Ethereum: A Gateway to the Decentralised Internet and Digital Innovation

Ethereum (1)
All about Ethereum – Thinking of adding Cryptocurrencies to your investment portfolio? It’s important to understand what you are investing in – here’s a brief guide to Ethereum, what it is, what it’s for and how it works.

What is Ethereum?

Ethereum is a digital ledger, referred to as a decentralised blockchain platform, that enables the creation of smart contracts and decentralised applications (dApps). Smart contracts are computer programs that automatically execute agreements between two or more parties without the need for intermediaries. DApps are software programs running on the blockchain rather than a centralised server. Amongst other things, Ethereum’s blockchain technology offers the benefits of automation, cost savings, transparency and security. Ethereum’s native cryptocurrency, Ether (ETH), is used for transactions, application execution, and network security.

Unlike Bitcoin, which primarily serves as a digital currency, Ethereum provides a programmable infrastructure where developers can build applications with custom logic, which refers to user-defined rules dictating how a system or program operates in specific situations. Instead of relying solely on standard functions, custom logic allows developers to tailor operations to meet specific requirements.

Ethereum was proposed in 2013 by Vitalik Buterin, a computer programmer who sought to expand the potential of blockchain technology beyond Bitcoin’s focus on peer-to-peer digital payments. Buterin envisioned a platform where developers could create decentralised applications using a programming language embedded within the blockchain.

Ethereum’s Use Cases

Ethereum’s flexibility enables various use cases across industries. Along with smart contracts and dApps as previously mentioned, the technology facilitates decentralised finance (DeFi), decentralised autonomous organisations (DAOs), tokenisation, non-fungible tokens (NFTs), digital identify and verification and various other functions.

At its core, Ethereum allows developers to create smart contracts, which are self-executing agreements with terms directly written into code. These contracts automatically execute when predetermined conditions are met, eliminating intermediaries, reducing costs and increasing efficiency, transparency and security. An example of when a smart contract may be used is in a real estate transaction. If one party is buying a property from another, they may opt to use a smart contract on Ethereum to handle the payment and transfer of ownership. The contract would stipulate that the buying party pay an agreed amount, for example 100 ETH, whilst the selling party provides proof of ownership and transfers the property deed. Once the buyer deposits 100 ETH into the smart contract, the contract locks the funds. Meanwhile, the seller submits the digital ownership deed to the smart contract. Once the smart contract verifies that both conditions are met, 100 ETH is released to the seller and the property deed transfers to the buyer. The entire transaction is recorded on the blockchain, providing a transparent and tamper-proof record.

Ethereum powers a vast ecosystem of dApps across various industries including finance, healthcare, logistics, social media and gaming. The purpose of decentralised applications is to allow for operation without a central authority, offering greater transparency and control to users. Decentralised finance (DeFi) platforms, such as Uniswap, Compound, and Aave, are becoming increasingly popular, enabling users to lend, borrow, and trade without relying on traditional banks or brokers.

Ethereum enables the creation of Decentralised Autonomous Organisations (DAOs), which are organisations governed by smart contracts and run by its members through a decentralised voting system to allow them to operate democratically, enabling collective decision-making on key issues such as capital allocation. The main purpose of DAOs is to enable decentralised collaboration among individuals who share a common goal, as DAOs remove the need for centralised control and give every member a say and ensure that operations are transparent. An example of a DAO could be a funding project, whereby the DAO pools resources to fund a venture or startup.

Tokenisation is another key use case for Ethereum. It involves converting real-world or digital assets into blockchain-based tokens that represent ownership. Tokens can represent fungible assets or non-fungible assets (NFTs). Fungible assets simply mean that they are identical and interchangeable, such as shares of a company, currencies or commodities. NFTs on the other hand are unique items, such as art and real estate. Amongst other things, tokenisation removes barriers to ownership and increases the liquidity of assets. For example, tokenising a property enables fractional ownership, which allows investors to gain exposure to the asset with much smaller amounts of capital. This increases liquidity as a greater number of investors have access to the asset class. Furthermore, because transfer of ownership is executed with smart contracts on the blockchain, it is much faster and more efficient than the traditional process of selling a property, further enhancing liquidity.

Potential Challenges and Risks to Etherum’s Future Growth and Acceptance

While there is little doubt about the importance of Ethereum’s technology, it does face a few challenges. The most important of which being a successful transition to Ethereum 2.0, which will address critical scalability issues, such as high transaction fees and slow processing speeds. This is paramount in remaining competitive, with Ethereum facing growing competition from other blockchain networks such as Solana, Binance Smart Chain, and Avalanche, all of which offer faster and cheaper transactions. To maintain dominance, Ethereum must continue improving its technology and user experience.

Another key issue is in relation to regulation. As governments worldwide develop regulations for crypto assets, Ethereum could face scrutiny, particularly regarding its decentralised nature and the use of Ether as a utility and investment asset. Whilst Donald Trump’s re-election to the White House is widely regarded as positive for the crypto space, the longer-term regulatory picture is still yet to be determined.

Ethereum has revolutionised blockchain technology with its programmable infrastructure, fostering innovation in decentralised finance. While it faces scalability and competitive challenges, Ethereum’s roadmap and strong developer community position it for long-term success.

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