How you may be confused about Ethereum
According to Coinmarketcap.com, Ethereum is the second largest cryptocurrency by market capitalization. Bitcoin leads with a cap at slightly over US$100 billion, and Ethereum follows at about US$40 billion. While this evaluation is commonly accepted, it isn’t entirely accurate.
The assumption places a false equivalence in the mind of anyone exploring the number two cryptocurrency after learning about it through Bitcoin.
The coin versus the blockchain
Most importantly, Ethereum is not actually a cryptocurrency but a protocol with a blockchain on which, theoretically, an infinite or endless number of cryptocurrencies can reside. Its equivalence is Bitcoin, a protocol with a blockchain that only supports the bitcoin (BTC) cryptocurrency.
In the crypto lexicon, Bitcoin with a capital ‘B’ signifies the blockchain, the payment network, the protocol as a whole, or the ecosystem. Meanwhile, bitcoin with a small ‘b’ stands for the coins on the blockchain.
With Ethereum, however, the words used for the blockchain and the coin are not the same, and their difference is more than a matter of changing the case of a letter. The blockchain takes the name of the protocol and its native coin is called ether (ETH).
While the Bitcoin protocol has a cap hard-coded into it of 21 million bitcoins, there is no cap on the number of ethers that can ever be in circulation. Instead, a flat emission rate of new ethers will continue to be produced ‘forever’, as each block is mined—creating a total of 18 million ETH annually.
Even though emission continues indefinitely, the supply is not infinite, and the cryptocurrency is considered deflationary. This is because as the number of ether in circulation (the monetary base) keeps growing, the percentage of new coins being released shrinks.
In a post published in April 2014, before the official launch of the Ethereum platform, co-founder Joseph Lubin outlined how ether would remain a deflationary coin.
He explained that at some point the 18 million ETH being released annually will only replace coins lost in circulation ‘due to loss of private keys, death of owner without transmission of private keys, or purposeful destruction by sending to an address that never had an associated private key generated’.
The Ethereum community is discussing the possibility of changing rules in the protocol through an upgrade known as Casper. The change may affect the number of new coins released annually, as well as the process of emission itself.
A multipurpose platform
The difference between the two largest cryptocurrencies, however, goes beyond how their native coins are named and issued. It extends to the capacity of their blockchains.
Satoshi Nakamoto designed the Bitcoin blockchain to support only its native coin. Even though Bitcoin can support other digital assets—with extra protocol layers added on top—the process is complex and requires a high level of technological input.
Meanwhile, since Ethereum’s foundation, the developers designed it to support other cryptocurrencies besides its native coin. Through smart-contract applications, they made it possible that anyone—even with few coding skills—could create a cryptocurrency in a matter of minutes and run it on top of the platform.
The additional capacity has made it the blockchain of choice for startups and entrepreneurs seeking to create tokens to sell to the public. This enables them to raise capital and grow budgets for projects in a process known as a token crowdsale or initial coin offering (ICO).
According to ‘The State of the Token Market’ report released jointly in 2017 by VC fund Fabric Ventures and TokenData, a platform that tracks data on token sales, startups raised about US$5.6 billion through ICOs.
Aside from supporting cryptocurrencies and other forms of digital tokens, Ethereum also functions as a backend for applications. It can act as a server that executes application processes, as well as store the data it generates. Compared to centralized servers, it offers a more secure and reliable environment for running applications.
Applications that use blockchains as their backend are known as decentralized applications (dapps).
A utility token
Ether is different from bitcoin in another way. The latter serves only as a form of currency or money—with such properties as a medium of exchange, a store of value and a unit of account. Ether can perform those functions as well, but its primary use is as a utility token.
In order to use the Ethereum blockchain as the backend for your decentralized application, you need to pay a fee. This fee is known as gas and you can only pay for it using ether.
Nuanced comparison
As we have seen, a comparison of the two largest blockchains is more nuanced than often portrayed. When you hear or read that Ethereum is ‘the second largest cryptocurrency in terms of market capitalization’, perhaps what is actually meant is that the ether token is the second largest cryptocurrency, without taking into account the full market cap of the structure running on top of its protocol.
Indeed, if we could quantify the value that Ethereum supports through third-party tokens, the cryptocurrency’s market capitalization could easily exceed that of Bitcoin.
About the Author
Rupert Hackett is the CEO of Bitcoin.com.au, Bitcoin.co.uk, and Bitcoin.ca (subsidiaries of Bitcoin.com.au). Rupert specialises in the digital currency and digital payment space and holds the world’s first Master’s degree in digital currencies. He writes for multiple Bitcoin and tech websites and is an acting Board Director for the Australian Digital Commerce Association (ADCA).
