7 min readEthereum: a Blockchain for Builders
Ethereum provides a secure yet flexible infrastructure for Web3 (the internet’s next generation) and decentralised finance (DeFi).
- Launch date: 2015
- Staking APY: up to 7%
- US$ 4,815 : All-time high (November 2021)
Ethereum At a Glance
A flexible and interoperable infrastructure
Ethereum provides creators a platform to build any type of application on a decentralised, global computing network.
Powerful Proof of Stake (PoS) Protocol
PoS is an energy-efficient, secure and light-weight consensus mechanism.
Powering a decentralised ecosystem
Ethereum benefits from a large community of developers and entrepreneurs focusing on creating the future of the internet and finance.
Staking
Ethereum supports staking, effectively rewarding users for locking up its token (ETH) and helping to secure the network.
Key Figures
How Ethereum Works
Ethereum relies on a Proof of Stake (PoS) consensus mechanism.
In ETH’s PoS protocol, validators must obtain 32 ETH then lock it away in a smart contract. Validators are then randomly selected to validate transactions and create new blocks. In return for maintaining the security of the network, they are rewarded with a portion of the block’s value.
PoS is highly flexible, and can be used in a variety of settings. As a result, ETH’s applications range from digital-native solutions such as Decentralised Autonomous Organisations (DAOs) and Non-Fungible Tokens (NFTs) to more “traditional” industries such as real estate, wills, supply chain & logistics and insurance.
PoS has several advantages over blockchain’s competing consensus, Proof of Work (used by Bitcoin):
Energy-efficiency: After switching to PoS in September 2022, Ethereum’s energy consumption dropped by 99.9%.
Safety: PoS limits the risk of 51% attacks (when an attacker holding more than 50% of the network’s computing power can manipulate the blockchain).
Accessibility: PoW requires users to solve complex mathematical puzzles to unlock rewards, relying on expensive hardware. Validators in a PoS protocol only need a computer (or even a smartphone) with an internet connection - as long as they lock enough ETH.
History & Milestones
In 2014, then 19-year-old computer scientist Vitalik Buterin published a white paper entitled A next-generation smart contract and decentralized application platform. Building on Bitcoin’s invention a few years earlier (2009), it aimed to show “how the blockchain concept can be used for more than just money.” Almost 10 years later, the bet paid off: as of Q4 2022, Ethereum settles an average value of $21bn daily.
Key milestones:
2015 : Ethereum is launched as a network and blockchain, following the creation of the Ethereum Foundation and an intense testing period.
2017: In order to develop Ethereum’s business uses, the Ethereum Alliance is launched, including companies such as Accenture, Intel, JP Morgan and Microsoft.
2021: Following a months-long bull run, ETH reaches its all-time high at US$ 4,815.
2022: The Merge - Ethereum switches to Proof of Stake, significantly lowering transaction costs while maintaining flexibility and security.
2023: Shanghai upgrade - Ethereum now allows staking withdrawals for validators and gets ready for further scalability with upcoming upgrades.
What's next?
Ethereum keeps evolving, and Vitalik Buterin has stated that 5 developmental phases are coming: the Surge, the Scourge, the Verge, the Purge and the Splurge. They are meant to increase scalability, eliminate technical debt, and keep improving the blockchain.
Layer 2s: Solutions to Ramp Up the Network
ETH Layer 2s are protocols that are built on top of the Ethereum blockchain improve the scalability and efficiency of the Ethereum network while maintaining its security and decentralization. These solutions aim to provide faster and cheaper transactions, reduce network congestion, and enable new use cases for Ethereum.
Many Layer 2s projects are currently being developed, promising to further extend Ethereum’s capacities. The current most popular Layer 2s projects are Optimism, Arbitrum, Polygon, StarkNet & zkSync.
CoinShares’ Analysis
Ethereum is designed to be an all-purpose blockchain providing support for many types of user interactions. Its smart contract capabilities support an entire ecosystem, encouraging creativity and attracting a large community of developers.
Given the growth profile of Ethereum vs other tech platforms, it could be argued that ETH is undervalued, especially as staking provides holders with a way to earn rewards through staking their ETH. And despite ETH’s high volatility, its yield is more than double that of its closest relative, technology equities.
Strengths
First-mover advantage. Ethereum is years away from competitors and has already witnessed strong network effects.
Community: Ethereum has the largest developer activity and resources among all smart contract platforms.
Deflationary tokenomics. Ethereum "burns" (i.e removes from circulation) ETH with each new transaction as part of the transaction fee. This leads to slower token issuance compared to other platforms, which allows ETH to accrue in value.
Weaknesses
Suboptimal infrastructure design. Ethereum runs on the Ethereum Virtual Machine (EVM) which is slow, expensive and has considerable inefficiencies.
Security. Smart contracts can be targeted by hackers, resulting in capital loss.
Scalability. Ethereum’s scalability still needs to be improved, to guarantee faster and cheaper transactions.
Opportunities
DeFi Growth. Ethereum powers many popular DeFi apps and could benefit from the sector’s rising adoption levels and development.
Continued improvements: Layer 2s will take the burden of executing transactions away from Ethereum, making the network cheaper and faster while preserving security guarantees.
Threats
Regulatory risks. Ethereum’s transition to Proof of Stake makes the asset more likely to be treated as a security, with associated constraints for issuers and investors.
Competition. Faster and cheaper blockchains continue to gain market share. As of Q4 2022, Ethereum holds 59% of smart contract market capitalization, down from 85% three years ago.