Ethereum 101 & How It Could Top Bitcoin in Cryptocurrency

What's up, everyone. This is Alex Lieberman, Co-Founder and Executive Chairman of Morning Brew. Welcome back to Founder's Journal, my personal audio diary where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. Today, I'm talking about Ethereum. I'm talking about what Ethereum is and why it's important for every modern business leader to understand it at a basic level. Let's hop into it. 

2017 in the East Village of Manhattan. That is when I first became aware of Ethereum. I lived in a five bedroom for basically the first five years out of college, and one of my roommates was a few years older than me, living with us, and he worked in emerging technology for PWC. And so his work required him to go deep into the world of crypto. At the time, in 2017, I remember him saying that he owned Bitcoin, he owned Ethereum, and he also owned Litecoin, but I had no idea why or what any of that actually meant. I hadn't even done research into Bitcoin at that point, so I just knew that these were cryptocurrencies. Around this time, I started doing some research into Bitcoin because it was definitely starting to hit an acceleration of hype, like whether you are on Twitter or watching the news, you were just starting to see more chatter happen about crypto and specifically Bitcoin.

But I didn't know anything else about the other coins, like Ethereum, and I just assumed that everything was secondary to Bitcoin, and crypto was a winner-take-all space where you have a bunch of these different coins and they all serve the same purpose and one would win, and because Bitcoin was the one being talked about, Bitcoin would be the one that won. Like, that was my juvenile take because I didn't know a lot about crypto at the time. And that was basically my perception from 2018 to 2021, so I didn't do much to dig into the space other than learn more about Bitcoin. I really stayed on the periphery of crypto and watched prices just go absolutely insane for a few years.

But then recently, I would say in the last three months, I started seeing way more about Ethereum relative to 2017, when, let's say, the chatter was 90% Bitcoin and 10% of Ethereum...it started feeling closer to 50% Bitcoin at 50% of Ethereum. And I found that fascinating. And this led me down a rabbit hole of reading, watching, and listening basically to everything I could get my hands on about Ethereum and understanding the nuances of this blockchain and cryptocurrency versus everything else out there. Before we dive into Ethereum, I want you to understand why it's important for you to understand this. Crypto is still super early in its life cycle, and Ethereum specifically is 41% of the market cap of Bitcoin, but there are certain aspects of Ethereum that I believe make it un-ignorable for any business professional.

At the end of the day, I believe that trends become important to study when three things happen and all three of those things are happening to Ethereum. The first is a flow of capital, the second is a flow of talent, and the third is new applications or products that are 10 X better than what's out there. So in 2021 alone, crypto investment is already at $17 billion, which is greater than the sum of 2010, 2011, all the way up to 2020, all of the previous years. There's a ton of big tech talent engineers that used to work at Facebook, Google, Amazon, these giants in the tech industry that are now flowing to working somewhere in crypto, especially in Ethereum, and there have been use cases of crypto that I've seen that could offer solutions to problems that a pre-crypto world simply wouldn't that's for all of those reasons, flow of capital flow of talent and 10 X applications.

It got me motivated to learn more than in 2017 when I just brushed aside Ethereum as a second best option to Bitcoin. Now I want to walk you through the most important fundamentals of Ethereum. So you have a good grasp about it, and you can have a conversation about it. The best way to understand what Ethereum is, is to understand why it was created. Ethereum was first imagined in 2013 when Vitalik Buterin, who was 19 at the time, he published a white paper, similar to a white paper that was published by Satoshi Nakamoto regarding Bitcoin, I believe in 2009. And the white paper for Ethereum basically described this new programming platform that would draw inspiration from Bitcoin's use of blockchain technology, but it would allow for far more use cases than Bitcoin, which had been developed four years earlier.

Here's how I would think about it. If Bitcoin was imagined as a digital version of gold, Ethereum was imagined as an evolved version of Amazon Web Services or AWS where an entire economy of new applications and products could be built on top of Ethereum. How I visualize it is almost like, say there was an entirely new city built. Ethereum is the pipes, the plumbing, the foundation of that city for buildings to be built on top of. The thought behind Bitcoin was, is Bitcoin would be the currency used to exchange value and store value in that new city, but the thought around Ethereum is it could literally be the foundation for an entirely new city, an entirely new economy.

And if that analogy doesn't make sense, you should check out the Founder's Journal episode I did on AWS, where I break down how that business basically acts as electricity for today's internet, because I think it'll help you understand the comparison that I'm making, now I'll include that in the show notes. But just assume the difference between the two is Bitcoin was imagined for a very specific narrow use case of being a currency and being a store of value to preserve your wealth, and the concept of Ethereum is to be a blockchain based foundation that is meant for millions of programmers to build millions of applications on top of where the use cases are endless.

Blockchain

Bitcoin is very constrained in its use, Ethereum is very abundant in its use. Now, this episode isn't meant to go deep into what blockchain technology is—I could do 10 episodes on that. But just as a refresher, a blockchain is a distributed ledger, which is just a fancy way of saying that a history of transactions is being kept, and no one party is in charge or solely responsible for saying what is true or what the transactions were. Truth is determined by many parties in a decentralized fashion versus one party in a centralized fashion. So just a quick example to reiterate what a blockchain is. At its simplest form, a blockchain is like Google Docs.

If you use Google Docs and you know that a Google Doc is shared by a group of people where no one is locked from the Google Doc, everyone can see the changes that were made and who made those changes in real time, and no one party controls access to the Google Doc. It's not like me having an Excel Sheet on my computer and if other people wanted to see the changes made or wanted to see what the information in it, I would have to send it to them over email, a Google Doc is shared by everyone and no one person has full say over what is written in the Google Doc. And so in practice, a blockchain allows for people to exchange value, whether it be money services or a product, without trusting a single party with their information or their money.

So today, when I say one party, what does that mean? Well, that could look like a bank, it could look like the U.S. government, it could look like Facebook, Amazon, Twitter, any of the big tech intermediaries. So bring it back to Ethereum. Vitalik Buterin's bet was that in the same way a financial asset like Bitcoin could benefit from decentralization, many other types of businesses and agreements could benefit from getting rid of the middleman and creating a transparent record for all to see, from the insurance industry, to the gaming industry, to lending, to digital art. Now, before I talk about a few of, I would say the most popular use cases of Ethereum today, I want to discuss a few concepts that you need to understand beyond it just being a programmable blockchain, to actually understand what Ethereum is and what makes it different.

Smart Contracts

And I would say the most fundamental concept is this idea of smart contracts. If you ever hear the phrase smart contracts used, you can assume that Ethereum is being talked about. You can't understand Ethereum without smart contracts, and you can't understand smart contracts without a Ethereum. So, smart contracts really is the feature that underpins Ethereum. It is the defining characteristic that transforms Ethereum from a singular currency that functions like gold, AKA Bitcoin, to a programmable blockchain or technology that hundreds of companies can build on top of. And so, as the name implies, a smart contract is literally just a contract that is memorialized with code.

So there's no more handshake agreements, there's no more broker making sure that each party is doing the right thing, smart contracts are non-alterable agreements between parties written in code. And a smart contract could range from a contract that releases money for your cousin when, each year when their birthday happens to a life insurance policy, where in the event of someone's passing a death certificate could be an input into that smart contract, and the output is a payment that gets released to the family of the deceased as soon as the death certificate is provided. The best, most simple way to understand a smart contract is thinking about it like a vending machine.

If you put money into a vending machine and then you click a certain button or certain combination of buttons, the vending machine will then output a snack or a drink. That is the logic that is programmed into the vending machine. Smart contracts work in the same way, where certain inputs lead to certain outputs, but because it's done with code, you don't actually need a person or a company to execute the agreement. So the final idea to solidify this is, if before, me sending money to you over Venmo involved Venmo, my bank talking to Venmo, and your bank talking to Venmo, with smart contracts, that agreement is just dictated in code and as soon as I send the money, the smart contract releases that money to you.

Ether

Smart contracts are the foundational feature of Ethereum. Now, once you get smart contracts, you need to understand Ether. Ether in its simplest form is currency. And it is the currency that powers the Ethereum blockchain. Here's how you think about it. If you want to go to a deli in the U.S. You pay with the U.S. Dollar. If you want to buy a charger on Amazon, you pay with the U.S. Dollar. If Ethereum is hypothesized as this new economy with businesses built on top of it, Ether is the equivalent of the U.S. Dollar to be able to transact in this new economy. Now it depends on what you think about Ethereum and the future of it, but there are basically two main ways you can think about Ether.

You could think about it simply, as a currency where if you want to be able to interact and exchange value in any business that's built on top of Ethereum, you need Ether. If you believe that a theorem is a future digital economy, that it really is going to act as the bedrock for so many businesses, Ether is almost stock, it's almost stock in Apple. You can buy Ether to take a bet on the future of Ethereum, because if you believe in the growth of the Ethereum ecosystem, then you believe more businesses are going to be built on top of this programmable blockchain, which means there'll be more demand for the currency that powers it since more people will be using more applications and interacting with more businesses that are built on top of this foundation.

dApps

So if Ethereum is a new economy that has tons of use cases because of smart contracts, Ether is the currency that allows you to be a participant in this economy. Now, I mentioned that, you know, tons of engineers, entrepreneurs, investors, they believe that a theory is this foundation for a new internet in which businesses can be built on top of blockchain technology. Well, there's actually a name for these new businesses that can be built on top of Ethereum, and that name is dApp or a decentralized app. At its simplest form, a dApp shows you the beauty of a theory of Ethereum being a decentralized open source platform. All that means is that everyone has been given a canvas to build their product.

The canvas is Ethereum, and they know that when they build their product, their business, their application can operate on top of this shared blockchain that Ethereum is. And you can think of a dApp like an app on your iPhone that you get through the App Store. The interaction with it is very similar, but you just know that the backend of this is built on smart contracts, as I described, and in a decentralized manner, because it's built on the Ethereum blockchain. And just like apps on an App Store dApps take many forms from games to trading platforms to places to buy art. And just like the app store on an iPhone, you can check out depths, you can look up the thousands of dApps that have been built already and thousands more that are going to be built in the future, you can literally just go to dapp.com, dapp.com, and it has this full catalog of all of the dApps that are ordered by category and popularity.

Okay, let's take a breather. So now, you know what Ethereum is, you know, what makes it different from Bitcoin and, you know, the properties that make it unique, like dApps. So let's now talk about some of the categories of dApps that have become popular in the Ethereum ecosystem, so said differently, there are all these applications being built on top of Ethereum, which is this new economy that sits on top of a blockchain. 

DeFi

There are certain categories that have become the most popular, let's call it categories of business, or the most popular categories of products that people are building decentralized apps or dApps around. The first one is called DeFi and DeFi stands for decentralized finance.

It is considered to be a new alternative to the current financial system. Simply put the current world of finance is defined by middlemen. You go to a bank to borrow money. You trade on a centralized exchange like NASDAQ or New York stock exchange. DeFi is all about taking out the middleman. It's all about increasing transparency and it's about giving users back their data. And this ranges from payments to lending to borrowing to investing. But honestly, I think the best way to understand DeFi at least how I've tried to understand it, is understand what problems exist with financial services today, and how can defy actually 10 X those problems.

How can it make the solution 10 X better? So there's a few examples, but one example is in lending. So, basically, as it works with the banking system right now is you have Chase Bank of America, Wells Fargo. When you put money in your checking account, the bank is basically borrowing the money that you've lent them and going out and lending it to other people, and you're getting basically paid 0.01% for that. So, just running the calculation quickly, for every hundred dollars that you put in your bank account, you're getting a penny of interest. It's nothing. And so because of the efficiency of decentralized lending platforms, because things are programmed in code rather than having middlemen, actual people that have to operate the borrowing and lending of these platforms, you don't have the costs of a traditional bank.

And so DeFi lending platforms can offer up to 3% interest on the money that you deposit, so literally, like, I don't know the math there, but like 3000 times the interest you are paid by a traditional bank, simply because by having contracts coded, rather than having people manage those agreements, the costs are way lower and platforms can offer way more in interest. And so if you want to go deeper into DeFi, it is a bottomless pit, but it is a really important category in the Ethereum ecosystem. You should check out CoinGecko, which wrote a great eBook called How to DeFi, and then you should check out some of the biggest DeFi projects like Compound Finance, Aave, MakerDAO, and Uniswap.

NFTs

And all of those will be great, great rabbit holes to start going down, which you will realize are bottomless rabbit holes to learn more about the world of decentralized finance, which is one sliver of the Ethereum ecosystem. Now there's a second sliver of the Ethereum ecosystem, and this is the world of NFTs. NFT stands for non fungible tokens, and it's a way to make digital assets scarce and unique. And these are powered by the Ethereum blockchain, and they've basically taken the world by storm, because for the first time, digital artists have been able to actually create scarcity around their art and collectors have started to buy digital art for the purpose of actually like buying the art as an investment for the price to go up over time.

And the reason that can be done is because the theory has smart contracts. And smart contracts can make it clear who is the one or two or three owners of a piece of art that is digitally made. Why, why is that, why is that important? Like what does this all mean? Well, if you think about it, there's one Mona Lisa, and yes, there've been ripoffs created of the Mona Lisa, but there's one painting, everyone knows where it is, except for me, I think it's in Louvre, and with physical goods, you either own it or you don't, and generally you can tell a big difference between the original and the knockoff.

In digital art, it's way harder. We have things like Google Images, we have things like right-clicking on an image and saving an image or copying an image. And so for the longest time, when people would create art, thousands of versions of their art to be on the internet. Basically, you could have infinite supply of one piece of art being created. Now, with NFTs, what it does is it makes ownership transparent and permanent. Yes, anyone could go and download an image of a piece of art that someone creates online, but you and everyone else would know that you're not the owner because a smart contract on the Ethereum blockchain would say exactly who the owner is. And so if you want to know what's happening in the world of NFTs, if you're interested in digital art or creating scarcity through Ethereum to make digital art valuable, you should check out Beeple, who sold an NFT for more than $69 million, and then there are other projects like Cryptopunks, Bored Ape Yacht Club, and VeeFriends by a Morning Brew's friend Gary V that you should check out if you're interested in this corner of the Ethereum ecosystem.

So Cryptopunks, Bored Ape Yacht Club, and VeeFriends and Beeple are kind of like the place, the tip of the iceberg for understanding NFTs. And then that's on like the side of buying art. If you want to check out the platforms where you could, buy, trade, and showcase the NFTs you own check out Foundation or OpenSea. So we've talked about two very popular and real applications of dApps on the Ethereum blockchain: DeFi, decentralized finance for the world of financial services, NFTs, which is for the world of generally digital art, creating non fungible tokens, taking something that is not scarce and making it scarce.

DAOs

Now the third and final category that has become big in the world of Ethereum and many dApps have been created round is something called DAOs, and DAO, D.A.O., stands for decentralized autonomous organizations, and the way you can think about it is it is a business that is owned and managed by its members versus a single CEO or individual. So a DAO is a totally new take on how businesses can be run. So similar to NFTs or DeFi, what makes DAOs work are the smart contracts or code that underlie them. DAOs aren't run through a centralized decision maker, like one person or a few senior leaders on a leadership team at a company, there is code that defines how the business operates, and it is 100% transparent for anyone, anyone involved in the DAO, to see and any big decisions or proposals—they happen through votes that all members take part in, not just one person in the business.

So, let me give you an example. One example of a DAO would be a charity that's run by its members, where all donations come into the DAO, so the smart contract collects all of the donations that come into this charity, and then the smart contract, because it has rules that are written into it, it decides how the charity will spend those donations. It's not up to the CEO, it's not up to senior leaders, whatever the smart contract says, wherever it says the money will be allocated, that is where all the donations will be funneled. If the DAO decides that it wants to change how it's going to give away the donations that it gets, who it's going to give it to, there will be a vote and the vote will happen amongst all of the members, not just one leader or a few leaders.

Another example could be a venture capital firm where investors invest in this venture capital DAO, the capital comes into the DAO, and then all members of the venture capital firm, not just a single general partner, could vote on what companies to back, again, versus it being a singularly made decision by one or two partners at the firm. Just like NFTs and just like DeFi, DAOs are a very, very deep rabbit hole, but if you want to read more about DAOs or just Ethereum in general, ethereum.org, like the, the foundation for the Ethereum blockchain, it has hundreds of hours of information on these topics like DAOs, like NFTs, like DeFi.

TL;DR

Like Ethereum broadly has the white paper. If you're interested, you should check it out. Okay, I'm going to stop there. That was exhausting. It is super interesting, but obviously there's a ton going on. I would be lying if I said I was an expert in Ethereum. I'm not an expert, I'm just an enthusiast and someone who's trying to learn more and help teach others. I just believe that all trends point to Ethereum becoming a more important part of society tomorrow than it was today. You've seen a flow of capital, you've seen a flow of talent, and like I mentioned earlier, there are applications that really are adding value to consumers. And what that means to me is it's our responsibility as just well-versed professionals or entrepreneurs, to understand the platform at its most basic level, to understand if there's business opportunities, and also so we can have smart conversations with our peers and friends.

I Want to Hear From You

I am sure that some of this went over your head or some of it could have been better explained by me, but my goal is for you to start with the foundation. I want this to be a conversation starter, not a fixed piece of content. So listen to this episode over and over. The second time will make more sense than the first time and the third time will make more sense than the second time. And I also hope that this will just act as a launch pad for you to ask me questions or to do more research yourself with some of the resources that I mentioned earlier. I've also added some of my favorite resources that I have read and consumed to the show notes, so if you'd like to go deeper after listening to this episode, send an email to alex@morningbrew.com or DM me on Twitter @BusinessBarista with any thoughts or questions that you have about Ethereum at all.

I know it's a lot, but I promise you it'll make more sense as you keep going deeper. As always, thank you so much for listening to Founder's Journal, and if you enjoyed, please let others know who you think would enjoy the show as well.