Bitcoin's Rival: Ethereum's Rapid Rise

Since I began my occasional musings on all things Bitcoin around a year and a half ago I have touched on many aspects of digital currency, but there is one that I have avoided: the large number of other currencies modeled on Bitcoin that have been seen as rivals. That lack of interest in “altcoins” as they are collectively referred to has, to this point at least, looked justified. Litecoin, Dogecoin and a host of others have had varying degrees of success, but none have really threatened to overtake bitcoin in terms of size or scope...until now. That has changed with the rapid rise of Ethereum.

Ethereum was originally proposed in a white paper published by Vitalik Buterin in 2013, but didn’t become a reality until the genesis block was released at the end of July last year. It is in many ways similar to Bitcoin. The record keepers of the system, the miners, are rewarded by receiving blocks of a currency (in this case called ether), based on proof of work. Unlike Bitcoin, which has an absolute limit on the number of coins that can ever be issued, Ethereum blocks will remain constant in size and have no pre-set limit on their number, making ether less disinflationary in nature than Satoshi Nakamoto's creation.

The fact that Ethereum has become so relevant so quickly is a sign of the speed at which the world of crypto-currency moves, but it is also a result of Ethereum offering something unique. It takes the concept of the blockchain, the distributed ledger system that was introduced by Bitcoin, one important step further.

There are many similarities between the two. Both, as mentioned, revolve around a distributed ledger system. In such a system, record keeping is essentially shared between a group of independent computers and the currency behind the system is used to reward people for taking on that role. That currency and the fixed supply and disinflationary nature of it were the focus of bitcoin, at least for many of the early adopters. It challenged the notion that money had to be controlled by government, and that the value of a unit of currency must decrease over time.

With Ethereum, however, it is the operating system, not the currency, that is the center of attention. Ethereum adds to the concept of the blockchain a capacity for what are known as “smart contracts,” contracts that are automatically honored by the ledger itself.

Perhaps the easiest way to think of that is in terms of sports betting: If two people wanted to bet on a game, one taking each side, then one of two things has to happen. Either they must trust each other to pay up, or they each hand their stake to a neutral party who pays out to the winner when the result is known, in which case both bettors must trust the third party.

Ethereum in effect acts as that third party, but without the need for trust. (That is why blockchain systems are also known as “trustless ledger systems”.) The terms of the bet are built into the contract at the time it is struck, and payout is determined by a future event.

Of course, the capacity for smart contracts that is built into Ethereum is not just of interest to the sports betting industry. Where the real interest comes from is Wall Street. It has frequently been said that the stock market is just a giant betting parlor, and the similarity of a trade to a bet in contract terms is undeniable. Both have two parties and in both cases one will win and the other will lose when the contract is terminated.

Ethereum has the capacity to process that transaction automatically, again without third party involvement, so it is little wonder that the banks and financial houses who have historically been those third parties are following its rise closely, and in many cases getting involved directly.

It is not just the banks, though. Microsoft (MSFT) is making it easy to use Ethereum on its cloud system, Azure, IBM (IBM) has made it known that they are exploring the system for use in the so-called “internet of things” and a host of companies have been set up specifically to exploit the possibilities of a smart contract enabled blockchain.

Many have been looking for ways to add smart contracts to the blockchain and Ethereum has solved that problem, resulting in a rapid rise just as Bitcoin is grappling with how to expand effectively. The currency still has a long way to go to eclipse the size and scope of Bitcoin, but it cannot be ignored and could yet emerge as the dominant force in the world of crypto-currency.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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