This article is not a put down of Bitcoin or other cryptocurrencies. Rather, it's trying to get at a core feature of cryptocurrency that I think will dominate future developments given regulatory sanctions on bad financial behaviors. In other words, Web3 projects will have to be about more than merely financial speculation. They will have to be about utility.
In short, remember this mantra:
Bitcoin is powered by the blockchain; Ethereum coins are used to power the blockchain.
The difference is between Bitcoin being mostly used for speculative purposes (i.e. hoping to profit from its increase in value) and Ethereum being used for utility purposes, with exchange and speculative features as well.
Although Bitcoin was not the first cryptocurrency (there were prototypes created in the 1980s and 90s), it was the first successful crypto coin to be used widely and gain traction within traditional financial markets. Bitcoin was created in 2008; and although no one really knows who created Bitcoin, its mission is widely known:
To allow people to send money electronically, primarily over the internet, safely, securely, and privately without any need of or interference from a central bank, owning corporation, or governmental authority.
Bitcoin’s functionality relies on blockchain technology, as a decentralized ledger, to record and confirm transactions between users–in this case, exchange of Bitcoin for services, products, or speculation on its value. So in other words, without blockchain technology, there would be no Bitcoin.
But blockchain technology can be used for many purposes, not just for the exchange of currencies. One important function is smart contracts, which are programs stored on-chain and which run when predetermined conditions are met.
With regard to decentralized blockchains, smart contracts perform functions automatically without central control, allowing individual users to interact with the smart contracts as appropriate. For example, a smart contract can calculate interest rates and apply them to an existing account. It could even automate a payout from an account given certain financial conditions being met. In addition, smart contracts cannot be erased; nor can they be reversed.
This is where Ethereum enters as the revolutionary figure.
It takes the prime purpose of blockchain technology to be the creation and application of smart contracts. These smart contracts essentially provide utilities, or things that can be used by us without the interference of a “middleman” or controlling authority.
Decentralized Finance is a significant development arising from smart contract technology. Users can apply for loans without having to go through a bank. Other users provide liquidity to a pool from which other users can borrow. Without a bank involved, lenders gain a fee for providing liquidity while borrowers get a reduced interest rate (when compared to banks).
How to Apply This
When one buys Ethereum’s currency (ETH), one is primarily investing in the utilities that the Ethereum network provides. And owning the currency also entitles one to governance or voting rights concerning the development of the Ethernet network.
In short, Ethereum is using blockchain technology to increase user capabilities. Bitcoin, as it stands, is only useful for speculative purposes tied to the value of the coin.
This means you can invest in Ethereum-based projects for worthy causes — whether this involves financial, practical, or moral motivations. It’s a way to bring the blockchain back to the real world and to what matters.
This article originally appeared on Medium and is a part of the Crypto Industry Essentials educational program presented by The Art of the Bubble.
Though this article is credited to me, it contains some written material by Sebastian Purcell, PhD from his The Art of the Bubble education series on cryptocurrencies.
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