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  • Ethereum used to be viewed as bitcoin's little brother.

  • But that was back when it was still worth a few hundred dollars, and many investors

  • didn't quite understand what it was.

  • Today, things are different, and ethereum has carved out a sizable share of the crypto

  • market, powering key innovations from decentralized finance to non-fungible tokens.

  • Investors in the ethereum cryptocurrency, known as ether, see it as a key rival to bitcoin.

  • But technical issues with the ethereum network are proving costly, and there's a flood of

  • new tokens that are hot on its tail.

  • So what is ethereum exactly, and does it have what it takes to unseat bitcoin as the king of crypto?

  • Ethereum was conceived in 2013 by Russian-born computer programmer Vitalik Buterin.

  • He was just 19 years old at the time.

  • Buterin was initially a strong proponent of bitcoin.

  • He even co-founded Bitcoin Magazine, one of the oldest media outlets dedicated to covering

  • the cryptocurrency. But he soon grew concerned with what

  • he viewed as shortcomings in bitcoin's underlying technology.

  • The basic idea of a blockchain is to spread out the responsibility of processing digital

  • currency transactions across a decentralized network of computers.

  • But Buterin saw potential for the technology beyond just making payments.

  • I visited Chris Dick, a quantitative trader at the crypto trading firm B2C2, to learn more.

  • Bitcoin was the major innovation, the original innovation in cryptocurrency.

  • But arguably ethereum is equally as big a step forward for the cryptocurrency industry.

  • Whereas bitcoin brought money onto the internet in a way that those funds could not be spent

  • twice, and you didn't have to have a central trusted counterparty.

  • Ethereum brought all that, but with the full capabilities of a computer on top of it.

  • In the ethereum white paper, Buterin proposed the launch of a new platform that would support

  • two key innovations, known as smart contracts and decentralized applications.

  • Smart contracts are lines of code written into the blockchain.

  • They carry out certain functions once a set of conditions are met.

  • Say I wanted to pay my rent using crypto.

  • With a smart contract, I could specify when my rent is due each month, and have the appropriate

  • funds sent to my landlord, without any time delays or middlemen like an estate agent facilitating the transaction.

  • These smart contracts are what power decentralized applications, ordapps,” on ethereum.

  • Think Facebook or TikTok, but on the blockchain.

  • With ethereum, you can have any software that's running remotely somewhere around the world

  • on the blockchain, and you don't have to have a central point of trust for that software.

  • So that means you can actually launch companies and launch entire pieces of software on top

  • of ethereum network and have it safe, working quickly and working in a secure way, like

  • completely around the world.

  • Like bitcoin, ethereum has attracted renewed interest from investors in the past couple of years.

  • But backers of both cryptocurrencies say they offer starkly different investment cases.

  • Bitcoin is predominantly used for transactions, and backers of the cryptocurrency believe

  • it to be a store of value, similar in some ways to gold.

  • Ethereum, on the other hand, is considered as more of a platform for the crypto economy.

  • It's become the destination of choice for apps developed on the blockchain.

  • There are two key trends in crypto that have come about thanks to ethereum: decentralized

  • finance, or DeFi, and non-fungible tokens, otherwise known as NFTs.

  • DeFi is an umbrella term used to describe a plethora of new financial products that

  • are built using the blockchain.

  • Such services allow you to make trades or apply for a loan or savings account, all while

  • bypassing traditional intermediaries like banks.

  • NFTs, meanwhile, are like the crypto equivalent of collectible items.

  • They're essentially tokens on the blockchain that say whoever owns them is the rightful

  • owner of a specific digital item - say, a work of art, or a character in a video game.

  • The entire market value of the ether cryptocurrency is now almost half that of bitcoin's.

  • In 2021, the total funds deposited into DeFi accounts swelled to more than $270 billion,

  • while trading in NFTs reached a record $40 billion.

  • Still, ethereum isn't without its flaws.

  • In the early days of its development, ethereum suffered a severe hack that led to the theft of tokens

  • worth around around $50 million at the time.

  • The victims in the attack were a group of investors known as the DAO,

  • or Decentralized Autonomous Organization.

  • It was a kind of investment fund, but with no traditional corporate structure or hierarchy.

  • Hackers exploited what's known as a recursive call bug.

  • It's sort of like if you were to withdraw cash from an ATM, but the system kept on churning

  • out funds without updating the balance.

  • The impacts of this heist was so large that it cause the ethereum blockchain to split into two separate branches -

  • Ethereum and Ethereum Classic.

  • Tom Robinson, co-founder of crypto compliance firm Elliptic, says such vulnerabilities are

  • now a common sight in the DeFi industry today.

  • The problem is that code, that smart contract has been created by human beings, and humans make mistakes.

  • And so what we've seen over the past two years, is that there are errors being made in these

  • DeFi protocols, which are identified and exploited by hackers.

  • And, as has long been the case with cryptocurrencies of all stripes, ether is a volatile asset.

  • Its price rose to an all-time high above $4,800 in November 2021, at the peak of the latest crypto craze.

  • It has since pulled back considerably from those levels, though.

  • But human error and market volatility aren't the only problems impacting ethereum.

  • Rising transaction costs, coupled with the huge amount of energy required to validate

  • transactions, have resulted in the creation of a multitude of new coins known asethereum killers.”

  • An issue that's long plagued the crypto space is what's known as the "scalability problem."

  • In essence, this refers to the idea that, as a cryptocurrency's usage grows, its underlying

  • platform struggles to keep up with the increased demand.

  • We've seen this already with bitcoin.

  • On the bitcoin blockchain, a new block of transaction is added to the chain around every

  • 10 minutes. But as usage of bitcoin begins to climb, the network can only confirm so

  • many transactions at a time, and so, the time required fluctuates.

  • The same can be said for ethereum.

  • With all these NFTs and DeFi services cluttering up the network, the fees required to process

  • those transactions, and the time taken for them to go through, have been on the rise.

  • One thing you'll often hear in discussions about ethereum is "gas fees."

  • And no, that doesn't have anything to do with the cost of refilling your fuel tank.

  • Gas fees is really a metaphor in this case for the transaction fee that a user has to

  • pay when sending funds on the ethereum network, or indeed, when interacting with a smart contract.

  • When you pay that transaction fee, somebody who you will never meet will run their code

  • and be able to process your transaction.

  • In order to get them to process your transaction, you pay this transaction fee that's also called the gas fee.

  • Another issue ethereum shares with bitcoin is its impact on the environment.

  • Both of the cryptocurrencies use a mechanism known as proof of work, which requires power-intensive

  • crypto mining to confirm transactions and mint new tokens.

  • A growing number of investors are turning to new crypto protocols, such as cardano,

  • solana and polkadot, due to frustration with these problems.

  • The developers of those networks are hoping to take the crown, with the promise of being

  • faster and more energy-efficient than ethereum.

  • However, ethereum isn't taking the challenge lying down.

  • It's currently in the process of upgrading to a new standard that proponents say would

  • make it run more efficiently, and in a way that's environmentally friendly.

  • This upgrade, known as ethereum 2.0, will see the ethereum network move over to what's

  • known asproof of stake.”

  • I asked Larisa Yarovaya, associate professor of finance at the University of Southampton's

  • Business School, to elaborate on what that means.

  • The current consensus algorithm that is used by both ethereum and bitcoin, in order to

  • create a new coin and to validate the transaction, the whole network needs to agree on it.

  • It requires huge number of computer power, a huge amount of computer power, huge amounts of energy.

  • If you're talking about proof of stake, then here it's slightly different.

  • Validator nodes are the computers that contribute to the security of blockchain networks like ethereum.

  • At the moment, those validators require specialist equipment in order to participate.

  • But with proof of stake, rather than miners, ethereum will rely on so-calledstakers

  • that lock up a portion of their ether to show they've got skin in the game

  • kinda like a deposit.

  • The more tokens someone commits, the higher their chances of being chosen to approve a

  • new batch of transactions, and therefore get rewarded in some ether.

  • Proponents say this will deter bad actors, as validators' ether is at stake if they

  • try to cheat the system.

  • That should, in theory, make the network more secure.

  • There are some downsides, however.

  • Here we can see straight away the distribution of the power and less decentralization than

  • is the case of bitcoin.

  • Also, some experts suggest that there are some security concerns in terms of proof of

  • stake, that it's much less secure system and consistent mechanism in comparison to the proof of work

  • Nevertheless, Larisa thinks that's a risk ethereum users should be willing to take.

  • We need to think about overall benefits, in my opinion, and if proof of stake is so much

  • more efficient, if it can offer better scalability, if it's more environmental-friendly, that

  • maybe community will be willing to compromise on safety and will be able to compromise slightly

  • on centralization and decentralization to accept more centralized technology.

  • The ethereum upgrade is expected to kick in properly at some point in the second half of 2022.

  • So, can ethereum become the king of crypto?

  • It certainly seems possible.

  • However, many experts say it's not a winner-takes-all market, and that there's room enough for

  • both ethereum and bitcoin to co-exist.

  • Ether and bitcoin are really quite different investments.

  • They're really seeking to achieve different things.

  • So bitcoin has really emerged as more of a store of value.

  • So it's about hedging against inflation.

  • Whereas ether is more about investing in ethereum as a platform for decentralized finance.

  • So I don't think it's necessarily about one competing with the other.

  • If anything, ethereum should be considered a bet that blockchain technology will power

  • the future of finance, and possibly even the internet as a whole.

Ethereum used to be viewed as bitcoin's little brother.

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