Ethereum: what is it and how is it different from Bitcoin?

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LONDON – Ether, the world’s second largest cryptocurrency, has stolen the limelight from Bitcoin recently. The digital coin hit a record high of over $ 4,000 on Monday and has grown more than 450% since early 2021.

That doesn’t come close to the return on meme-inspired Crypto Dogecoin, which is up over 11,000% since the start of the year. But many crypto investors are jokingly disapproving of Dogecoin, and have compared its rise to the Reddit-fueled trading frenzy that drove the prices of GameStop and other stocks soaring.

Here’s a breakdown of what Ether is and how it differs from Bitcoin:

How it started

Ether is the home currency of Ethereum, an open source blockchain platform. Ethereum was founded in 2013 by Russian-Canadian programmer Vitalik Buterin and several other crypto entrepreneurs. Many of the people who started Ethereum were previously involved with Bitcoin.

Bitcoin’s functionality was too limited for Buterin. In an interview with Business Insider, he compared it to a calculator that “does one thing well” while saying Ethereum is more of a smartphone with multiple applications that you can use.

That is the main premise of Ethereum. Like Bitcoin, it is based on blockchain technology – essentially a distributed computer network that records all cryptocurrency transactions. Unlike Bitcoin, users can build apps on Ethereum.

In Buterin’s own words, Ethereum is “a blockchain with an integrated programming language” and the “most logical way to actually create a platform that can be used for many more types of applications”.

Smart contracts

The Ethereum network hosts so-called smart contracts – collections of code that execute a series of instructions and are executed on the blockchain.

These contracts operate decentralized applications or dapps that are similar to smartphone apps that run on Google’s Android or Apple’s iOS operating systems, except that they do not respond to a company or government agency.

Recently, there has been a massive surge in activity on the Ether network thanks to the rise of NFTs, or non-fungible tokens, which are digital assets designed to represent ownership of unique virtual objects. That’s because a lot of NFTs – from the colorful online cats from CryptoKitties to the cyberpunk-inspired avatars from CryptoPunks – run on Ethereum.

In simple terms, Bitcoin is a payment network that allows value to be transferred between two people around the world. Today it is mainly used for investing. Ethereum, on the other hand, aims to create the infrastructure for an Internet that is not maintained by any single authority.

A big trend in Ethereum right now is decentralized funding, a term that refers to traditional financial products like loans and mortgages that are created using blockchain. In this case, blockchain replaces the middlemen – from banks to governments – and tracks everything.

criticism

However, the Ethereum is far from perfect. In 2017, the popularity of the game CryptoKitties resulted in the network becoming severely congested by Ether, which significantly slowed transactions and led the game’s developers to increase their fees.

Scalability is one of the biggest problems on the Ethereum network today. A proof-of-work protocol similar to Bitcoin is currently used. This means that cryptocurrency miners have to compete with specially designed computers to solve complex mathematical puzzles in order to validate transactions.

This has led to criticism of Bitcoin and Ethereum from those who are concerned about the enormous energy consumption of their networks.

However, Ethereum is in an ambitious upgrade called Ethereum 2.0. This would lead to a “proof-of-stake” model that relies on “stakers” who already have some ether to process new transactions.

Crypto investors say the upgrade should help the Ethereum network run on a larger scale, process a lot more transactions faster, and support apps with millions of users.

This could also lead to a short-term price increase. More and more ether is being hidden for a “lockout” period from token holders trying to become stakers and validate transactions on the new network. This could theoretically limit the available ether supply.

Still, some skeptics of digital currencies like bitcoin and ether remain unconvinced. The recent rally has reminded some investors of the 2017 crypto bubble, when Bitcoin soared to $ 20,000 before falling to $ 3,122 a year later. Bears say cryptocurrencies are in another bubble waiting to burst. But the cops believe things are different this time – namely, increased interest from institutional investors.

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