In Market Morning earlier today, I covered how mining of Ether, the cryptocurrency associated with Ethereum, is driving sales of AMD graphics cards. Kristian and Zach and I talked a little bit about Ether and the Ethereum project but I think we failed to emphasize what makes Ethereum different from other cryptocurrencies and just how revolutionary Ethereum is.
As I alluded to this morning, basic cryptocurrencies like Bitcoin are arguably not meaningfully different from pyramid schemes – all value comes from the willingness of newcomers to buy in. If demand dried up, the entire value of Bitcoin could evaporate tomorrow, and everyone holding it now would be a sitting duck. For more about the mechanics of cryptocurrencies, see Kristian’s great post from a few weeks ago.
So how is Ether different?
Essentially, the Ethereum project is taking steps to make cryptocurrency more useful and socially productive.
The rise of currencies like Bitcoin was an inevitability of improved computing and encryption technology, but they don’t provide any service beyond being a valueless token. The Ethereum Project has deliberately paired its cryptocurrency with a platform for writing open-source contracts and applications.
Users can write complicated financial agreements with one another, share them with the entire Ethereum network so that they are held accountable and cannot easily cheat or be hacked, and then the network carries out the terms of the contract, including financial transactions. Ether, the actual currency associated with Ethereum, is the medium of those transactions.
The unique “smart contract” system of Ethereum means that, unlike other cryptocurrencies, Ether is useful for much more than speculation and black-market transactions. Here are some real-world applications Ethereum has been used for:
Solar panel owners in Brooklyn are selling energy back to the grid using blockchain-verified electricity meters.
Imogen Heap released a new song “Tiny Human” through Ethereum, as an experiment in blockchain music sales as an alternative to the traditional model of distribution through record labels.
The Luxembourg Stock Exchange is using the Ethereum blockchain to store document signatures for access.
Lastly, Ethereum is novel because it allows its blockchain to be used for the creation and maintenance of cryptocurrencies besides Ether. Participants can set up their own blockchain currencies and have them backed up by the rest of the Ethereum network, meaning that even fledgling cryptocurrencies with few nodes can still be very secure.
The smart contract capabilities of Ethereum, and its widespread uptake for highly legitimate and risk-averse operations suggests that it may represent a significant new step in blockchain technology. In the not too distant future, the Ethereum blockchain or something like it might become the gold standard for financial exchange, and even for applications like intellectual property licensing and elections.
When it comes to the Ether currency itself, it’s harder to say what the future is. In the past few months, the price of Ether has gone up like a mandman. However, Ether is like other blockchain currencies in that it has no intrinsic value, so there’s no guarantee its hot streak won’t turn around.
I’m optimistic, though. Given the rapidly increasing interest in Ethereum smart contracts, which necessitate the use of Ether as a medium of exchange, it’s hard to believe that Ether won’t remain a hot commodity.
Put it this way: I’m planning on buying a little tomorrow.
Until next time,