3. Ethereum: an extra step into blockchain.

A bit of History

Ethereum is a decentralized, censorship resistant, cryptographically hard, trustless and permissionless open-source blockchain, its native currency is Ether. So to make things clear from now, the ETH/USD that you see on trading platforms is not called Ethereum, its called Ether (trading for USD); Ethereum is the blockchain. In 2013, Vitalik Buterin, a young Russian-Canadian programmer who previously wrote articles for Bitcoin Magazine, got the idea for Ethereum, after discovering Bitcoin and realizing that with blockchain technology, a lot more can be done relatively to what Bitcoin does.

Of Ethereum's eight co-founders, only Vitalik Buterin is still working with the Ethereum community. Charles Hoskinson and Gavin Wood have started rival smart-contract blockchains (Cardano & Polkadot); Anthony Di Iorio, Amir Chetrit and Jeffrey Wilcke have left crypto to focus on other activities. Mihai Alisie and Joseph Lubin have started companies to help build Ethereum's decentralized application and layers.

You can think of Bitcoin like the Phone, you can call & talk to people and that’s it; Ethereum is like the Smart Phone, you can build apps on it. Therefore, Bitcoin isn’t Turing complete; you can write scripts but you cannot code anything fancy on the platform. Ethereum is Turing complete, meaning that you can write a program to do just about anything, it’s highly flexible (more on this later). Development was crowdfunded in 2014, which gave investors an opportunity to get in early (the ones who held their ETH are probably enormously wealthy today); the network went live on 30 July 2015.

Bitcoin vs Ethereum Design

· Founder: Unknown (Satoshi Nakamoto) <> Vitalik Buterin

· Genesis: January 2009 <> July 2015

· Code: Non Turing (Script) <> Turing Complete (Solidity, Serpent, LLL & more)

· Ledger: UTXO – Transaction <> Transactions, State, Storage, Receipts

· Block time: 10 minutes <> 13 Seconds

· Consensus: Proof of work <> Proof of work, moving to Proof of Stake

Also note that Bitcoin was not crowdfunded, there was no opportunity to get in earlier than the date the network went live.

UTXO vs Account/Balance Model

There are two popular types of record keeping in today’s blockchain networks. The first method is called the UTXO (Unspent Transaction Output) Model and the second one is the Account/Balance Model. Bitcoin employs the UTXO model, making it a transaction ledger. Ethereum uses the Account/Balance Model, making it a balance ledger. To simplify, the Bitcoin network only uses past transactions to determine how much money you have left in your wallet, while the Ethereum network uses the traditional way of book-keeping by tracking how much money each wallet has, and when you need to spend money, the system checks its record to make sure you have enough balance before approving the transaction.

For currency usage, I like the UTXO model more, because it offers better privacy. I also understand why smart contracts use the account-based model, as they need to store information other than just native currency.

Decentralized Applications and Smart Contracts

Ethereum is a Turing-complete virtual network that runs applications and stores information on a blockchain. Turing-complete means that it can take a program, run that program and show some result; so it has the ability to understand and implement any future agreement, allowing anyone to launch permanent and irreversible decentralized applications (Dapps) onto it, with which users can interact. Decentralized Finance (DeFi) applications offer an extensive range of financial services without the need for conventional & power hungry financial intermediaries like brokerages, exchanges, or banks, such as allowing cryptocurrency users to borrow against their holdings or lend them out for interest. Ethereum also allows for the creation and exchange of NFTs, which are non-fungible tokens connected to digital works of art or other real-world items and sold as unique digital property.

Ethereum serves as a platform for a big number of other cryptocurrencies, called ERC-20 tokens, which serve as currencies for the Dapps mentioned above. The most notable ERC-20 tokens today are UNI, currency to the Uniswap decentralized exchange (built on Ethereum of course) and LINK, currency to the Chainlink network that allows the integration of off-chain data into smart contracts.

These are complex subjects to understand, researching and reading about the crypto space is crucial to be crypto literate. Eventually, being crypto literate will be as important to you as being financially literate.

Ethereum has two types of wallets: private key accounts, and contract accounts (to read and write smart contract code). For all transactions on Ethereum, you must use its currency Ether.

Transition from proof-of-work to proof-of-stake

The Ethereum blockchain is currently secured by the proof-of-work system, which is similar to Bitcoin’s. However, it is soon moving to the proof-of-stake system with Ethereum 2.0.

Proof of stake is a consensus mechanism used by blockchain networks to validate transactions that need to be added to the blockchain; it tries to address the weaknesses of proof of work systems. The issue with proof of work is that when the activity on the network goes up, proof of work systems use up substantial resources and create pollution. This is because proof of work miners compete to solve a cryptographic puzzle to earn rewards, and every miner on the network is computing the same problem simultaneously, so a lot of the energy is consumed for nothing. Therefore, miners pool their processing power to get more steady income, but large mining pools also introduce the risk of one entity gaining control over a blockchain.

The proof of stake protocol removes the need for mining equipment; instead, transaction validators stake their coins into a locked wallet and use their own computers to create new blocks. Remember, blockchain literally means a “chain of blocks” and a new block is added to the chain every 13 seconds (in Ethereum). New block creators are democratically elected by the system. The Ethereum blockchain also makes it fair for people with a normal computer to validate transactions, which is why Ethereum has scaling problems at the moment. The problem with scalability (more transactions per second) is that if we want that, the blockchain will become more centralized, at the power of validators with the latest and most expensive super computers.

Today, so many people participate in the blockchain, from building great applications to simply buying and selling NFTs. Additionally, there are so many ethereum developers coming from everywhere working to improve the system, no other alt-coin has that. This is what is great about Ethereum; it’s extremely decentralized, making it safer.

King of Alt-Coins, Stablecoins, DAOs and Wrapped Bitcoin

So what makes Ethereum stand out compared to other smart contract platforms like Cardano, Polkadot, Avalanche or Solana?

First, Ethereum has been here for much longer than these new projects, it has proven itself with time, with its use of stablecoins, NFTs, DeFi… none of the other projects come close in terms of value circulating in the network, we will talk about them later.

First, let’s explain what stablecoins are: Stablecoins are pegged cryptocurrencies. For example, a USD-backed stablecoins like USDC is ALWAYS equal to one US Dollar. USDC stands for USD Coin, which is a cryptocurrency issued by a company called Circle. What these guys do is, they take your real USD and store it as cash or cash-equivalents in vaults in exchange for USDC. Many other companies do the same thing, Tether for USDT and Paxos for BUSD (in collaboration with Binance); my personal preference is USDC.

However, there are four general approaches for price-stable tokens:

· Fiat-collateralized: Fiat currencies in reserves collateralize tokens to provide price stability by pegging token value to reserved fiat value: (USDC, BUSD, USDT, BIDR, EURS, UPEUR)

· Crypto-collateralized: Crypto assets in reserves as collateral to provide price stability, these stablecoins are backed 200 to 300 percent because of the volatility of crypto assets. (DAI, sUSD, RSV)

· Algorithmic non-collateralized: Software economic models aim to provide price stability without relying on underlying collateralized assets. (UST)

· Hybrid: A blend of the three basic approaches above. (FRAX)

If you know some stablecoins, you may recognize that the most popular are the fiat-collateralized, but the other methods have the benefit of eliminating the centralized organization that holds power over it.

The most important thing to note is that stablecoins are cryptocurrencies; crypto is not only for massive return on high volatility. For example, you can store your USD on an Ethereum wallet thanks to stablecoins, instead of keeping it in the bank. You can also lend your stablecoins through Ethereum DeFi apps like Aave or Compound to earn a 4% annual return (Current return on USDC lending), all in a decentralized manner thanks to smart contracts. Stablecoins are compatible with other smart contract platforms, stablecoins are not exclusive to Ethereum. For example, USDT (Tether) was launched before the Ethereum network went live as it does not have its own blockchain. Instead, it operates as a second layer token on top of other cryptocurrencies’ blockchains: Bitcoin, Ethereum, EOS, Tron, Algorand, Bitcoin Cash, Solana, and is secured by their respective hashing algorithms. Given how far ahead it is from its competitors, Ethereum has the most opportunities for stablecoin usage.

DAOs: A DAO is a Decentralized Autonomous Organization; it’s an organization that is governed by code and programs using smart contracts, it can use external info and execute commands without human intervention, and it operates through a token mechanism that lets community stakeholders make proposals. If the majority vote in favor of a proposal, the newly proposed rules are implemented.

This brings me to Wrapped Bitcoin: a wBTC is a Bitcoin that has been wrapped (or converted) for use in the Ethereum ecosystem. This means that you can use Bitcoin in the form of ERC-20 tokens, allowing you to use Wrapped Bitcoin in DeFi apps. Wrapped Bitcoin always has the same price as Bitcoin, bar some slippage in liquidity pools. Plenty of other coins have been wrapped for different reasons, but wBTC is the most popular wrapped coin today. The reason I explained DAOs right before is because the wBTC protocol is controlled by a DAO. Each wBTC DAO member holds a key to the multi-signature wallet that secures the system.

The DeFi Industry

DeFi (decentralized finance) is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can do most of the things that banks support: earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more… However, it’s much faster and it doesn’t require any paperwork or a third party. As with crypto in general, DeFi is global, peer-to-peer, pseudonymous, and open to all.

The DeFi space boomed in 2020, making Uniswap the hottest crypto to buy at the time. I mentioned Uniswap earlier on, it’s the biggest decentralized exchange in terms of volume and market share (If you add V2 & V3).

Lending markets are another popular form of DeFi, which connects borrowers to lenders of cryptocurrencies. One popular platform, Compound (Token, allows users to borrow cryptocurrencies or offer their own loans. Compound sets the interest rates algorithmically, so if there's higher demand to borrow a cryptocurrency, the interest rates will be pushed higher.

DeFi lending is collateral-based, meaning in order to take out a loan, a user needs to put up collateral, often Ether. That way, users don't give out their identity or credit score to take out a loan.

Here’s coinmarketcap.com’s brief explanation of how the COMP protocol works:

“When a user deposits tokens to a Compound pool, they receive cTokens in return. These cTokens represent the individual’s stake in the pool and can be used to redeem the underlying cryptocurrency initially deposited into the pool at any time. For example, by depositing ETH into a pool, you will receive cETH in return. Over time, the exchange rate of these cTokens to the underlying asset increases, which means you can redeem them for more of the underlying asset than you initially put in — this is how the interest is distributed.

On the flip side, borrowers can take a secured loan from any Compound pool by depositing collateral. The maximum loan-to-value (LTV) ratio varies based on the collateral asset, but currently ranges from 50 to 75%. The interest rate paid varies by borrowed asset and borrowers can face automatic liquidation if their collateral falls below a specific maintenance threshold.”

Compound is a good application; you can use it with a cold storage wallet too, but beware that they’ve had some recent issues, so it’s always best to do research first.

When investing in DeFi, always keep in mind that it is a disruptive technology, and new tech is risky, especially for beginners who cannot differentiate between good and bad projects.

I believe that DeFi is here to stay, regardless of the regulatory challenges that it needs to pass, as I would always bet on massively disruptive technologies instead of traditional ones. Remember: everything in our world is going digital.

NFTs

Non-Fungible Tokens are my personal favorite thing in the crypto space. A non-fungible token is unique, it cannot be swapped for an exact copy like normal tokens, where 1 ETH = 1 ETH. This is coded using smart contracts on Ethereum (Majority). And while many argue that NFTs are just hype and will disappear one day, the same was said of Bitcoin in 2013, the same was said of Ethereum in 2017. NFTs today are used as proof of ownership for digital art, with many pieces selling for tens of millions (check out cryptopunks and bored ape yacht club).

I’ve heard others newbies tell me: “what stops me from screenshotting the photo and selling it on the internet?” okay… what stops me from printing an exact copy of the Mona Lisa and selling it for millions? The fact that it’s not the real one, that’s what stops both scenarios, you don’t have a proof of ownership saying it’s the official one. NFTs are minted on the blockchain; their uniqueness makes it effortless to authenticate their ownership rights.

I’ve heard other newbies say of an NFT cryptopunk worth millions: “This shouldn’t be worth 10 bucks!” I then asked them if they would sell this exact piece to me for $10 had it been in their wallet, and the answer was no. My point is, people criticizing the value of NFTs (especially the bankers who think they can value anything from a hair follicle to a planet in our solar system), who are you to put a value on art?

Note that NFTs are using ERC-721 and ERC-1555 tokens on the Ethereum blockchain.

Other industries & areas to potentially disrupt with Ethereum

· Insurance

· Social Media

· Real Estate

· Video Games

· Online Betting & Gambling

· Healthcare

· Government

With time, blockchain technology will get to everything, just as the internet did in the 90s (anyway blockchain and crypto is the internet).

Ethereum’s outlook for the future

First, let’s get the wrong question out of the way: is crypto & blockchain technology going to disrupt major industries? It’s an obvious yes. The right question to ask is: who’s going to be the one to dominate the internet of money? There is a huge competition happening right now between the smart contract platforms (Bitcoin is not a smart contract platform) and it includes Ethereum, Cardano, Polkadot, Binance Smart Chain, Avalanche, Solana, Algorand, Stellar, and many other lesser-known projects. All of these are layer 1 blockchains, meaning that they offer the base layer for applications to be built on top, as we mentioned before with Uniswap and Compound. For those who still do not understand, it’s like having an empty land with water, soil, trees, hills, etc…(this is the layer 1) and building roads, hospitals, schools, businesses… this is the layer 2.

Currently, Ethereum is the best smart contract and layer 1 blockchain to run dApps on. Some may disagree, but here are my arguments:

Layer 1 blockchains are in constant development because of the blockchain trilemma: Security, Decentralization and Scalability. Today, we can confidently say that none of the smart contract blockchains possesses all three attributes, as it is currently impossible to have scalability without compromising a significant level of decentralization. The reason is when a blockchain is more computationally intensive; the average user is less likely to run a node, which would make the network more centralized. All of Ethereum’s main competitors have compromised decentralization to offer more scalability, making Ethereum the only completely decentralized smart contract platform. When a blockchain has more scalability, transactions are cheaper, and this is the main criticism used by Ethereum critics; it’s too expensive to use compared to others. The fact is, Ethereum will never compromise decentralization, and people are currently working on solutions to make the network cheaper without reducing decentralization.

Another important fact: for the general development and improvement of the Ethereum blockchain, a huge number of researchers and client implementers write papers, proposals and possible updates, and agree on protocol upgrades with finalized specifications. Different Ethereum clients use different languages and approaches while remaining interoperable, and the client implementers are independent developer teams unrelated to the Ethereum foundation. The point here is that it keeps the development of the protocol decentralized, and this is the key, as this is different to the other chains who have one client with one development team.

So, before we move to other coins, let me write this again: Bitcoin and Ethereum are massively decentralized protocols, and nothing else comes close to their level of decentralization.

To continue reading, proceed to the next section available in the home page: 4. Summary of other important coins & tokens.