Over the course of this series of articles, we will look at the main cryptocurrency blockchains, with the goal of helping you understand what they are, how they work, what they do, and what their pros and cons are. .
You will come away from this series not only with a better idea of what cryptocurrency is all about; You’ll understand why the way a token works, the way its blockchain processes transactions, is key to its success or failure as a digital asset.
Reading: Ethereum b2b series
see also: pymnts blockchain series: what is cosmos?
so what is ethereum?
ethereum is where cryptocurrency ends and blockchain begins.
that may be a bit dramatic, but the reality is that before ethereum, blockchains were something of a one-trick pony. they were decentralized digital ledgers that were very, very good at creating an unalterable, time-stamped record of transactions that allowed two parties to transact without trusting a third party or each other, and without risking double-spending.
in other words, beginning with the launch of bitcoin’s “genesis block” on January 1st. On January 3, 2009, cryptocurrencies were all about currency: making peer-to-peer payments.
That changed on July 30, 2015, when the ethereum mainnet went live with its own block zero, transforming blockchain technology from a digital ledger into what ethereum’s main creator, vitalik buterin, likes to call it a “world computer”.
see also: pymnts cryptography basics series: what is a blockchain and how does it work?
That’s because ethereum is so much more than a store of value or event log.
Ethereum is a smart contract platform, which means it can be used to create self-executing agreements that are written on an immutable blockchain. when the conditions specified in a smart contract are met, it is executed automatically, fulfilling the terms without any external human control or supervision.
see also: pymnts defi series: what is a smart contract?
pretty much that means ethereum can be used to trade options and futures, sell a video or a car, track shipping containers around the world or lettuce from farm to table, bet on football games, Create crop insurance plans that automatically pay when the temperature drops below freezing: Essentially any form of trade or anything that involves managing a supply chain can be done more cheaply, quickly and accurately.
the world if/then
Smart contracts are written in what computer coders call “if/then” statements, which are at the heart of virtually any business transaction or contract: “if John pays Mary $5,000, then Mary will give Mary a car.” john” or “if the national weather service reports that the temperature fell below freezing at steve’s farm for three days in a row, acme crop insurance will pay you the value of the damaged produce.”
The point is that almost all computer programming languages are made up of if/then statements. that means ethereum if/then statements, if made complex enough, can be used to create entire decentralized applications, known as dapps. thus, a cryptocurrency exchange, a video game, even an entire metaverse virtual world can be built in the solidity smart contract programming language of ethereum.
this is why decentralized finance, or defi, is based on ethereum or blockchains trying to be a better, faster or more scalable version of ethereum. smart contract programming is sophisticated enough that dapps can be built complex enough to run without any centralized human intervention of any kind: no owners, managers, or government staff at all.
Also read: pymnts defi series: what is defi?
that’s where buterin’s “world computer” idea comes from: ethereum can be used as a decentralized computer.
One twist to this is that smart contracts don’t exactly run on the ethereum blockchain. ethereum has something called ethereum virtual machine, or evm. this is a virtual environment separate from the central part of the blockchain transaction log where smart contracts live and can interact, where they are executed.
Ethereum’s native token, ether, makes it no. 2 blockchain by market cap. Which obviously means a lot of people have invested in eth, as ether is known on cryptocurrency exchanges.
That said, Ether is one of only two cryptocurrency tokens used by the US. uu. Securities and exchange commission agreements are not securities, but “utility tokens” that serve a specific purpose within a crypto ecosystem. that is, they give the owner the right or ability to use a service or product on a blockchain.
in the case of ether, this purpose is to create smart contracts.
To be self-executing, a contract must be paid automatically when specified conditions are met. the way this works is that when a smart contract is agreed, the buyer “locks” a certain amount of ether into the contract.
Because smart contracts, like everything else on blockchains, are immutable, i.e. unalterable, parties can trust that payment will be made because it has already been made: if it is well drafted, the contract will only runs when conditions are met or when it expires (if it does), returning the locked ether to the person who deposited it.
One of the biggest strengths of ethereum is that you can build a dapp or protocol on it without having to use ether tokens. instead, developers can create their own tokens using a technology specification called erc-20, and those tokens will work just as well, but only for that dapp or protocol.
and indeed there are many other technical specifications that are supported by ethereum, although erc-20 tokens are by far the most common. another one gaining a lot of traction is erc-721, the standard for non-fungible tokens (nfts).
also read: pymnts nft series: what are nfts and why are they the “next big thing” for cryptocurrencies?
It’s worth mentioning that most of the major “ethereum killer” blockchains trying to be upgraded versions of ethereum, which has various achilles heels, use ethereum token standards and also support evm.
the latter because it allows them to be written in the same solidity programming language. that, in turn, makes it easier to entice dapp developers to port a project to their blockchain.
see also: pymnts defi series: what are the main defi blockchains?
ethereum has two big problems: scalability and power consumption.
Scalability is why ethereum killer blockchains like polkadot, solana, cardano and polygon are eating at least a little of ethereum’s lunch.
read here: pymnts blockchain basics series: what is a polygon? an ethereum killer hedges his bets
In a nutshell, ethereum is not fast enough. it can only handle 12 to 15 transactions per second, too little to be a threat to visa’s maximum speed of 65,000 tps.
and as it is by far the most popular blockchain platform, it is being crushed under the weight of its own success, with delayed transactions at peak times and sky-high transaction fees; like $70.
read more: pymnts crypto basics series: what is a consensus mechanism and why is it destroying the planet?
Then there’s power and pollution: while not as bad as bitcoin, ethereum uses a proof-of-work consensus mechanism (see link above) to mine new eth and write new transactions to the blockchain, which which requires a huge amount of energy. again, at the time of writing, as much as the netherlands.
However, there is a solution: ethereum 2.0. but that’s another story.
another story: can proof of stake solve the esg problem of cryptocurrencies?