2017 saw many cryptocurrencies jumping into the spotlight, perhaps none more so than Bitcoin’s biggest competition: Ethereum. This currency is relatively new, it launched publicly in 2015, but has already climbed to the number 2 position in terms of cryptocurrency market capitalization, with a total value of over $60 Billion USD.
The coin was proposed and developed by Vitalik Buterin, one of the youngest developers in the cryptocurrency space. Buterin was a recipient of the Thiel Fellowship in 2014, created by former PayPal executive Peter Thiel, which gave him the opportunity to complete development of Ethereum.
Ethereum rose to popularity in 2017 in large part because of the important role this cryptocurrency plays in ICOs (Initial Coin Offerings). Because the Ethereum network is designed to support smart contracts as well as other unique cryptocurrencies (in the form of ERC20 tokens), it is an ideal platform to use when raising funds and issuing tokens for new projects.
Smart contracts can also be used in conjunction with DApps (Decentralized Applications). CryptoKitties was the first DApp to achieve viral success earlier this month, but its popularity also created severe congestion within Ethereum’s Blockchain in the process, raising concerns about scaling issues.
To help you better understand Ethereum and understand why the value of this cryptocurrency has increased over 6000% this year, here is a closer look at smart contracts, DApps, and ERC20 tokens:
Smart contracts are an important part of the Ethereum platform and one of the reasons that this cryptocurrency saw such tremendous growth in 2017.
A smart contract allows two parties to agree on the terms of a contract which can then be executed by the Ethereum Virtual Machine (EMV), a special feature of the Ethereum network. In the same way that Bitcoin transactions can be considered trustless, Ethereum Smart Contracts are also trustless. That means that parties who enter into smart contracts don’t need to rely on each other or a third party to carry out the terms, they will be automatically fulfilled by the Ethereum network.
Smart contracts have many practical applications. A popular example is that a smart contract can be used to settle a bet about the weather. Two people can upload the terms of the bet (for example, whether or not it will rain on a specific day in a specific city) to the EMV as a smart contract code. The EMV will then execute the terms of the contract by checking for rain on the day indicated (using previously agreed upon verification methods, such as a weather app or website). Once a winner is determined, the EMV will automatically distribute the prize.
Smart contracts are also useful for ICOs involving ERC20 tokens because developers can send newly issued tokens in exchange for Ethereum in a single transaction. This is accomplished by setting an agreed upon exchange rate for the newly minted token and then returning the set amount whenever a specific Ethereum address receives funds.
ERC20 tokens are a revolutionary way to issue new cryptocurrencies by taking advantage of the Ethereum Blockchain and platform. It should be noted that there are non-ERC20 tokens and partially compliant ERC20 tokens that also use Ethereum’s Blockchain, but with the introduction of ERC20 tokens, there is now a universal standard set, making it easier to launch and use new coins.
Each ERC20 token is its own smart contract and uses Ethereum’s Blockchain to validate transactions between users.
The popularity of this standard and the wave of ICOs that were launched using the technology helped catapult Ethereum up the ranks of cryptocurrencies to the point that it even challenged Bitcoin earlier this year, almost becoming the most valuable cryptocurrency in terms of market cap.
One criticism of the ERC20 token standard is that it makes it too easy to launch a new cryptocurrency, undermining the value of cryptocurrencies as a whole. At last count, there were over 19000 unique ERC20 tokens already created!
CryptoKitties (and other DApps)
One distinguishing feature of most cryptocurrencies that sets them apart from traditional currencies is that they are decentralized. That means there is no central authority controlling the flow of currency or verifying individual transactions.
Like decentralized cryptocurrencies, DApps are decentralized applications that also have no central authority controlling distribution. In fact, you can consider cryptocurrencies themselves to be some of the first DApps created. There are still developers and programmers who work on these apps, but once they are released, they can take on a life of their own.
The Ethereum White Paper discusses the three types of applications that can be built on top of the Ethereum network:
- Financial applications – such as other cryptocurrencies and financial tools.
- Semi-financial applications – apps that have a financial aspect such as a reward system, but also have an important non-financial aspect, such as a task that must be accomplished to obtain the reward.
- Non-financial applications – such as decentralized voting systems.
In November, AxiomZen launched their DApp CryptoKitties, a clever throwback to digital pets that were popular in the late 90’s. Users can collect and breed these unique e-pets with the knowledge that just like cryptocurrencies CryptoKitties cannot be forged or duplicated and they belong entirely to their owners, although there’s some debate about just how decentralized the CryptoKitties App actually is.
Because of these features, CryptoKitties have been in serious demand and individual Kitties have sold for over 200 Ether. With Ether currently valued over $500 per coin, that means the rarest CryptoKitties are worth over $100,000!
While they share many features with cryptocurrencies, AxiomZen describes CryptoKitties as a “cryptocollectible.”
Because there are fees for different in-game activities (such as breeding new CryptoKitties), this DApp’s rise to popularity actually managed to congest the Ethereum Blockchain and slow down transaction confirmations. At times, as much as 15% of all Ethereum network traffic was caused by CryptoKitties transactions and activities.
The success of CryptoKitties marks an important milestone for Ethereum, expanding the possible uses of the Ethereum network and paving the way for other DApps. However, the network congestion caused by just one viral DApp also shows that Ethereum, like Bitcoin, still has to scale before it can be used to host multiple virally popular DApps along with all the transactions that will come with them.
Ethereum has achieved tremendous growth in a relatively short timespan. Here’s a quick look at how they’ve accomplished it:
Whatever the future holds for cryptocurrencies, DApps, and smart contracts, it seems like Ethereum and its founder Vitalik Buterin will have an important role to play in their development. For this reason, Ethereum has solidified itself as a top cryptocurrency in 2017 with a bright outlook for the future.