Byte-Sized Crypto Series: Ethereum 101

Today will be the start of a new, more bite-sized, quick fire analysis on individual crypto tokens. The point of this series is to summarise the overall thesis of a crypto asset and to provide an overview of what the project does.

For the first of this series, we will take a look at the world’s Second Largest Cryptocurrency by Market Cap, and that is none other than Ethereum.

Introduction

Ethereum was co-founded by a Russian-Canadian programmer Vitalik Buterin, or vb in short if you view his blockchain wallet address.

Ethereum is a layer-1 blockchain that currently operates on the Proof-Of-Work consensus, same as Bitcoin. What this essentially means is that the transactions are settled by miners and we pay “gas” or Gwei to them for helping us settle the transaction.

The key difference between Bitcoin and Ethereum is the creation of “Smart Contracts” on Ethereum, which brings about a whole new use case and utility for Ether (ETH), the native currency for the Ethereum network.

Total Value Locked – A metric to gauge the popularity and liquidity depth of a blockchain ecosystem (As of 30 June 2021)

Ethereum is a giant ecosystem that is ever-growing where decentralised applications (Dapps) thrive. It is currently the largest ecosystem for Decentralised Finance with the deepest liquidity and the largest Dapps that include famous protocols like Uniswap, Yearn.Finance, Curve and many more.

You also have ERC-20 tokens which are Ethereum-based tokens that exist on the Ethereum blockchain and these include tokens like USDT/USDC/UNIand thousand other tokens and you also have NFT or Non-Fungible Tokens. NFTs are ERC-721 tokens which are, like the name suggest, not fungible.

NFT Quick Intro

In simple terms, non-fungible just means that there are no way there is an exact same design or standard of a specific NFT, which means each NFT is unique and not interchangeable. So things like Birth Certificates, NRIC, Passports, Artworks, Music, Concert Tickets or Driver Licenses can all be turned into an NFT and become immune to copyright/counterfeits. The uniqueness of NFT also makes them highly scarce, which gives them a high price tag and why we saw sky high valuation for some NFTs.

Ethereum’s Current Problems

However, due to the many flaws, scalability issues and congestion that is going on with Ethereum right now, the Ethereum blockchain currently has a high barrier to entry for retail investors due to the expensive gas fees to use the blockchain to access decentralised applications like Aave, Curve, Maker or Compound for example.

This is also why we saw alternative blockchains like Binance Smart Chain, Polygon, Fantom, Solana, Avalanche, Harmony etc. gaining traction due to their cheaper gas fees, faster transactions and overall ease of use while Ethereum transits to a new self.

Enter Ethereum 2.0

Ethereum 2.0 is basically an improvement upgrade for Ethereum to enhance the scalability of the network. And this would be done through a carefully planned roadmap by the Ethereum Foundation.

Eth 2.0 is also code named “Serenity”, which includes the implementation of several enhancements, speed, efficiency, and scalability that should be improved without sacrificing security and decentralisation.

1. Proof of Work – Proof Of Stake

The very first and most prominent upgrade would be to transfer Ethereum from Proof-Of-Work (POW) into Proof-Of-Stake (POS) consensus mechanism. Doing so will give Ethereum immense amount of scalability.

POS replaces the computing power used in POW by requiring validators to have ‘skin in the game’ through staking. In simpler terms, by staking a minimum of 32 ETH, you can become an Ethereum 2.0 validator and become paid for confirming transactions just like miners did in POW.

2. Sharding (Divide and Conquer)

To access the Ethereum network, individuals need to do so via a node, which is basically a computer. Nodes are required to store a copy of the entire network (since the beginning), which drastically slows the network down as the network becomes more popular and demand goes up.

To solve this, Ethereum 2.0 will introduce the concept of sharding, which is basically a divide and conquer strategy.

Shard chains are just like any other blockchain, but they only contain specific subsets of one whole blockchain. This allow nodes (computers) to only deal with one slice (or shard) of the Ethereum network, and thus increase the transaction speed and overall capacity of the Ethereum blockchain.

Visualising how sharding will be like

To put it into perspective, just think of the original Ethereum as a restaurant facing a long queue with only 1 cashier counter. Through the implementation of sharding, you essentially divide the same queue into 10 cashiers and speed up the clearing of orders. This will speed up the network tremendously.

3. The Beacon Chain (Already Live)

Since the shard chains will be working in parallel to the main Ethereum network, there needs to be something that keeps everything in-sync. The beacon chain basically ensures this by providing consensus to all shard chains that are working in parallel.

The beacon chain will be the first implementation of Ethereum 2.0 (implemented successfully!) as the coordination layer of the new network, and once the entire Eth 2.0 is implemented, the Beacon Chain will finalise the data of 64 shards.

What’s Next?

Now that you understand the basics of what Ethereum is and the key updates of Eth 2.0, why is Ethereum so popular and so highly anticipated among the investment space?

This is due to one of the most exciting upgrades to Ethereum, and that is EIP-1559. (Ethereum Improvement Proposal-1559)

EIP-1559 is basically a proposal (already approved and waiting to be deployed) that will transform Ethereum into a deflationary token. Each time a transaction on Ethereum occurs, a portion of ETH will be burned out of circulation forever.

Gas fees will also not fluctuate like before which makes transaction fees more predictable. All of these are implemented to eventually transit Ethereum into a Proof-Of-Stake blockchain through the merger of Eth 1.0 and Eth 2.0.

The more the Ethereum network is used, the more ETH is burned. Getting the catch yet? This is going to be crazy! Because the more the supply is burned, the higher the price of Ethereum is going to be. And demand going up will lead to more burning and hence even lesser supply. Simple economics here.

EIP-1559 is set to be live in July 2021. Which is literally soon at the time of writing. (The testnet for EIP-1559 is already live!)

EIP-1559 is just one of the many upgrades that will become the stepping stones to turn Ethereum into a highly scalable world computer with the deepest liquidity and the global hub of Decentralised Finance and NFT adoption.

Buying ETH is literally owning a piece of the internet, as it is the gateway to many of the most powerful and largest Dapps out there which are permission-less, transparent and inclusive.

As long as you have internet connection and a DeFi Wallet (eg. Metamask), you have access to the most advanced technology and financial service out there. The bankless population who were rejected by banks can now enjoy financial inclusivity and equality among other things.

Based on Ethereum Foundation’s updates and roadmap, we might even see the merge and transition towards Proof of Stake this year, and that alone is a huge catalyst for the demand of ETH.

Couple that with the burning of ETH after EIP-1559 is implemented, and the extremely deep and enriched network effect Ethereum already enjoys, there is no reason Ethereum is only going to be worth less than 1 trillion market cap at the point of writing. Even just capturing 0.5% of the world’s financial services market, would mean that each ETH could be easily worth $15,000 USD or more.

Conclusion

The above are just the tip of the iceberg as to what Ethereum is all about, as it is a gigantic ecosystem with a parallel universe of its own without the spoon feeding from the central banks or governments to survive. Unlike big banks which relies on money printing and bailouts to thrive, Ethereum couldn’t care less what central bankers do.

The huge, sharp crashes proved the resilience of this new technology, and the ability to recover crash after crash, even without government stimulus, just prove how powerful blockchain technology is going to be. Banks are threatened because it threatens their existence and purpose in the economy.

I won’t be surprised to see more than half of the banks today vanishing 10 years from now. Those that embrace the technology and potential of crypto will thrive, while those that don’t will fall eventually. It’s just a matter of time.

The future of Ethereum is bright and even with the fierce competition from other layer-1 blockchains like Solana or Binance Smart Chain.

In the long run, ETH will be my biggest bag among my crypto allocation (as it already is), and I will continue to accumulate more ETH no matter how crazy Mr Market decide to be or no matter what Elon Musk decide to tweet tomorrow.

If you are not accumulating ETH, you are investing into crypto wrongly. Not financial advice though!

For those who are already into Crypto

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What is Bitcoin? Answers here

Or do your due diligence on Bitcoin in my post here where I debunk some of the myths regarding Bitcoin.

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What is Decentralised Finance (DeFi)?

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How to Value Crypto Assets?

Learn more about how you can put a “fair value” on crypto such as Bitcoin, Ethereum and more here

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Alright that’s it! For now, think long term, tune out the noise and avoid the temptation of gambling meme stocks, think of the companies that will do well in the long run simply find bargains/dollar cost into your positions. If you need some inspiration for companies to research, you can check out my post on 5 stocks to buy if the market crashes here.

Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.

Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor.