This is part 11 of a series of short cryptocurrency “explain it like I’m five” posts. If you’re just joining us, start here: Crypto ELI5 Part 1: What is a blockchain?
This series of blog posts is meant for the absolute beginner in cryptocurrency. They are also meant to be concise and easy to understand. If you’re interested in learning about crypto, some of the history of crypto, and how to get started with using crypto, follow along! We’ll be adding a new post daily and each post will build on the one previous to it.
Ethereum, a second generation cryptocurrency
A few years after the debut of Bitcoin, Ethereum came along with a whole new trick up its sleeve, and launched the second generation of cryptocurrencies. Ethereum wasn’t just about storing value, it was about tying functionality to that value. In Computerland all functionality is expressed in the form of code, and Ethereum is no different. While Bitcoin simply stores a number, Ethereum also stores code in the form of smart contracts. Why is that a good thing? Because it makes money smarter.
Let’s imagine you own a song that everybody wants to hear. Using a smart contract tied to that song, you can decide you want to receive a certain amount of money every time the song is played. Since the contract exists in the form of code, and since the song is stored digitally and is tied to that code, the smart contract can automatically be executed any time the song is played. And since the smart contract is also tied to your crypto wallet, every time the song plays you get paid. Smart contracts are kind of revolutionary.
A few more years passed as people stared on in wonder. And then slowly the problems began to emerge. The biggest problem with Bitcoin is how much energy it consumes for just a single transaction. There have been some attempts at improving this, and if all you want to do is buy and hold for the long run, it’s somewhat manageable. But even at current usage levels, Bitcoin consumes the same amount of electricity as Venezuela. There’s no way it can scale to the level of transaction processing that would be required if billions of smart contracts were executing every day all over the world. Historically, Ethereum has been almost as bad, but that is now changing with the introduction of proof of stake.
Check back in tomorrow for Crypto ELI5 Part 12: What is proof-of-stake?
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