In recent years, alongside the expansion of the cryptocurrency market and the advancement of blockchain technology, Ethereum (Ether) has garnered significant attention following Bitcoin. This article professionally and clearly summarizes the mechanisms and features of Ethereum, compares it with Bitcoin, and discusses its future prospects and investment aspects. Whether you’re looking to learn more about Ethereum or considering leveraging blockchain for business or investment, this article contains valuable information that you shouldn’t miss. Please read until the end.
What is Ethereum?
Ethereum is one of the cryptocurrencies with the second-largest market capitalization after Bitcoin. However, its essence is not merely a “virtual currency” but primarily a platform for developing decentralized applications utilizing blockchain technology. Ethereum was conceptualized by Vitalik Buterin in 2013 and officially launched in 2015.
Unlike Bitcoin, which solely handles simple “value transfers,” Ethereum provides a versatile blockchain that can execute “smart contracts.” This allows for the automation of contracts and transactions without the need for intermediaries, enabling applications across a wide range of fields such as finance, gaming, art, and crowdfunding.
Mechanism and Features of Ethereum
Smart Contracts and EVM
The most prominent feature of Ethereum is its ability to execute “smart contracts” on the blockchain. A smart contract is a programmatically defined contractual mechanism that automatically executes when certain conditions are met.
Ethereum supports the execution of these smart contracts through the EVM (Ethereum Virtual Machine), a virtual machine that operates decentralized on the blockchain. The EVM is maintained by individual nodes (computers) in the Ethereum network, which mutually verify the correct execution of programs.
Advantages
- No Central Administrator Needed (Decentralized)
- Extremely Difficult to Tamper With
- Transparent and Automated Contract Execution
Disadvantages
- Difficult to Address Bugs or Specification Errors in Programs
- High Transaction Fees When Network is Congested
DApps (Decentralized Applications)
Ethereum serves as a valuable foundation for developing DApps (Decentralized Applications) that utilize smart contracts. DApps are not dependent on specific companies or servers but are maintained and managed by a network of numerous nodes.
Concrete Examples:
- Decentralized Exchanges (DEX): Users can directly exchange cryptocurrencies without intermediaries.
- Decentralized Games: Management of in-game currencies and items occurs on the blockchain.
- Decentralized Social Networks: Reduced risk of censorship by operators and allows for free publication.
The expansion of the DApps ecosystem has contributed to Ethereum often being described as the “world computer,” becoming a crucial infrastructure on the blockchain.
Ether and Gas Fee
Ethereum issues its own token called “Ether” (ETH). When executing smart contracts or using DApps, transaction fees known as “Gas” (Gas Fee) are required.
- Gas Fee: A transaction fee that depends on the complexity of the smart contract or the amount of data. Gas fees can significantly rise when the network is congested.
- Rewards for Miners (or Stakers): Gas fees are paid as rewards to nodes that provide computational resources for processing transactions and smart contracts.
Ether can be exchanged on exchanges for Bitcoin or fiat currencies (such as Japanese Yen or US Dollars), making it an attractive investment asset as well.
Differences Between Bitcoin and Ethereum
Although both Ethereum and Bitcoin utilize the same blockchain technology, they differ significantly in several key aspects:
Different Purposes
- Bitcoin: Serves as a digital currency and primarily a means of value transfer.
- Ethereum: A platform for executing smart contracts on a versatile blockchain.
Programming Flexibility
- Bitcoin: Limited scripting capabilities.
- Ethereum: Highly functional smart contracts (Turing Complete).
Supply Limitation
- Bitcoin: There is a fixed maximum of 21 million BTC.
- Ethereum: Currently, there is no strict limit, but future upgrades aim to implement mechanisms to curb issuance.
Compared to Bitcoin, often referred to as “digital gold” due to its value preservation capability, Ethereum is increasingly utilized as a multifunctional application platform.
Concrete Use Cases
DeFi (Decentralized Finance)
DeFi (Decentralized Finance) is an umbrella term for financial services offered on Ethereum without the need for centralized institutions like banks or brokerage firms. Using smart contracts, it is possible to perform lending, deposits, and trading.
Representative DeFi Protocols:
- Aave: A lending platform that directly connects lenders and borrowers.
- Uniswap: A decentralized exchange using the AMM (Automated Market Maker) model.
- MakerDAO: A system that issues the stablecoin “DAI” based on collateral.
Advantages of Using DeFi:
- Lower fees due to the absence of intermediaries.
- Users have full control over their assets.
Risks:
- Bugs in smart contracts.
- Liquidity risks.
NFT (Non-Fungible Token)
NFTs (Non-Fungible Tokens) have become widespread thanks to the ERC-721 standard on Ethereum. Unlike fungible tokens, where each token has the same value, NFTs represent unique value.
Application Areas:
- Digital Art: Proof of ownership of original works.
- Game Items: Creation and trading of unique in-game items.
- Metaverse: Ownership and trading of virtual land or buildings as NFTs.
The NFT market experienced tremendous growth between 2021 and 2022 and is expected to continue expanding into areas such as gaming, metaverse, music, fashion, and more.
DAO (Decentralized Autonomous Organization)
DAOs are self-governing organizations managed by smart contracts on the blockchain. They enable transparent and immutable management of voting and finances.
Advantages of DAOs:
- Operation without a central administrator.
- Automation through smart contracts (cost reduction and increased efficiency).
- Enhanced organizational transparency.
DAOs are gaining attention as a new form of business structure, and their adoption in startups, communities, and social projects is expected to accelerate.
Ethereum 2.0 (Consensus Layer) and Future Upgrades
Ethereum faces challenges with scalability (processing capacity) and high Gas Fees due to the increasing number of users and the proliferation of smart contracts. To address these issues, upgrades known as Ethereum 2.0 (currently referred to as the “Consensus Layer”) are being implemented incrementally.
Transition from PoW to PoS
- Reduction in Energy Consumption: Switching from Proof of Work to Proof of Stake significantly reduces energy consumption and environmental impact.
- Increased Resistance to 51% Attacks: Stakers (holders) can participate in block creation, enhancing resistance to 51% attacks.
Introduction of Sharding
- Database Partitioning: Parallel processing of transactions through sharding significantly increases the network’s transaction processing capacity.
- Reduction of Network Load: This leads to lower Gas Fees and more efficient network operation.
Other Upgrades
- Expansion of Layer 2 Solutions like Rollups: More efficient transaction processing through compression and batching.
These upgrades will enable Ethereum to handle a larger number of transactions, stabilize and reduce Gas Fees, and decrease environmental impact. Additionally, it is expected that more companies and developers will join the Ethereum ecosystem as a result.
Advantages and Risks of Investing in Ethereum
Advantages
- Increased Demand Due to DeFi and NFT Boom: As the use of DApps, DeFi, and NFTs expands, the demand for Ether (ETH), used for Gas Fees and collateral, rises.
- Technological Innovation: The introduction of Ethereum 2.0 and the expansion of Layer 2 solutions can enhance Ethereum’s value in the long term.
- Diverse Service Platform: Utilization in various fields such as finance, gaming, art, and metaverse offers significant potential for ecosystem expansion.
Risks
- Price Volatility: Like all cryptocurrencies, Ether’s price can fluctuate significantly daily, posing a risk of rapid losses.
- Technical Risks: Bugs or vulnerabilities in smart contracts can lead to substantial losses or security issues. Additionally, upgrades may face delays or failures.
- Rise of Competing Projects: Blockchain platforms like Solana, Polkadot, and BNB Chain offer faster transaction processing and lower Gas Fees, which could threaten Ethereum’s position.
- Regulatory Risks: Stricter regulations on cryptocurrencies in various countries may impact Ethereum’s development and trading.
Conclusion: The Future of Ethereum
Ethereum has established itself as a versatile blockchain platform that enables the use of smart contracts, offering a different value proposition compared to Bitcoin. DeFi, NFTs, and DAOs facilitate the realization of various services and communities without the need for centralized institutions, making it a key player in the future of blockchain.
With the implementation of Ethereum 2.0 and the spread of Layer 2 solutions, issues related to scalability and high Gas Fees are expected to be resolved, attracting more users and businesses to the Ethereum ecosystem. The active and technologically skilled developer community is another strength of Ethereum.
However, it is important to also consider risks such as price volatility, security issues, regulatory changes, and competition from other blockchains. When considering investments or using Ethereum for business purposes, it is essential to stay updated with the latest development trends and regulatory environments and make decisions that align with your risk tolerance.
Ethereum transcends the boundaries of being a “cryptocurrency” and opens up new possibilities as a decentralized platform. With the ongoing global development of blockchain technology, Ethereum will continue to play a central role and attract significant attention.
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