What is Ethereum: Applications, Pros, and Cons

What is Ethereum: Applications, Pros, and Cons

Vitalik Buterin, a programmer and one of the founders of Bitcoin Magazine, first described Ethereum in a 2013 white paper as a technology for introducing decentralized applications beyond cryptocurrencies. He explained to the core developers that the cryptocurrency and the entire blockchain technology could benefit from other applications.

He worked with Yoni Assia, the chief executive of the online trading platform eToro, on a project called Colored Coins. The two published another white paper that outlined the additional applications of blockchain. However, the project did not proceed because the two failed to come to an agreement on how they should proceed.

In January 2014, formally introduced Ethereum at the North American Bitcoin Conference. Buterin with Gavin Wood, Charles Hoskinson, who eventually left to put up the Cardano blockchain platform, and Anthony Di Iorio to develop further the applications for their idealized blockchain platform. Several professionals from different fields and disciplines become the founding members of the planned platform.

An online public crowd sale that spanned from July to August 2014 funded the development of the platform. The Switzerland-based Ethereum Foundation was also established to oversee the development and operations during the same year. Ethereum was finally released on 30 July 2015. It became the largest cryptocurrency in terms of market capitalization in January 2018.

Explainer: What Exactly Is Ethereum and How Does It Work?

Note that Ethereum is not exactly a cryptocurrency. It is specifically an implementation of a distributed ledger technology based on blockchain. A more specific description is that it is a decentralized and open-source blockchain with smart contract functionality. It serves as a platform for cryptocurrencies and other blockchain applications.

But what exactly is a blockchain? For starters, a blockchain is a database composed of blocks. Each block contains relevant data about a particular transaction. Furthermore, this block is linked or chained together with other blocks of all related previous transactions. A blockchain is fundamentally a digital ledger of transactions linked together using cryptography.

The data contained in each block include a timestamp, specific transaction data, other data indicating the number and history of transactions, and a cryptographic hash to record and validate its uniqueness and authenticity. Each new transaction creates a new block that is then chained to a previous block and the entire series of blocks.

What makes blockchain interesting is that it is duplicated and distributed across a network of computer systems. Hence, the record list continuously grows with each transaction, and this is maintained by a sizeable number of participants from across different geographic locations, thereby making the ledger public and decentralized.

Blockchain technology corresponds to the entire system used for enabling the creation and maintenance of these blocks using a peer-to-peer network of computers. Several blockchains have been introduced using different technological implementations. These include the Bitcoin blockchain that maintains the Bitcoin cryptocurrency, and the Ethereum blockchain that powers Ether other cryptocurrencies such as SLP, and other blockchain applications.

Applications: What Are the Real-World Uses of Ethereum?

The applications of Ethereum have spanned from cryptocurrencies to non-fungible tokens and permission ledgers. Remember that its founders intended to develop a blockchain that would have expansive use-cases beyond a decentralized digital currency. The following are some of its notable applications and planned use-cases:

Cryptocurrency Coins and Tokens

Ether is the native cryptocurrency or crypto coin of the Ethereum blockchain platform. Individuals or miners who add blocks to this blockchain using a proof-of-work system are rewarded with this cryptocurrency that can be used to purchase goods and services, converted into fiat money, or traded with other cryptocurrencies and non-fungible tokens.

Currency exchange markets have designed the code ETH to Ether. The Greek uppercase Xi character is sometimes used as its currency symbol. In most cases, especially in media references and public discourses, Ether is imprecisely referred to as Ethereum. It is important to reiterate the fact that Ethereum is the actual blockchain while Ether is its native currency.

Blockchain-based organizations and projects have also developed crypto tokens on top of the Ethereum blockchain using the ERC-20 and ERC-721 standards. Tokens based on these standards can interoperate within the Ethereum ecosystem of decentralized apps. There are hundreds of ERC-20 tokens and thousands of ERC-721 tokens.

Examples include the AXS and SLP tokens used in the NFT-based game Axie Infinity, the stablecoin DAI, the LINK tokens used in the decentralized oracle network Chainlink, and the COMP token of the decentralized finance project Compound. The growing applications of Ethereum are fueling the development of more crypto tokens.

Of course, it is important to note the difference between cryptocurrency coins and tokens. Both are digital assets. However, a coin is the native asset of a particular blockchain network that can be used as a medium of exchange and as a store of value. Tokens are internal digital assets of a particular blockchain-based project or application.

Non-Fungible Tokens and NFT Digital Assets

The ERC-721 standard is the specific standard for creating or minting so-called non-fungible tokens or NFTs. Note that an NFT is a unit of data stored on a digital ledger that can be added to a digital file to certify its uniqueness. NFTs also represent a class of digital assets that have been certified to be unique and, therefore, not interchangeable.

Several digital contents have been converted into valuable digital assets through NFT minting. These include digital artworks, online memes, viral video clips, digital music, digitized documents, written contents posted on social networking sites such as a Twitter Tweet or a Facebook Post, and in-game assets of video games, among others.

Note that ERC-721 is a technical standard used for the implementation of non-fungible tokens using the Ethereum blockchain. It fundamentally outlines and mandates rules that all NFTs must follow. NFTs based on this standard are interoperable within the Ethereum blockchain. They can be traded with other NFTs or other tokens, as well as the Ether cryptocurrency.

Play-to-Earn Games Based on Non-Fungible Tokens

NFT-based games or blockchain games have gained popularity and momentum beginning in 2020. Several of these video game titles have been built on the Ethereum blockchain. It is also important to highlight that most of these games are based on the emerging play-to-earn model or a combination of play-to-win and play-to-earn models.

The in-game assets of these blockchain games include playable characters, weapons and other items, and points, among others, are non-fungible tokens. They are digital assets that can be sold or traded for other in-game assets, crypto tokens, cryptocurrencies, or fiat money. They fundamentally have a real-world monetary value.

One of the most popular NFT games that use Ethereum-based crypto tokens to reward players is Axie Infinity. Players can earn Axie Infinity Shards or AXS and Smooth Love Potion or SLP upon completion of in-game tasks and other activities. These tokens can be used to buy tokenized in-game assets or traded for Ether.

CryptoKitties is another popular NFT game built on the same blockchain technology. First released in 2017 and developed by Canada-based Dapper Labs, it fundamentally involves players breeding and collecting virtual kittens. Each virtual kitten is a non-fungible token minted using the ERC-721 tokenization standard.

Other Commercial Applications of Ethereum

Several commercial and industrial applications of blockchain have emerged using the Ethereum platform. For example, the Royal Bank of Scotland has built a Clearing and Settlement Mechanism that capitalizes on the advantages of blockchain and the benefits of using a distributed ledger of transactions and smart contracts.

Companies involved in software development such as Amazon, Microsoft, banks such as JPMorgan Chase, Visa, and Credit Suisse, other tech companies such as Intel, and Deloitte Limited, among others, have plans to build software and networks based on the Ethereum blockchain to build decentralized computing capabilities and services.

Microsoft has also offered Ethereum Blockchain as a Service via its cloud computing division Microsoft Azure. The company is also looking to use this platform to combat digital piracy. Amazon Web Services have also launched specific services that will allow individuals or organizations to build blockchain capabilities based on this platform.

Other financial services providers have emerged based on the same platform to capitalize on decentralized finance. For example, Aave and Compound allow individuals to earn interest by lending their tokens, while Uniswap and Matcha provide a marketplace for trading tokens. Token Sets and Index Coop are some of the more specific investment use cases.

Pros and Cons: What Are the Advantages and Disadvantages of Ethereum?

The biggest advantage of Ethereum is that it is the first blockchain platform that has demonstrated the multiple applications of blockchain technology. Remember that it was developed and introduced to explore different uses cases beyond cryptocurrencies. Aside from this advantage, take note of the following specific benefits:

• Established and Emerging Applications: The established and further expanding applications of this blockchain technology promotes the creation of a specific ecosystem and a digital economy characterized by the interoperability of cryptocurrencies and tokens, as well as the utilization of distributed ledger technology. These applications are a testament to the practical and utilitarian capabilities of Ethereum.

• Popularity of the Ethereum Platform: Developers planning to build projects using this particular blockchain platform can take advantage of its established and emerging applications. Using this platform can provide a competitive advantage, especially when introducing and promoting a particular blockchain project.

• Ether as an Established Cryptocurrencies: Ether is the second-largest cryptocurrency in the world in terms of market capitalization. Ethereum-based tokens can readily trade these digital assets for a globally recognized cryptocurrency that can be used as money to purchase goods and services or traded with fiat money.

• Smart Contract Functionality: A smart contract is a transaction protocol that automatically executes, controls, or documents legally relevant events and actions according to the terms of a contract or an agreement, thereby reducing costs associated with intermediation, enforcement, and fraudulent incidents.

• Transition to Ethereum 2.0: The platform is planning to upgrade to a “2.0” version that will provide additional advantages over other blockchain platforms. This transition would equip the blockchain with the more energy-efficient proof-of-state consensus mechanism, thus replacing the energy-intensive proof-of-work mechanism, as well as the use of database sharding to increase transaction throughput.

Despite the numerous applications of Ethereum, and its potential to promote further blockchain ledger and the practical use cases of a distributed ledger, it has notable disadvantages and limitations. These drawbacks stem from the same multiple applications. Note that Bitcoin remains a robust cryptocurrency because the underlying blockchain is dedicated completely to a single function. Take note of the following:

• Crowding Related to Blockchain Projects: A lot of blockchain projects have used Ethereum. However, this popularity has brought forth scalability issues. For example, the popularity of CryptoKitties in 2017 has crowded out other businesses in the platform, thus resulting in transaction delays. Emerging projects and applications can result in numerous crowding instances in the future.

• Risks in Cryptocurrency Investing: Numerous individuals and organizations have considered investing and trading cryptocurrencies and tokens. However, these digital assets are extremely volatile as demonstrated by extreme upward and downward price movements. The price of Ether has fluctuated a lot in the past while experts have warned the tendency of non-fungible tokens to induce an economic bubble.

• Key Programming Difficulties: The platform is Turing complete and utilizes some of the most commonly employed programming languages. However, it also uses Solidity, a new programming language that has some notable issues and a considerably high degree of coding difficulty. Numerous instances showed a propensity toward vulnerabilities in coded smart contracts. These vulnerabilities include identification or authentication issues, and exploitability, among others.