Home / / Crypto I - Ethereum

Crypto I - Ethereum

,


I've recently been looking into the crypto space, and in this post, I'll share a bit about Ethereum, currently the second largest coin on the market behind Bitcoin. 

Cryptocurrency, being a product of computer science and cryptography amongst other things, can be quite an involved topic. In the first section of this post, I aim to explain the key idea behind blockchains, a summary of Ethereum, and it's near future in under 150 words per section. In the second part, I'll share some charts and trends which I personally find interesting.

This is basically positioned as a newbie-friendly introduction to Ethereum, so if you're already well versed with the topic, you might find most of the stuff here too shallow.

Section 1a: What is a blockchain? 

Simply put, a blockchain is a list of transactions. It is like when you open your mobile banking app and view the statement detailing “who pays who how much money”.


Source: 3Blue1Brown Youtube

The key thing about a blockchain is that unlike bank statements which are stored on the bank’s servers, this record can be stored and maintained by multiple users of the blockchain. In this way, users do not need to trust that the bank is not modifying the records for their benefits. 


Before every new entry gets added to the blockchain, there needs to be a majority consensus. Hence, if a malicious actor controls 51% of the system, they would be able to write whatever they want to the blockchain, compromising it. This makes decentralization a big deal and a key concept in any blockchain.

Section 1b: What is Ethereum?

Ethereum is a blockchain-based ecosystem. Unlike Bitcoin which primarily aims to be a store of value like gold, Ethereum is more ambitious, trying to be the platform where people can build any trust-less, decentralized applications, for leisure, entertainment or financial use cases. 


With this in mind, Ethereum was developed with a heavy emphasis on smart contracts, which are basically scripts that execute based on certain conditions, just like a normal computer program. The rules are written in purpose-built languages such as Solidity, which is object-oriented and high-level (like popular general-purpose languages such as Python).


Ether (ETH) is the cryptocurrency that is consumed/used when using/interacting with the Ethereum blockchain. This is known as ‘gas fees’ in Ethereum and is analogous to the transaction fees in Bitcoin. ‘Gas fees’ scale with demand, so a period of high blockchain activity would require more fees to push the transaction through.


Section 1c: Ethereum’s Roadmap

Ethereum has various major updates coming up. It's complicated. I will quickly explain two main things that will be implemented, along with why it is important.



Shared by co-founder Vitalik Buterin on Twitter


1. Proof-of-Stake

When someone ‘mines’ Bitcoin or Ethereum, what they’re doing is actually committing a large amount of computational resources to solving a problem. After the problem is solved, the miner adds an incoming transaction onto the blockchain, and everyone agrees to it after seeing how much effort is put in, hence the term “Proof-of-Work”.


As the process of ‘mining’ is a computationally expensive task, it costs a lot to set up a ‘mining node’, from the specialized hardware (GPUs and ASICs) to electricity costs. This lends itself to environmental and sustainability complications. A prohibitive barrier-to-entry would also lead to centralization, which is the opposite of a blockchain’s main goal, as only larger players and corporations would be able to afford the setup.

A “Proof-of-Stake” system substitutes the computing power for how many coins a user stakes/commit. This solves the environmental and barrier-to-entry issues mentioned above, along with other benefits detailed below.


2. Sharding

In a typical blockchain, every node/participant would have to keep track of and verify all historical transactions on the network. When a new transaction comes in, all nodes must come to a consensus before it can be added to the blockchain. This leads to a 15 transaction per second cap on Ethereum’s network, which is woefully slow (eg. Visa does 1,700 transactions per second on average).


A sharding scheme would entail creating multiple sub-chains, with one more that coordinates all of them. Ethereum plans for 64 shards, and have already launched the coordinating “beacon chain”. This would allow for some parallelization, where shards can validate and add to the blockchain independent of one another. As smaller chains are easier to attack (taking control of 51% of the chain’s resources), miners/validators are randomly shuffled between shards periodically.

This would increases network throughput and could help to reduce transaction costs.



Section 2: Ethereum Trends

Ethereum’s native token, Ether (ETH), has been climbing rapidly in traded value recently. However, coin prices might be driven up by traders, speculative or not. Personally, I feel that since Ethereum’s value proposition is as a decentralized application platform, looking at how the ecosystem is growing could be equally or even more important.

 

The number of new applications being created have decreased over the past few years, but is still largely above the 2015-2016 period. 
  

Transaction volume have risen sharply up till September 2020, driven mainly by finance and exchange applications.

 
In general, the number of daily active Ethereum addresses (proxy for users) have surged past it’s previous high in 2018. 
 

As a proxy to general interest, we see that the subreddit r/ethereum has seen explosive growth in both subscribers and comments, mirroring the ETH price.
 

The subreddit r/ethdev, which is a technical forum that focuses more on Ethereum application development, is also experiencing a boost in interest. This could bode well and could potentially prelude a more vibrant app market.

Personal Closing Remarks

Cryptocurrencies at this point is still a volatile asset class to invest in. While larger, more well known coins such as Bitcoin and Ethereum enjoy greater stability, it is still less much more volatile than traditional asset classes. Because of this, I have never considered it seriously, and have only just started researching and learning for real.

I know that this is quite a hot topic of debate, but I see some value in blockchain technology, and hence in cryptocurrency. Alongside greater institutional adoption, it is only a matter of time before cryptocurrency in some form becomes mainstream, and it is worth spending some time learning the basics, even if you do not end up putting money into them.

I hope that this post adds some value to you! My main focus will still be on dividend investing, but I thought that writing this post could help solidify my understanding, and could be interesting to some of you out there :)

Cheers, 
InvestingNugget



Author's note:

At the point of writing, I own some ETH. I have put in my best effort to ensure that the facts are accurate, but I do not guarantee it. Opinions are my own and do not constitute any recommendations.


Powered by Blogger.