Ethereum, with its currency Ether, is present in the media worldwide and is increasingly becoming a serious competitor for the now established Bitcoin. Both bitcoin and ether are digital currencies, but the systems behind them are quite different. But what distinguishes Ether from Bitcoin, what are the advantages and disadvantages of this currency, and is Ether a real alternative to Bitcoin?
The origins of Ethereum
The development of Ethereum started in 2013, with the system being introduced to the global public for the first time in 2014. However, the eventual programming and implementation of the project took until 2015. The founders of Ethereum are Russian-Canadian programmer Vitalik Buterin and Briton Gavin Wood. Meanwhile, Ethereum’s development is led by the Ethereum Foundation, an NPO based in Switzerland.
What is Ethereum?
Unlike Bitcoin, Ethereum itself is not a cryptocurrency, but a platform for decentralized applications. Similar to a smartphone, different apps can be installed on this platform. In the end, Ethereum is therefore only an operating system, but not a cryptocurrency in the true sense.
Decentralized in this case means that there is not a single administration point for this application, but that the application is distributed on a broad network, which consists of many computers. We showed you what a decentralized network is and how it works in our post about bitcoin.
The main difference with a centralized network is simply that there is no central control point. The rules that are played by in this network are determined by so-called smart contracts.
What are smart contracts?
Applications running on Ethereum’s decentralized system work by means of smart contracts. These contracts are similar to normal purchase contracts, with the difference that they can be executed automatically. In addition, smart contracts can also be designed with if-then rules.
Example of a smart contract
For example, two parties could agree that a certain amount will be paid out exactly when it rains on the first of May. If it does rain on the first of May, the amount is debited from one party and credited to the other. The smart contract would thus execute automatically without the intervention of an intermediary.
What is Ether?
Monetary units used in smart contracts are called ethers. The Ether itself is thus the cryptocurrency of Ethereum, but only a part of the overall system. This is exactly the reason why Ethereum has attracted so much media attention lately. After all, this platform is not just a pure cryptocurrency, as is the case with Bitcoin, for example. Rather, Ethereum is a standalone platform that offers programmers different possibilities, which could revolutionize various industries. In order to understand the concept a little better, we have worked out two examples for you below that will help make the complex theory a little more tangible.
Nowadays, companies as well as private individuals can raise equity capital outside of traditional banks with the help of P2P loans. One popular platform for companies is Kickstarter, for example. This platform brings investors and entrepreneurs together. With the help of Ethereum and smart contracts, such intermediary platforms could become superfluous in the future. For example, if an entrepreneur needs startup capital of 500,000 euros, he or she can set up a smart contract via Ethereum. The contract will only be executed when the entrepreneur has managed to convince enough backers of his idea and the required sum is available in full. If the sum cannot be raised, the smart contract becomes worthless.
This example shows very clearly that the technology behind Ethereum could revolutionize entire economic sectors, since, even if we are not always aware of it, we deal with contracts almost every day.
Example: entertainment sector
Another example can be found in the entertainment sector. Nowadays, it is common for musicians and listeners to be brought together via different platforms, such as Spotify. On the one hand, there are people who listen to the music and pay Spotify regularly, and on the other hand, there are musicians who make their music available via Spotify. The middleman, Spotify, retains a portion of the profits made and pays out the rest to the participating artists. With the help of an application based on Ehtereum and smart contracts, this scenario could be automated. The middleman would then be completely eliminated, which would not only lead to more efficient processing, but also to cost advantages.
Does Ethereum have potential?
Ethereum could revolutionize not only our everyday lives but also the financial industry with the help of smart contracts. This is also the reason why big banks are so interested in cryptocurrencies and Ethereum. Transactions that take place in banks usually need to be validated by many employees and entered into bank internal registers. With the help of smart contracts, this effort would be eliminated because there would be a central register in which all the necessary data is automatically stored. The individual contracts could be executed automatically as soon as their underlying conditions are met. The cost savings in options and bond trading and lending would be astounding.
How does Ethereum differ from bitcoin?
As mentioned earlier, Ethereum itself is not a cryptocurrency, but a platform. The system was designed to run decentralized applications on it. In contrast, Bitcoin is a pure cryptocurrency and can therefore be meaningfully compared only to Ether, Ethereum’s currency.
One thing Bitcoins and Ether have in common is the fact that both currencies are created by miners. However, the currencies differ from each other in several ways. For example, using the technology behind Ether, many more transactions can be carried out in the same amount of time than with Bitcoin. This is precisely one of the Bitcoin’s known weaknesses. Several times in the past, Bitcoin has experienced bottlenecks in confirming transactions, which meant that many users had to wait several hours for their transaction confirmation. Another difference lies in the volume of the two currencies. Bitcoin is limited to 21 million Bitcoins. There can never be more Bitcoins. In contrast, Ether can theoretically be mined infinitely, which makes unlimited spending possible.
Does investing in Ethereum make sense?
Ether undoubtedly has a very high potential, with the currency being linked to the growth of the Ethereum project. However, this also results in high volatility, which is common with cryptocurrencies. Therefore, extreme price fluctuations can occur, which means that investments in a short period of time can lead to high profits, but also high losses.
In conclusion, the technology is still relatively young in direct comparison with bitcoin. Even with Bitcoin, the weak points have only emerged over time. It is therefore quite possible that the weaknesses of the concept behind Ethereum are not yet known at the current time. We are therefore of the opinion that an investment in Ethereum could be quite appealing, although this is pure speculation. We think that money that is absolutely needed should not be invested in Ether. However, if you have a few euros on the side that you do not absolutely need, an investment in the Ether can be quite an interesting investment option.