Cryptocurrencies like Bitcoin are becoming more popular, and valuable, every day. With a market cap of over $100 billion, these digital currencies are becoming some of the hottest investments around the world.
Bitcoin, the cryptocurrency that most people have heard of, recently hit the $3,000 mark. A lesser known cryptocurrency called Ethereum has also hit an all-time high recently. With a market cap of over $34 billion, Ethereum is the second largest cryptocurrency on the planet.
Many analysts and investors believe the Ethereum could one day surpass Bitcoin as the largest cryptocurrency. They point to its innovative blockchain technology as one reason that Ethereum could dominate the digital cash space going forward.
What Is Ethereum?
At its core, Ethereum is a network that uses "smart contracts" to pay parties after certain contract specifics have been met and verified. For example, a person could set up a smart contract that would automatically pay a plumber once the work had been done and verified.
But Ethereum's blockchain technology does not end with business applications. Governments could use the Ethereum network as well. If a homeowner has set up his tax payment through the Ethereum network and he then decides to cancel that smart contract, after a warning period, the local or state government would automatically place a tax lien on the property.
The “gas” that runs this network is known as “ether” (trading symbol ETH) and that is the store of value or cryptocurrency. Since the beginning of the year, ETH has risen from $10 to a high of over $400. It is this meteoric rise that has garnered the cryptocurrency much attention.
How Does Ethereum Work?
The Ethereum blockchain technology is similar to Bitcoin’s, but the use of smart contracts sets it apart. Each node in the network stores the most current state of each smart contract. That is in addition to all the ether transactions that are happening.
For every Ethereum contract, the network needs to keep track of the current information, or state, of all the applications running. This includes all the smart contracts code, where it is stored, and the user’s balance.
Every time a contract is used on the Ethereum blockchain, a network of thousands of computers go to work to process it. These contracts are written in a code known as bytecode that can then be read by a feature called “ethereum virtual machine” (EVM).
Every node on the network holds a copy of all transactions and smart contract history. This is because every time an action takes place on the network, the network must come to an agreement that the action took place and is valid.
The goal is for the entire network to take responsibility for validating the current state of each contract. This is a big departure from the central authority model where an intermediary like PayPal or a financial institution is the ultimate arbiter of whether a transaction is valid or not.
Can Ethereum Surpass Bitcoin?
With so many potential applications in both the public and private sector, many analysts believe that Ethereum could one day be the largest cryptocurrency, passing Bitcoin.
Currently, Bitcoin has a 38% market share, but that is down from over the 80% share that it had in early 2017. With a total market cap of $42 billion, Bitcoin is this the largest cryptocurrency. However, Ethereum is closing that gap with a market cap of $34 billion.
As developer and investors begin to flock to Ethereum it seems just a matter of time before it edges out Bitcoin as the premier cryptocurrency. There is already a term for it. Market observers have dubbed it “The Flippening.” A quick search on social media for the hashtag will bring back tens of thousands of results.
While most analysts are focusing on Ethereum’s promise as a reason it has become the main rival for Bitcoin, some analysts believe that it is Bitcoins issues with scalability that have lead to its loss of market share.
Currently, in Bitcoin’s blockchain technology, the block can only hold up to 1MB of transaction data. That means that they can only process a fixed number of transactions. This has caused many delays in the network. Many Bitcoin users have complained that their purchases have taken many hours, and in some cases, even days to process.
And there doesn't seem to be a solution on the horizon. Proposals to increase the capacity of the network have failed. It seems that Bitcoin’s growing pains have aided Ethereum’s rapid growth.