Ethereum – the multi-purpose blockchain
Summary: Ethereum is the second-biggest cryptocurrency measured on market capitalization, and the applications of the Ethereum technology goes way beyond financial transactions. The current limitations in transaction speed are being considered in a large ongoing upgrade to the whole blockchain.
Ethereum is a decentralized smart-contract blockchain launched in 2015. Ethereum is at the time of writing the most used cryptocurrency measured on the number of transactions as well as value settled on its chain. The technology behind Ethereum allows a broad span of financial application, as developers can make and distribute decentralized applications and smart contracts on its blockchain without downtime, censorship, fraud nor intervention from intermediaries. Ethereum is, for example, used to facilitate the storage, transfers, and trading of stablecoins, which are cryptocurrencies pegged to fiat money – e.g. following the value of 1 USD. Additionally, Ethereum has applications outside traditional finance, as Ethereum technology is used for the verification of ownership of digital art, supply-chain management, tokenization of real estate, decentralized loans, and many more. On an ongoing basis, individuals, developers, and companies are finding new ways to benefit from Ethereum. Cryptocurrencies based on Ethereum is called a token. At the time of writing, over 350’000 tokens exist on Ethereum. Though, only a fraction of these is actively being used. It is possible to trade tokens directly on Ethereum using decentralized exchanges without interacting with traditional exchanges.
Upgrade on its way
Ethereum is currently using the same method to verify transactions as Bitcoin called proof-of-work. This means that massive computing power across the globe verifies the transactions in return for transaction fees and newly mined Ethereum. Similar to Bitcoin, this consensus mechanism is not scalable as Ethereum is only able to handle 15 transactions per second. Due to the lack of scalability, the transaction fees on Ethereum have recently skyrocketed. Some days, the average fee has been well above $10, significantly limiting users in using Ethereum. The Ethereum Foundation is, however, working together with developers on updating the blockchain to make it more scalable, safer, and more environmental-friendly. The update involves a multi-year plan to change the consensus mechanism to proof-of-stake, where holders of Ethereum can stake a part of their holdings, and through this validate transactions. The first part of the update called ETH 2.0 was launched in December 2020 and is expected to be fully implemented in late 2022. It is expected to allow Ethereum to handle a minimum of 50,000 transactions per second. However, Ethereum is currently meeting intensively competition from similar cryptocurrencies being able to handle significantly more transactions with close to zero in transaction fee compared to Ethereum’s status quo.
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