Bitcoin, Ethereum and what the future holds

While Bitcoin may currently be the most popular virtual currency, it's certainly not the only one out there. Bitcoin's up and coming competitor, Ethereum, is another cryptocurrency that utilizes blockchain technology. Both can be traded, mined and bought on popular trading platforms such as MARKETS.COM, eToro and Plus500.

The 451 Take

Bitcoin is fueled by speculation. Its value has rocketed because people are buying the cryptocurrency in the hope it will gain value, not because they want to spend it – this could be a bubble in waiting. However, its lasting legacy is likely to be the blockchain, and Ethereum could be the platform that brings it into the mainstream. High-profile corporations are betting on Ethereum, which is a positive sign of potential, and it has a range of use cases now.

What is Ethereum?
Bitcoin has been around since 2009, and Ethereum was initially released in 2015. Ethereum has drawn the attention of entrepreneurs and corporations because it supports open source code and smart contracts, and decentralized applications can be built and deployed on top of it. Smart contracts, also known as self-executing or digital contracts, are computer protocols (algorithms) that automatically enforce and execute the terms of a contract whenever the conditions of the contract are met.

Earlier this year, large banks such as JPMorgan Chase and ING, technology giants such as Intel and Microsoft, and other organizations (30 in total) formed the Enterprise Ethereum Alliance to focus on enterprise use cases of Ethereum. This kind of commitment from the business world can make Ethereum become bigger than Bitcoin over time. For example, by offering Ethereum as part of Azure, Microsoft is making it available to more users than would otherwise use it, and is helping spur further innovations. However, we believe that Bitcoin and Ethereum can coexist, since they are working toward different goals.

How is Ethereum different from Bitcoin?
Bitcoin is all about payments, and Ethereum is much more than that – Ethereum expands Bitcoin's capabilities and opens up the blockchain to additional functionality and applications. They have different goals in mind – Ethereum was designed to be much more than a payment system. Its blockchain can simultaneously run smart contracts across nodes and attain verifiable consensus without the involvement of a trusted third party. Potential use cases are basically limitless – from banking (microcredits) through real estate (mortgages) to e-government (voting).

These smart contracts are essentially pieces of code that can be processed and verified on the distributed Ethereum platform. Any code willing to pay for execution can run on top of Ethereum, meaning it is not just a distributed ledger like Bitcoin, it's also a distributed computer, able to process smart contracts and record them.

Bitcoin is a virtual currency, whereas Ethereum is a platform for executing smart contracts. Ethereum does have its own currency – 'Ether' – which is primarily used to pay for processing transactions to reward those nodes underpinning the Ethereum network.

It is Ethereum's broader, more general capability that is likely to leave with a stronger position compared with Bitcoin when the speculation dies down. As we have suggested, Bitcoin could be a bubble about to burst, blown-up by investors buying up Bitcoins – not because they want to spend them, but because they hope they increase in value. Ethereum's Ether currency could potentially be a big bubble, too, but if the platform is properly implemented across a range of use cases, it could stand the test of time long after Bitcoin has gone, since it has a purpose beyond just speculation (i.e., the paying of smart contract transaction fees).

One of Bitcoin's greatest challenges is processing time – it can take up to an hour to approve a transaction – and the creators of Ethereum have taken steps to reduce this down to minutes, which is likely to encourage further take-up. Furthermore, a number of Ethers are released each year, whereas Bitcoin's have a fixed capacity, which will encourage growing use – less chance of a speculator holding on to a large percentage, thus decreasing liquidity.

Use cases
Smart contracts are exciting on their own, but also because they can become the building blocks of a decentralized autonomous organization (DAO) that fundamentally functions like a company that only exists in cyberspace. Basically, a collection of contracts and obligations can be coded into Ethereum. The concept of companies that don't need humans may sound a bit futuristic (and scary), but it certainly makes us think about all sorts of new opportunities and use cases that smart contracts and Ethereum can enable.

If we don't want to go that far just yet, decentralized applications (DApps) using smart contracts and running on Ethereum are already being developed. DApps run across a decentralized network and are enforced without the involvement of a third-party authority. Basically, all kinds of multi-party applications that rely on a central server, such as chat, banking or gaming, can be disintermediated by the Ethereum blockchain. Early examples include NotarEth, an Ethereum-based notary service; Eathlance, a job market platform built entirely on Ethereum's blockchain using only cryptocurrency for payments; and Swarm City, a decentralized commerce platform built upon Ethereum – just to mention a few.

An industry that can benefit from Ethereum and smart contracts is the Internet of Things (IoT). As more devices are connected to the internet, their ability to interact by using smart contracts will become more valuable. Chronicled, a San Francisco-based company, has developed an open source registry for IoT microchips and consumer products on the Ethereum blockchain. Ethereum has many potential use cases in the financial industry, as well. London-based financial technology startup Babb App is building a banking platform using Ethereum's smart contracts.

With all of this said, there are risks inherent in Ethereum's smart contracts, since they operate in unregulated territory – moving law to the digital space presents challenges. While smart contracts do not require users to know or trust each other, they do need them to trust the code, so the code becomes the law. If that is the case, correcting bugs in the code, for instance, may result in breach of contract, and gaps in the code can result in financial losses. Further challenges include when a smart contract needs to be linked to the external world or when there are elements that are subject to value judgements.

The future of both Bitcoin and Ethereum is uncertain, and it is hard to predict what models will work; however, blockchain, smart contracts and DAOs may be the beginning of a new economy. It's like the internet in its first phase – complex and incomprehensible for most, but with huge potential for the future.

Csilla Zsigri

Senior Analyst, Cloud Transformation

Owen Rogers

Research Director, Digital Economics Unit

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