What's All the Hype With Ethereum?

Out of all the various blockchains that have been started, Litecoin (LTC), Cardano (ADA), Polkadot (DOT), Dogecoin(DOGE), or now even Apecoin (APE), one seems to stand out ahead of the rest -- Ethereum (ETH). It is the most used blockchain in the world and second to maybe only Bitcoin (BTC) in name recognition. So why does this one stand out and why should I care about anything other than Bitcoin?

First of all, Bitcoin is inherently limited by its protocol. It was not designed to be anything other than a distributed ledger of a cryptocurrency. Bitcoin's blocks can only contain very simple transactions that can't do much more than give X coins from A to B, given that A has at least X coins in the ledger. Since this was the designed purpose, Bitcoin falls short when it comes to supporting more advanced protocols built on top of it for four main reasons: Lack of Turing completeness, value-blindness, lack of state, and blockchain blindness. Although Ethereum has shortcomings, it has been specifically implemented to circumvent these limitations in robust ways.

Ethereum has a few major hurdles to cross shortly: use of energy, use of storage, and vulnerability to corruption. The first two areas of concern are related to the blockchain's scalability. The use of energy is a concern for most widely distributed blockchains which employ proof-of-work for adding new blocks to the chain. This method intentionally makes it computationally difficult to create a valid hash for a new block - slowing down new block creation. This is known as "difficulty" and it goes up proportionately to the total amount of computing power working on the chain. For example, Bitcoin now requires its 256-bit hash to have 17 leading zeroes which is so difficult that all the computers together can only generate one block about every 10 minutes. Since only the computer that solves the hash gets the prize, they are always running trying to find the next hash first. This is so resource-intensive that in 2021 it was estimated that this cryptocurrency mining used 7 times as much electricity as all of Google, more than many countries.

Next, storage is a concern as all transactions must be approved by every node in the network. To do this processing these nodes must receive a full copy of the blockchain. The Ethereum chain is already nearly 1TB in size and will continue to grow, especially as complex applications and smart contracts are built over it. As it continues to grow, Ethereum will become prohibitively difficult to participate in. Only large groups or companies with huge servers will be able to participate.

Finally, Ethereum has unique issues with bad actors because its scripting language is so flexible. Functionally anything can be written into a transaction in an attempt to harm others. Although it has safeguards in place to prevent infinite loops in the form of a denial-of-service attack, these contracts could be written in other ways to maliciously harm other unsuspecting users. Further, Ethereum's complexity of scripting makes application-specific integrated circuits (ASIC) seemingly useless as they would be unable to process the variable logic. However, if an actor were able to produce enough contracts on the chain, built to facilitate these circuits, then those with the capital for this expensive investment would once again gain the upper hand.

Now for the good news about Ethereum. It was specifically designed to be open and flexible so that applications and protocols could be built on top of it. Its scripting language is Turing complete which means that you can add arbitrary state transition functions and have them autonomously execute (smart contracts). The blocks on the blockchain are aware of values such as the hash and the time that the block was created. There are even ways for smart contracts to determine the relative value of Ethereum and other currencies. Furthermore, a big change coming this summer is its transition from a proof-of-work to a proof-of-stake model; this will allow a higher transaction rate and will decrease energy usage by up to 99%. Also, because Ethereum's nodes are state aware, they will be more scalable than other blockchains as nodes will not have to store the entire blockchain ledger within them. With these advantages in mind, Ethereum lends its way to various web3 applications.

The Ethereum ledger will be able to tokenize nearly anything including US dollars, stocks, property, concert tickets, or even in-game points. These transactions could be facilitated by intermediate accounts or smart contracts that only release an item after certain conditions are met: the amount of time, votes, payments, or even when your parlay hits during March Madness. Gambling is facilitated much easier in Ethereum due to its visibility of naturally occurring random events such as the hashcode or timestamp of a block.

Another popular application, and the most common implementation of smart contracts, are financial derivatives.  These contracts will be able to pull from other smart contracts that serve as data feeds into the ledger. For example, the NASDAQ could maintain a contract that keeps track of the exchange rate of ETH to dollars (ETH/$). These financial derivative contracts could then be created to hedge against the volatility in the coin's price. The limitation here is that this data feed is not truly decentralized and we would have to rely on NASDAQ to act in good faith with their exchange rates. On the other hand, there are ways to even decentralize data feeds, by getting a consensus on anything from exchange rates to weather and then only rewarding those who provided the closest to average answers.

Decentralized Autonomous Organizations (DAOs) are what many people view to be the future of corporations. Instead of a board of directors getting together to hire a CEO to carry out their policies, a group of people could get together and write a complex smart contract that carries out its code similarly. It would be able to hire, fire, and conduct business according to the rules (code) that are dictated by this group. Similar to how a board would vote in a corporation, these members would have to form a majority or supermajority to approve any changes to the code base. It could even distribute dividends based on stock ownership. Votes could be determined by a majority of people, a majority of shares, or even have those responsibilities delegated to a subset of the group. In this not-so-future scenario, the glorified C-suite could be a thing of the past.

The possibilities of blockchain applications on Ethereum go on and on. People are using this blockchain to register names and domains, rent out unused server storage, perform distributed cloud computing, and more. The real hype about Ethereum is the flexibility in its implementation which will allow others to take blockchain and Web3 to unexplored places. Blockchain is not going anywhere and if you were to pay attention to any of them I would recommend Ethereum.