Those who aren't knowledgeable about Ethereum might wonder why the Ethereum network has suddenly grabbed so much attention. I believe that a perfect storm of factors have converged to cause the rise of Ethereum, and while Ethereum is currently in a bubble, it is here to stay.
A brief overview of Ethereum can be summarized as follows. Ethereum is best thought of as a very inefficient "world computer" where any type of computation can be performed. While Bitcoin also uses a blockchain like Ethereum, it does not support loops, and therefore it cannot execute any program. The ability to loop and branch provides Ethereum software the ability to perform a number of actions autonomously, on-chain. For example, while Bitcoin can be used in conjunction with an external betting website to operate a dice game, the dice game itself can be run on Ethereum, with the network itself paying out winners when money is received at a certain address, with the only human involved being the player.
Let's examine the advantages of Ethereum over Bitcoin:
- Ethereum can do things that are frowned upon by authorities: If developers have the technical knowledge, they can use the Ethereum network to do more than the Bitcoin network can. There actually exists an Ethereum contract that implements a pyramid scheme. Those who want to get involved can triple their money by sending money to the contract and getting others to join under them. Since the scheme operates autonomously, the contract will continue indefinitely as long as the Ethereum network exists and it cannot be shut down.
- Transactions in Ethereum can involve less trust, leading to lower costs: The ability to do more on chain allows for less trust to be involved, which can lower costs. Contracts can automatically resolve themselves rather than relying on a human to make a determination.
- Ethereum has a better initial design: Unlike Bitcoin, which cannot agree on a blocksize solution, and Litecoin, where nobody bothered to even debate it, Ethereum foresaw the issue of blocksize and uses a mechanism of increasing "gas cost" to deal with it. The size of Ethereum blocks ends up only being limited by demand and the available resources.
- Ethereum has good people in charge: Distributed systems are excellent at preventing bad people from taking bad actions. But without good people involved, development cannot move forward. Ethereum has a major advantage over many other coins in that there is a single person who is viewed as a founder who continues to respect everyone and promote the coin's development. Vitalik Buterin, Ethereum's founder, is available to serve as the final arbiter of disputes in the case that an issue came up in the future, and the development team of Ethereum continues to be functional and working on new features.
- It's difficult to send money in Ethereum: Ethereum was designed as a network for computation, not sending money - but many people are now using it to store value and trade. Sending money in Ethereum is complex, and it was over a month between the time I started writing the payout code for our pool and the time we finally stopped encountering issues with it. The main problem with sending money is that there are two costs in Ethereum - "gas cost" and the price of Ether itself, and both of those values are independent of each other. The effect is that the transaction fee of a transaction is unknown until after the money is already spent. Furthermore, Ethereum does not allow multiple outputs in a single transaction, so the simple task of sending money to a lot of people in Bitcoin requires the creation of one contracts per recipient in Ethereum, a process that is wasteful of disk space.
- Proof of stake: In scrypt coins, a recent trend has been to have "proof of work" mining periods before a coin switches to proof of stake, which is what Ethereum also plans to do. The pattern for such coins is that they inevitably have a lot of market activity during the mining period, and then the proof of stake period causes a significant reduction in the number of nodes and number of transactions. So far, most of these coins have demonstrated that proof of stake incentivizes people not to spend money (because coin age influences proof of stake payouts), while mining encourages money to change hands and keep the network alive.
- Ethereum is hugely inefficient: The running of Ethereum has become an issue on our daemon servers because it is enormously inefficient. It uses far more resources than any other coin because every computation is performed by every node. As a result, the cost of contracts is expensive. This problem could be eliminated by having a randomly chosen portion of the network execute a contract and then send the results to everyone else. The Ethereum developers have promised to implement such "sharding" in a future release. In the meantime, though, CPU usage is by far the most expensive resource in a computer, and the daemon is already becoming so resource intensive that non-miners like us will eventually have to uninstall it.
- Inflation: Ethereum is an eternally inflationary currency, which discourages people from investing in the network.
- Lack of profit potential: One of the problems with automating operations is that there is less opportunity for people to make money. Running an online casino can be profitable, but writing an automated casino that pays out people with no human intervention isn't. Unfortunately, most people have to make money to survive, so the number of people who will actually take advantage of the really interesting stuff Ethereum allows is small.
One of the critical missing features that could catapult Ethereum into the #1 position is a Bitcoin Core-compatible API. The Bitcoin Core API has been duplicated across almost every other bitcoin client and altcoin, so that simple monetary operations like sending money and retrieving balances can be performed with almost identical code in these coins. The addition of Ethereum to any business's operations requires weeks or months of development and testing, whereas the addition of litecoin to a bitcoin business requires significantly less effort.
A community project to develop a REST API that can perform operations like "sendmany" or "listreceivedbyaddress" would result in a huge increase in the number of sites supporting Ethereum. In fact, the lack of a compatible API likely explains why large corporations like Coinbase are allowing Tristan D'Augusto to profit $80k/day at Poloniex uncontested solely through Ethereum trade fees for weeks on end.
In conclusion, Ethereum is superior to Bitcoin. The reasons for the technical superiority are not the smart contracts - because while smart contracts are interesting, it isn't clear what the profit motive is in widely deploying them. Instead, Ethereum is better because it has resolved the core issues with Bitcoin before they ever became issues. While Bitcoin languishes for the next few years, Ethereum is likely to continue to rise as more and more applications support it. Its critical weakness is that it was not designed as a store of value, but if that issue is resolved, it is possible that Ethereum will eventually surpass Bitcoin as the #1 network.