How Ethereum is Changing the Crypto Narrative
Published February 28, 2022.
There are still many people who haven’t heard about Bitcoin, although Blockchain data available on Statista shows over 300% increase in the number of crypto wallets from 21 million people in 2017 to over 81 million at the time of writing this article. That is only a part of the current crypto trend that is now the subject of ministries of finance and governments across all continents of the globe. From Eastern Europe to Asia, Africa, North America, South America, and Australia, governments are having face-offs with what they have dubbed a potential threat to financial stability and a haven for cybercriminals.
Nevertheless, the advantages of cryptocurrencies continue to unveil in unimaginably positive ways, making it obvious to most countries that it means more good than evil for everyone and can reduce wealth inequality. In some quarters, citizens have scorned governments and public officials as clueless baby boomers, yet the public keep using crypto in cases where they would have given their rights away quite easily thanks to the blockchain and decentralization.
The buzzword making headlines today in crypto is Bitcoin. It is the flagship cryptocurrency that introduced the world to the power of blockchain technology when applied practically. The next thing to Bitcoin in crypto is Ethereum, and the popularity of Ethereum is merited because it gave more use-cases to the technology and made adoption possible at the same time. So Bitcoin is more popular because many people love to be conservative, but there is more in cryptocurrency than Bitcoin, and Ethereum is the true gamechanger.
What Is Ethereum?
Ethereum is a decentralized universal computer for applications on a public virtual machine—known as the Ethereum Virtual Machine (EVM)—that brings everyone on the network to a consensus or agreement on the state of the network. All users of Ethereum can ask this computer to perform a wide range of transactions which are then broadcasted to the network for validation and verification by other participants on the network. The EVM changes in its state with every transaction initiated on the network, which is added and broadcasted throughout the network so that nodes or computers participating on the network can update their copy of the ledger to the latest state. Transactions on Ethereum are known as requests, and they are verified, validated, and stored permanently on the blockchain, updating the state of the EVM with each group of transactions in a block. The network uses cryptography to secure transactions and ensure verification and validity.
Ethereum supports the uploading of reusable codes to the EVM that developers publish to the EVM data layer. These codes or programs uploaded to EVM can be called by anyone using the Ethereum network with specific parameters that instruct the EVM to perform some defined computations in the code. The codes are known as smart contracts, and developers pay a fee to the network to make smart contracts public. The possibilities with the parameters for smart contracts are nearly unlimited, and each parameter represents a unique use case for the Ethereum network.
Ether or ETH is the native currency of Ethereum. It is used to incentivize validators of transactions or miners on the Ethereum network. Transactions on Ethereum require payment of fees known as gas fees to these miners. Ethereum gas is a unit of computation needed for transactions on Ethereum. These computations consume some resources, and gas settles the cost of those computational resources.
Ethereum Gas Fees
Fees on the Ethereum blockchain are denominated in gwei or giga-wei, which equals to a billionth of an ETH. Wei is the smallest unit of Ethereum which takes its name from Wei Dai, founder of the popular B-money cryptocurrency project. Currently, Ethereum uses a proof-of-work consensus whereby each transaction is calculated by multiplying the gas limit or base amount of gas you are willing to consume for a transaction by the gas fee denominated in gwei.
Suppose an anonymous user, Bob, decides to send 1 ETH to another user, Charlie, with a gas price of 200. We can arrive at the gas fees paid in ETH given that the gas limit for Ethereum transactions is fixed at 21,000 units thus:
21,000 x 200 = 4,200,000 gwei = 0.0042 ETH, arrived at by 4,200,000/1,000,000,000, which is the amount of gwei in 1 ETH.
So Bob will send 1.0042 ETH from which 1ETH goes to Charlie, and the remaining 0.0042 goes to the miner for verifying and adding the transaction to a block for validation and inclusion on the EVM state.
With the recent London hard fork or upgrade, however, Ethereum has made efforts to make the gas fee more predictable by introducing a target block size of 15 million and a maximum block size of 30 million, which determines a base fee. Since Ethereum is the most popular blockchain for building decentralized applications, it has often been difficult to verify transactions. With this upgrade, a base fee determined by the level of demand for the spaces in a block is set and incremented by 12.5% when the target is exceeded. That base fee is burned, and the tip incentivizes miners. So transactions on Ethereum are now given by:
(Gas limit x base fee) + tip
So in our previous example, if Bob was to send 1 ETH to Charlie at a base fee of 100 gwei and a tip of 10 gwei. The calculation will be:
21,000 x 100 + 10 = 2,310,000/1,000,000,000 = 0.00231 ETH
0.0021 ETH is burned of this amount, while 0.00021 ETH goes to the miner as fees. Going by the block size rule, when the block space demand crosses 15 million, the 100 gwei base fee becomes 112.5, representing an increment of 12.5%.
Smart contracts on Ethereum are written in solidity, and deploying them requires higher computational power than the average transaction. Ethereum is moving to proof-of-stake soon, which will decentralize the current concentration of ETH among a few by allowing anyone with 32 ETH to become a validator. Ethereum powers some of the most popular DeFi applications, such as Uniswap, Bancor, Balancer, and Curve.
Ethereum vs. Bitcoin: Key Differences
Ethereum is more practical and value-driving to the crypto and blockchain than Bitcoin. Even though people often cite cases of forks such as the Ethereum Classic, which represents a division of the Ethereum blockchain, Ethereum still outperforms the flagship cryptocurrency on several points. It is also important to note that Bitcoin has forks of its blockchain, such as BCH and Bitcoin Gold.
Mining and Staking
Ethereum currency uses a combined proof-of-work/proof-of-stake algorithm, thanks to the Beacon chain, which shipped on December 1st, 2021. Bitcoin uses a proof-of-work consensus. Proof-of-work requires miners to solve a piece of mathematical computation to add new blocks to the state of the network. Although Ethereum supports the creation of decentralized applications that have limitless use cases—most of which are still being explored today—Bitcoin only recently got the Taproot upgrade that allows the creation of apps on top of the Bitcoin blockchain. However, Ethereum is still a step ahead in technology. There are plans to make ETH a complete proof-of-stake blockchain that will be live in months, according to Vitalik Buterin at the ETHDenever event.
Mining Ethereum is not different from mining Bitcoin at the moment. The only way to create ETH and BTC out of nothing is by solving complex mathematical puzzles required to generate a block. The popular function used for solving blocks is SHA 256, developed by NASA, which hashes strings to get target results for new blocks to be created. As Ethereum upgrades to proof-of-stake, staking will create blocks on the network through a similar process that qualifies verifiers on a base amount of token holdings, such as 32 ETH.
Market Cap and Transaction Fees
The total maximum supply of ETH is 120 million. However, the number will keep going down due to the burn mechanism introduced by Ethereum, which sends a fixed number of ETH to an only-deposit-to address from each transaction. On the other hand, Bitcoin has a total fixed supply of 21 million.
Transaction fees on Bitcoin are cheaper than Ethereum gas fees. The current gas fees on Ethereum in the past ranged from $15 to $52.46 in gwei since January. Transactions on the Bitcoin blockchain costs just $2.30 on average. Going by the market share, Bitcoin holds twice as much value as Ethereum. The flagship cryptocurrency holds more than $700 billion in value, while Ethereum’s market share is in the neighborhoods of $300 million. Ethereum has steadily lost value to other programmable blockchains like Solana due to its high gas fees. However, the fees are down to a reasonable level since its all-time-high.
Energy consumption is measured in watts, or joules per second. Suppose you think about a joule as a unit of energy. In that case, we can then say a watt is a unit of energy per second. Bitcoin uses 124 TW/H or terawatts per hour, an energy usage around five times New York City’s energy consumption. Ethereum consumes an average of 48 TW/H, which is much smaller than Bitcoin’s energy consumption by a factor of 3.
With the proof-of-stake upgrade of Ethereum, the energy consumption will go down by 2,000% to around 2.4 TW/H.
Bitcoin was the first cryptocurrency that removed the world from the shackles of centralization. It serves as digital money and a store of value, and with the current taproot upgrade, it will be possible to build decentralized projects on Bitcoin. Ethereum is a decentralized computer for everyday applications with limitless opportunities.
The Future of Ethereum
Keep in mind that even though Ethereum fees are high, we are yet to explore the impact of dApps on the Bitcoin network, so it is hard to compare both blockchains on that level. In terms of energy consumption, however, Bitcoin is so far behind Ethereum that companies like Tesla have stopped accepting Bitcoin.
Even though Bitcoin supporters think this is unfair because banks consume about 140 TW/H, the number of people using Bitcoin is fewer than those using Banks. You can imagine the energy situation when everyone starts using Bitcoin. Ethereum is energy efficient, and several upcoming upgrades will make the platform even more preferable to Bitcoin.