What is Ethereum and Why Should I Care?
Ethereum is probably a term you’ve heard of, but if you’re like many people, you may be having a hard time wrapping your head around the concept. Here is something you need to know: The technology that underlies bitcoin, ethereum and other digital assets is the foundation to the next paradigm shift to our internet connected world of cloud computing.
It’s this giant swarm of internet technology buzzing with excitement and with “FOMO” (Fear Of Missing Out). Of course, everyone wants to be in the ground floor of future technology to own stock in the next Apple, Microsoft, Google, or Amazon.
Below are some links and information that may help you further understand this “blockchain” technology and keep up with the exciting news.
What is an Ethereum token?
As a business owner or IT professional, staying on the cutting edge of the latest digital trends is imperative. One rapidly growing trend I have been researching and studying are Ethereum tokens—digital assets that are being built with the Ethereum blockchain as their foundation, thus benefitting from Ethereum’s existing infrastructure. For those of you who may be new to the world of digital assets, you’ll find the following beginner’s guide a helpful tool in understanding Ethereum, Ethereum tokens, and the difference between the two.
Ethereum is a decentralized platform used to create smart contracts that represent digital assets called Ethereum tokens. This is similar to the App Store providing a platform for iOS apps with some apps issuing their own digital currencies that are used within the game or system. However, unlike Apple, with Ethereum there is no centralized entity deciding what gets added to the App Store. Anyone can create a token on top of Ethereum.
Ethereum tokens can represent anything—real objects, such as gold (Digix), or a native currency used to pay transaction fees for specific services or resources (Golem). In the future, tokens may even be used to represent stocks and bonds. The purpose of each token is determined completely by its intended use. Tokens can have a fixed supply, constant inflation rate, or even a supply determined by a sophisticated monetary policy. Tokens can be used for a wide range of functions, such as paying to access a network or for decentralized governance over an organization.
Tokens are usually issued to the public through a crowd sale, or initial coin offering (ICO). The token’s creators will issue the token to others usually in exchange for ether, but sometimes bitcoin or other digital currencies are also used. The recent increase in ICOs has completely changed project funding. Ideally, if you are building a decentralized application, you want the tokens to be owned by as many people as possible, but that is not necessary.
Several resources can take you through the process of creating a token and explain how they work. For example, Token Factory provides a simple user interface that allows you to create your own Ethereum token with custom parameters.
Since Ethereum tokens are just a specific type of smart contract included on the Ethereum blockchain, Ethereum tokens, like bitcoin and ether, are also tracked on the blockchain which is the public ledger of all transactions that have occurred.
Some of the largest Ethereum tokens by market cap are Augur’s REP and Golem’s GNT. Both of these developing projects have a combined market cap of about $450 million. To give you a better understanding of the vastly different functions an Ethereum token can have, we’ll briefly go over how each of them work.
Co-founded by Joey Krug and Jack Peterson, Augur is a decentralized prediction market which allows users to bet on the outcome of different events. It can also be used for hedging purposes. For example, if you own 1 bitcoin that is worth $2,000 and want to hedge that holding, you can bet that by a certain date the price of bitcoin will be below $2,000. If the price of bitcoin goes up, your holdings will be more valuable. However, if it goes down you will offset your losses through the prediction market. There is no centralized source that reports on the outcome of events. Though this decreases the risk of a corrupt reporter, it creates a need for a decentralized reporting source.
To fill this need, Augur has issued an Ethereum token called Reputation (REP). There is a fixed supply of 11 million REP tokens in existence, 80% of which were sold through a crowd sale raising $5.3 million. These tokens are used for reporting on the outcome of prediction market events. REP holders must report on the outcome of randomly selected events, providing the decentralized reporting pool needed to settle the outcome of Augur’s prediction markets. REP holders receive half of all transaction fees generated by prediction markets on the platform as compensation for this valuable service. The penalty for false reporting is a fine in REP, and if the majority of REP holders are dishonest then ultimately Augur’s credibility is damaged and the value of REP goes down. As a result, honesty is incentivized.
Golem , headed by Julian Zawistowski, allows people to rent out their spare computing power. The idea is that by creating a worldwide supercomputer, computing power will become less costly and more accessible to everyone.
Golem’s Ethereum token, Golem Network Token (GNT), has a fixed supply of 1 billion GNT in existence, 82% of which were sold through a crowd sale raising $8.6 million. These tokens are required for interacting with the Golem network and is the currency used as payment when renting computing power. The limited supply of tokens for accessing this network drives up the value of GNT as more people want to use Golem. Theoretically, this aligns the incentives of people holding GNT with those using it.
You may have heard about ERC20 tokens. The initial ERC20 page “describes standard functions a token contract can implement.” ERC20 is a standard interface for tokens and are simply a subset of Ethereum tokens. In order to be fully ERC20 compliant a developer must include a specific set of functions into their smart contract that at a high level will allow it to perform the following actions:
- get the total token supply
- get the account balance
- transfer the token
- approve spending the token
ERC20 allows for seamless interaction with other smart contracts and decentralized applications on the Ethereum blockchain. Tokens that have some but not all of the standard functions are considered to be partially ERC20 compliant and can still be easy for external parties to interact with depending upon which functions are missing.
Many Ethereum tokens have been created and many more are up-and-coming. Below are some useful links to help you better understand Ethereum tokens as well as stay updated on the most recent news:
Understanding Ethereum tokens
The difference between App Coins and Protocol Tokens
How to Raise Money on a Blockchain with a Token
Introducing the Blockchain Token Securities Law Framework
Tokens, Tokens and More Tokens
The perfect token sale structure
Keeping up with Ethereum tokens
The best path to continued success in any business is to be on top of the trends. As you know, that is most true in the digital world. We at IBIS are motivated by your success, and helping you stay up-to-date is our top priority. For any questions, feedback or comments, please feel free to contact us. We are here to help you solve problems and find new ways to improve your business through technology.
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