In recent years, Bitcoin, the golden child of the cryptosphere, has seen great popularity and acceptance as a store of value, while Ether – the native cryptocurrency of the Ethereum blockchain – has remained stable in second place.
Most of the major DeFi (Decentralized Finance), dApps (Decentralized Applications), and NFTs (Non-Fungible Tokens) protocols – don’t worry, I’ll explain all of these terms below – currently running on the Ethereum blockchain at The Price of Ether is now rising faster than that of Bitcoin. After gaining 260 percent year over year (compared to an 87 percent increase for Bitcoin) and growing more than 15 percent this week, the coin hit an all-time high of just over $ 2,740 at the time of writing.
The exploding value of ether, coupled with the growing attention of major institutions such as Mastercard, JPMorgan and UBS, the build-up of excitement for “Ethereum 2.0” and the complete switch to a PoS consensus mechanism (proof-of-stake) (more on this below)) the coin looks well positioned for further gains. This begs the question: will Ethereum overtake Bitcoin?
CRYPTO-SAVVY is an occasional series of Inverse that explains the world of cryptocurrency and where it’s going next.
Bitcoin versus Ethereum
Before we dive into the attributes of Ethereum, let’s examine one of the most important differences between Bitcoin and Ether: their consensus mechanisms.
As many readers will likely know, the distributed ledger, which contains a record of all previous transactions stored on a computer network around the world, is a central component of blockchain technology. The operation of the distributed ledger requires ensuring that the entire network is consistent with the contents of the ledger, and this is the job of the consensus mechanism.
Although Ether is currently migrating to a different consensus mechanism, the two most important cryptocurrencies are currently working with a PoW consensus (Proof-of-Work). With PoW, the probability of mining a block is determined by how much computational work the miner is doing, with a reward being given to the first miner to solve the cryptographic puzzle of each block.
As network miners compete for computing power, mining communities tend to become more central over time. This aspect is worrying for some as control of blockchain networks is shifting from the larger community to fewer and fewer hands. This reduces the security of the blockchain and also contradicts the decentralized philosophy of cryptocurrencies.
NFTs like those sold on OpenSea are based on Etherium.OpenSea
The developers of the Ethereum blockchain are aware of the disadvantages of PoW and are facing increasing pressure to reduce the energy consumption of the underlying protocol. You are in the middle of an ambitious move towards a consensus mechanism called Proof-of-Stake (PoS). The move, called Ethereum 2.0, is intended to increase the speed, efficiency and scalability of the blockchain and then offer a more environmentally friendly validation process.
The pieces come together, albeit slowly. Phase 0 of Ethereum 2.0 called “Serenity” started on December 1, 2020. On April 15th of this year, the so-called “Berlin” upgrade was successfully implemented. While there is no set date for the transition to PoS to be completed (to the frustration of many), Ethereum founder Vitalik Buterin published a blog post last month outlining how the network’s transition can be made faster than the developers originally planned – possibly good news after months of delays due to mismanagement and errors.
According to Charles Hoskinson, founder of the cryptocurrency Cardano, the main advantage of Ethereum 2.0 is that the network does not have “gigantic overhead and energy consumption” (to decide who can create a block), so the protocols are “much lighter” and massively more energy efficient. “Of course, these are all the features that will make Ethereum more attractive to investors and traders alike – once the transition is final.
Ethereum: dApps and DeFi
As a digital currency, Bitcoin is designed with a limited number of use cases in mind – the asset of choice for investors looking for a value-added business. In contrast, Ethereum is not just a cryptocurrency. It’s a network that supports smart contracts: programs that run on the blockchain that can be run automatically when certain conditions are met. In this context, Ethereum also organizes DeFi (Decentralized Finance) projects. Smart contracts allow developers to create more advanced functionality than just sending and receiving cryptocurrency. We call these programs decentralized apps, dApps.
There are DeFi-dApps that can be used to create stable coins (cryptocurrencies whose value is pegged to the US dollar), lend money to earn interest on coins, and implement automated, advanced investment strategies. A particularly fun and unique example of a dApps running on the Ethereum blockchain is Crypto Kitties, where users collect, breed, and sell digital cats. This all means there’s a lot of money going into Ethereum: at least $ 41 billion (and the counting) is currently on the blockchain in DeFi projects, compared to just $ 4 billion eight months ago. These special and advanced features highlight the growth and innovation associated with the Ethereum blockchain and are part of the reason why some people in the cryptosphere are becoming more and more excited about the potential that ether can offer.
Bitcoin, Ethereum or … both?
As mentioned earlier, there is a lot of excitement in Ethereum – remember, Ether has just hit an all-time high! However, until the aforementioned Ethereum 2.0 is a known size, there are doubts about its ability to meet the already significant need for bandwidth to support transactions. The launch of this improved Ethereum network, while proof of the strength of the project, also represents changes and therefore risks.
All in all, it is very likely that Ether will continue to outperform Bitcoin in 2021. Even if Ethereum has not yet fully recognized the benefits of the growing popularity of DeFi-dApps and NFTs. “The exploding NFT market will directly benefit the value of ETH, and I think ETH has room for growth until its price catches the current excitement,” says writer and analyst Noam Levenson.
Keep in mind that institutional investors have been a crucial element in adding value to Bitcoin over the past year. Will more traditional investment giants turn their attention to Ethereum? In this case, it would mean mainstream institutions validating not only the current value of ETH, but the entire Ethereum ecosystem, according to Haohan Xu, CEO of the digital asset trading network Apifiny.
Over the past few months, we’ve seen increasing signs that institutional investors are indeed realizing the value of the Ethereum ecosystem. Grayscale Investments, the world’s largest digital asset manager, added nearly $ 1 billion to its cryptocurrency trusts in 24 hours. That included $ 586.5 million at ETH (compared to $ 283.3 million at BTC) – historically these numbers would most likely be reversed. According to the Securities and Exchange Commission (SEC), two ETH funds launched by Galaxy Digital (a cryptocurrency asset management firm led by Mike Novogratz, a notorious bitcoin bull) have so far invested at least 32, Received $ 1 million. These moves by financial giants like Grayscale and Galaxies continue to spark the conversation and represent an increasingly positive sentiment regarding the second largest cryptocurrency.
In conclusion, let me remind readers that there is a different take on this debate between BTC and ETH. We may have to ask, “Why can’t we all get along?” Invictus Capital analyst Jason Peckham points out that while Bitcoin and Ethereum are naturally compared, it doesn’t make much sense as they both vie for “separate and mutually beneficial use cases” and investors get into the two coins various reasons.
Bitcoin is often referred to as a “currency token” and Ether as a “utility token”. Because of this, Ether is unlikely to overtake Bitcoin in terms of market capitalization. The two are different heads of the same animal. And while interest in what Ethereum can offer increases, the “digital gold” that Bitcoin is at least to this day remains king.
“BTC is unlikely to be dethroned as the leading cryptocurrency, but the growth in the Ethereum blockchain is hard to bet,” says Peckham. Let the seemingly more complex and dynamically evolving ETH narrative intimidate you. “