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Ethereum

By Victor & Grayson
August 22, 2019

Disclaimer

The following review is not financial advice. Coin Grades’ ratings and letter assignments reflect the technical and practical viability of these cryptocurrencies in the eyes of the Coin Grades team. As always, we encourage you to do your own thorough research from multiple sources before choosing to invest in any cryptocurrency.



Overview

Throughout the crypto world you will see variants of “Ethereum, Ether, or ETH”. Ethereum generally refers to the blockchain, Ether refers to the cryptocurrency, and ETH is shorthand for Ether. All three of these terms are sometimes used interchangeably.

Originally proposed in 2013 by Vitalik Buterin, Ethereum was built in mid-2015 as a way of expanding upon the potential of blockchain technology. Instead of simply providing a decentralized public ledger, Ethereum is essentially a smart, self-operating global computer that natively allows for “smart contracts,” which are censorship-proof records of contracts that are secured without the participation of any central authority. This allows for the immutable recording of information and economic data. Having this system operate in a decentralized manner allows for added security as data is stored across the world through nodes instead of explicitly being in one location.

DApps (Decentralized Applications) can be coded on top of Ethereum as well. DApps are just like the applications you know and love on your smartphone and computer, except they are run on top of the Ethereum blockchain. This grants them all of Ethereum’s benefits, such as decentralization, immutability, and added security. This widens the range of use-cases for Ethereum and provides a lot of opportunities for developers entering the space––not just enterprises––to create their own DApps quickly and simply. By buying Ethereum, you are owning a share in a world computer network that supports many different applications.

In addition to the ability to execute programmable smart contracts and decentralized applications, Ethereum offers the ability for programmers to create their own cryptocurrencies on the Ethereum network. These cryptocurrencies are referred to as ERC-20 tokens. This allows for smaller cryptocurrency and blockchain projects to use the Ethereum network and its miners to give their projects a level of legitimacy without needing a blockchain of their own. Many projects use Ethereum to launch their own cryptocurrency. Once funds and resources are raised, they migrate to their own individual blockchain separate from the Ethereum network. In this way, Ethereum is an incredible tool for tech startups seeking to get started in the world of blockchain.


Security 8/10:

It is important to note that smart contracts are open to security breaches, as seen with the DAO Ethereum hack in 2016, which led to the hard fork into the new Ethereum blockchain, leaving the original blockchain, Ethereum Classic (ETC), behind. The new Ether (ETH) token is ultimately what has appreciated the most in value, as it has attracted a large developer community and venture-capitalist following.


Decentralization 7/10:

Ethereum’s total circulating supply is 106.7 Million, 68% of which was pre-mined. For the coins that have yet to be mined, mining difficulty remains consistent over time. Ethereum block size is also relatively small, resulting in shorter block processing times (14-15 seconds). Ethereum addresses and transactions are encoded using Keccak-256 hash. Ethereum has no hard cap on its total supply, meaning it will always be kept in a constant state of inflation.

Fees are paid using the Gas payment system, which means that every transaction on the Ethereum blockchain requires a little bit of Ether to be spent. This fee is given to the miner in exchange for processing the transaction. A user can pay more “Gas” as a portion of the amount of ETH sent in order to prioritize their transaction, or conversely choose to send less if the transaction is not a priority. The amount of gas spent will directly influence how quickly the transaction is processed, these fees are usually no more than a couple of cents worth of Ether. Other blockchains have built upon this system by operating fully on two-token models where GAS can be generated simply by holding tokens or “staking” them in their own wallets. There are plans to switch Ethereum over to Proof-of-Stake in order to relieve the cost of proof-of-work mining.


Scalability 5/10:

Ethereum faces some speed and scalability issues. For example, it can only operate at speeds of around 25 transactions per second (VISA can achieve 45,000 transactions per second by comparison). While transaction speeds are four times quicker than Bitcoin, considering the heavy load on the Ethereum blockchain with smart contracts, DApps, and ERC-20 tokens, this certainly presents itself as a scaling issue to be addressed in the future.


Speed 6/10:

As mentioned above, Ethereum does face some challenges when it comes to speed. These issues are in the process of being addressed in Ethereum 2.0. There is more information about this in the “Team” section below.


Energy Consumption 6/10:

Since Ethereum currently uses the Gas system for payments, this allows users to spend less on transactions, and by extension alleviating some of the incentive to consume large amounts of energy (on average). Additionally, many of Ethereum’s enterprise-level solutions would help streamline businesses. By extension, this would have a positive impact on the energy consumption by large corporations. While this doesn’t have to do with Ethereum’s coding per se, it has pretty wide-reaching implications. Improving efficiency overall should reduce production costs. This side-effect shouldn’t be ignored. However, ETH still requires work to process transactions. Its energy consumption would likely be reduced by scaling solutions.


Team 10/10:

Development is currently underway for a new fork of the Ethereum blockchain, known as Ethereum 2.0. ETH 2.0 aims to implement sharding and proof-of-stake as major alterations to the code. Sharding is a major effort to improve scalability, as it would divide network load, ideally allowing the network to scale and perform more transactions simultaneously. Proof-of-Stake (PoS) would relieve the pressure on miners and allow for less expensive mining.

PoS allows for entities to operate as validators on the network, voting to validate new transactions on the blockchain instead of using their processing power to mine them. In order to qualify as a validator node in Ethereum 2.0, one must have at least 32 ETH in their wallet. For this, a node will be rewarded GAS based on their positive contributions to the network. One drawback of PoS is that it could lead to more centralization––one entity controlling much of the voting power in the network. The backbone of the new Ethereum 2.0 network will be known as “The Beacon Chain.” An initial version of this chain is set to launch as early as 2019, though many expect rather extensive delays.


Community 10/10:

Ethereum has an extremely active developer community. Developers meet from all over the world, multiple times per year, to work on Ethereum applications and discuss the future of the network. ETH NY was over capacity this past year, which was a significant change from the past. This shows that growth is still occurring behind the scenes.

Mentioned in this review is also the fact that most ICO projects have failed and left investors with a negative sentiment. There are some detractors in the community who have this attitude, and there are some disagreements as to how Ethereum should proceed towards a scaling solution.


Adoption 9/10:

The Enterprise Ethereum Alliance (formed in 2017) encouraged the building of blockchain startup projects on the Ethereum blockchain. The ensuing Initial Coin Offering (ICO) craze was a hallmark of the crypto-mania we saw in 2017. Despite the ICO craze dying down, Ethereum has continued to be used and adopted at the enterprise level. J.P. Morgan, Ernst & Young, Deloitte, and other major financial institutions are currently using the Ethereum blockchain.

Unfortunately, the vast majority of cryptocurrencies sold through ICOs are valued at a fraction of what they were worth during the peak of the craze in 2017. This has led to a negative investor sentiment towards many of these projects, as the investors feel that the companies made off with their funds. It should be emphasized that at no point was holding an ERC-20 token meant to be equated with holding a stake in the company. Otherwise, this would be a blatant violation of unregistered securities laws.


Growth Potential 6/10:

The Ethereum network is the second most valuable in the cryptocurrency market. Since much of it was pre-mined, more investors had the opportunity to buy into it at a low price, leading to a less equal distribution of wealth within the network. Over time, as more nodes operate on the network, it is expected to become more stable and decentralized, though there is a continuing debate on this subject.

Ether has lagged behind Bitcoin in terms of value appreciation since the bottom of the 2018 bear market, although it outpaced it in terms of growth between 2016 and the end of 2017. Historically, the ETH/BTC ratio has been much higher. At its peak, Ethereum almost overtook Bitcoin as the number one most valuable cryptocurrency in the market.

General investor sentiment for Ether is relatively low when compared with Bitcoin at the present time of writing. This is due to the perceived overvaluation of the Ethereum network as a result of the ICO bubble in 2017. However, due to upcoming upgrades to the code, increasing adoption, and past price performance, it is possible that ETH reclaims some of its former glory as a major player in the cryptocurrency market. Much of this depends on continued improvements in security and scalability.


Liquidity 10/10:

Since Ethereum is currently the second largest cryptocurrency by market valuation, it benefits from higher liquidity. Due to its availability on most exchanges where Bitcoin is also traded, ETH benefits from significant trade volume. At times, trade volume for ETH has surpassed that of Bitcoin.

Summary

In all, Ethereum is one of the most all-encompassing cryptocurrencies out there. While it’s not designed to necessarily be a currency, the functions that Ether and the Ethereum blockchain provide by way of smart contracts, decentralized applications, and the ability to support ERC-20 tokens provides undeniably one of the most compelling use-cases in the market. As with most other cryptocurrencies, Ethereum’s key to surviving and thriving rests in its ability to scale effectively and adequately merge with existing financial institutions. If the Ethereum team is able to adequately follow through and ETH 2.0 delivers on all of its promises, then Ethereum could see another resurgence akin to the ICO craze it created in 2017. This is a big if, however, as a dozen or so other Decentralized Application platforms are chomping at Ethereum’s feet, ready to take its place should it fail or take too long to adjust. Despite this, Ethereum’s adoption by fortune 500 institutions should be a testament to its ability to change the way platforms are handled in the future.

Final Rating

Pros - Highest liquidity for any alternative cryptocurrency, diverse use cases, strong developer community, enterprise-level adoption .
Cons - Skepticism about future improvements, selling pressure from failing blockchain startups, no cap on total circulating supply .
CoinGrades Rating: 77/100
Coin Grade: B+

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