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The Rapid Rise of Ethereum
Originally posted 7 Apr 2016 by
Since I started my occasional writings on Bitcoin and things related to Bitcoin about couple of years ago, I’ve discussed almost all aspects of the digital currency. However, I’ve avoided one particular aspect that is many other currencies that have the same model as Bitcoin and are seen as its rivals. Up till now, it looked justified to not have much interest in these other digital currencies referred to as “altcoins.” Dogecoin, Litecoin, etc. have had some success, but none of them has really threatened bitcoin, both in terms of scope or size. However, things have changed with Ethereum’s rapid rise. Ethereum was proposed by Vitalik Buterin in the white paper that was published in 2013. However, it did not become reality until the release of genesis block in July 2015. Ethereum is similar to Bitcoin in a number of ways. The system’s record keepers, the miners, get rewarded through receiving blocks of currency (which are known as ether). They are rewarded based on the proof of their work. Quite opposite to Bitcoin, which has a limit on number of coins that can be issued, the Ethereum blocks will continue to stay constant in size and there isn’t any pre-set limit on the number. This makes Ethereum less disinflationary compared to Bitcoin.
The fact the this new digital currency Ethereum has rapidly emerged as a strong competitor to Bictoin shows the speed at which crypto-currency’s world moves, and it’s also a result of the uniqueness that Ethereum offers. Ethereum takes blockchain’s concept, the distributed ledger system introduced by Bitcoin, another important step further. Ethereum and Bitcoin have many similarities. As mentioned above, both revolve around distributed ledger system. In this system, the record keeping gets shared between different independent computers and currency behind this system is used for rewarding people for taking on this role. Bitcoin’s focus was that currency, fixed supply and the disinflationary nature.
Bitcoin challenged the notion that the money must be controlled by the governments, and that value of currency must decrease with time.
On the other hand, with Ethereum, it’s the operating system and not the currency that’s the center of attention. This new currency adds to concept of blockchain a capacity for what are called “smart contracts”. These are the contracts that get automatically honored by ledger itself.
One of easiest ways to explain this is in terms of the sports betting: In case there are two people who want to bet on a match, one person taking one side, then there are two possibilities. Either these two people must trust one another that they will pay, or they will hand their stakes to some neutral third party who pays to the winner when result comes, and in this case both the betters must trust this third party.
What Ethereum does is that it acts as the third party, without any need of trust. (This is why the blockchain systems are also called “trustless ledger systems”.) Terms of bet are built in to the contract at the time bet is made and payout gets determined by the future event. Of course, capacity for smart contracts that’s built in to Ethereum isn’t simply of interest to the industry of sports betting. Wall Street is the place from where real interest comes. It is frequently said that stock market is simply a huge betting parlor, and similarity of trade to bet in the contract terms can’t be denied. There are two parties in both the cases and one of the parties will win and the other party will lose when contract gets terminated.
Ethereum has capacity of processing that transaction automatically, without the involvement of a third party, so it’s little wonder that financial houses and banks who have been acting as those third parties since decades are following the rise of Ethereum very closely. In many cases they are even getting involved directly.
It’s not just the financial houses and banks. Microsoft is making the use of Ethereum easier on its Azure cloud system. And IBM has said that the company is exploring a system for use in “internet of things” and different companies have been set up simply to exploit possibilities of smart blockchain that is contract enabled.
Many companies have tried different ways of adding smart contract to blockchain and this problem has been solved by Ethereum. This has resulted in rapid rise of Ethereum just when Bitcoin is trying to figure out how to expand in an effective manner. Ethereum still has long way to go when it comes to eclipsing the scope and size of Bitcoin, but it can’t be ignored and it can emerge as a dominant force in the world of crypto-currency.
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