Ethereum: From Smart Contracts to Market Domination!

Ethereum is a layer-1 blockchain designed for building apps, organizations, holding assets, transacting, and communicating without a centralized authority in control.

On top of that, Ethereum is perhaps most famous for being the pioneer of smart contract technology.

Smart contract technology essentially created the first true revolution to cryptocurrency since the inception of Bitcoin, allowing for individuals and assets to move without human oversight, but I’ll come back to that shortly.

Created by Vitalik Buterin in 2013, Ethereum is a decentralized application platform.

This means it’s a network for applications to be built on, with ETH being the fuel that runs its operations.

Typically, some of the applications you’re likely to meet on the Ethereum network include decentralized finance, NFTs, crypto games, and much more.

How do Smart Contracts work?

Ethereum is the hub on top of which decentralized applications are built. That means it’s a platform for developers to create apps that use ETH as their payment method.

The biggest difference between Ethereum and Bitcoin is smart contract technology.

Smart contract technology is an automated way in which individuals can interact without an intermediary required.

Smart contracts are self-executing code that only executes once the pre-agreed criteria within the smart contract have been met. This allows users to trade, swap assets, and more, without someone to approve the transaction.

Person A sets up a smart contract that states something to the effect, “when Person B places X amount of ETH into Person A’s crypto wallet, transfer the NFT from Person A to Person B.”

The Ethereum merge explained

Originally, Ethereum was a Proof-of-Work blockchain, similar to Bitcoin, but in 2022 successfully completed its transition to Proof-of-Stake for verifying its transactions.

While both Proof-of-Work and Proof-of-Stake are reliable consensus mechanisms, Proof-of-Stake is far more energy efficient.
The difference between the two is: Instead of asking 51% of the network’s validator nodes to agree on a transaction, like under Proof-of-Work, under Proof-of-Stake those with the most staked, or deposited, to the system are likely to be selected to verify the transactions.

Of course, other nodes check the accuracy of the answer provided, but essentially, by asking fewer validators the system is quicker and more energy efficient.

The logic behind staking is, those with the most invested in the system are least likely to provide incorrect answers because the punishment for being caught submitting false transactions far exceeds the reward for doing so.
This leads us to our next question, what makes Ethereum unique?

As we’ve already discussed, smart contracts are a big part of that – a concept that has now been widely used by many other blockchains. Though, what else makes it unique is its market cap.

While all other cryptocurrencies seem to move up and down the market cap rankings, Ethereum has held its place at #2 for the last 5 years.

Thus, leading to speculation that it will one day replace Bitcoin as the world’s largest cryptocurrency, in an event known as “The Flippening.”

Currently, Ethereum has less than 50% of Bitcoin’s market cap, but it has over triple the market cap of third place showing that it is by far the largest altcoin on the market.

Experts will argue about which is better between Bitcoin and Ethereum, but as they serve different purposes it seems unfair to compare them directly. Especially if you believe the crypto market isn’t a zero-sum game with only one winner.

However, while this is all well and impressive enough, crypto projects survive long term by the strength of their tokenomics, and Ethereum is no different.

As I mentioned previously, Ethereum recently changed from Proof-of-Work to Proof-of-Stake, and with it came a change to how the ETH tokens are created.

Originally, like Bitcoin, Ethereum was a Proof-of-Work network where 2 ETH was rewarded every 15 seconds to the person who successfully solves a complex cryptographic puzzle that verifies the blockchain’s list of transactions.

Initially, there was no supply limit, and around 120,000,000 ETH was circulating when ETH converted from Proof-of-Work to Proof-of-Stake.

One reason for the change was to allow the Ethereum network to scale better. Under the Proof-of-Work setup, the larger the network grew the longer it took for transactions to finalize.

This wasn’t ideal for the blossoming decentralized finance on the platform which often relied on near-instantaneous trading to secure the best rates of returns on investments.

Another benefit to the change was to solve the inflation problem, with the Proof-of-Work version of Ethereum running between 2-4% inflation annually. Naturally, if more ETH is being produced than used or burned then its price will struggle to rise.

When the switch occurred, ETH was no longer mined every 15 seconds but rather it was now issued.
This issuance rate solves the inflation problem by setting the rate between 0.5% and 1%, with the exact rate decided by the number of validators currently on the network.

Additionally, the base fee, or the fee it costs to place a transaction on the Ethereum network, was now burned.
This means, in theory, if the Ethereum network becomes large enough and its burn rate exceeds its issuance rate, ETH could become a deflationary asset.

If the Ethereum network becomes so large that ETH becomes deflationary, it stands to reason that the value of ETH should increase too.

Typically, if an item is in demand but has a restricted supply, the value would increase as people pay more to acquire it.

In Conclusion, Ethereum is a blockchain designed for applications to run on top of, which uses ETH as its fuel. Perhaps most famous for providing the world with smart contract technology, Ethereum’s design allows for many types of apps and organizations to appear on its network.

Ethereum has been the second largest network for half a decade, and thanks to its continuous updating remains on top of the alt-coins today.

While there are many layer-1 blockchains out there acting as competitors, none have so far managed to cause any real threat to the Ethereum network.