Ethereum is the new and popular cryptocurrency which has reached almost 80% of Bitcoin’s total market-cap. So the question is “Is Ethereum a competition to Bitcoin or something to co-exist with Bitcoin?” We’ll try to answer that in this post.

What is Ethereum?

According to ethereum.org,

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.

To simplify this, you can think of Ethereum as Bitcoin + Smart Contracts. Ethereum can act as a programmable blockchain. Anyone can program and deploy a contract which can run arbitrary code and then execute the contract on the blockchain.

Hold on, isn’t running arbitrary code on a network dangerous?

The code is run on Ethereum Network through the use of smart contracts. Each smart contract has an address, code and some storage. When you send a transaction to the contract address, the code is run on every node on the network inside a special protective sandbox called Ethereum Virtual Machine (EVM).

EVM is a sandboxed environment which protects the nodes from infecting their computer in the event of a malicious contract. If a malicious contract does exist, it will not be able to harm or damage the network. Moreover, EVMs are limited to prevent this from happening.

So, what are some practical use-cases of smart contracts?

Smart Contracts are able to execute transactions depending on some outcome. Here are some of the chief applications where Ethereum Smart contracts are already being used or can be used:

Prediction Markets

Crowdfunding

Voting Systems

Escrows

Savings Account

Gambling

Domain registries

Business to Business Contracts

You may already be familiar with one quite popular use case of Ethereum: Initial Coin Offerings (ICOs) where companies issue tokens running on top of Ethereum Network to fund their product and allow the investors to influence the product’s road-map. There will be a separate post about Ethereum ICOs coming soon.

Ethereum smart contracts allow a contract to create tokens which can be distributed to investors of ICOs which are distributed by the company offering the ICO. Tokens over Ethereum can act as a separate entity tightly tied to Ethereum blockchain. They can be used for innovative projects like sharing your computer’s GPU power or hard-drive space to the network to earn money or buying power from the network.

Advantages of Ethereum over Bitcoin?

Ethereum has two main advantages over Bitcoin currently:

Scalability: Bitcoin currently has an artificial limit of 1 MB blocksize. What this means is it can handle only 4 average transactions per second before the block becomes max-size. This leads to transactions backlogs and higher miner fees.

Ethereum can already handle a lot more transactions per second than Bitcoin currently can. Moreover, Ethereum can be compared to a world-wide super computer more than just a blockchain performing transactions.

Ethereum can also scale much easily than Bitcoin with community support behind it. (EIP 648 proposal currently being worked on can easily quadruple Ethereum’s scalability.)

Bitcoin can also solve the scalability problem with sufficient community and miner support behind it. There are many proposed scaling solutions with a solution called Segwit2X getting a large percentage of miner support at the time of writing. It can scale Bitcoin from 4-8 times its current transaction limit.

Bitcoin currently has an artificial limit of 1 MB blocksize. What this means is it can handle only 4 average transactions per second before the block becomes max-size. This leads to transactions backlogs and higher miner fees. Ethereum can already handle a lot more transactions per second than Bitcoin currently can. Moreover, Ethereum can be compared to a world-wide super computer more than just a blockchain performing transactions. Ethereum can also scale much easily than Bitcoin with community support behind it. (EIP 648 proposal currently being worked on can easily quadruple Ethereum’s scalability.) Bitcoin can also solve the scalability problem with sufficient community and miner support behind it. There are many proposed scaling solutions with a solution called Segwit2X getting a large percentage of miner support at the time of writing. It can scale Bitcoin from 4-8 times its current transaction limit. Smart Contracts: Smart contracts allow more than just transactions on the blockchain. It allows more advanced uses on the blockchain than Bitcoin can.

Smart contracts allow more than just transactions on the blockchain. It allows more advanced uses on the blockchain than Bitcoin can. Presence and representation in corporate world: Ethereum has the backing from corporate clients, through the Ethereum Enterprise Alliance (EEA) which works with hundreds of enterprise grade companies in all fields from banking to healthcare. Large scale companies like DTCC, State Street, Infosys, Deloitte, MUFG, Toyota Research Institute and Broadridge are members of EEA.

Disadvantages of Ethereum?

No hard cap of maximum number of ETH

Bitcoin has a process called block-reward halving enforced on the protocol level where every four years, the number of Bitcoins mined by the miners in every block become half. Essentially, the inflation rate of Bitcoin halves and so the maximum number of Bitcoins converge to 21,000,000 Bitcoins. There can never be more Bitcoins in existence than 21 Million.Ethereum however does not have any fixed hard cap. According to ethereum.org,

Is the ether supply infinite? No. According to the terms agreed by all parties on the 2014 presale, issuance of ether is capped at 18 million ether per year (this number equals 25% of the initial supply). This means that while the absolute issuance is fixed, the relative inflation is decreased every year. In theory if this issuance was kept indefinitely then at some point the rate of new tokens created every year would reach the average amount lost yearly (by misuse, accidental key lost, death of holders etc) and there would reach an equilibrium.

However, 18 M ETH/year is just a maximum limit of the Ethereum Inflation rate. It is planned that this year, Ethereum will switch from Proof Of Work method of mining to Proof Of Stake. This will be a huge change in the network, can save a lot of electricity and also increase the transaction rates and speeds.

But the rate is not expected to be kept: sometime in 2017 Ethereum will be switched from Proof of Work to a new consensus algorithm under development, called Casper that is expected to be more efficient and require less mining subsidy. The exact method of issuance and which function it will serve is an area of active research, but what can be guaranteed now is that (1) the current maximum is considered a ceiling and the new issuance under Casper will not exceed it (and is expected to be much less) and (2) whatever method is ultimately picked to issue, it will be a decentralised smart contract that will not give preferential treatment to any particular group of people and whose purpose is to benefit the overall health and security of the network.

Over funding of ICOs:

This is not a technical problem with Ethereum but it affects the network. Companies have a product for which they need funding and they set up an Ethereum smart contract and open up their product for crowdfunding. People send ETH to the smart contract and receive tokens representing the company (the tokens work on the Ethereum network only).

So, that’s all good and well, right? Where’s the problem? Well, there’s nothing wrong with investing in ICOs. It’s when people invest in ICOs just to sell the tokens at a small potential profit when they become available for trading. This will lock down a lot of ETH in the hands of few developers who may or may not make the product.

Can Ethereum replace Bitcoin?

The answer is most definitely unknown. It depends on lots of factors in the future. How great is Ethereum’s acceptance level? Were there any major attacks on the Ethereum network? How far has Bitcoin scaling come?

Depending on many circumstances, Ethereum could just co-exist alongside Bitcoin with both of them having their special uses. Bitcoin as a store of value like Digital Gold and Ethereum for its smart contracts and faster network.

Ultimately, it’s for the future to see. It is unpredictable. Maybe, neither Ethereum nor Bitcoin are the leading cryptocurrencies of the future. One thing which is certain is the future of cryptocurrencies in general is quite bright.

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