reaches the required amount. This eliminates any time delays and middlemen like an agent facilitating the transaction.
Smart contracts power decentralized apps, or “dapps”, on Ethereum. Daps are software that executes on the Ethereum network; think Facebook or Insta, but on the blockchain.
Ethereum enables you to run any software remotely on the blockchain, and the software isn’t on any specific server. This means you can launch companies on top of Ethereum and have it safe, working quickly and securely, and accessible to the world.
DeFi NFTs
Two key innovations were born thanks to Ethereum: decentralized finance, or DeFi, and non-fungible tokens, otherwise known as NFTs.
DeFi is the general term for “dapps” that provide financial services using the blockchain. A DeFi product can help you execute a trade, apply for loans, or create a savings account, all while bypassing traditional intermediaries like banks.
NFTs are like collectible items for the crypto world. For example, say you want to sell a painting. You can generate an NFT on the blockchain for that artwork. The NFT specifies who its rightful owner is. This can also apply to other collectibles such as a video game character.
Ethereum’s ecosystem is growing year by year. Its currency, Ether, has a total market value that’s nearly a third of Bitcoins. DeFi accounts control over $270 billion in funds and NFTs are the rave of the moment.
How Bitcoin is viewed compared to Ethereum
While Bitcoin and Ethereum have attracted interest from investors in the past couple of years, the interest has come for different reasons.
Bitcoin is a digital currency, hence it is used predominantly for transactions. Investors also see it as a store of value, similar to Gold or the US dollar in some ways. Some even buy it hoping its value will increase in the future so they can make a profit.
Ethereum, on the other hand, is considered more as a platform for the crypto economy. It provides the infrastructure upon which apps can run on the blockchain. Today thousands of apps are developed on the blockchain thanks to Ethereum.
Issues With Ethereum
Despite its explosive growth, Ethereum isn’t without its flaws. Let’s look at some of the issues facing Ethereum.
DeFi Hack
Ethereum suffered a hack in 2016 that saw nearly $50m worth of Ether stolen from the platform. As a result, the value of the Ether slumped by 25%, and the Ethereum blockchain had to be split into two separate branches: Ethereum and Ethereum Classic.
The hacking came about because of a software flaw. This flaw was found in an app running on the Ethereum network, not in Ethereum itself. The hackers were able to withdraw funds without the system updating the balance.
In the aftermath of the incident, Buterin pleaded for crypto exchanges to stop trading so the developers could resolve the issue. The victims in the attack were a group of investors known as the DAO, or Decentralized Autonomous Organization.
Human Error
Smart contracts are made up of software code. Human beings write the software, so they are not infallible. There have been many incidents of coding errors in DeFi protocols, some of which were exploited by hackers.
As the technology for writing quality code got better, the rate of errors has been reduced drastically. The Ethereum platform now has high-end software security mechanisms to review apps before they go live on the network.
Scalability Problem
Poor scalability is an issue that has long plagued the crypto space. The idea is simple: as more people use a cryptocurrency, the underlying platform struggles to keep up with the increasing demand.
We’ve already seen this with Bitcoin. A block of transaction is added to Bitcoin’s blockchain every 10 minutes, more or less. But as more people use Bitcoin, the time taken to verify transactions fluctuates wildly.
The same can be said for ethereum. It’s becoming more expensive to validate transactions, leading to an increase in transaction costs. This increase in transaction fees also contributed to the rise of new tokens known as “Ethereum killers”.
Gas Fees
The term “Gas fees” is a metaphor for transaction fees. You pay a transaction fee when sending funds through the Ethereum network. Once you pay the fee, someone you probably will never meet will run their code and be able to process your transaction.
Like Bitcoin, Ethereum 1.0 uses the proof of work mechanism to process transactions on the blockchain. This hurts the environment because the system requires power-intensive crypto mining to verify transactions and mine fresh coins.
For this reason, many new cryptocurrencies are trying out other crypto protocols. Examples include Cardano, Solana, and Polkadot, who all use the “proof of stake” protocol. The aim is to develop a solution faster and more energy-efficient than Ethereum.
Proof of Stake
Ethereum 2.0 went live in September of 2022. This upgrade saw Ethereum switch to the “proof of stake” mechanism. But what does that mean?
The old mechanism for validation requires a huge number computer power and energy to keep the system running smoothly. This is because the old consensus agreement required the whole network to agree to create a new coin or validate a transaction.
With proof of stake, Ethereum does not rely on miners. Rather it relies on so-called “stakers” who stake a portion of their ether to prove their legitimacy. Think of it as a deposit.
The more tokens a person gives up, the higher their chance of being chosen to approve a new batch of transactions. The person then gets rewarded in some ether.
Ethereum vs Bitcoin
So, can Ethereum become the king of crypto?
It seems possible when you consider its importance to the crypto ecosystem. However, many experts don’t see it as a competition where the winner takes all the perks. There’s enough room for both Ethereum and Bitcoin to co-exist.
Also, a more appropriate comparison would be Bitcoin vs Ether. Even then, people invest in both for different reasons. Many consider Bitcoin as more of a way to store value. So they buy Bitcoin to hedge against inflation.
Whereas, ether is more about investing in Ethereum and its ecosystem (DeFi and NFTs). We don’t consider Ether a competition to Bitcoin - both have their uses. Investing in Ether means investing in the future of decentralized finance, and possibly the future of the internet entirely.