Blockchain - Ethereum

25 Sep 2017

Since launching in early 2015, the Ethereum project has received a great deal of attention thanks to its ability to host and execute the “smart contracts” that can be used to power decentralised applications. Alongside this publicity, the value of Ethereum’s native digital currency, ‘Ether’ (ETH) has skyrocketed from just under USD$10 in January this year to almost $400 at its peak in the last few months. This is great news for people who own Ether, but these dizzying valuations mean little to us unless we understand the fundamental ideas driving this ascribed value. What is Ethereum really? And how is it different from Bitcoin? Misconceptions about the Ethereum protocol and its functionality are rife, leading some to falsely label it as a “replacement” for Bitcoin. As this post will attempt to articulate, I do not believe that one protocol will come to dominate the other. Bitcoin and Ethereum are attempting to do quite different things, and will likely co-exist and perhaps even interweave in the economy of the future.

While different, Bitcoin and Ethereum do share many technical similarities. To understand Ethereum, it does help to first have a basic understanding of how Bitcoin and Blockchains work. For the sake of brevity, I have summarised the core differences between the two protocols below:

As you can see, Ethereum offers a greater level of flexibility, while building upon many of the same foundations pioneered by Bitcoin. Developers and innovators in the ecosystem have begun to search for ways to build protocols with greater flexibility and functionality to contrast with the more feature-specific send/receive digital currencies. Ethereum’s approach has been instead to run a generalised system that allows developers to build applications from the ground up, paving the way for a plethora of potential use-cases.

A good analogy for this difference can be found in the feature phones that came before true smart phones. These feature phones had pre-selected features such as MP3 players and cameras that worked well, but were inflexible. With the iPhone came a paradigm shift; suddenly developers could create freely, and a wide array of applications soon begun to emerge on the newer devices using generalised operating systems. Multiple photography and music “apps” could now exist on a single device. These applications have since grown into their own market.

It is on top of this generalised approach that Ethereum’s key innovations arise:  blockchain-enabled smart contracts and decentralised applications (view my previous post if you’d like to get wrap your head around smart contracts).

It is these innovations that promise to disintermediate many of the services we currently take for granted. Venture capital markets have already seen this disintermediation happen, with ‘Initial Coin Offerings (ICOs)’ offering start-up ventures an alternative way to access seed capital funding. To date, almost USD$2 billion has been raised in ICOs of varying sizes, and has even surpassed venture capital investment into blockchain-related start-ups in the last 12 months. Whilst we agree that there are numerous valid concerns that need to be raised about the current ICO landscape, the underlying fact that entrepreneurs in most jurisdictions now have a new avenue to accessing venture capital is a major innovation, and should not be dismissed.

None of us can predict what tomorrow will look like, but I feel that smart contracts and decentralised applications are here to stay. Ethereum helps to provide a platform for these smart contracts and applications to run on, and will help power a distributed web in the economy of tomorrow alongside Bitcoin, IPFS, and numerous other promising projects. I am excited to see where this path leads.

DDLS will release some workshops and webinars on blockchain technology in the near future. If you'd like to be informed about availability please click on the image below and you'll be notified as soon they're ready.