An Introduction to Ethereum

Ethereum is the second largest crypto investment by theoretical value ($156.23B), second only to Bitcoin ($367.35B). Ethereum has been in the news recently as it has undergone a massive update (the Merge) that has Ethereum investors and supporters excited for the future. In order to understand the Impact these updates will have, let’s first look at what Ethereum is, and how it operates.

Ethereum is a decentralized technology, powered by blockchain, that is host to an ecosystem where individuals can build applications, hold assets, transact, and communicate without a central authority. This probably sounds like the same “word salad” that you read for every cryptocurrency, however, Ethereum is not a currency, but rather a platform that is programable. For a comparison, think of Bitcoin as a network of payments, and Ethereum as the whole marketplace. Individual programmers have the ability to create decentralized applications (also known as “Dapps”) that run without a centralized party. Take for example Uber: If I wanted to call for a ride to the airport, I would need to open my Uber app and request a ride. Uber would then find a nearby driver and connect the two of us. If you took this same scenario and put it on the Ethereum network, there would be no central authority of Uber. It would be the driver and passenger connected directly, without any third-party involvement. In short Ethereum, is trying to decentralize all aspects of the internet. Even though the internet itself is not solely controlled by one organization, companies like Google, Amazon, Facebook, Apple, all deal with a significant amount of the traffic that runs through the internet. Almost no action on the web happens without some sort of third party or intermediary. This is what Ethereum is trying to solve.

Now that we know what Ethereum is; how does it function? Ethereum uses a coding language called Solidity, to write “Smart Contracts” which are the logic that operate the Dapps. These contracts are not much different than how we would traditionally think about a contract. It is simply a series of If-Then statements. If I pay a car dealership $600 a month, then I can lease one of their cars. If I do not pay, then I cannot use the car. Programmers use conditions like these to write smart contracts and then the Ethereum network executes it. The network also takes care of all aspects of monitoring the contract, enforcement, payment, and management. Going back to the previous example, if I did not make my $600 lease payment, then instead of the bank reaching out to provide notice, the Ethereum network would simply lock me out. There is no spirit of law on the network. As far as the network is concerned, everything is written in black and white. Along with that, once these smart contracts are uploaded to the Ethereum network, they are unchangeable. This makes the language of every contract critical.

Now to the recent update. Previously, transactions that occurred on the Ethereum network were verified and stored on the blockchain network using Proof-of-Work (PoW). In order for a transaction to be verified, computers (called miners) simultaneously solved cryptographic puzzles and the first one to solve the puzzle was rewarded with cryptocurrency (Ether). This created an incentive for individuals to build large mining farms so they could obtain the most computing power. This led to a large use in energy across the world, which has been a major criticism of the crypto space. To solve this the Ethereum network recently switched to a Proof-of-Stake (PoS) model. In PoS, validators (formerly miners) stake their own currency as collateral; in order to have a chance at being selected by the network to validate transactions. If selected, the validator will be solely responsible for validating the transactions without other competitors. This creates a massive reduction in energy consumption because instead of having multiple computers trying to solve the same puzzle (PoW model) now the network only has one validator solving the puzzle. In fact, according to Digiconomist, the Ethereum network cut its energy consumption by 99.95% once the Merge took place.

For Ethereum promoters, this is a major win in the public relations column and clearly separates them from their major competitor, Bitcoin. For reference, see below for Bitcoin’s energy consumption.

The difference between the two is drastic to say the least. With the push for clean energy and reducing our carbon footprint; Ethereum is leading the charge in the crypto space.  

There are many other advantages and new challenges that are a result of “The Merge”, but the question remains…will this green energy initiative ripple throughout the crypto space and is it enough to garner new investment and support?

Time will tell.

DISCLOSURE: This article is meant to be educational in nature and not a recommendation of any cryptocurrency.  Investing involves risk, including possible loss of principal.  Investing in Cryptocurrency involves additional risk including security of wallet, regulatory and adoption risks.  Please consult with your advisor before investing.