#Issue 5: So, no competitor to Bitcoin? Eh!
We have achieved a landmark this week: “Chai+n = Chain” crossed triple-digit subscribers since inception. Let’s take a moment to celebrate the small win!
Welcome to the 100+ new members of the blockchain tribe who have joined us since last month.
Hi folks,
Happy Sunday munching! 2.5 months and we are already on the 7th issue of our Chai + n = Chain newsletter series with 100+ subscribers. Phew, time flows faster than we think!
Ours is a capitalist world - a free-flowing market where many companies offer products/services to the same $7bn consumers - but we, as consumers and in general the market, decide what we would buy at what price point. In this case, the companies compete with others to serve us, so that we can choose what is best for us. We know some companies better than the rest, who are the first movers in their category and set the stage for an entire industry to be born. The best one today: Amazon!
Same is the case with the blockchain industry - Bitcoin took the world by storm when it was launched in 2009 and arguably became the biggest crypto-currency by market capitalization. With the popularity of Bitcoin, other crypto-currencies were also launched and there are more than 4000 in existence today. Eh, there is always a Flipkart and Myntra to an Amazon!
With this, we discuss the second most popular blockchain today - Ethereum and how it is different from the Bitcoin blockchain. Sit back, relax and enjoy a cup of hot chai (maybe with a biscuit)!
So, no competitor to BTC? Eh, we have ETH!
Wikipedia defines Ethereum as “decentralized, open-source blockchain with smart contract functionality”. Two terms to note here:
It is a decentralized blockchain (well that’s what we have been harping all along with this newsletter)
Smart Contract Functionality (this is something special about Ethereum that doesn’t exist in a Bitcoin Blockchain)
Now, let’s know how the Ethereum community itself defines Ethereum:
“Its the world’s programmable blockchain”
So basically, Ehtereum is more than digital money and payments. It has become a marketplace of financial services (known as DeFi or Decentralized Finance), games, and decentralized apps with just the core functionality - smart contracts.
As we have discussed in the earlier issues, crypto-currency is a Use Case of Blockchain Technology. In the case of the Ehtereum blockchain, Ether is its native crypto-currency.
What is a Smart Contract?
In its simplest form, a “Smart Contract” is a piece of code that runs on Ethereum blockchain. It’s called a contract because the code can control things like Ether, other digital assets, and transactions.
The code executes an agreement or a part of an agreement automatically when some pre-determined conditions are met. For example, a vendor of a company would receive his full payment after 30 days after the invoice is raised (called as net-30 in business and credit language). In this case, a smart contract would be binding between the vendor and the company with:
Agreement - To release 100% payment of a vendor
Condition - Only after 30 days after the invoice is raised
Now you may ask, this is being followed in our systems now as well, right? How does this smart contract make a difference? Bang on!
First of all, this contract is smart because it is automated. So, the payment would be released automatically without any manual intervention (any accountant approving the release). Secondly, the condition is paramount and can’t be changed - no matter when the invoice is raised, the payment would be released only and only after 30 days (not after 29 / 31 days) and the vendor would be paid in full - 100% of the invoice raised.
But fellows, does this even seem practical?
Consider this scenario - currently there are so many images, videos, gifs, and digital assets being created everyday. No one knows the origin of the images or the gif’s but we share them endlessly without the original creator getting his / her due, i.e the creator does not get any royalties for the creation of his / her art.
If let’s say, Abhi injects a code in the digital image he created - a Digital Monalisa - every time his Digital Monalisa is shared with any other person (sold for understanding purposes), he would receive 2% of the total selling price of the image. What this solves is 2 problems that plague today’s digital world:
We can always determine the current owner of that piece of Digital Content
The digital creator always gets his royalties without any misuse
This is basically a Smart Contract which is called as a Non-Fungible Token in Blockchain language
And this smart contract can be entirely built on Ethereum Blockchain!
Blockchains : Bitcoin vs Ethereum!
I came across an interesting article from Packy MckCormick - “Own the Internet - A Bull Case for Ethereum”, where he has termed Ethereum as the “Excel of Blockchains”. That’s the simplest comparison I could have read about the discussion : Bitcoin vs Ethereum (note that we are comparing Bitcoin and Ethereum Blockchains here). And I quote him here:
Bitcoin is like a database. That’s what a blockchain is -- a distributed ledger of transactions. The Bitcoin blockchain lets people send each other bitcoin (BTC) and tracks who owns which bitcoin at any given time. It can also reward people for securing the database by giving them BTC for turning electricity into solutions to math problems (Proof of Work or PoW). It does one thing really well: track ownership of bitcoin.
Bitcoin is kind of like a spreadsheet, and many people compare blockchains to spreadsheets, but that’s not what I mean when I say that Ethereum is like Excel. I mean that the same elements that have propelled Excel for nearly four decades are present in Ethereum, too.
It starts with flexibility. Ethereum is a Turing complete, programmable blockchain that lets anyone build full-blown applications using smart contracts. People can build all sorts of decentralized apps (dApps) on top of Ethereum, plugging into the blockchain and the surrounding ecosystem to provide everything from security to identity to payments. Decentralized Finance (DeFi) apps, NFT marketplaces, Decentralized Autonomous Organizations (DAOs), and games and virtual worlds can all be built on top of Ethereum, all fueled by the native currency, ETH.
That flexibility is really hard to do.
You could replace “Excel” with “Ethereum” and it works perfectly. Ethereum’s early usability challenges are a function of its flexibility. Ethereum is something of a choose-a-phone, and clearly millions of people do want to compose for it.
Beyond the product philosophy, there are some specific similarities between the two:
Turing Completeness. If something is Turing complete, it means that it can solve any reasonable computational problem. With the introduction of Lambda, which lets users create their own formulas, Excel became Turing complete. With Ethereum, you can write smart contracts that can solve any reasonable problem.
Composability. In Excel, “You can chain functions, passing the output of one function as the input to another, allowing for an enormous number of potential computational pipelines. Each time Excel adds a function, the power and flexibility of Excel is multiplied, since that new function can be chained to a large number of existing functions.” This is very similar to the idea of composability, or “X Legos,” on Ethereum.
Together, Turing completeness and composability mean that you can build smart contracts to compute anything, and then chain them together to build increasingly complex things, more quickly. It takes time to get the engine revving, but it should move quickly once it’s moving.
Moving towards Proof of Stake
In the last-to-last issue, we had detailed out the most common Blockchain consensus mechanisms :
Proof of Work
Proof of Stake
Delegated Proof of Stake
Currently, Ethereum also works on the Proof of Work methodology - the same consensus mechanism, as Bitcoin works currently. However, the Ethereum community would be moving to something called as “Proof of Stake” consensus mechansim by the 1st week of August, 2021.
The million dollar question here is - WHY???
Circulation of Ether
There is a cap on the maximum number of Bitcoins which can be generated currently - 21 million which would be reached by 2140 (Bitcoin creator - the mysterious Satoshi Nakamoto had written this logic). This would make Bitcoins scarce, i.e with fixed supply, people would scramble to own Bitcoins thus increasing its value (proper supply and demand problem - anything which is rare is expensive and its value increases with time).
This is not the case with Ethereum blockchain - there are about 116 mn Ether (ETH) in circulation today and can also be increased infinitely.
Why does this matter?
It matters because infinite supply makes Ether inflationary and lose value in the long run. In that case, it doesn’t make any sense for me to buy / hold Ether as an asset because its value will decrease in time. That’s the biggest problem with Ethereum and its currency Ether.
Gas Fees
Whenever a transaction occurs on the Ethereum blockchain, one has to incur a transaction fee called as “Gas”. It’s as simple as the commission to get the transaction onto the block, which the Ethereum community pays to the miners who verify the transaction and cement it on the blockchain.
Miners who successfully verify and create a block are rewarded with 2 freshly-minted ETH and all the transaction fees within the block. This gas fees are very volatile and expensive - they change on the basis of auction and demand.
Move towards Green
As the blockchain world had gone into a frenzy due to this tweet by Elon Musk on the negative effects of Bitcoin mining on the environment:
Thus Ethereum - also being on Proof of Work Mechanism - uses lot of electricity for mining ETH and hence wants to move away to “Proof of Stake”. We would do a deep dive into the Technical Details of Proof of Stake in the next issue.
That’s for it today folks! Hope you have got a basic idea of - “What is Ethereum Blockchain and how it differs from Bitcoin”. If you want to explore more deep, down here:
https://www.notboring.co/p/own-the-internet
https://ethereum.org/en/what-is-ethereum/
https://ethereum.org/en/learn/
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