APRIL 8, 2020
What is Ethereum & How Does Ethereum Work?
Ethereum is a blockchain-based platform that completely revolutionises the way transactions are carried out thanks to Smart Contracts.
As you may know, Bitcoin allows you to perform secure transactions without intermediaries through the blockchain. In other words, technologically speaking, Bitcoin is simply a peer-to-peer currency.
That seems sufficient, doesn't it? Why do we need another technology or currency to carry out transactions?
In everyday life, we carry-out many different transactions. Whether it is a simple banking transaction, the reimbursement of medical expenses from the insurance company or the purchase of a house, all these transactions require one to several expensive and slow third parties who are not necessarily trustworthy.
Thus, Ethereum's goal is to simplify, secure and improve all these transactions by implementing them on the blockchain.
What are Smart Contracts?
The revolutionary idea behind Ethereum is the possibility of deploying "Smart Contracts" across its blockchain. A Smart Contract is simply a small piece of code that contains all the instructions of a given transaction. Like a contract written on a paper, it contains all the information necessary for the smooth running of the transaction in addition to new possibilities to automate and facilitate everyone's life.
These Smart Contracts have infinite possibilities and will allow exchanges that were not possible with the current constraints.
To illustrate the power of Smart Contracts, let's look at the following example:
"Stan wants to buy Roger's house."
Today, to ensure that the transaction is done in the best possible way, we would need to have:
- A real estate broker
- A notary
- Insurance companies
Each of these intermediaries charges significant fees, requires time, and is not necessarily trustworthy depending on where this transaction takes place.
For a Smart Contract, you have to have:
- A smart contract
In a secure and cost-effective way, the smart contract contains all the steps and information necessary to validate the acquisition in a secure and decentralised manner. In addition, this transaction is stored eternally on the Ethereum blockchain.
Thanks to Ethereum, Stan can buy Roger's house safely, quickly and without expensive middlemen!
An ecosystem based on Smart Contracts
As illustrated below, Ethereum allows you to perform, like Bitcoin, peer-to-peer transactions, create Smarts Contracts and create applications based on these Smart Contracts. In other words, Ethereum is a kind of programmable money.
What are the benefits of Ethereum?
The usefulness of Smart Contracts is infinite, here is a list the most relevant ones:
- Decentralised finance: from a loan to a transfer, all transactions can be deployed securely on the Ethereum blockchain
- Voting systems: a voting system deployed on the blockchain helps to combat manipulation and provides valid results
- Digital identity: through the blockchain, it is possible to have a secure validation of identities
- Insurance: cost reductions, accuracy, and automation of refunds
- Products authenticity: the authenticity of any object or creation can be validated through the Ethereum blockchain
- Create your own project on the Ethereum blockchain and possibly issue tokens for a fundraising event (ICO)
Decentralised applications are simply applications based on Smart Contract to secure, decentralise and automate transactions. The uses are endless and it is natural to secure and remove intermediaries for gambling (casino, poker,...), collections games, cards games and for exchanges.
Today, the majority of decentralised applications are used in the field of games and gambling as well as for exchanges as shown below.
In addition to these applications, it is even possible to create a decentralised autonomous organisation (DAO) which are described in this dedicated video.
Where is Ethereum today?
Created in 2013, Ethereum and its cryptocurrency Ether (ETH) which is necessary to fuel transactions, smart contracts and dApps, is in 2nd position in terms of total market capitalisation just behind Bitcoin (30 billion on 3.7.2019).
Today, the use of its network in terms of number of transactions is now four times higher than Bitcoin with more than 1 million transactions per day.
The creation of new smart contracts has also doubled in the last year. This can be explained by the large number of projects that are running and developing on the Ethereum blockchain.
Indeed, as mentioned above, it is possible to create your own token to develop your own project on the Ethereum blockchain. These tokens have their own utilities but circulate on the Ethereum blockchain. SwissBorg’s CHSB token is one of these tokens.
In other words, the Ethereum blockchain is a kind of highway with the "Ether" brand as its main car/token, which runs with many other brands with different characteristics
On the waffle graph below, we can see that, of the first 200 projects in terms of market capitalisation, more than 50% of them are running on the Ethereum blockchain. This highlights the place that Ethereum has taken on the market.
The Ethereum network's intrinsic value
As we have presented for Bitcoin, several factors must be taken into consideration when trying to evaluate a project like Ethereum. Thanks to the Smart Contract, the number of use cases is exploding compared to Bitcoin and the share of speculation on its future use is significant.
For the moment, it is necessary, like for Bitcoin, to provide computational power to validate transactions (mining). Therefore, the value of an Ether (ETH) is also linked to its production cost.
In the article "What is Bitcoin?", we introduced a law, Metcalfe's Law, that links the use of a network to the value of that network . Empirically, in terms of the value of the network alone, it can be shown that Ethereum is currently underestimated compared to its real use (the blue curve is above the green curve).
What's in Store for the Future of Ethereum?
Why is Ethereum not yet adopted globally despite this technology?
Like all new technologies, Ethereum is still in development and suffers from certain weaknesses that will soon be overcome by new developments.
Indeed, today the number of transactions per second is limited on the Ethereum blockchain. It is even already congested. To imagine global use, Ethereum must become scalable.
To compensate for this deficit, Ethereum will, between 2020 and 2021, change the process by which transactions are validated. It will no longer be necessary to mine with computational power but stake Ether to validate transactions. In addition to becoming a greener and more sustainable technology, this change from Proof of Work to Proof of Stake will allow the network to be divided into multiple sub-networks (sharding) to gain a factor of 1000 on the number of transactions.
And, in this way, to become a potentially globally usable technology.
Ethereum is a technology that completely revolutionises the way transactions are carried out. Thanks to Smart Contracts, it is possible to replace all existing standard contracts to improve transaction security, limit costs and decentralise the world. The applications are almost infinite and we are still at its beginning.
We can safely believe that Ethereum will continue to grow and will remain one of the biggest players on the market because more than 50% of the top 200 projects in terms of market capitalisation are deployed on Ethereum. The improvement of the network will make it possible to have a sustainable and scalable protocol for future global use. Let’s not forget that this project is only 6 years old!
Invest in Ethereum in a safe and secure way with the SwissBorg App
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