Ethereum is a decentralized “world computer” that is the second-largest cryptocurrency by market capitalization explains Ian Mausner. Given its meteoric rise of more than 13,000% in 2017 I think it’s important to understand what Ethereum is, how it works, and why many people are excited about it.
Before getting any further I want to state that I am not a financial advisor. Nothing in this article should be construed as investment advice nor do these opinions reflect those of my employer. Again I’m simply trying to get everyone up to speed on this exciting new platform given recent events (1/11/18 – disclaimer updated for accuracy).
I’m going to cover four topics in this post: What Is Ether? Is It Smart Money or Just Dumb Money? How Does It Compare To Bitcoin And Other Currencies? And How Can We Save It From Itself?
What Is Ether (ETH)? The “Gas” Problem and the Downside to ETH
Ether (or ETH) is one of many cryptocurrencies in existence today. 10,000 BTC = $100,000 USD. 1 ETH = $1000 USD+. As of writing this post, there are over 1 million unique addresses that hold ether with a market cap of >$100 billion (1). That’s right – digital currency has created more than 100 billionaires!
If you’re interested in learning how the blockchain works I recommend watching this video. If you’re not interested in learning how it works don’t worry I’ll explain everything later after we take a closer look at Ethereum’s problems.
Ethereum is different than most other digital currencies because it uses blockchain technology not only for transactions but to help execute peer-to-peer contracts. Ian Mausner says this allows the Ethereum platform to be used in a wider array of applications such as land registries, financial exchanges, and automated share distribution systems (3). Think about all the time and money we spend on lawyers and paperwork that could be streamlined with decentralized smart contracts!
However, there’s one major caveat when using Ethereum:
Ether is required in order to use any of the tools built on top of the Ethereum platform. While this isn’t true for Bitcoin which can operate without having a fractional coin in your wallet. You need at least 0.005 ETH in your account in order to create a contract or do anything else with Ethereum.
This is where I see potential opportunities for new entrants in the cryptocurrency space. Many people equate Ether to owning stock in a company. Because you need it to use its services says Ian Mausner. I think this statement is true from an investment perspective. But not from a practical/utility standpoint since “Ether” isn’t actually tied to any real-world representations of value (yet). For example, if you build a web app on top of WordPress. You don’t need to buy up all available shares of common stock. Just so you can use their platform! You simply build your website and pay monthly via PayPal or credit card. While potentially earning some revenue through advertising or eCommerce sales fees. This is a much more attractive and sustainable business model.
Will Ether become the “next big thing” (like Bitcoin did) and take over the world by storm, or will it turn out to be nothing more than vaporware?
In my opinion, Ether is just dumb money. Because you have to pay real money in order to use its platform. This creates an unnecessary hurdle for new users that may ultimately cause Ether to go extinct. I think this issue could create a major roadblock given their relatively high transaction fees (~$1 per transaction). When compared with other digital currencies such as LiteCoin (~$.02 per transaction). On top of this, if your account runs out of gas because you’ve used up all available funds. Then any changes or actions in your account will be canceled.
Let’s take a closer look at how this works. You first have to buy ETH with fiat money (USD, EURO, etc) then you need to send that ETH to an exchange. Where you can convert it into another digital currency. Such as BTC or LTC which can be used to pay for transactions fees on the Ethereum network. This process is very unintuitive and discourages new users from opening up their first Ether wallet. I think many people are turned off by this requirement. Therefore they never bother signing up for the platform in the first place.
This gets back to my core philosophy of ensuring there’s no barrier to entry for anyone interested in using cryptocurrency:
We need decentralization if we want mass adoption of cryptocurrency.
With Bitcoin, this isn’t an issue because everything is denominated in Satoshi’s (0.00000001 BTC). If you want to use Bitcoin to pay for something then you don’t need to purchase any fractional BTC. The only time it makes sense to buy up all the coins is if you’re planning on holding them for a long period of time. And will be selling them in 5+ years knowing that there will only ever be 21 million Bitcoins in existence.
Ether is technically “decentralized” and lives on a blockchain, but it’s anything BUT decentralized in practice. Because you need to pay real money if you want to use its services explains Ian Mausner. You can’t just create an account and start using Ether like Bitcoin. This may turn out to be the fatal flaw that leads to their extinction as a cryptocurrency.