Ethereum – A Decentralized and Open-Source Super Platform
Ethereum is a decentralized community-operated blockchain that enables a range of services and applications that generate immense value.
Ethereum is often described as “the foundation for our digital future” (Ethereum.org, 2022) and “the economic foundation for the metaverse” (Bankless, 2021). But what is Ethereum? Is it a platform? And why are people so convicted that Ethereum will be the foundation of our digital lives moving forward?
According to Ethereum Foundation, Ethereum is a “community-built technology behind the cryptocurrency ether (ETH) and thousands of applications you can use today” (Etherum.org, 2022). Ethereum enables a number of different services, such as accessible banking (through lending, borrowing, and saving services), a more private surveillance-free internet, a peer-to-peer network (transactions without intermediaries), and censorship-resistance (no one can stop your payments or prohibit your use of Ethereum services) (Ethereum.org, 2022). Ethereum further enables multiple marketplaces for digital art, coordination tools for countless internet-native and globally dispersed organizations, and over one million financial transactions every day (Ycharts, 2022).
Ethereum allows this range of services by being a programmable blockchain. In 2009, Bitcoin created the first blockchain, which was a non-programmable blockchain enabling peer-to-peer transfer of digital cash. Currently, Ethereum uses Proof of Work (PoW) which is a consensus mechanism invented by Bitcoin that allows distributed consensus, or agreement without centralized governing bodies. PoW is extremely energy intensive and requires network nodes (miners) to all agree on the state of transactions within a blockchain. A more scalable alternative is Proof of Stake (PoS), which requires people to function as network nodes by ‘staking’ their cryptocurrencies and acting as validators. Ethereum is currently transitioning to be a PoS blockchain, which will greatly reduce it’s environmental impact and also “provide scalability that is orders of magnitude greater than what is currently available with Ethereum” (Cryptopedia, 2021).
Ethereum, as the first programmable-blockchain, extends beyond just payments and is a “marketplace of financial services, games and apps that can’t steal your data or censor you” (Ethereum.org, 2022). Vitalik Buterin, the creator of Ethereum, wrote in the 2014 whitepaper, “What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create ‘contracts’ that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.” Ethereum is maintained through a decentralized governance process whereby anyone can process a Ethereum Improvement Proposal (EIP) which is then voted on and approved by members of the Ethereum community (ranging from core developers to network validator to application users). Ethereum exemplifies decentralized governance and community-ownership and operates as a user-owned platform.
Michael Cusumano, Sloan Professor at MIT, defines platforms as “foundation products or technologies that various firms can build upon to create new products and services or transactions” (MITSDM, 2019). He notes that the more innovations and transactions on a platform, the more valuable it becomes due to network effects. Ethereum creates immense value as a platform by providing the infrastructural foundation for innovations and transactions. While many platforms either function as a transaction platform or an innovation platform, Ethereum is unique in that it functions as both, similar to Apple, Google, and Microsoft (MITSDM, 2019). From the transaction perspective, Etherum has a native token (ETH) that is used for peer-to-peer and enterprise transactions. More importantly, however, from the product perspective Ethereum enables decentralized applications to be built and scaled. One of the reasons Ethereum has become widely successful is due to network effects. These networks effects have been created by both Ethereum’s first mover advantage, vibrant and active ecosystem, open-source standards, and interoperability. An important aspect of the Ethereum ecosystem is that digital goods created on Ethereum’s blockchain must remain on Ethereum’s blockchain. For example, an NFT minted on Ethereum’s blockchain must remain on Ethereum’s blockchain unless the underlying code is changed. This further reinforces Ethereum’s network effects as a programmable blockchain. Ethereum is also extremely expandable, and many of the current applications built on Ethereum were inconceivable during Ethereum’s conception 7 years ago.
Over the past few years, Ethereum has experienced immense growth. Below is a graph (adapted from BitInfoCharts, 2022) demonstrating the average number of Ethereum transactions per day since August 2015.
Overall, while Ethereum is often seen publicly for its valuable (and volatile) native token, it is ultimately a decentralized platform that enables thousands of applications and services.
References
Bankless. (2021, September 21). Defining the Metaverse. https://www.youtube.com/watch?v=EqQiPseP_P8
BitInfoCharts. (2022). Ethereum Transactions Chart. BitInfoCharts. https://bitinfocharts.com/comparison/ethereum-transactions.html
Buterin, V. (2022). Ethereum Whitepaper. Ethereum.Org. https://ethereum.org
Cryptopedia Staff. (2021, December 7). Ethereum 2.0: Ethereum Blockchain Scaling Solution. Gemini. https://www.gemini.com/cryptopedia/ethereum-2-0-proof-of-stake-pos-blockchain-serenity
Ethereum.org. (2022). Home. Ethereum.Org. https://ethereum.org
MITSDM. (2019, October 15). The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power. https://www.youtube.com/watch?v=Yo0ydXtVjGk
Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. 9. Ychart. (2022, March 5). Ethereum Transactions Per Day. https://ycharts.com/indicators/ethereum_transactions_per_day
Hello Maxwell! Thank you for this piece. I agree with you when you said that the transition toward PoS can significantly improve scalability. With the current PoW, I believe the potential of the network effect is not fully exploited because of congestion. Once the number of users and transactions gets large, it takes longer on average for transactions to get validated and the network effect between users can turn negative
I totally agree, Sebastiano! Thanks for your thoughtful reply. The PoW congestion definitely impedes network effects, as do high gas fees. I used to think the PoS transition would lower gas fees, but recently I’ve been reading about how that might not be the case – gas fees may remain despite the shift to Ethereum 2.0.
Great post, Max! Very well written and informative. I think this space is still young but greatly valuable and the use cases are tremendous.
Agreed! Thanks, Adela!
Thank you so much for sharing, Maxwell! It is so informative and I have learned a lot. I think what you mentioned about network effect of Ethereum is a great advantage to expand, but from what I have known that many of Alt coins are developed from ETH chain, is it possible that the value of ETH might get too attached to those altcoins and it may eventually harm the ecosystem it initially want to build? This post is so well-constructed, thank you!
This is a great point, Serrino! Many alts are built on Ethereum’s chain, and I think so much of the pricing is speculative. I think generally the Ethereum ecosystem itself won’t be too effected by alt coins and ‘pump and dumps,’ but I think these things definitely contribute to a negative reputation for Ethereum and crypto in general.
The thing I love most about Ethereum is that it’s value driven, not profit driven. The core developers and people building Ethereum genuinely are working towards a brighter future enabled by decentralized technology, not greater value capture. One of the reasons I chose not to expand on the ‘value capture’ aspect of Ethereum is because I think it all so speculative, and ultimately Ethereum is about enabling better systems, not more profits.
What a cool post – Ethereum would have never come to mind as a platform which is why this was a great post to read. One of the use cases I’ve been fascinated with is donations to nonprofits across borders through crypto and ETH. UNICEF Office of Innovation is in fact doing some amazing work on funding organizations through the ETH they received as a donation from the Ethereum Foundation. Your post did lead me to wonder about what work would have to be done to increase the absorption capacity/receptiveness of the users to realize the true network effects and scale of ETH.
Thank you for this thoughtful note, Snigdha! I think the UNICEF and Eth Foundation partnership is fascinating.
One crypto organization I’m involved with is Gitcoin (https://gitcoin.co/) and their mission is to fund digital public goods. They have an extremely innovative funding model called quadratic funding that incentives ‘the many over the few.’ Here is an article about quadratic funding: https://gitcoin.co/blog/gitcoin-grants-quadratic-funding-for-the-world/
In short, it works by matching donations to the most amount of people donating, rather than the person donating the most. So 100 people giving 1 dollar would be matched with more funding than 1 person giving 100 dollars. I definitely recommend checking out Gitcoin, and if this is of interest to you I’d be happy to connect you with someone who works on grants at Gitcoin!
Thanks for the post! Even though I’ve seen Ethereum pop up in the news a lot, I’ve never stopped to consider what has made it successful — I appreciate you describing it in further detail here. It sounds quite complex technologically — I’d love to learn more about why having a programmable blockchain is better than having a blockchain that simply integrates with other programs. That said, you’re point around programs and property not being transferrable to other domains seems like a neat property of Ethereum that will continue to drive its success.
Thanks for your kind words, Daniel!
One of the things that makes Ethereum so special and innovative is that it’s an open-source and permissionless programmable blockchain, meaning anyone can program / build anything.
There are blockchains focused on enterprise integrations (a great local example is Algorand), and there are definitely pros and cons to those sorts of integrations. Blockchains can also integrate with each other through ‘bridges’ but these bridges are often susceptible to attacks/hacks, and they are considered not the best idea generally.
I agree with your note about how non-transferability of assets on Ethereum will help drive its success. Almost all of the most successful NFT projects and DAOs are based on Ethereum’s blockchain, and this is further driving huge network effects.