What Makes Ethereum Different?

While Ethereum is considered to be a cybercurrency, and in fact is the world’s second largest by market capitalization, meaning the value of all the money held in it, it isn’t primarily a currency at all, and this is just one of its uses.

Ethereum is actually a software platform that just happens to function as a currency. The currency part of Ethereum, called Ether, is an important feature of it, serving as a means of exchanging value between parties that use the software to manage contracts, called smart contracts.

What Makes Ethereum Different?Both Bitcoin and Ethereum utilize what is called a blockchain, which is a means of validating transactions through a network of computers comprised of users of the platform. With Bitcoin, all the transactions that have ever occurred are kept on record in the blockchain, on a public ledger, instead of being kept privately in a central database, which has always been the case before blockchain technology came along.

Ethereum also uses blockchain technology, maintaining public records, but instead of being focused on financial transactions primarily, where currency is exchanged for something else, it is more centered around allowing participants to share and complete tasks using the software as well as allowing for compensation to be made between parties, with their currency, Ether.

Ethereum is therefore considered to be a more evolved form of blockchaining, for instance it is referred to as Blockchain 2.0 or even Bitcoin 2.0 to reflect its more sophisticated and advanced structure.

Aside from being a software platform, Ethereum is also a Turing Complete programming language, which assists developers in building the smart contracts and distributed applications that Ethereum is used with.

Ethereum still trades as a digital currency alongside Bitcoin and all of the other cybercurrencies that have emerged over the last few years. Bitcoin did get a lot bigger head start, being launched in 2009 as opposed to 2015 for Ethereum, but Ethereum has shown that it has fewer limitations and has much more practical value than Bitcoin, and one day soon may end up being not only better but bigger as well.

Ethereum is quickly catching up, not so much in terms of market cap, with the investing public in other words, but with those whose needs are more sophisticated as well as those who are taking a longer term look at the future of these two cybercurrencies and have come to realize that it is Ethereum that has the most potential.

Ethereum is More Tailored to Specific Applications

While Ethereum can serve as a means of people making payments to one another for non- software related transactions, transactions not occurring in the blockchain in other words, it is its use as a means of both facilitating blockchain agreements and allowing parties to pay for the services rendered that makes it really stand out.

All cryptocurrencies function as peer to peer payment methods, but with Ethereum, the software is peer to peer as well, which can improve the efficiency of contracts as well as eliminate the need for third party verification or escrow.

Let’s imagine that two parties come to an agreement for one to complete a certain task for a certain amount of money. The traditional way to arrange this would be to have a third party hold the funds that is allocated for the project and deliver it to the other party upon the successful completion and verification of the task.

Instead of having a third party such as a lawyer handle all this, smart contracts make the contract transparent and a matter of public record in the blockchain. The money for the contract is held in the blockchain and if the required tasks get completed as agreed, the money gets released to the party responsible for completing them, and if not, the money can be returned to its original owner, all through an automated process that is not subject to discretion or misapplication.

This is just one example of how this technology can be put to work, and what it does essentially is remove the need for the power to enforce or verify transactions to be vested in a central authority, and instead have it publicly verified so to speak.

It is as if someone put the contract on the internet for all to see and the internet itself is going to manage it from there, not the people but their computers, and all this transparency can be a big benefit to all parties, taking advantage of current technology to take what has up until now been private and make it all public.

Blockchain contract management not only ensures that money be distributed appropriately, but that the process itself be allowed to operate more efficiently along every step of the way. Many contracts are quite complicated and there are often delays in making needed or wanted adjustments along the way, and blockchaining can serve to streamline all of this by the parties agreeing among themselves to these changes without the need for third parties.

Smart Contracts and Distributed Programs Have Huge Potential

Smart contracts can go well beyond just parties contracting to deliver services to one another. The broader idea and the broader application comes out of using public computers to manage data, decentralizing processes as well as making processes more transparent.

Businesses and governments have already used smart contracts based upon Ethereum to expedite things like supply chain management, process financial transactions more efficiently, log changes of ownership, manage personal records, and much more. Anytime something needs to be verified privately, or is verified privately, there is a potential to improve the process through looking to verify it publicly through blockchaining.

Ethereum essentially offers the ability to automate the fulfillment process, and perhaps even more importantly, allows for a better flow of information among interested parties. This involves both improvements in access as well as speed of access, and takes the potential of computers to manage our lives to the next level, one that would not be possible otherwise.

Ethereum’s Blockchaining in Action

A simple example of this would be using blockchaining to log the amount of money that you have in a bank account. Relying on a central database, the bank’s in this case, may lead to errors and disputes, which can sometimes be difficult to resolve. We wouldn’t typically worry too much about this but some people do, with their money merely being represented by a number on a bank’s computer.

What if the computer crashes?  What if it gets hacked?  What if you are the victim of fraud and the bank claims that it was you that spent the money?  There are all sorts of potential pitfalls that may occur given that all of your money is kept on one computer system essentially.

What if, instead, this data was kept on computers around the world, on the cloud so to speak?  This doesn’t mean that everyone would know how much money you had, as this would be encrypted to ensure privacy, but there would be a record of your money kept at many other places besides your bank.

The use of Ethereum’s smart contracts isn’t limited to data of a financial nature, and is now being used to manage things like health records, to better ensure things like accuracy as well as better manage the flow of information.

This can help prevent mistakes being made that could even cost you your life, in addition to being useful with things such as making insurance claims. With your information essentially on the public domain, a hospital’s records, another hospital’s records, doctor records, and so on, all this information can be integrated much better and this will allow for more accuracy and efficiency overall.

There are a great deal of things that can be managed, and better managed, in the public domain, and while we are early in this trend, with this idea being virtually brand new, we will likely see more and more things being managed by the blockchain in the coming years, where it may even replace centralized database management in the near future.

Given that we have the technology for such things now, thanks to software like Ethereum, as well as the concept of the blockchain itself, more and more applications are being managed this way every year, and there is no reason why this won’t continue to grow.

How Does This All Effect the Value of Ethereum?

It is important to make the distinction between Ethereum the software and programming language and Ethereum the currency, which is technically called Ether, although most people refer to both as Ethereum.

The value of Ethereum as a currency and as an investment is still subject to the same market forces essentially as other digital currencies, which is basically driven by demand.

One of the interesting things about Ethereum as far as making inroads as a currency is that its verification is much more efficient than Bitcoin and its other major competitors, meaning that its use won’t be anywhere near as limited as far as offering what amount to impractical transaction times.

With that said, no cybercurrency can compare to the efficiency of the current payment system using traditional currency through centralized databases, and verifying transactions through the blockchain is a very long way off in terms of speed. Speed matters a great deal here and very often neither the purchaser nor the vendor is going to want to wait even minutes for payments to be verified, especially with in person transactions such as retail purchases.

Ethereum does boast an internal market for it so to speak, those using the software and looking to take advantage of its feature in transferring funds, and this can only serve to solidify the demand for it as a currency, even though at present, only by a very modest degree.

In the end, the people always speak as far as how much they value something, and this will continue to drive the value of Ethereum up and down like it does with all cybercurrencies as well as anything else of value that is traded.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: andrew@marketreview.com

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.