People often ask me, “If bitcoin is so great, why do we need all these other coins like ether?”
Or, “Why do 2,000 different cryptoassets even exist? Shouldn’t we all just use the best one?”
It’s a logical question.
We’re taught to think about bitcoin and other cryptoassets as currencies. Viewed that way, having multiples makes no sense. Why do we need multiple digital currencies if there’s only one internet?
The answer is that the term cryptocurrency is misleading.
Traditional currencies like the dollar, the euro and the yen all do essentially the same thing; they are payment tools in different countries or regions. But cryptoassets like bitcoin and ether actually do very different things. Understanding those differences is the key to understanding which ones will be important in the future.
Bitcoin vs. Ether
Bitcoin was the first and is today the most valuable cryptoasset in the world. It was created in 2009 when its pseudonymous inventor, Satoshi Nakamoto, figured out how to do a seemingly simple thing: send money over the internet safely without using a bank.
The software that allows this to happen is called the “Bitcoin blockchain.” As the first blockchain ever created, the software underlying bitcoin is pretty basic. Essentially all you can do with it is send, receive, and store bitcoin.
Ether, by contrast, was created in 2015. The software that underlies ether is called the “Ethereum blockchain.” It’s much more flexible than the Bitcoin blockchain. In fact, the Ethereum blockchain is “Turing-complete,” meaning you can program it to do anything. If Bitcoin is a beeper, Ethereum is a smart phone.
It’s easy to imagine why Ethereum’s flexibility is a big deal. If you can program money, you can replace many of the things that the traditional financial services industry charges us huge fees for.
What Could Ethereum Do? Here’s One Example
Before I joined the crypto industry, I was the CEO of a business called ETF.com. We didn’t always have that URL, however; we bought it from a squatter for quite a bit of money.
When we bought it, we didn’t trust the squatter: We weren’t going to wire him money before he sent us the URL. Similarly, the squatter didn’t trust us: He wasn’t going to send us the URL before he got his money.
To facilitate the transaction, we hired a lawyer to sit in the middle and act as an escrow agent. We wired our payment to the lawyer, the squatter sent him the URL, and the lawyer crossed the transaction. For this service, he charged us something like $2,000.
Today, rather than hiring the lawyer, we could write a small program for the Ethereum blockchain. The program would say: When Matt uploads the money (in ether) and the squatter uploads the URL, cross the transaction. We would save $2,000! Multiply that by a hundred different simple financial services and you can see why ether is potentially a big deal.
Does That Mean Ether Is Better Than Bitcoin? No.
Does that mean ether is “better” than bitcoin?
From a software security perspective, Bitcoin’s limited functionality “limits the attack surface” for cyber attacks. As a software that handles money, security is hugely important, and Bitcoin’s simplicity makes it super secure.
Moreover, from an ease of use perspective, having only “send”, “receive”, and “store” as your options makes it easier to avoid human error.
As such, bitcoin’s underlying software is optimized to be extremely secure and easy-to-use: Perfect for bitcoin’s primary use case as a kind of “digital gold.”
By contrast, ether’s underlying software is more flexible, which is why people talk about it disrupting the broader financial industry. It’s not as good as Bitcoin at storing value, but it’s way better at replacing overpaid lawyers and investment bankers.
Other leading cryptoassets are optimized for other use cases. XRP, for instance, is optimized for speed, and is designed to replace traditional international payment systems. Monero is optimized for privacy, and is optimized to complete with private/offshore banking solutions. And so on.
Does this mean we need 2,000 different cryptoassets? Of course not. Most of them are worthless and will trade to zero.
But my guess is that a handful of them will find major addressable markets and become quite valuable in the future.
PS: Crypto experts will undoubtedly point out that people are working to expand bitcoin’s core functionality using off-chain enhancements, such as the Lightning network. It’s true, and that work is very interesting. I’ll address the idea of off-chain enhancements to various blockchains in a later column.