What Are the Top 3 Things People Get Wrong About Ethereum?

Introduction

With so many cryptocurrencies to choose from, it’s easy to get lost in just what each of them really offers. Ethereum and it’s token, ether (ETH) have taken the cryptocurrency scene by storm since its launch in 2015, being the #2 token in value behind Bitcoin at the top spot. But how does Ethereum actually work? All cryptocurrencies are not created equal and Ethereum especially has a pretty unique case for itself.

What people get wrong about Ethereum, is the nature of its decentralization. It’s easy to assume that cryptocurrencies are just like Bitcoin, but they are not always as decentralized as someone may claim. Ethereum is actually more than just a currency, it’s an entire network structure that has a lot more functions than meets the eye. Finally, Ethereum is not a store of value like Bitcoin is.

1. ETH is Decentralized just like Bitcoin

While it is true that no central bank or authority issues Ethereum tokens, it may not be fair to say that Ethereum is fully decentralized. Surface level explanations make the claim that Ethereum is decentralized and it certainly has that appearance, but investor and podcast host, Brad Mills, has an analysis that proves otherwise. Mills’ analysis is quite lengthy and a lot to take in, so for now let’s just go with the layman’s version of it.

Mills’ strongest argument is that the Ethereum network is set up in such a way that it will recreate the Wall Street style financial structures on a blockchain. While Ethereum and other DeFi applications built on the network claim to offer governance opportunities, the truth is that tokens like Compound (COMP) usually have a distribution that looks like the graph below. Mills refers to it as a “LARP”. Despite the claim that such a thing has “tens of thousands of holders”, actually only around 100 people control 96% of the tokens, which is a very poor case for any sort of decentralized governance structure.

His strongest argument above is actually at the end of the article, but he offers some additional arguments that strengthen the point.

Ethereum founder, Vitalik Buterin still holds significant influence over the development of the network (such as with EIP-1559, a major monetary policy update for Ethereum). So do a handful of development and DeFi teams such as the Go Consensys, Ethereum team, Gitcoin team, and Uniswap.

What remains to be seen is Mills’ prediction about the Proof-of-Stake change to the Ethereum network. Mills predicts that once Ethereum switches to their Proof-of-Stake system, that this will further decrease decentralization efforts. The reason cited is that proof of stake systems tend to centralized power over time, and are just a replication of financial structures we already have driving out economies today.

Keep in mind that Ethereum’s level of decentralization is a point of contention between BTC maximalists and Ethereum supporters but at this point it’s fair to at say that ETH’s level of decentralization is different than Bitcoin.

2. ETH is Just a Currency For its Own Platform

In the world of cryptocurrency, a given cryptocurrency operates on a blockchain network. For example, Bitcoin has it’s own blockchain independent of other blockchains.

Ethereum is also a blockchain with its own cryptocurrency (ETH). However, Ethereum’s blockchain works differently than Bitcoin’s does in several ways.

Ethereum’s blockchain is more flexible, and it offers developers the opportunity to build apps on the network called dApps. You’ve probably heard of at least one of these in the form of Uniswap, but there are many others such as Axie Infinity, a blockchain-based video game.

Ownership of ETH is required to cover applicable fees that come with making use of the network. In this sense, Ethereum is simply a currency that gives monetary access to these dApps. Outside of use within Ethereum, ETH is not widely accepted as a currency.

3. ETH is a Store of Value

Ether (ETH) has been argued as a store of value, but this isn’t quite true. Arguably the main function of Ethereum is to run dApps.

ETH is required to interact with any and all dApps in the form of “gas”. This has since led to ether being dubbed “digital oil” rather than “digital gold”. If we are to carry the analogy further, no one would suggest that real-world “oil” is a store of value. Rather, oil is a commodity; a means to an end. This is the sort of framework I think ether fits better into, rather than being a store of value like its predecessor bitcoin.

Not being a store of value isn’t a knock against ETH or the Ethereum network, as much as it may sound like one. It just means ETH isn’t digital gold, it’s something much more flexible and perhaps even may offer more value to a given user, depending on their needs, skills, and what they’re comfortable having in their portfolio. It’s a very subjective cryptocurrency.

Conclusion

So what do people get wrong about Ethereum? That it’s decentralized, that it is more than a currency for its own platform, and that it is a store of value.

Ethereum isn’t decentralized just because ETH is not issued by a central authority. Decentralization is much more of a multi-faceted issue. Much of Ethereum’s activity is subject to the whims of a handful of influential people that may be outside of positions of legal authority, but still hold a huge sway over the markets.

Ether is still evolving as a currency, but I think we have enough information at hand to say it looks more like digital oil, than digital gold. Finally, Ethereum isn’t really a store of value because the network functions the way it does with or without price, and is determined more as a function of user utility rather than as digital gold.