All About Ethereum, The New Cryptocurrency King

Cryptocurrencies surged back into the zeitgeist after the price of Ether (Ethereum's cryptocurrency) rose to more than $400 at its peak, a 5,000% increase since the start of the year. The wealth created from this burgeoning industry is hard to comprehend, especially when it’s so difficult to see where the value of these currencies comes from. Here, we'll take a brief but deep dive into Ethereum, the heavyweight challenger to reigning champ Bitcoin.

What Is Ethereum?

Although the name may suggest otherwise, Ethereum did not emerge out of thin air. It uses similar blockchain technology to Bitcoin, but its platform is Turing-complete, which is why it's also called a "programmable blockchain." This means that much more advanced functionality and applications can be developed on top of it, including other cryptocurrencies.

Bitcoin, on the other hand, has only one function, which is to facilitate peer-to-peer transactions as a digital currency. Although Bitcoin was the first to harness the power of blockchain technology, its limited scope in terms of function and purpose has created scaling issues for the eight-year-old currency.

Not All Blockchains are Created Equal

Smart Contracts and the Ethereum Virtual Machine are core features to the Ethereum blockchain--features that, together, allow the Ethereum network to be more than just a digital currency payment system. Smart Contracts are self-executing contracts written in code.

For example, let’s say I make a $100 bet with Bob that each Ether will be worth $500 USD by the end of this month, and we both write the terms up in a Smart Contract. This Smart Contract is now on the public ledger and therefore cannot be meddled with or adjusted without breaking the underlying code of the program. Now let’s assume it’s July, and Ethereum is still under $500 USD. With a normal contract or a simple handshake bet, I can say, “Oh, I was just kidding,” or “I don’t actually have the money.” Bob would then have to sue me in the court of law for his $100. With a Smart Contract, the terms of the deal self-execute, or in other words, the terms of the deal are automated as programmed per the original code of the contract.

Although other blockchain technologies can execute Smart Contracts, Ethereum has this feature baked into its payment system, allowing instantaneous transfers of value across a decentralized global market with zero downtime and no middlemen--at least in theory.

Back in the real world, ETH transactions have already been slowed down significantly at the time of an "Initial Coin Offering" (ICO), which gained its name from its resemblance to an Initial Public Offering (IPO) of stocks in a company. An ICO is when companies offer their own tokens/coins that are built on top of the Ethereum platform, as a way to obtain investment to fund the development of their technologies. When high interest is expressed for an ICO and too many people try to buy Ether, the network has shown its limits. However, the group of developers behind Ethereum have already started working on some mid- and long-term scalability fixes.

Despite some hurdles, Ethereum has already had a profound real-world effect. Using the Ethereum blockchain, the United Nations successfully authenticated food aid vouchers for 10,000 Syrian refugees and now plans to expand the project to include 100,000 refugees by August.

The World’s Universal Computer

The Ethereum Virtual Machine (EVM) is a universal computer that gives developers the ability to operate and deploy nearly any type of application over the Ethereum network. The EVM decentralizes program operations in a transparent and secure blockchain network.

Imagine the internet as a series of nodes connected in the structure of a web. In this scenario, a server is a central node that many other smaller nodes (say, desktop PCs) connect to. Such a topology creates fail points that, if attacked, can take out large swathes of the internet, as was the case in the Amazon AWS outage earlier this year. By decentralizing and distributing information in identical, cryptographically secured blocks across its entire network, Ethereum eliminates those vulnerable fail points like the servers composing the backbone of our internet. For this reason, many are calling Ethereum the Web 3.0.

GPU Mining is Back, For Now…

The bitcoin market underwent profound changes in the four years since we first wrote about GPU mining. The average user can no longer use their GPUs to mine for bitcoins because the process has become far too intensive. Instead, mining is now controlled by companies predominantly based in China, where electricity is far cheaper than, for example, in the United States.

However, you may have noticed that AMD Radeon RX-series cards are sold out everywhere you look, or available from scalpers for $500 or more. Indeed, just like in the good old days of mining, graphics cards are flying off the shelves to satisfy the demands and needs of amateur and professional miners alike. A good mining rig usually consists of a barebones motherboard, an entry-level Intel processor (you don’t need a fast CPU to mine hashes), and 5-10 GPUs. On eBay, we've spotted rigs going for more than $3,000, although you can usually build your own for around $2,500.

In short, the market’s demand for GPUs cannot be satisfied, and that’s thanks to Ether’s skyrocketing value. GPU mining is once again profitable, even considering the cost of electricity. Despite the dearth of AMD cards, you can still get into the game with Nvidia GPUs, which are able to compute blockchain hashes almost efficiently as the Graphics Core Next architecture.

ASIC-Resistant Mining

So, why can miners use GPUs to mine Ether effectively, but not bitcoin? It all has to do with the the consensus algorithm designed for Ethereum. The Ethereum Network uses a custom designed, ASIC-resistant, proof-of-work algorithm (PoW) called Ethash. With Ethash, miners receive blockchain rewards (in other words, Ether) by computing randomly selected transactions. According to the Ethereum whitepaper, this design has two important outcomes:

First, Ethereum contracts can include any kind of computation, so an Ethereum ASIC would essentially be an ASIC for general computation - ie. a better CPU. Second, mining requires access to the entire blockchain, forcing miners to store the entire blockchain and at least be capable of verifying every transaction. This removes the need for centralized mining pools.

Ethereum ASICs are possible, and there may be economic incentives for such a chip in the future. However, even at Ether’s current value, the economic climate for such an ASIC is far from ideal. Even if a company were to make the necessary R&D investment to develop an Ethereum ASIC, competing players could “poison the well” with Smart Contracts specifically coded to thwart a successful ASIC, in what the creators are calling a “human solution” to a technical problem.  

Right now, Ethereum runs a PoW algorithm to reward miners, but the development team has promised to move to a Proof of Stake (PoS) algorithm in the future. PoS rewards miners for ownership of coin via a percentage of transaction fees for operating the network. In this instance, users are not mining coin, but forging them from those that already “exist” on the network. PoW rewards miners with coin by solving a complex computational puzzle, which we all know as a blockchain. PoW systems are incredibly inefficient and require substantial amounts of power. Many in the cryptocoin communities believe that PoS is a far more sustainable and environmentally friendly way of rewarding investors and owners.

With that in mind, we wouldn’t recommend running out and plopping down a few grand on a new mining rig just yet, at least not as a solid long-term investment. Although Ether mining is profitable right now, the market is not only volatile, but there is also a distinct possibility that users won’t be able to mine Ether at all in the near future. Once the switch to a PoS algorithm occurs, miners will be left out in the cold with obsolete equipment. Those in on the game now should continue mining while there's still a vast opportunity to do so, but be wary of investing in any sort of specialized rig with money you plan to earn back from mining.

The good news is that even if Ethereum switches to PoS, there are plenty of other cryptocurrencies you can mine. The manufacturers out there are fully aware of the supply chain snafu caused by cryptocoin miners. ASRock and Biostar already have motherboards on the market that are designed specifically for mining. Both motherboards are sold out at the time of this writing--but then again, that may be a sign of a future filled with far more affordable off-the-shelf mining hardware.

A Volatile Future Ahead

The potential for the Ethereum network is exciting--not just for computer hardware enthusiasts, but for average consumers, as well. The implications of the Etherum Virtual Machine and the future promise of Web 3.0 could bring about an internet that is both more fair and secure. Securely distributing the network and the information it carries across all its connected nodes (that is, all web-connected devices) would make the need for net neutrality a thing of the past.

Entrepreneurs, enthusiasts, and researchers are only now beginning to fully understand and implement blockchain technology. There are already hundreds of cryptocurrencies out there, and competition in this sector continues to heat up. Ethereum might be on top today, but a competing cryptocurrency could just as easily topple it tomorrow. A recent "flash crash” saw Ethereum free-fall from a price of $328 to below $13, although it has since recovered, stabilizing at at around $250 (at press time). This “flash crash” event is just one of many examples that show not only Ethereum’s volatility, but also the uncertainty facing the cryptocurrency industry as a whole. We’ll be following this story as it develops, especially when it affects the computer hardware industry as a whole, as it did earlier this week when the price of Nvidia GeForce GTX 1070 graphics cards soared to a price of over $500 retail.

Further Reading

If this article piqued your interest, here is a selection of links for further reading:

All About Bitcoin Mining: Road To Riches Or Fool's Gold?

As Prices Soar, Graphics Card Manufacturers Appeal To Cryptocurrency Miners

GTX 1070 Prices Soar Alongside The 'Ethereum' Cryptocurrency

Ethereum: The World Computer

The Official History of Ethereum

The Ethereum Whitepaper