What makes Ethereum unique as a cryptocurrency and its influence in the financial space? Could it be the future of decentralized finance?
Key Takeaways:
- Bitcoin was created as an alternative to fiat money but Ethereum was developed to facilitate P2P contracts and applications via its own currency vehicle.
- If Ethereum upgrade (Ethereum 2.0) is fully deployed, it could handle at least 20,000 Transaction Per Second and up to 100,000 TPS.
What is Ethereum?
Ethereum is a decentralized, open-source blockchain, which was designed to enable the creation and execution of smart contracts and decentralized applications or dApp.
Basically, Ethereum takes the concept of blockchain and expands it. As earlier pointed out in our articles, Blockchain is like a public ledger that records transactions across many computers so that any involved record cannot be altered retroactively.
Unlike Bitcoin, which is primarily a digital currency, Ethereum is a whole ecosystem while both rely on blockchain their core operations.
Relationship Between Smart Contracts and dApps
Smart contracts are self-executing contracts. The terms of the agreement are written into code. This code lives on the Ethereum blockchain.
When the conditions in the contract are met, it executes itself. No middlemen. No intermediary. No interference. Just pure and transparent transactions.
Decentralized applications, or dApps, on the other hand are applications that run on a Peer-To-Peer (P2P) network of computers rather than a single computer.
They are a type of software program designed to exist on the Internet in a way that is not controlled by any single entity.
Relationship Between Ethereum and Bitcoin
Ethereum and Bitcoin may seem similar, but they serve different purposes.
While Bitcoin was created as an alternative to traditional money, a digital currency that could be used globally, Ethereum was developed to facilitate peer-to-peer contracts and applications via its own currency vehicle.
The Key Features of Ethereum
Decentralization: Ethereum operates on a network of computers (nodes) that work together, meaning it’s not controlled by any single entity.
Smart Contracts: These are self-executing contracts with the terms directly written into lines of code.
dApps: Ethereum allows developers to build and deploy decentralized applications, which is key to the financial system revolution.
Ether: This is Ethereum’s native cryptocurrency, used to facilitate transactions within the network
Ethereum’s Role in Decentralized Finance (DeFi)
Decentralized Finance or DeFi aims to recreate centralized finance and improve upon traditional financial systems, but without the need for intermediaries like banks or brokers.
The beauty of Ethereum is that with its smart contract functionality, it serves as the backbone for this new financial landscape.
Ethereum’s Role in DeFi
Ethereum’s smart contracts are the building blocks of DeFi. They automate the execution of agreements, making transactions transparent, efficient, and secure.
This invention has led to the creation of a wide range of financial applications that are changing the way we interact with money.
DeFi Applications on Ethereum
There are several DeFi applications that have been built on Ethereum, a few of them include:
Lending Platforms: These platforms allow users to lend and borrow cryptocurrencies without the need for a traditional bank e.g. Compound and Aave.
Decentralized Exchanges (DEXs): DEXs such as Uniswap, SushiSwap enable users to trade cryptos directly with each other, without an intermediary.
Stablecoins: These are cryptocurrencies designed to minimize volatility. They are often pegged to traditional assets like the US dollar. Examples include DAI and USDC.
Yield Farming: This involves lending out cryptocurrencies in return for interest, often in the form of additional tokens. It’s a way for crypto holders to earn passive income.
Insurance Platforms: These platforms, like Nexus Mutual, provide decentralized insurance services.
Ethereum 2.0 and the Future of Finance
Ethereum’s potential to revolutionize finance is undeniable, but it’s not without its challenges.
For instance, scalability issues and high transaction fees have been a major concern. However, Ethereum 2.0, the upcoming upgrade to the Ethereum blockchain, promises to address these issues and more.
What is Ethereum 2.0?
Ethereum 2.0 or Eth2 or “Serenity,” is an upgrade to the Ethereum blockchain. This upgrade aims to improve the speed, efficiency, and scalability of the Ethereum network, allowing it to process more transactions and ease congestion.
Key Features of Ethereum 2.0
Proof of Stake (PoS): Ethereum 2.0 will shift from the current Proof of Work (PoW) system to a Proof of Stake (PoS) system.
In PoS, validators are chosen to create a new block based on the amount of Ethereum they hold and are willing to ‘stake’ as collateral.
Sharding: Ethereum 2.0 will introduce sharding, where the Ethereum blockchain will be split into multiple parts, called ‘shards.’
Each shard will be capable of processing its transactions and smart contracts, significantly improving Ethereum’s capacity and speed.
Crosslinks: These are references to shard chains in the Ethereum 2.0 main chain. Crosslinks are crucial for keeping the network secure and balanced.
Ethereum 2.0 and the Future of Finance
With Ethereum 2.0, the Ethereum network aims to become faster, more secure, and capable of handling thousands of transactions per second.
This scalability could enable a new wave of financial applications on Ethereum and solidify its position as the backbone of DeFi.
The Risks and Challenges
Scalability Issues
Despite the proposed solutions of Ethereum 2.0, scalability remains a concern.
The Ethereum network currently handles between 20 to 30 transactions per second (TPS), while traditional systems like Visa and MasterCard can handle over 20, 000 TPS.
When Ethereum 2.0 is fully deployed, it is believed that it would have the capability to process between 20,000 to 100,000 Transactions Per Second, according to analysis by OKX, this would be a breakthrough and change the financial system.
Regulatory Concerns
As with all cryptocurrencies, regulatory concerns pose a significant challenge. Governments worldwide are still figuring out how to regulate cryptocurrencies, and any new laws or regulations could impact Ethereum’s growth and usability.
Competition
Ethereum faces stiff competition from other blockchain platforms. Competitors like Binance Smart Chain and Polkadot also offer smart contract functionality and are vying for a share of the market. Ethereum needs to continue innovating to maintain its leading position.
Security Risks
While blockchain technology is secure, it’s not immune to attacks. Smart contracts, a key feature of Ethereum, have been targeted in the past. Although rare, such incidents can undermine confidence in the platform.
Market Volatility
Cryptocurrency prices are notoriously volatile, and Ethereum’s Ether is no exception. While potential gains can be high, the risks could be devastating. Investors need to be aware of this volatility and invest wisely.
Ethereum’s Potential To Revolutionize The Financial World
Innovation: Ethereum’s smart contract functionality has paved the way for countless innovative applications, from DeFi to NFTs.
The constant innovation on Ethereum could drive demand for Ether, Ethereum’s native cryptocurrency.
Ethereum 2.0: The upcoming upgrade could significantly improve Ethereum’s scalability and efficiency, potentially driving further adoption and increasing the value of Ether.
Dominance in DeFi: Most DeFi applications are built on Ethereum, and the growth of DeFi could directly benefit Ethereum.
Want To Join The League Of Ethereum Investors?
The key means of joining the league of Ethereum investors is by trading in Ether, which can be done on any major cryptocurrency exchange.
It’s also possible to invest in Ethereum by participating in Initial Coin Offerings (ICOs) or buying tokens of DeFi projects built on Ethereum.