Blockchain, Bitcoin, Ethereum – these are buzzwords we consistently here buzzing around the news, social media and even in coffee shops. But even with all the talk going on about blockchain, there’s still a lot of confusion surrounding it.
What is blockchain and Ethereum? And why should you even care? Well, for one, it’s panning out to be the future of our economic system. But before we go there, let’s go into a little background about money.
What is Money?
The green dollars and silver and copper coins we grew up using to purchase goods is quickly becoming nonessential as money is being digitalized. And that’s thanks to the emergence of the digital realm. If you own a debit card, credit cards then you know how rare it is for someone to have physical money on them.
Payments are just a swipe or computer click away.
We all know money is the exchange we use to pay for goods and services. But what we don’t see is the system that tracks money ownership and transactions. This requires a trusted third-party entity that will handle tracking money to ensure transactions are legal and conflicts are dealt with (if possible). The government, financial institutions, banks are the third-party we currently entrust with the economic system we have set up today.
Unfortunately, the economy is ran by the powers of the central government, which uses their authority to print money. And this is one of the reasons why we have over $20 trillion in debt and it keep growing. It is one of the biggest risk to the current economy, and at this level of debt is unsustainable and seems we have not learnt much from 2008.
What the 2008 Economic Downturn Taught Us
During 2008, we saw the curtain lifted on the central authority, and whole financial system become close to collapsing. Banks gave risky loans and created instruments far beyond regulatory guidelines and borrowers used their homes as cash machines. Borrow more and live rich. Keep refinancing on every bit of equity.
When the clock stopped and Cinderella dance came to end there was chaos on the main street and wall street. There was no equity in the deals as everything was leveraged. Borrowers stopped paying the mortgage as the home prices declined and their remaining equity evaporated in thin air. Banks were holding on to these loans and began collapsing as they became severely under capitalized. The capital and the ALLL was not enough to support the falling loan portfolio value. We saw hundreds of banks collapsing under the weight of it.
When the government stepped in back in 2008, they bailed out these entities (banks and financial institutions) by giving them tax payer’s money. We thought we learnt a lesson.
The government continues to print more and more money, which only reduces the value of dollar. Real value of money is decreasing in front our eyes and purchasing power of dollar is decreasing day by day. Inflation is creeping in and constant increase of balance sheet is again putting the economy in uncharted waters. It’s no surprise the public lacks trust in the central banking system, as money is created from thin air!
Blockchain & Ethereum
The definition for blockchain is this: “A blockchain is a decentralized, distributed and incorruptible digital ledger that’s used to record transactions across many computers chronologically and publicly.”
The keywords you want to pay attention to are incorruptible, digital, public and decentralized. It sounds a lot like the opposite of what the central authority has set up today.
To put it more simply, blockchain is a network of computers that has a chain-of-blocks. In each block, there is a ledger containing lists of transactions. The transactions are incorruptible because they’re secured cryptographically and linked to prior transactions for the resource it’s representing.
Now, it’s important to note that cryptocurrency and blockchain are not the same thing. However, the two are used interchangeably because of Bitcoin and how it relates to both.
Simply put – blockchain is the concept and cryptocurrencies are the applications that use the concept to solve real issues. Another way to put it is like this: cryptocurrency is to blockchain as email is to internet.
So, what is Ethereum?
Ethereum, like Bitcoin, uses blockchain technology to facilitate cryptocurrency trading and smart contracts in a secure manner. Ethereum is open-sourced and is available to the public.
There are two accounts you can use for Ethereum – accounts that are externally owned and contract accounts. Externally-owned accounts are controlled by private keys that are manipulated by human users.
Developers are able to use Ethereum to deploy apps that are decentralized. Bitcoin tends to be the more popular cryptocurrency, but Ethereum maintains a more aggressive growth.
What’s the Difference Between Bitcoin and Ethereum?
There are quite a few differences between Ethereum and Bitcoin, such as the following:
- You can only trade Bitcoin in cryptocurrency, while Ethereum provides multiple methods of exchange, such as smart contracts, cryptocurrency and Ethereum virtual machine.
- Ethereum uses “proof of stake” and Bitcoin uses “proof of work” security protocols.
- Bitcoin only facilitates public transactions, while Ethereum facilitates public and private transactions.
- Block time for Ethereum is 12 seconds versus Bitcoin’s 10 minutes.
- It’s expected that Ether will reach 90 million tokens by 2021, while Bitcoin is capped at 21 million.
- Bitcoin rewards computers for verifying transactions, while Ethereum allows computers to take a transaction fee.
The Future of Bitcoin
Bitcoin, there is a different perspective you need to know about. Bitcoin has a 21 million token cap, what makes its equivalent of “Digital Gold”. It has limited supply like any precious metal or scare valuable asset. The functionality of Bitcoin and its purpose are completely different than Ethereum. Bitcoin main purpose is to be “currency” what has limited supply. It is based on trust created by users.
Bitcoin is actually a “People’s currency” with no central authority but authority what is user exercised and administered. The limited supply of it makes it a very good instrument against inflation. Like gold, Bitcoin has a limited supply and hard to mine. In the future, Bitcoin – the digital gold – may one day might replace actual gold as the safe asset. Even if Bitcoin is not able to replace, but take a bite of gold it can be an extremely value asset class.
Bitcoin, Eth are new asset class and they are still in their initial years and their application in real world might be still 2-4 years away. When it’s all said and done, the cryptocurrencies and blockchain industry might be a real problem solver for host of issues not limited to banking, finance, and monetary policies.
Robin Trehan is associated with a Blockchain company and is a banking expert.