A deep-dive into Ethereum
Here is an interesting corporate story.
This story is one of the biggest blunders in American corporate history.
In 1980, a company called AT&T (one of the biggest companies in the world as of now) was experimenting with something called cellular telephony- an earlier version of the cell phone.
It gave a project to one of the top three consulting firms to conduct a market study and ascertain what the size of the cell phone market would be by 2000.
The firm came back with a report saying that the number would only be 900,000.
In 2000, the number of cell phone users was 109 million.
The firm was off by 99%. Because of this mistake AT&T had to go and acquire a company called McCaw Cellular for 12.6 billion USD.
But what does this story have to do with cryptocurrencies?
It is important to understand that even big, reputable consulting organisations can miss important trends.
In 1980, the cellular market was going through a revolution. In 2021, the #1 industry going through a tectonic shift is the finance market.
Post 2008, the entire world of finance is being built up again. So much has happened in the last 10-12 years.
The earlier part of the crypto market was Bitcoin, which was called Crypto 1.0. Bitcoin was envisaged as a replacement of fiat currency. Then came in Ethereum, which is Crypto 2.0. The embedded technology of smart contracts gives Ethereum immense intrinsic value.
Crypto 3.0 has also come up. These would be called Matic and Cardano.
This article explains the intrinsic value of Ethereum, in absolutely layman’s terms, through simple examples.
First things first, it is important to know that the entire value add of cryptocurrencies like Ether and Bitcoin is that they are decentralised.
Imagine tomorrow morning, the government just had the mood to print 100 billions USD. And you have just saved one lakh rupees.
The value of that 1L rupees comes down due to the insane amount of money being flushed into the economy. This is why people are bullish on cryptocurrencies.
If the government also controls cryptos, it destroys the entire argument.
They could regulate the supply of cryptos into the economy as they willed and be done with it.
Now, to talk about Ethereum. Let us understand the key difference between Bitcoin and Etherum.
If Bitcoin is money, Ethereum is programmable money.
What gives Ethereum intrinsic value?
The answer is simple. Ethereum is based on smart contract technology.
Smart contracts are a series of codes that get executed on the blockchain network.
Let us understand the utility of a smart contract through an example.
All of us are aware of an escrow account. If not, that is fine, keep reading further.
Imagine I’m sitting in India and you are in Singapore. We’re both big builders. I want to buy 100 flats from you.
A bank like J.P. Morgan or Morgan Stanley will come into picture and co-ordinate the contract between the two parties.
This is what an escrow mechanism is. You and I do not share trust and hence we will involve a bank.
In this mechanism, the bank ends up making a lot of commissions. The two parties have to go through a lot of paperwork. The process in its entirety is extremely tiring and ineffective.
A smart contract solves that problem. It takes away the middlemen and makes transactions hassle free.
Let us say, I want to buy a house from person X. I will travel to X’s city. We will then go to a registrar office to sign the documents. X might ask me to pay him 10L before we go to the office, and I will do that in good faith.
But, what if he runs away with my money? This is something that actually happens. Moreover, in real estate transactions, we don’t know when we will actually get the money.
Commissions to the middlemen, brokerage, and all these things make buying a house a nightmare.
Imagine, if you had a simple contract which checked for all the required conditions and automatically transferred money into one’s account.
The friction in transactions could be reduced immensely.
You can unlock so many services through this technology. Smart contracts can be designed to solve many problems around legal finance, merger & acquisitions, food contracts, housing market etc.
The data below shows the market capitalization of Ethereum from August 2013 to November 2021.
Source of picture- Statista.
Right now, there are 2700 decentralised applications that use Ethereum as a network.
You name it, and smart contracts will have an applicability around it.
To sum it up, is Ethereum a utility product? Yes.
But it is to be noted that a lot of inefficiencies exist in the market. There is still an immense scope of improvement and Ethereum is working towards it.
If you would like to understand a detailed comparative analysis of Bitcoin and Ethereum, you can watch this video.
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