Tuck Santoro

Everyone already knows about Bitcoin… now let’s dive into some of the “alt”ernatives.

Due to Bitcoin’s considerable dominance in both market capitalization and overall “marketing buzz”, I have concluded that my early “AltDay” altcoin breakdowns would best serve my audience if they continued following my first outline of comparing each coin to BTC. I accept that these comparisons will slowly find fewer applicable connections as I continue to examine more cryptocurrencies with increasingly disparate technologies and use cases. But for now, my main intention is to offer a baseline for observation and an overall palatable experience for veteran crypto traders and beginners alike.

Current market data on Ethereum can be found here.

The Team

The Leader of Ethereum’s Core Developers: Vitalik Buterin

Co-founder Vitalik Buterin was just 17-years-old in 2011 when he began programming on Bitcoin’s blockchain. After quickly growing obsessed with the idea of a distributed ledger on the blockchain, Buterin founded Bitcoin Magazine which quickly became a staple in the crypto community. Having spent some time in the space, Vitalik grew tired of what he saw as a very narrow-minded vision of blockchain’s applications and decided to take matters into his own hands. Fast forward to 2015 and Vitalik had launched the Ethereum blockchain.

Education: University of Waterloo (Dropped out)

Note: In the traditional investing space, school pedigree and level of degree could potentially be important to consider. Considering blockchain technology is so young, many Universities are still developing their blockchain programs. Therefore, I do not see this metric being massively relevant for another 5–10 years.

Notable Awards: Fortune 40 Under 40, Forbes 30 Under 30, World Technology Award, and the Thiel Fellowship Award

Note: Vitalik is one of my favorite programmers in the space. He is well known for producing a massive amount of content on ETH and other blockchain topics and is extremely active on GitHub.

Ethereum Core:

Today, Ethereum still boasts one of the largest pools of developers devoted to designing dApps (more on these later) for its blockchain. Additionally, a considerably large group of noteworthy companies have formed the Enterprise Ethereum Alliance which is tasked with finding innovative applications for smart contracts.

ETH vs. BTC: Differences at a Glance

Consensus Mechanism: a set of rules that decides how “consensus” on the blockchain ledger is achieved.

  • Ethereum: Proof of Work, soon to be Proof of Stake (maybe?)
  • Bitcoin: Proof of Work

Average Transaction Fee: the fee levied on each transaction that is confirmed on the blockchain(data as of 7/17/19)

  • Ethereum: $0.184 USD or .00082 ETH
  • Bitcoin: $1.903 USD or .00018 BTC

Transaction Speed/Block Time: a calculation of the average time required for a block to be verified. Most exchanges require at least three “confirmations” that the transaction has occurred before giving you access to the funds. Each confirmation is achieved after a block has been verified. In short, multiply block time x 3 to calculate the transaction speed.

  • Ethereum: fluctuating between 10–20 seconds
  • Bitcoin: 10 minutes

Block Reward: How many coins are given to the miner who successfully mines one block?

  • Ethereum: 2 ETH
  • Bitcoin: 12.5 BTC

Circulating Supply: How many coins will eventually be in circulation?

  • Ethereum: No max supply (106,953,854 in circulation as of 7/18/19)
  • Bitcoin: 21,000,000 (17,824,700 in circulation as of 7/18/19)

Note: Since its inception, Ethereum has avoided implementing any explicit monetary policy. However, on April 1, 2018, Vitalik Buterin shared an EIP (Ethereum Improvement Proposal) offering his thoughts on capping circulating supply at 120 million ETH, marking the first economic proposal made by the project’s founder. Buterin’s recommendation would serve two purposes, first to prevent the concentration of ETH mining facilities, and second to boost the coin’s inflation rate, therefore making it more profitable for miners and investors alike. This proposal came as a surprise to many ETH followers as it was a direct reversal from a letter he wrote in 2017 where he argued against developing inflationary currencies as this only results in the coins being bought and held rather than being used to transact. While I appreciate the technology’s ability to facilitate frequent transactions, due to the relatively onerous onramps to cryptocurrencies (aside from CashApp), and the large number of platforms that allow the seamless transfer of USD, I have yet to use crypto in this fashion. Therefore, I would prefer for ETH’s maximum circulating supply to be capped soon in order to boost the coin’s inflation rate.

Mining:

  • Ethereum: ETHhash cryptographic algorithm is designed to require more “memory-hardness”, in theory making it ASIC-resistant. More on this here.
  • Bitcoin: SHA — 256 cryptographic algorithm bodes well for large-scale mining corporations and ASIC’s in particular. (This makes BTC mining less available for the everyday miner)

Use Cases

Smart Contracts: the major “game changer” of the Ethereum blockchain.

As previously mentioned, Ethereum’s technology and use cases are entirely different from that of Bitcoin. While Bitcoin’s blockchain is designed to facilitate transactions with the chain’s native coin BTC, Ethereum was designed to become a revolutionized adaptation of the internet using a tool called “smart contracts”. To understand how a smart contract operates, it is important to first consider the underlying nature of a contract. When most people hear the word “contract”, their brains immediately jump to lawyers and signatures, however, at their roots, contracts are simply conditions and actions (or if’s and then’s). In fact, one’s day-to-day life is filled with contracts.

For instance, when you purchases a soda from the vending machine, you are entering into a rather humdrum contract yourself:

If you put the proper dollar amount in the machine, it will dispense a drink. If you fail to provide the machine with enough USD, the machine will not dispense your drink because you have not met your end of the contract.

Many large corporations have found great success in serving as a third-party platform that facilitates these sorts of contracts (think Uber or AirBnB) by taking a portion of the agreement in the form of a fee. By looking at the growth of these companies in recent years, it is obvious that many people do not mind paying a fee to avoid the overhead costs of running a taxi service or hotel. Vitalk on the other hand, dreams of a world where these types of contracts can be regulated and executed on the peer to peer level using a decentralized authority. Using an interconnected group of computers on a single blockchain, individual computers can confirm that the elements of the contract have been met, eliminating the need for a centralized middle man.

This was certainly an ambitious task, but also one that blockchain had already proven capable of accomplishing through Bitcoin. On Bitcoin’s blockchain, a node only approves of a transfer of BTC if clear conditions are met, ultimately, forming an elementary smart contract. Ethereum seeks to broaden the uses of Bitcoin’s smart contracts beyond simply currency.

To accomplish this feat, Vitalik replaced Bitcoin’s restrictive programming language with one that is considered “Turing-complete”. A “Turing-complete” programming language essentially allows one to create robust smart contracts that may work together to build entire decentralized applications (dApps) or decentralized autonomous organizations (DAOs).

dApps and DAO’s:

Decentralized applications are exactly what they sound like, applications that can complete a wide range of tasks or functions and are stored on a blockchain. Decentralized autonomous organizations are entire companies that have no central authority and are run by a network of interconnected computers. Due to the relatively recent inception of both dApps and DAOs, the true level of functionality and application for these products has yet to be seen.

There are some key commonalities between both dApps and DAOs:

  • Open Source: The codebase should be accessible by the general public allowing for greater scrutiny and transparency. Additionally, all decisions made on the blockchain should be made by both developers and everyday users of the product.
  • Decentralized: All transactions must be recorded on a public ledger which is accessible by all users and non-users alike.
  • Incentivized: Anyone who confirms the transaction ledger (think mining) and thus secures the network, should be rewarded for their work. Miners on the Ethereum blockchain are rewarded in ETH.

Note: These dApps are stored on the blockchain and executed by Ethereum’s Virtual Machine. The entire network is then tasked with securing (through mining) the smart contracts. Publishing a dApp on the blockchain, requires the developer to pay a fee in ETH.

My three favorite real-world applications for dApps and DAO’s:

1. The Service Industry:

  • Example: Autonomous ride-sharing using self-driving cars and Ethereum’s smart contracts. This would allow car owners to have their car serving as a taxi service while they are sitting at home on their couch. (I may explore this concept in a future blog post)

2. Gaming:

  • Example: Cryptokitties (personally I find this game to be ridiculous, however, the community absolutely loves this stuff and some of these digital cats were sold for hundreds of thousands of dollars)

3. Digital Collectibles:

  • Example: Blockchain’s transparency and interconnected nature bode well for ensuring the rarity or value of an item. Many companies are currently looking to tokenize sports teams. To accomplish this, a fixed number of tokens are floated during an Initial Token Offering (ITO). Users can purchase these tokens using fiat currencies and exchange them with other fans. At various points throughout the season, token holders will have the opportunity to vote on non-essential team decisions such as which athletes attend the next scheduled meet and greet. Socios is an industry-leading example.

Ethereum’s Strategic Partners:

Over thirty tech companies, large banks, and other forward-thinking businesses have formed a partnership called the Enterprise Ethereum Alliance which will be focused on developing meaningful dApps and new smart contract use cases. Some of the more noteworthy names are considered to be JP Morgan Chase, Intel, Microsoft, and Banco Santander.

ERC-20 Tokens:

Tokens are created by a smart contract which also serves as the medium of exchange for handling transactions and keeping tabs on user balances of said tokens. To purchase tokens, users send ETH to the smart contract that was developed by the entity that is selling the token. The smart contract then converts the ETH into tokens using the current ERC-20 standards (“Ethereum Request for Comments — 20”) which act as a set of guidelines or rules for the steps that must be taken to create a token on the Ethereum blockchain. These tokens can then be traded on exchanges, essentially acting as your traditional equity security.

Note: ERC-20 ultimately attempts to protect token investors from the widespread pump and dump scams that crowded the token space during the ICO (Initial Coin Offering) boom. The “20” in ERC-20 is merely a number assigned to the standard.

So why would a company look to create their own ERC-20 compliant token?

The answer is quite simple, this allows start-up businesses who are unable to seek institutional investors an opportunity to crowdfund. These token projects are almost always pump and dump scams and the tokens eventually hold little to no value. AVOID AT ALL COSTS.

Ethereum’s Scalability Problems and Consensus Mechanisms

When talking to any blockchain or cryptocurrency “expert” about Proof of Work or Ethereum in particular, fears of scalability issues will almost always arise in conversation. There are multiple reasons why Ethereum may be unable to scale at an equal pace to cryptocurrency adoption, however, many of them are rather complicated so I will simply touch on the easiest to understand.

Currently, Ethereum uses Proof of Work as its consensus mechanism. For numerous reasons which I will cover in a future post, PoW requires a massive amount of computing power and therefore electrical power. This is due to the highly competitive atmosphere that the mechanism creates for its miners. As investors with deep pockets came into the space, they began to build considerable “mining farms” made up of thousands of specialized mining computers. These computers require large amounts of power to run, making cryptocurrencies using the PoW consensus mechanism a major enemy of the environmental community.

As a resolution to this problem, Ethereum developers have decided to move on from PoW and adopt Proof of Stake (PoS). On the most basic level, PoS resolves a majority of PoW’s scalability problems by forcing miners to use their coins as collateral when attempting to confirm the ledger. In theory, staking your ETH allows for miners to prove their trustworthiness on-chain.

While solving the scalability issue has been quite exciting for ETH investors, the mining community has responded rather negatively to this proposal as it would greatly reduce the number of validators who could confirm smart contracts on the blockchain. This transition to PoS has had many proposed dates, the most recent of which has been an estimated window of the end of 2021. The project has been named “Casper” and is a part of a much larger transition to ETH 2.0.

Conclusion

From a fundamental analysis perspective, I find Ethereum to be one of the most exciting decentralized projects in development. That being said, the project’s progress can be likened to that of a slowly trickling faucet as opposed to the rushing waterfall that many hoped it would be. With development strolling along at a leisurely pace, many competitors with significant backing and strong teams have entered the space. These projects (commonly referred to as “ETH Killers”), include but are not limited to: Hyperledger Fabric, NEM, Cardano, QTUM, Tezos, VeChain, and Stellar (which will be covered next Thursday).

With every new dApp that is published on any of these smart contract blockchains, the native coin or token gains another set of users, only driving the demand and value of the USD currency pairing upwards. Regardless of which project can pull away from the pack, one thing is certain; there WILL be a winner. Now the difficult task will be for investors to identify that winner before the rest of the trading community.

Lastly, over the long run, any fundamental crypto investor should keep a close eye on the progress of the aforementioned Casper project. As I stated earlier, Vitalik has several dates for its release, most of which have come and gone. If ETH continues to miss these targets, the value of the ETH/USD pairing will almost certainly take a significant hit.

Here are some key elements to consider (ranked by order of importance as I understand them):

  1. Use Case: allows one to gauge who the coin’s competitors are and also the projects ability to be globally adopted.
  2. Strength of Development Team: equally as important as Use Case and crucial for the longevity of a coin. Crypto projects take years of development before they can become truly “decentralized”, a strong team is necessary to bring the project to fruition.
  3. Consensus Mechanism: there are currently two primary consensus mechanisms for mining cryptocurrencies: Proof of Work and Proof of Stake. Depending on your views on the technology, many blockchain enthusiasts typically hold a strong preference for one over the other.
  4. Technical Indicators: these are largely beneficial for those who are interested in “swing” or “day trading”. That being said, any sound trading strategy should include a mix of both fundamental and technical analysis.
  5. Strategic Partners: Blockchain businesses looking to integrate themselves into the global economy typically do so by partnering with already well-established companies. These partners can play a crucial role in the success of the coin.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be, nor should be perceived as investment advice. Seek a duly licensed professional for investment advice.



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