Ethereum has become a serious rival to Bitcoin because it has managed to differentiate itself in the marketplace. That is because Ethereum is a specialty cryptocurrency, created for specific purposes Bitcoin does not serve.
Bitcoin is intended for general use in any kind of financial transaction, and is therefore geared toward eliminating the middlemen in the financial industry. Bitcoin owners can exchange Bitcoin directly with each other and avoid giving a cut to brokers, agents, and the like.
Ethereum, on the other hand, was created to eliminate the middlemen in legal transactions. This has far-reaching implications for world trade, and for the value of Ethereum as a currency for conducting worldwide transactions between large organizations and companies.
What Is Ethereum?
Ethereum is a cryptocurrency, like Bitcoin. It can be bought, spent, and stored online. It only has the value that the marketplace agrees on. That is, it is worth what someone is willing to pay for it on any given day. In this way, it is similar to stocks, though some would argue that stocks have a company with earnings and assets behind them, which determines the value of the stock.
For those that think Ethereum is based on nothing, there is a surprising underpinning that contributes value to this currency. It is used by governments and international corporations to conduct business. That means it is in demand among institutions. Many institutions have stayed away from cryptocurrencies-most recently Bitcoin Cash-because they can't see any intrinsic value in them. But Ethereum has a built-in attraction: smart contracts. This makes it valuable to international organizations.
Let's look at smart contracts as part of Ethereum's Blockchain approach.
What Blockchain Technology is Ethereum Based On?
Ethereum uses blockchain technology, but in a much different way than Bitcoin does. Whereas the Bitcoin blockchain stores transactions, the Ethereum blockchain goes a step further and stores the formulas to execute contracts with no lawyers, accountants, escrow officers, or agents of any kind.
For example, the Ethereum blockchain might store this logic: On December 1, transfer $1 million from account A to account B if account A has more than $2 million. If not, do not make a transfer.
What happens is that if the conditions are met, the transaction takes place without a bank, a lawyer, or any third party whatsoever.
The Ethereum cryptocurrency is simply the coin that will be used in the transaction. Ethereum currency exists to execute smart contracts.
The implications of smart contracts have not been lost on those doing business around the world. If a contract can be reduced to a simple program logic that all parties agree to, and then they can walk away knowing the transaction will only be triggered when all conditions are met.
Ethereum's Blockchain can also be used to create and distribute DApps-decentralized applications. These apps are not owned by anyone, and they can't be shut down or have any downtime. They can be used for a variety of transactions and anyone can use them at any time. DApps can perform diverse functions, such as asset planning or allocation or resources.
How Is It Different Than Other Cryptocurrencies?
Many cryptocurrencies exist to be traded. That is, they serve no function other than to be bid up and down and bought and sold. They only exist digitally, of course, and speculators hold them for a time then take profits, if possible.
Ethereum is tied to a specific function, which is smart contracts. These contracts have value to the people who use them, and the coin, Ethereum, is the currency the contracts are executed in. This additional purpose is the main difference between Ethereum and other cryptocurrencies.
What Can Ethereum Be Used For?
In addition to executing smart contracts, Ethereum can be used to trade, just like any other cryptocurrency. Companies may accept Ethereum as payment for goods and services, but this would be most likely done as part of an execution of a smart contract.
The Bottom Line
Ethereum has carved out a unique space in the cryptocurrency universe, and holds promise as the currency for future worldwide transactions. It could very well become a universal currency that is used for business transactions in order to keep them safe and private.
Many expect a rotation in cryptocurrencies, meaning that current winners will fall and new ones will take their places, giving investors to get in on the kinds of gains they may have missed with the rise of Bitcoin.
However, there is an argument to be made that Ethereum could hold its value because it may be important to international business and government expenditures. That remains to be seen, but it is likely that as the dust settles in the cryptocurrency market, investors will start to look for intrinsic value. Ethereum appears to be building that intrinsic value now.