The Secret To Ether’s Recent Heroics Might Be In Its Origin Story

The Secret To Ether’s Recent Heroics Might Be In Its Origin Story
Stéphane Renevier, CFA

almost 3 years ago4 mins

What’s going on here?

Is ether better than bitcoin – and can it continue to outperform? Before you can even begin answering those questions, you need to understand the key differences between the two.

Ether’s price rise has pulled away from bitcoin’s in recent months (Source: Coinlib)
Ether’s price rise has pulled away from bitcoin’s in recent months (Source: Coinlib)

Bitcoin: “the ultimate store of value”

Bitcoin’s original vision was the creation of a peer-to-peer digital payment system that was self-sustaining, secure, and stored on decentralized blockchain infrastructure. But bitcoin was also designed to be a store of value not subject to government control or big banks as go-betweens. Understanding those origins is important because the overarching Bitcoin network was built accordingly:

  • The supply of bitcoins is scarce: it’s preprogrammed to shrink, while an inbuilt cap encourages deflation – or increased value.
  • The Bitcoin network favors simplicity, security, and stability over speed when processing transactions.
  • It’s built to last: the same framework has been used since its inception in 2009.

Bitcoin only really does one thing – storing and swapping value – but it’s designed to do it well. While many see a lack of innovation as one of the Bitcoin network’s weaknesses, it’s also a source of strength. As a digital store of value, there’s arguably no better alternative to bitcoin.

Ether: a bet on blockchain

The Ethereum network was built to be the world’s programmable blockchain: it executes code and even has its own programming language, with ether tokens the fuel facilitating operations. But this “world computer” isn’t centrally controlled, and anyone with an internet connection can run decentralized Ethereum-hosted applications including games, financial services, and social networks.

The project officially launched in 2015 and expanded on Bitcoin’s blueprint, creating a new use for the underlying blockchain technology beyond mere record-keeping. Ethereum’s most important innovation was the ability to create “smart contracts” that are automatically executed when certain conditions are met.

Smart contracts work like a vending machine: with the right inputs (like money + snack selection), a certain output is guaranteed (snack dispensed). Smart contracts similarly remove the need for a shopkeeper – and bypassing intermediaries means that transactions are cheaper, faster, and potentially safer. Decentralized applications running on smart contracts (a.k.a. dapps) are highly resistant to censorship and corruption, with popular use cases including:

Two things are worth noting, both of which will have a big impact on the ether token’s long-term attractiveness. First, usage of dapps remains at a relatively embryonic stage. Second the sheer complexity of the Ethereum network has created significant challenges, such as a lack of scalability. It’s therefore in the process of transitioning to an upgraded Ethereum 2.0, which is expected to be fully operational by 2023.

So on the one hand, ether’s like any other cryptocurrency: it can be used for payments, speculation, or trading. But whereas bitcoin is inherently focused on being a store of value and means of exchange, ether’s primary goal is to provide computer power for transactions on the Ethereum network and thereby monetize the value created by new uses of blockchain.

Why should I care?

While bitcoin and ether may seem similar – they’re both decentralized digital currencies using blockchain technology – they’re very different in what they’re trying to achieve. Bitcoin’s use cases are well-defined and its technology is simple; ether, meanwhile, is central to a complex and still developing network of decentralized applications.

With that in mind, you might begin to perceive why ether has proved so popular in recent months: dapps, and those focused on NFTs in particular, have shot to prominence and attracted a lot of mainstream attention. With ether effectively the fuel which powers all this fire, it’s little wonder users and investors are focused on the potential for demand to grow further.

As to how likely that looks – well, that’s a subject we’ll examine in further detail next week.

Key takeaways

  • Bitcoin’s network is designed to favor simplicity, security, and stability: it’s focused on storing and swapping value.
  • Ethereum adds a layer of complexity in the form of decentralized applications built on top of its blockchain, with computing power effectively paid for in ether.
  • Understanding the differences between the two is key to comprehending why bitcoin and ether are experiencing divergent price performances.
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