Ethereum Stands Proud as the Second Biggest Cryptocurrency. Why Exactly..?
What Does it Do?
The Ethereum Network is a platform which allows you to build decentralised apps on top if you want to use programmable money. At the base level you can send ETH to other people so for a casual user the experience is not dissimilar to Bitcoin. The Ethereum Network therefore provides the following benefits:
A censorship resistant, transparent record of transactions
The ability to send Ether (Ethereum’s token/coin) to anyone with an Ethereum address
The ability to store your Ether without having to trust a 3rd party (bank)
This is where the Bitcoin comparison ends…
Ethereum also allows you to build autonomous companies, trade within the Decentralised Finance industry, interact with Smart Contracts and Non Fungible Tokens on top of the Ethereum Network.
Ok that’s 3 very different things Ethereum lets us do. Let’s break them down.
What is Decentralised Finance?
Ethereum has birthed a new industry called Decentralised Finance (DeFi). At the moment you have to go through a variety of third parties to get anything done in the financial system:
You need to go through an estate agent and a lawyer to buy a property
You need to go through a stock broker to buy stocks and shares
You need to go through a bank to get a loan
You need a bank to loan money out
You need a trusted Bank/Lawyer to holds funds in Escrow1
DeFi aims to remove the middleman in all the above cases. DeFi also removes the interviews, credit checks and all that other stuff stopping people from accessing the financial markets. It is this functionality that truly differentiates Bitcoin from Ethereum.
If you already have access to banking services you can access similar products for cheaper as DeFi cuts out the middleman.
If you do not have access to banking services you do now via DeFi.
DeFi is pretty new and is fraught with new and exciting risks. Smart Contracts provide a lot of the functionality within the DeFi space.
What are Smart Contracts?
Smart Contracts provide the functional backbone for a lot of things within the Ethereum universe. See the below illustration:
A Smart Contract is a self-executing program that will make and receive payment depending on the conditions it is programmed to accept. The easiest example is an exchange. You (the party) send some crypto to a smart contract and in return it sends you some crypto of a different denomination. All this is executed by the smart contract without the need for 3rd party oversight.
A more complicated example would be Augur. Augur describes itself as a prediction market although it feels more like betting shop.
Customers can go to Augur to bet on the outcome of real-world events
Customers can also create bets for other customers to bet on
Customers can sell their bets to other customers before the bet is closed
All this is done peer to peer without any human middlemen. The Smart Contracts have replaced the book keeper
Augur provides the tools for customers to create and make their own bets. They don’t set the odds nor do they have access to any of the bets once they have been created. Bets are made and paid out in crypto currencies.
What are Non Fungible Tokens (NFT’s)?
You will need your thinking hat on for the following example. Lucky for you we spoke to de Vinci and he had some questions too:
In Response to de Vinci:
The Wealth Gap (TWG): Howdy Leo! As you know the Mona Lisa has hung in the Louvre Museum (Paris) since 1797. Everyone knows where it is. You probably know that there are millions of copies of it everywhere (online and offline) so people everywhere can admire it. Of course, viewing one of the flawless replicas does not come close to seeing the original and people will travel across the globe to see the Mona Lisa at the Louvre.
Leo: Why do they travel? If they have a perfect replica at home why bother spending money to see the original?
TWG: Good question! We think it’s something to do with emotions and maybe a bit of one-upmanship:
‘I’m very rich, clever and deep and I go to the Louvre every year to look at the Mona Lisa because it is so wonderful, deep and powerful! Oh yes nothing can compare to the original’ - that sort of thing.
People will also build things up in their heads and get excited about seeing the ‘original’.
Leo: Okaaay that makes sense! So how will Ethereum help me with my new picture?
TWG: Ethereum will allow you to create a unique token that’s recorded on the Ethereum Blockchain and attach your picture to that token. Creating the token and attaching the picture to it is used as proof that the holder of that coin owns the picture. Once you have minted that token you can splash that picture everywhere because your ownership is documented on the blockchain.
Leo: What is to stop someone copying the image and making another NFT…?
TWG: Someone could do that but that’s like painting a copy of the Mona Lisa. Everyone knows where the original is and it was uploaded to the Ethereum blockchain earlier than the copy. It might be a good copy but it’s just not the same.
Leo: Cools thanks Bro!
That is how and why NFT’s work.
The market for NFT’s is hitting some silly valuations at the moment and we struggle to understand some of the prices. Mind you some people will pay thousands for a Charizard Pokemon card so what do we know..?
As our lives move more and more online we can see NFT’s becoming more commonplace. Some of the art valuations are definitely suspect but imagine owning a unique digital weapon that you can use in a computer game. Now imagine that weapon can be used across multiple games and only you have a copy of it. That sounds pretty cool to us.
Hopefully that gives you a decent overview
In Part 2 we will look at the unique risks and rewards that come with the Ethereum Blockchain.
Until Next Time
The Wealth Gap
‘Escrow’ is the term used to describe a legal arrangement where a 3rd party (Bank, lawyer whatever) holds money until a certain condition is met. Buyers and Sellers will use escrow when they don’t fully trust each other