No doubt you have been following Bitcoin and Ethereum, either from their early days or if you’ve just started exploring the crypto markets. These two giants have been dominating the space from the beginning. While Bitcoin is ranking as the top cryptocurrency, it is the technology behind the Ethereum network that is fuelling a large number of altcoins and decentralised finance (DeFi) applications, as well as driving developments with huge potential.
The 30th of July, 2021 will mark the sixth anniversary of the launch of the Ethereum network – and that is not the only reason to celebrate as the ETH price has been reaching new all-time-highs since the beginning of this year. But how did Ethereum end up as such a vital force in the world of cryptocurrencies and what is behind the basics?
The Ethereum network (EVM)
If you have read some of the articles on our Bitpanda Academy Beginners’ section, you already know that Ethereum is a decentralised blockchain which is mostly known for DApps and smart contracts. Just like other blockchains, it is a database running on a network of computers (called “nodes”) all over the world where transactions are shared and updated simultaneously. This means that every participating computer keeps an up-to-date copy of the current state of the Ethereum network.
Ethereum, Ether (ETH) and gas
While the term “Ethereum” is used to denote different types of things, here are some of the actual definitions. Ethereum is the name given to the Ethereum network but Ether (ETH), the native cryptocurrency of the Ethereum network that is used for transactions and a store of value, is also often simply referred to as “Ethereum”.
“Gas”, on the other hand, measures the computational effort required to execute such a transaction. This “gas” is the equivalent of the required network fees to process a specific transaction and is paid in Ether (ETH).
So why didn’t Bitcoin evolve the way Ethereum did? Simply put, for technological reasons.
In computer programming, scripting languages are used to automate the execution of tasks. While the scripting ability of Bitcoin is limited to peer-to-peer transactions, Ethereum set out to create a distributed system that also offers functionality for the decentralised automation of mechanisms for digital assets.
The technology behind Ethereum allows two or more parties to use protocols that are called smart contracts. These smart contracts perform pre-set computations or actions (if certain conditions are triggered) and manage tokens. Smart contracts are immutable. They are used in applications such as decentralised applications (DApps) and have many more potential use cases.
In its most basic sense, a token is a single element of a programming language that is considered a unit of value. There are different ways to differentiate between tokens. One is the difference between security tokens and utility tokens. A security token represents a share in a company issuing the token while a utility token, such as Bitpanda’s ecosystem token BEST, provides access to and the ability to make use of specific services. It is the Ethereum ERC20 token standard that is behind a huge range of blockchain projects.
ERC20 and ERC721 token standards
In the Ethereum network, standards (the agreed way of doing things) ensure compatibility for all implementers and users. The letters “ERC” stand for “Ethereum Request for Comment” which is a document containing rules written by programmers of smart contracts that become standards across the Ethereum ecosystem once an improvement proposal has been accepted by the community. There is a broad range of ERC standards, with ERC20 and ERC721 being the most important.
The ERC20 token standard is a standard for fungible tokens (more about this to follow), such as tokens used for staking or payments and is the world’s most widely-used standard for launching tokens on a blockchain. On the other hand, the ERC721 standard is Ethereum’s non-fungible token standard for the creation of a unique token, such as a record of ownership.
Fungible and non-fungible tokens
What do the terms “fungible” and “non-fungible” mean? Any fungible asset, such as a one-dollar bill or Bitcoin, is mutually interchangeable with another. For instance, units of Bitcoin are fungible tokens. Fungibility means that a unit of value can be replaced by an identical unit.
Let’s say you go shopping, pay for something and get a one-euro coin back that someone else paid for their shopping with. This one-euro coin is fungible – the coin itself does not matter as it has the same value as every one-euro coin and it doesn’t matter which particular one-euro coin you hold.
A non-fungible token (NFT) on the other hand, certifies a unique digital asset that is not interchangeable. A non-fungible token can be used to digitally represent a person’s ownership of a unique item, such as a work of art or music on the Ethereum blockchain. A non-fungible token is one of a kind, it cannot be modified or interchanged with another token. For this reason, NFTs, as records of ownership and stores of value, are currently all the rage in the art world.
We are convinced that the ecosystem around Ethereum remains one of the most innovative and exciting projects in the crypto space – what do you think?
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Author: Judy Unger