Ethereum Is The Second Most Valuable Digital Currency, Behind Bitcoin

Ethereum Is The Second Most Valuable Digital Currency, Behind Bitcoin


Brett Colbert, Solutions CTO and Vice President of Enterprise Architecture at Salesforce and I recently introduced you to Blockchain, noting that the technology is poised to disrupt business of all sizes across all industries. We also introduced Bitcoin as the first and largest Blockchain valued at over $34 billion market cap. According to the World Economic Forum, Blockchain can give rise to the next generation Internet.

coinmarketcap.com

CryptoCurrency Market Capitalizations (July 17, 2017)

Bitcoin and its related Blockchain introduced many people to the concept of a Blockchain back in October of 2008. A very strong use case for Bitcoin and Blockchain is 21.co, a silicon valley startup that is using Bitcoin to re-invent and optimize sales, marketing and research in the enterprise. Since then, we have heard about ‘Smart Contracts’ built on Blockchain with much of the news related to the launch of Ethereum in July 2015. New entrants into this space include EOS and Tezos. Given the positive feedback that Brett and I received regarding industry use cases with Blockchain, we decided to extend the Blockchain and digital currency topic, focusing on Ethereum – the second most valuable cryptocurrency, behind Bitcoin.

Futurism

The Ethereum Blockchain

Ethereum is a decentralized platform that runs ‘smart contracts’. Smart contracts are computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract. It was created and launched by Vitalik Buterin in 2014. Smart contracts store information about who owns what item(s), who should get paid and who should pay based on certain criteria including time frame, and Ethereum will automatically move funds based on those rules. An example could be property title or a car loan. Ethereum is an open source software.

Ethereum is emerging as one of the most important blockchain platforms today. Ethereum started as an opensource software platform for decentralized applications, where stakeholders needed Ether the token to pay for computational steps and storage operations on the platform, said Joseph Lubin, Co-Founder of the Ethereum Project” — World Economic Forum

Ethereum was designed to be a programmable blockchain – you can build apps on it – and those apps are referred to as distributed apps or dApps. Ethereum’s blockchain is similar to the bitcoin blockchain, but was created to make it easy to digitize anything related to a contractual obligation.

  • Bitcoin’s Blockchain primarily stores financial transactions.
  • Ethereum’s Blockchain primarily stores contractual transactions.

Value and Scale of Ethereum – Ethereum is Turing-complete which, in very general terms, means that it can be used to program anything. ETH or Ether is the main currency of Ethereum network but Ethereum also provides the ability to create other tokens, shares or currency. Ethereum uses a concept of ‘gas’ as a way to calculate a price for network computation or data storage. Gas is the price and the way to pay for the gas is through Ether.

The Ethereum blockchain has another amazing feature which is related to how it incents the network of computers used to validate the blockchain. Five times a minute a computer on the Ethereum network gets a reward of 5 ETH or Ether. The prize is stored in the blockchain. At the current price of approximately $180 per ETH, that is about $4500 per minute or about $6.5M per day.

Because Ethereum is based on code, the contracts are managed exactly per the rules in the code, without any human intervention required. To fuel the dapps, Ethereum uses Ether. Similar to the incentive of bitcoin, Ether incentivizes computers to validate the transactions for the dapps.

“According to Co-Founder Vitalik Buterin, the Foundation’s core tasks include (a) research on the next version of Ethereum protocol and standards; (b) co-development and maintenance of the six different clients such as C++ and Go; and (c) community outreach to both newcomers and existing community members, publishing transcript of core developer calls, promoting developer events and keeping channels of communications open.” — World Economic Forum

Ethereum is a major game changer when you think about how many inefficient, manual or highly people-dependent processes exist related to contracts.

What are smart contracts?

Smart contracts allow someone to programmatically create an agreement or contract between multiple people that contain decisions, store information, can be time-based in the sense that conditions are met according to a time schedule, specific actions can executed based on contract logic, can have an associated validation incentive through the disbursement of tokens/coins and can have a payout or payouts based on certain conditions.

As Vitalik Buterin says, “a smart contract is a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated.”

Creating these smart contracts on a blockchain mean that they benefit from the advantages of blockchain which include decentralization (no central controlling entity), distribution (a network of computers), security and incentives to participants who validate the transactions.

What are decentralized apps or dApps?

An example of decentralized apps are apps that are built using Blockchain. The backend of a dApp runs on a decentralized network of servers (versus servers controlled by one entity) and could be using smart contracts. The apps built on Ethereum are open referred to as dApps.

Why can’t we just create smart contracts using bitcoin blockchain?

You could program smart contracts using bitcoin but it’s much more difficult than using something like Ethereum. Bitcoin has a very limited scripting language.

Vitalik Buterin, the creator of Ethereum, explains in a Andreessen Horowitz podcast, that he moved towards a more generic protocol when he realized that he needed to create a Blockchain with no features – no specific transaction types. He built Ethereum to be a very generic architecture based on code so that a person could build whatever they want. You can define state, rules, modifications, etc and therefore you can code anything. Ethereum allows for a more complex set of rules so you could integrate things like IoT devices and non-financial applications.

You can program Ethereum using Solidity which is a ‘contract-oriented, high-level language whose syntax is similar to that of JavaScript and it is designed to target the Ethereum Virtual Machine (EVM).’ Remix is a browser-based Integrated Development Environment that has an integrated compiler and Solidity runtime environment without server side components.

What are examples of dApps that are built on Ethereum?

  • Etherisc is creating Ethereum smart contracts to build decentralized insurance applications to make the purchase and sale of insurance more cost effective and provide greater transparency into the insurance industry. Investors are able to buy and trade a decentralized insurance portfolio. Imagine a completely decentralized insurance agency.
  • uPort is “an open source software project to establish a global, unified, sovereign identity system for people, businesses, organizations, devices, and bots”. uPort is an identity solution built on Ethereum smart contracts. Identities can be for individuals, devices, entities or institutions. Identities are self-sovereign which means that the owned and managed by the creator. uPort can digitally sign and verify claims, actions or transactions.
  • Gnosis is “crowd sourced wisdom” and built on Ethereum. It is a platform on which you can build apps for industries such as insurance, sales and finance – anything related to prediction markets which ultimately help you make better decisions. Specific applications include hedging risk, incentivizing behavior, forecasting weather and election results.
  • Ethlance is a Ethereum smart contract based freelancing solution. You can create jobs or apply for jobs using Ethlance.
  • Aragon is a dApp focused on two main challenges related to decentralized organizations. The first challenge is upgradeability and the second is decentralized arbitration. Aragon implements basic features of an organization like a cap table, token transfers, voting, role assignments, fundraising, and accounting.
  • Ujo is a music platform built on Ethereum. It leverages uPort for Identity and provides licensing and payments through Ethereum smart contracts.
  • Golem, which was funded in November 2016, is creating a global market for idle computer power. Basically you can sell your idle computer cycles to someone else. Golem leverages the Ethereum blockchain as a smart contract. The Golem Project describes itself as “Airbnb for computers. Rent your unused CPU/GPU cycles and get paid in cryptocurrency. A decentralized network powering true cloud computing.”
  • Swarm is focused on “serverless hosting incentivized peer-to-peer storage and content distribution. The primary objective of Swarm is to provide a decentralized and redundant store of Ethereum’s public record, in particular to store and distribute dapp code and data as well as block chain data.”
  • Ethereum Computation Market is “The computation market is a service for Ethereum that allows for verifiable off-chain execution of computations that would be otherwise prohibitively expensive to execute within the EVM.” In general terms, ECM allows someone to pay someone else to execute a calculation outside of the Ethereum network and then provide the results of that calculation back to the Ethereum network, where it will be validated. This provides a less expensive alternative to performing complex calculations directly on the Ethereum network, since each execution of code on the Ethereum blockchain has a charge associated.
  • TrueBit provides ‘a scalable verification solution for Blockchains’. As described in their white paper, “Our new system consists of a financial incentive layer atop a dispute resolution layer where the latter takes form of a versatile ‘verification game.’” In general terms, TrueBit outsources computation by allowing anyone to request a computation and someone else providing the result of that computation as well as being rewarded for that result. TrueBit is an Ethereum smart contract.
  • MakerDAO is an Ethereum smart contract that provides a less volatile coin, a stablecoin called Sai (first version was called Dai), that is tied to the value of the US dollar. There is also an exchange called Oasis, which is built using Ethereum smart contracts, is fully autonomous and has zero fees. This may be one of the most radical example of leveraging Ethereum smart contracts – imagine being able to completely decentralize our financial exchanges, leveraging Ethereum’s distributed network to ensure validity of exchange transactions, without any person needing to be involved.

What are Ethereum browsers? Ethereum is its own network of computers. According to ethernodes.org, there are approximately 23,680 Ethereum nodes in the global network. In order to easily access the Ethereum network and the associated dApps, there are a number of Ethereum network browsers that you can use: Mist, Parity, Meta Mask (a Chrome browser extension) and Status.

Scaling Ethereum to billions of users – According to Fred Ehrsam, previously co-founder @Coinbase and a trader @GoldmanSachs, there are two necessary steps: 1. Having all of the necessary parts of the dApp developer stack. and 2. Scalability of these components.

Fred Ehrsam

Scaling Ethereum

Facebook as a measuring stick – Let’s do the math on running something like Facebook. Facebook handles about 175k requests per second (900k users on the site in any given minute, assume an action is taken every 5 seconds). And this probably doesn’t include API requests, which are a better analogue and probably 3–4x higher. At the moment, Ethereum can handle about 13 transactions per second, which cuts in half to about 7 transactions per second for tokens (4.7m gas limit, 21k avg gas price for standard txn = ~220 standard txns every block, current avg block time 17s = 13 txns/sec, gas requirement roughly doubles for token transactions). And this doesn’t include more expensive smart contract execution.” — Fred Ehrsam

According to Coindesk, the overall market cap for digital currencies has fallen from $115 billion to $61 billion in a month. There are a lot of speculation for the digital currency value drop in the past weeks, including simple market adjustments. This is not a new phenomenon, meaning digital currencies have had 7 years of price fluctuations. That said, don’t bet against blockchain, Bitcoin, Ethereum or other crypto-currencies. Don’t forget the developer that paid 10,000 Bitcoins for two pizzas in 2010 – at today’s price, that’s $20 million dollars for two pizzas.

Blockchain could power the next generation Internet and Ethereum has the potential to be a significant part of decentralized cyrptocurrencies, smart contracts and how businesses will reinvent themselves through an entirely new set of capabilities born from new business model innovation.

This article was co-authored by Brett Colbert —- Solutions CTO, Vice President of Enterprise Architecture at Salesforce. You can follow Colbert on Twitter at @brett_colbert.

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