Crypto Dip-Toe – Part 6: Into the Ether

“There is nothing more helpless and irresponsible than a man in the depths of an ether binge.” -Hunter S. Thompson (in Fear and Loathing in Las Vegas)

I found it amusing to imagine myself quoting the above line to a bunch of high school kids or young techies and listening to their reactions:

Who is this Hunter Thompson guy, and why does he hate crypto so much?

Or…

Amen to that, dude! I binged supes hard on Ether once – ended up wasting all of my tokens on worthless NFTs and lost everything. You’ve gotta be careful with that stuff!

Ether Ain’t What It Used To Be

Ethereum and its cryptocurrency, Ether (ETH – or “eeth” for short), may seem like just another “crypto thing” we hear about in the news. But, if you aren’t already aware, you’ll soon learn why these could become an integral part of our digital future.  Perhaps unsurprisingly, part of the use case is in digital payments/banking and money transfers – topics often surround Bitcoin. More importantly, however, Ethereum is a platform on which to develop new solutions, aka “the world’s first programmable blockchain.”

As we now know from Parts 1-5 of this series, “blockchain” is simply this new-ish protocol that can provide us with a secure, decentralized way to verify, trust, and track interactions, transactions, and other information. We’ve also learned that Bitcoin is one cryptocurrency constructed on one specific blockchain. Ethereum, in contrast, is a blockchain on which many digital currencies and other solutions can be created, and now we’re going to study it in more detail. Here we go!

 

So What?

You can imagine that many people asked the same question when the internet first became available. And it’s a very fair question, as the subject is all, well, very Ethereal 😊. Just a few decades ago, it would’ve been virtually impossible to comprehend the incredible amount of knowledge the internet would eventually put at our fingertips – how it would transform our shopping habits, alter our social lives (for better or worse), create/destroy incredible wealth, and even allow control of physical items from our yet-to-be-created smartphones. And, even if all of that internet technology could’ve been developed overnight, the inherent human resistance to change and associated learning curves still would have meant years or decades for implementation and acceptance. I try to give similar respect to the blockchain because we simply don’t know how impactful it can or will be. But right now, Ethereum is the “top enterprise blockchain platform,” serving as the backbone of next-gen technology solutions, so it’s worth learning the basics.

For added context, here are several current examples of Ethereum use cases:

  • Decentralized Finance (Defi): Financial services and products, like lending, trading, betting, payments, crowdfunding, and insurance.
  • Decentralized Autonomous Organizations (DAOs): a group of people (who may not know one another!) forming a company on the blockchain, pooling funds for a cause, and voting on initiatives; the core is all based on a code, so it doesn’t require trust between individuals who have never met in person.
  • Web3: the next generation of the internet, where personal data isn’t monetized, and control/servers are decentralized. I wonder about the implications for current tech solutions, like Google Search (all ad monetization) or web-servers (i.e., the cloud)…
  • Non-Fungible Tokens (NFTs): a way to represent unique ownership, which you may have heard of related to art and collectibles; the concept also applies to items like domain names, event tickets, documents, etc.

Of course, none of these are without their challenges, but it’s clear that blockchain has the potential to infiltrate many aspects of our lives, and – at least currently – Ethereum is part of that story.

Get Smart

At the core of Ethereum is the “smart contract.” The smart contract is conceptually like any other contract, but the Ethereum network automatically enforces it. Thus, there’s no human intervention to review the terms of the contract and decide whether a given transaction abides by the terms or not. It’s very black-and-white. If the conditions of a given contract are met, the transaction is executed.

More simply, a smart contract is just code for something that can be accomplished on the Ethereum blockchain. I think the “digital vending machine” example in this article drives the point home in a way that’s easy to comprehend (as we’re hopefully all familiar with vending machines). You put the money into the machine, select a snack or beverage by pressing a button, and receive your item. It’s a simple “if, then” function (or a basic, automated contract). And, aside from the infamous situation where your bag of chips gets stuck instead of falling to where you can reach them, it works every time with no human intervention.

Now expand that vending-machine idea to the virtual realm, and that very predictable, pre-coded, trustworthy interaction can apply to endless applications. One party fulfills its end of a smart contract, and the function executes automatically and as expected – no human disruption; no cashier; no 60-days-til-closing to get your house. As the article goes on to say, “like how a vending machine removes the need for a vendor employee, smart contracts can replace intermediaries in many industries.”

It’s a Machine!

As covered by CoinDesk, the rules of smart contracts are executed by the Ethereum Virtual Machine (EVM); it’s what runs the code and ensures smart contracts (transactions) are carried out as intended. While the “machine” can be thought of as one centralized system that the code and transactions run through (because that’s easier for our brains to imagine), we know by now that it inherently MUST NOT be centralized, as it wouldn’t work in the world of crypto/distributed-ledger technology (DLT).

Instead, what’s really happening is that the nodes (computers) on the network run the smart contract transaction through their local version of the machine (EVM), and they have to agree that the code/contract executes correctly; that’s the “consensus mechanism,” just like we learned with Bitcoin – widespread agreement for security and trust. Because if there WERE a big central machine, it could be more easily controlled and manipulated, which would undermine the whole concept of DLT and blockchain.

Digital Oil?

To build applications, users need to adopt the official (crypto) currency of the Ethereum platform, Ether (ETH). When transactions occur, fees (known as “gas fees”) are charged; at times of spiking traffic, the gas fees have gotten very high – sort of like how Uber and Lyft rides can get prohibitively expensive during rush hour or in an NYC rainstorm. But that phenomenon should normalize as processing/transaction capacity expands in the future – IF all goes as planned. Now, don’t ask me whether that’s a big “IF” or a small “if,” but anecdotally speaking, there seem to be a lot of solutions in the works to address capacity (and energy-use) concerns, so I do think that problem will get sorted out.

I laughed when I read that Ether is often described as “digital oil.” I get the idea: it’s like the “gas” or energy that powers the whole Ethereum ecosystem. But, even if it’s a good analogy, it still made me laugh. That comparison to oil or an industrial metal is why some believe ETH is and/or will be valuable.

Unlike Bitcoin, there can technically be an unlimited amount of ETH produced over time (though recently capped at 18 million coins per year). However, there is also a belief that a) there is support for continuing to reduce the issuance rate (disinflationary), and b) demand could outpace supply for a variety of reasons (deflationary). Those combinations could alleviate concerns of inflationary fears (i.e., devaluing ETH). Some also argue that continued issuance can help balance some degree of future demand and thus reduce price volatility.

Only Predict What You Can Control

Maybe Gen Z or Gen Alpha’s version of Fear and Loathing will turn out to be a movie about a kid on a really wild crypto binge, instead of a drug-fueled trip to the desert. But – as with all of this crypto stuff – nobody actually knows what’s coming or going. And that can best be summed up in one word: speculation. Caution is warranted.

My prediction? Next time we’ll round out our cryptocurrency discussion by looking at Stablecoins and what recently went awry with one approach to the future of money.

Until next time, this is the end of alt.Blend.

Thanks for reading,

Steve

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About the Author

Steven Tresnan, CAIA®, CFP®

Private Wealth Advisor

Steve is a Certified Financial Planner as well as a Chartered Alternative Investment Analyst®. He is also an Accredited Investment Fiduciary, which helps him offer guidance to clients with fiduciary responsibilities, such as board members of trusts, foundations, and endowments. Steve earned a Bachelor of Science degree in Industrial Engineering from Penn State University.

Steve serves on the board and finance committee of New Music USA – a national nonprofit devoted to the development and appreciation of new music in the U.S. – and volunteers as the Treasurer for Campus Fun & Learn, a child development center on the campus of Rockland Community College in New York.