Despite Bitcoin’s domination of the global cryptocurrency market and its huge market cap, Ethereum, which arrived on the scene only in 2015, is regarded by many as superior to its predecessor.
Ethereum has generated enormous interest among institutional and retail investors, thanks to its underlying technology and explosive growth. Unlike Bitcoin and many other digital currencies, Ethereum was designed to be much more than merely a store of value or a medium of exchange. The network that powers it is decentralized and built on blockchain technology that includes composability and smart contract capability, giving Ethereum many more uses than Bitcoin.
Numerous updates to Ethereum are in the works. Its next upgrade, the London hard fork next month, is one of the most anticipated network updates in the blockchain industry. To understand why the London hard fork is so significant, let’s first take a look at the Ethereum network, what it’s all about, and what the future has in store for it.
Here’s what you’ll learn in this Forkast.News explainer on Ethereum:
- Ethereum’s roots
- The thinking behind Ethereum
- What makes Ethereum different from other blockchain platforms?
- How is Ethereum shaping the blockchain industry?
- The London hard fork and why it matters
- The road to Ethereum 2.0
- Ethereum’s vision for the future
An initial white paper on Ethereum was published in 2013 by Russian programmer Vitalik Buterin, who is now known as the company’s CEO and public face. The Ethereum Network boasts a relatively long list of contributors and development teams, but the founding five were Buterin, Anthony Di Iorio, founder of Decentral, Charles Hoskinson, founder of Cardano, Mihai Alisie, founder of Akasha World, and Amir Chetrit.
The network’s development was crowdfunded in 2014 in a campaign that sold its native Ether token to investors and raised more than US$18 million. That capital helped to launch the first release of the Ethereum network — also known as Frontier — on July 30, 2015, with a supply of 72 million coins.
Ethereum has since become one of the world’s main blockchain networks, with an ecosystem of decentralized applications built around it.
“I was browsing a list of elements from science fiction on Wikipedia when I came across the name. I immediately realized that I liked it better than all of the other alternatives that I had seen; I suppose it was the fact that sounded nice and it had the word ‘ether,’ referring to the hypothetical invisible medium that permeates the universe and allows light to travel.”
The thinking behind Ethereum
As a decentralized, open-source blockchain network, Ethereum invites developers from all over the world to contribute to its technology to build decentralized applications and smart contracts. DApps can have a significant impact on the economy, as they create disruptive new ways to transact with funds and transfer property. Smart contracts and dApps are revolutionary technologies that create more possibilities on the blockchain.
Ethereum describes itself as “the world’s programmable blockchain,” with a fairly simple premise: to help developers create more blockchain programs and grow the decentralized finance ecosystem. Today it serves as the world’s main decentralized marketplace for financial services, apps and games.
Ethereum-based dApps are some of the most secure financial applications on the market. They can be used without the risk of fraud, theft, censorship, interference from third parties and server downtime, and their fees are payable in the network’s native currency, Ether.
What makes Ethereum different from other blockchain platforms?
Ethereum is a decentralized, open-source blockchain, meaning that a distributed public ledger verifies and records all transactions. Every member of the network holds an identical copy of the ledger with all past transactions, but the ecosystem isn’t managed by any central party.
The Ethereum network’s native digital token can be used as an investment, a payment method, to settle smart contracts, and to pay their associated transaction fees, or gas fees.
Ethereum’s key point of difference with Bitcoin is the platform’s ability to trade more than just cryptocurrency, and its enablement of more complex financial transactions.
Another distinguishing feature is its smart-contract functionality. Much like any other contract, smart contracts enable parties to agree on future deliveries of goods or services without the need for intermediaries. The contracts are coded on the blockchain and deliver an agreed amount of Ether to the appropriate party as soon as the contractual conditions are met.
Smart contracts live on the blockchain and run exactly according to their specific sets of rules. Ethereum describes them as being similar to vending machines in that they give you the correct item if they are supplied with sufficient funds. Smart contracts can hold funds just like an Ethereum account, allowing the network to mediate agreements and transactions effectively without third-party entities.
How is Ethereum shaping the blockchain industry?
Buterin was fascinated by blockchain technology from the age of 17, when he co-founded Bitcoin Magazine. He imagined a blockchain platform that offered more possibilities and uses than Bitcoin, which eventually became his vision for Ethereum.
“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way,” Buterin said on Babbage, a podcast by The Economist. “I thought they were going after individual applications. They were trying to kind of explicitly support each [use case] in a sort of Swiss army knife protocol.”
Despite drawing inspiration from Bitcoin, Ethereum is an entirely different type of digital asset. Bitcoin is used mainly as a store of value, but the concept behind Ethereum was to decentralize applications besides financial services. Most “ETH-heads” see it as a “world computer” rather than a mere digital asset, which has the potential to completely decentralize the digital world.
Instead of centralized servers, Ethereum’s network uses nodes run by volunteers all over the world, forming a supercomputer network. Ethereum enthusiasts hope there will be global access to these nodes in the future, much like the internet today.
Another key difference between Ethereum and Bitcoin is that Ethereum allows both permissioned and permissionless transactions. Permissionless transactions enable any computer on the network to verify a transaction, but permissioned transactions can be confirmed only by a select group of nodes without them being exposed to the remainder of the network.
Ethereum is known as a second-generation blockchain, meaning that the distributed ledger network offers additional built-in functionality to support more complex functions, such as smart contracts and other DApps.
Ethereum’s smart contracts and DApps were considered revolutionary technology when they appeared, encouraging the developer community to build new applications and broaden the uses of blockchain.
Despite having more uses than Bitcoin, Ethereum remains in second place as a cryptocurrency. Yet the network’s aggressive growth, future vision and development team have prompted much speculation that Ethereum eclipse Bitcoin’s current dominance in the near future.
The London hard fork and why it matters
The next major update on Ethereum’s roadmap is the London hard fork, which includes the much-anticipated Ethereum Improvement Proposal “EIP 1559.” The update will go live on July 14, as decided at the Ethereum Core Devs Meeting on April 23.
EIP 1559 summarizes the hard fork as “a transaction pricing mechanism that includes [a] fixed-per-block network fee that is burned and dynamically expands/contracts block sizes to deal with transient congestion.”
In plain English, Ethereum’s current transaction pricing mechanism will be changed. Under the current mechanism, users send transactions with gas fees to miners as payment for processing transactions. Miners choose the transactions with the highest bids and create new Ether coins when they solve the transaction. Due to increasing network congestion, users must bid higher sums during busy times, which leads to slower transactions and gas price volatility.
The new price auction model that will be introduced with the London hard fork will replace gas fees with a fixed, per-block network fee. This will work as an automatically calculated base fee, with slight fluctuations depending on network congestion. For users requiring transactions to be completed faster, there will be an option to reward miners with tips.
Another feature introduced with EIP 1559 is that the network will start to burn gas fees altogether, which will address one of the main criticisms of Ethereum – that the supply of Ether is unlimited.
The supply of Bitcoin, by contrast, is capped at 21 million coins, and Cardano’s ADA cannot exceed 45 billion coins. Some investors have expressed concerns over Ethereum’s potential for inflation due to its unlimited supply of coins.
Experts and investors speculate that burning gas fees will send Ethereum prices soaring. Ben Edgington, lead product owner at Consensys Quorum Protocol Engineering, who is working on the hard fork, is optimistic about the changes.
“Potentially, more ether will be burned that will be generated for miners,” he told Business Insider, adding that this could reduce the supply of ether over time, “which actually trumps Bitcoin monetary policy, which is fixed.”
The developer community hopes that will cement the economic value of Ether within the Ethereum platform, and reduce the risks associated with miner extractable value, as described in EIP 1559.
Investors have been attracted by the ecosystem’s versatile applications, such as building dApps and supporting non-fungible tokens. Making Ether scarce will likely give the coin significant bullish momentum, as all the fixes that the London hard fork promises.
The hard fork is part of a larger set of upgrades that will lead to Ethereum 2.0, the transition of the network from a proof-of-work protocol a proof-of-stake protocol. Developers hope that will address Ethereum’s security, scalability and sustainability issues.
The road to Ethereum 2.0
The slogan behind Ethereum 2.0 — “Grow Ethereum until it’s powerful enough to help all of humanity” — makes it clear that the network is aiming to become a versatile ecosystem that adds further functionality to its existing infrastructure.
But to unlock Ethereum’s full potential, the development team must resolve three major issues:
- Network congestion
Due to fluctuating gas fees, the network is often congested, leading to significant delays in transaction processing. The new price auction model introduced with EIP 1559 hopes to resolve that.
- Disk space
As the network grows, running a node will become increasingly difficult due to increased disk space requirements. This is one of the biggest challenges of making Ethereum more scalable, which the developer team is hoping to solve with Ethereum 2.0.
- Energy consumption
Ethereum’s proof-of-work consensus consumes energy equivalent to a medium-sized country. The developer team is hoping to solve that with an update to the proof-of-stake consensus mechanism known as The Merge that promises to make Ethereum 99.95% more energy-efficient.
Developers and investors worldwide are excited about the changes leading up to Ethereum 2.0, which promise to make the network bigger, more secure, scalable and sustainable.
The roadmap to Ethereum 2.0, initially known as “Serenity” was published by Consensys in 2019, but has since been subject to minor changes. Industry experts speculate that the launch of Ethereum 2.0 might be blockchain’s “iPhone moment,” signifying the point at which it becomes widely available.
The last major upgrade on the path to Ethereum 2.0 was the Beacon Chain, which went live on December 1, 2020. This was a foundational component for Ethereum 2.0 that introduced staking and set up the ecosystem for sharding.
The next major upgrade, the Merge, marks the end of the proof-of-work consensus mechanism. During the update, the mainnet will merge with the beacon chain’s proof-of-stake mechanism and transition Ethereum fully to proof-of-stake.
The upgrade will replace proof-of-work miners with validators that have already invested in Ethereum, and create a more environmentally sustainable ecosystem. The London hard fork is the second and final hard fork required for the merge, which is expected on July 14.
The third and final upgrade for Ethereum 2.0 is Shard Chains, expected to go live in 2022. Shard chains will be used to spread the network’s workload across 64 new chains, making it easier to run a node by keeping hardware requirements relatively low, leading to a more scalable protocol.
The upgrade will expand the network’s transaction processing and data storage capabilities. The shards themselves are likely to gain more features over time.
Ethereum’s vision for the future
Ethereum is one of the most important blockchain ecosystems when it comes to creating a truly decentralized internet, but decentralized scaling can be difficult. Despite countless challenges, the network aims to become a “world computer” with smart contracts and dApps that millions can benefit from.
Ethereum as we currently know it proved that the ecosystem is working, as it already has dApps and smart contracts that many people are using to manage digital assets. These enable advanced uses of cryptocurrency, such as NFTs and decentralized finance. However, Ethereum 1.0 wasn’t designed to support the growing transaction levels that it has seen, which has led to network congestion and high gas fees.
Ethereum 2.0 will solve these issues, making Ethereum scalable, secure and environmentally sustainable for mass adoption. It will make transaction processing more efficient, enabling thousands of transactions per second and reducing their cost significantly.
The Ethereum ecosystem is already among the world’s most technically advanced blockchain platforms, with a team of developers continuously rolling out updates. But much of the blockchain’s future outlook depends on the success of the London hard fork and Ethereum 2.0.
In a few years, Ethereum could become the backbone of the crypto-asset ecosystem and house most blockchain dApps. According to a report by Goldman Sachs, which calls it the “Amazon of information,” Ethereum has a good chance of overtaking Bitcoin, the most popular store of value.
“Given the importance of real uses in determining the store of value, Ether has a high chance of overtaking Bitcoin as a dominant store of value,” a Goldman Sachs analyst wrote, according to leaked sections of the report posted on Twitter.
According to the latest updates by Etherscan, Ethereum 2.0 already had more than $10.6 billion worth of Ether staked at the time of writing, further proof of support for the network. A smooth transition to Ethereum 2.0 could offer the network a leg up against Bitcoin’s market monopoly and set Ethereum up for institutional and mass adoption.