In an earlier article on various notable Bitcoin “competitors” (some of which actually compliment Bitcoin’s architecture) I mentioned Ethereum.

Ethereum is extremely interesting and holds a great deal of promise, but is substantially more complex than Bitcoin in its functionality.  Seeing as how it has, as mentioned previously, diverged with Bitcoin’s price somewhat and has seen an approximately 300% price rise since early Dec. 2015 it is worth watching from an investor’s perspective also.  I would point out that it is still relatively early in its cycle and I doubt the full risks and potential benefits of the technology has been understood.

This is a far more complex innovation than Bitcoin, but I will try to summarize what Ethereum is below.  Keep in mind, I am not a coder, and even if I was it is unlikely that the full scope of this innovation has been realized.

What is Ethereum?

Ethereum is an innovative platform technology which contains its own built in cryptocurrency (Ether)  and is custom coded.  It is based upon the cryptographic theory and model behind Bitcoin.  Most recently, Microsoft showed significant interest for their Microsoft Azure cloud computing services.  It is more than just a cryptocurrency in the sense that it contains a built-in (Turing complete) coding language (Solidity) which allows for the creation of custom-coded smart contracts.

Furthermore it is faster validating tranfers than Bitcoin, and unlike Bitcoin it is not a deflationary “currency”.  The supply will increase over time rather than being fixed.

The platform is already attempting to be scaled to create a 2.0 version with additional features.  While the currency has been designed to be proof-of-work like Bitcoin, they are attempting to move it to a proof-of-stake model, where a “deposit” is put on the line to transfer a transaction, rather than validating transactions with the other nodes on the blockchain, which has some benefits.

What are Smart Contracts?

The idea for the platform adopting this model arose out of many different cryptocurrencies being designed for different purposes. Ethereum tries to give coders the customizability which was being written into hundreds of cryptocurrencies in a single platform.

Smart contracts are rule-based snippets of executable code which exist on the Ethereum blockchain.  The code is public access (hence, can be written by coders, but utilized by other market participants) and is immutable- the code, once written and verified upon the blockchain, cannot be changed.  They also cannot be removed by a third party once they are verified.

smart-contracts1
An example of an Ethereum smart contract using pre-written code blocks.  One application of Ethereum.

Examples of Smart Contracts?

The implications of the smart contract system is substantial. Anything from crowdfunding a business, to making a Bitcoin clone, to creating a currency specifically for the creation of an specific financial arrangement, like a derivative, could be coded up on the platform.

You could even use it on a trading platform, or in a bond auction.  It is worth noting that it is far faster than Bitcoin in its transaction speed.

Where do I stand?

This is a potential quantum leap in electronic currency, and it does away with many of the “less beneficial” aspects of Bitcoin.  I expect this technology to be extremely disruptive to a range of existing electronic business models if it turns out to not be flawed in its design.  As it is still a relatively young technology, it may have a few stumbles along the way to becoming fully viable.

Either way Ethereum is definitely something to keep an eye on.  I urge that investors stay grounded, however, don’t overbuy the hype in the short term and remember that new technologies take time to properly develop.

Many existing Cryptocurrencies (of which there are literally hundreds) do not excite me in scope the way this currency does.

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