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The Applications of Cryptocurrency: Evidence from Ethereum

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Abstract

Cryptocurrency (e.g., Ethereum and its currency Ether) presents an opportunity to completely change the way money is transacted, which perhaps even redefines the money. On this basis, this paper will investigate and discuss the basic principles and corresponding applications of Ethereum. As a matter of fact, operating on a decentralized platform while also using the global reach of the internet, transactions can be made with little cost, without interference of intermediaries and government intervention. Besides, it will keep the personal information of the user private. In addition, according to the analysis, each user can define how they use ether as they please, e.g., using Ethereum to store assets like art and reselling them through Ethereum. However, Ethereum still has many issues to fix ranging from security risks, privacy risks, and perceived stability due to Ethereum’s notorious volatility and previous illegal activities from other platforms (e.g., Bitcoin). More research is required to distinguish whether Ether can be a viable alternative that could be added to the economy or even completely replacing traditional money altogether and address the current concerns. These results shed light on guiding further exploration of cryptocurrency.
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The Applications of Cryptocurrency: Evidence from Ethereum
Hengyu Li*
Department of economics, University of Toronto, Ontario, Canada
*Corresponding author: hengyu.li@mail.utoronto.ca
Abstract. Cryptocurrency (e.g., Ethereum and its currency Ether) presents an opportunity to
completely change the way money is transacted, which perhaps even redefines the money. On this
basis, this paper will investigate and discuss the basic principles and corresponding applications of
Ethereum. As a matter of fact, operating on a decentralized platform while also using the global
reach of the internet, transactions can be made with little cost, without interference of intermediaries
and government intervention. Besides, it will keep the personal information of the user private. In
addition, according to the analysis, each user can define how they use ether as they please, e.g.,
using Ethereum to store assets like art and reselling them through Ethereum. However, Ethereum
still has many issues to fix ranging from security risks, privacy risks, and perceived stability due to
Ethereum’s notorious volatility and previous illegal activities from other platforms (e.g., Bitcoin).
More research is required to distinguish whether Ether can be a viable alternative that could be
added to the economy or even completely replacing traditional money altogether and address the
current concerns. These results shed light on guiding further exploration of cryptocurrency.
Keywords: Cryptocurrency; Ethereum; decentralized payment.
1. Introduction
In general, cryptocurrency is a novel category of payment for online trading based on blockchains
techniques proposed by Nakamoto [1]. The technique is a decentralized technology distributed across
many computers that manage and record transactions [2, 3]. The functions of them are similar to
arcade tokens or casino chips. Contemporarily, there are more than 10,000 different cryptocurrencies
traded publicly according to market research website. The total value of all bitcoins, the most popular
digital currency, was about $735 billion, down from a high of $1.2 trillion in April. The market value
of different cryptos is shown in Fig. 1.
Among various cryptos, Ethereum is one of the well-known one that possesses the second large
market value. In this paper, the working mechanisms, applications as well as the risks of it will be
discussed and demonstrated. The rest part of the paper is organized as follows. The Sec. 2 will
introduce the working principle. Subsequently, the economic importance as well as conditions will
be discussed. Afterwards the Sec. 4 will demonstrate the costs as well as benefits of the Ether.
Subsequently, the functions of it will be clarified in Sec. 5 from distinguishing trading medium or
value store. Later, the Sec. 6 will discuss the prospects and possible future development of e-retail
payment tools of Ether. Eventually, a brief summary will be given in Sec. 7.
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Fig. 1 The market value of crypton currency [4].
2. Descriptions of the working principle
Ethereum operates on a decentralized computer network, with Ether (ETH) as the currency [5].
This means that Ether is open to everyone and attempts to be a community based platform. According
to the Ethereum official webpage, the Ethereum platform in addition to being a place to make transfer
payments, it can also be a platform for safe and secure marketplace. Ether operates based on smart
contracts provided by the platform, and users who own Ether can execute smart contracts through
distributed Ether virtual machines.
A smart contract is a computer program that allows users to create their own rules for ownership.
Users can implement Ether transactions through smart contracts. Ether implements a distributed and
permanently kept ledger called blocks where all transactions are recorded and traceable through a
distributed ledger which is called a blockchain that is used to manage and track the currency. Users
of Ether use private and public key pairs provided by the Elliptic Curve Digital Signature Algorithm
(or be known as ECDSA) in order to ensure the security of transactions [6]. A sketch of the procedure
for ETH payments is illustrated in Fig. 2 [7].
Fig. 2 A sketch of the ETH working process [7].
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3. Economically important terms and conditions for consumers and businesses
For ETH consumers and businesses, the factor that most affects its widespread use is security, as
it was reported that a hacker once stole $60 million by attacking an Ethereum-based venture capital
fund [8]. Without guaranteed security of transactions, users will gradually reject this type of
transaction. All users of Ether can execute smart contracts, so hackers can steal other people's property
by attacking smart contracts. Other cryptocurrencies such as the famous Bitcoin has been involved in
illegal actions and transactions making the adoption of cryptocurrencies questionable as certain
activities such as tax-evasion or contraband is undesirable [9]. In contrast with investing in stock
which is a fraction of ownership in a business, Ethereum depends entirely on its investors'
expectations. The only thing that increases its price is the positive anticipation of other currency
holders. Depending on the expectation in the market, Ethereum can be extremely volatile, it carries
great potential profits, but also great risk. Similar to other major cryptocurrencies, the enduring value
available in Ethereum is still questionable, and the unstableness restricts its widespread adoption to
some degrees. Another issue presented is the social perception of owning such assets. Generally,
cryptocurrencies are still considered novelties and not commonplace making individuals feeling
uncertain about whether to own them [9].
4. The costs and benefits for individuals to use the Ether
The main cost of Ether is the time cost and GAS cost, and the most important benefit is the
decentralized platform. Extending blocks of Ether requires a lot of miners' time, and users need to
execute smart contracts when performing transactions and other operations, and the execution of
smart contracts requires GAS as "fuel", which is the GAS cost of Ether.
The advantage of using Ether is that transactions can be made on a decentralized platform, no
longer needing to trust intermediaries, low transaction costs and high efficiency [10]. Traditional
forms of money require certain financial institutions and infrastructure for circulation however with
cryptocurrency, the creation, maintenance, and employment of workers is a lot fewer and easier to
work with than traditional physical currency [11]. Another benefit is that transactions can be done at
a lower cost as the infrastructure is already in place since the internet is global and the government
does not need to intervene [12]. It can potentially mean users have a lower cost barrier of entry and
do not have to worry about government bureaucracy or intermediaries [11].
However, some say the digital infrastructure is actually a potential added cost. If one institution
wants to make an international transfer, there may be an increased need of intermediation and
monitoring [6]. In addition, while the internet is global and anyone can access it, the governments
and users that may potentially use the service may be untrustworthy thereby leading to the global
system being compromised. This may lead to an increase in mistrust in the financial institution
cryptocurrency is trying to uphold thereby reducing the stability of the system.
For many individuals, Ethereum has another benefit of being highly liquid [13]. Many people who
currently use Ethereum are exploring putting their assets into Ethereum, while some financial assets
like money, others have put their works of art into Ether tokens which can help individuals make
money [14]. However, just like bitcoin, ether is also subject to volatility, meaning its value can change
rapidly and unexpectedly. This makes it hard for people to consider investing in Ethereum if the
platform has high volatility. One benefit of using Ethereum is that Individuals can exchange the
currency without the need for a bank or other third-party intermediary, and the lack of a central bank
means the transaction of Ethereum is almost anonymous, even if it is outright on the blockchain [11].
5. Functions: Medium of exchange or store value
Laura et al. evaluated the function of Ether as a medium of exchange by first converting a currency
into Ether and then exchanging Ether for another currency [14]. They found that Ether has low
transaction costs and can break geographical restrictions, so it can be used as a proper medium of
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exchange. In terms of benefits, most of the currencies except the Japanese yen can be exchanged, by
using cryptocurrency without paying an exchange fee, thus creating added value for the consumer.
Since Ether can be used as a payment method just as credit or debit cards, it can play a role as a decent
or average of exchange, besides that market participants can also enjoy its low cost of transaction
along with the absence of geographical restrictions.
In addition, due to the economic benefits assessed when researching currency exchange with
intermediaries, in most cases, users of Ether will experience tangible benefits in the procession of
exchange when giving a valuation of currencies no matter whether their countries are developed or
developing. Regarding Levulyte and Sapkauskiene’s research in 2021 [15], for Ether's unit-of-
account feature, the authors aimed to evaluate the intra-day, intra-month and intra-year price
deviations to check whether they differ significantly from legal tender or demonstrate a stable trend
over time. According to the results, developed country currencies have the smallest daily deviations
while Ether has larger daily deviations. The standard deviation for Ether is also larger, indicating high
volatility and consequently an increased risk for Ether.
The monthly price fluctuations also show similar fluctuations to the daily trends, with the monthly
volatility of Ether being high. Not only is the change in the daily closing price evaluated, but also the
volatility of the day - the range between the lowest and highest daily prices. The data shows Ether
having larger volatility, with a particularly strong trend of price fluctuations and a smaller tendency
for fiat currencies.
As for the calculation of annual indicators, the results show a similar trend to daily and monthly
fluctuations. In general, Ether has exhibited large price fluctuations in the short term and the long
term, making it impossible to use Ether as a unit of account. Exchange rates are fluctuating for all
types of currency, but apparently, daily fluctuations in the price of cryptocurrencies are more intense
than traditional currencies, this creates some barrier accompanied with a sense of insecurity when
evaluating it as a store of value [15]. As a consequence, Ether is often rejected as a means of storing
value owing to its large daily price fluctuations.
6. Prospects and possible future development of e-retail payment tools
Cryptocurrencies including Ethereum present an opportunity for increased efficiency for the
movement of money and assets. However, central banks and countries also have lots of costs to
consider as the platform is still new and could present many issues for anyone looking to use the
platform. In terms of countries, the positive influence of the growing e-payment on the amount of
consumption and general GDP is more obvious in countries which have significant levels of shadow
economy, indicating that e-payment and other similar technologies could be in a vital position in
shadow economy transformation [16]. To be specific, for euro-zone countries, tax revenues have
increased, probably because they are collected more efficiently. It suggests that electronic payment
systems may play a higher role in stimulating and promoting economic activity, or in revealing or
changing the shadow economy.
Therefore, it is beneficial for the government to promote e-retail payment. According to Ref. [16],
new technologies such as DLT and mobile computing have not significantly changed the specifics of
making central bank accounts available to the public. By contrast, these same technologies may have
changed the central bank's trade-offs in providing token-based systems. It is unexpected that this
change will not come through changes in the efficiency or risk of the token system. Instead, the
fundamental change will be that new technology like online payment software or websites could
allow central banks or regulators to increase competition in the market for payment services at the
wholesale and retail levels, making large companies able to finish the trade in a faster and safer way.
By offering a token-based system to a wider range of participants, including individuals but most
likely new financial firms, the central bank could increase competition and spur innovation.
While this has been possible before, by opening up high-value payment systems to non- traditional
financial institutions, new technology makes it a real possibility for central banks to enter this space.
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Thus, it is believed that electronic payment methods can indeed bring more convenience to banks and
increase the likelihood of transactions. Canada is one of the seven most developed economies in the
world with a mature distributed ledger technology. The central bank of Canada (BOC, the Bank Of
Canada) has a great autonomy in monetary policy. BOC launched the Jasper project to study the
feasibility and the cost and benefits of distributed ledger technology.
In the first phase of the Jasper project, BOC built a proof-of-concept system for payment settlement
in which the Ethernet platform was invoked to increase resilience [17]. The cost of Ether is mainly
due to the investment in the development of new technologies and the investment in large-scale
computing power. The decentralized Ethereum uses peer-to-peer transactions, which no longer
requires the participation of trust intermediaries and cumbersome reconciliation operations,
optimizing the transaction process and improving transaction efficiency. The transaction records of
Ether are permanently kept, which provides great convenience to improve the transparency of
transfers and trace the source and destination of funds.
The introduction of blockchain technology facilitates the upgrade of financial infrastructure and
provides greater profit returns for all users, which can attract more investment, promote the financial
upgrade and drive Canada's economic development. Meanwhile, the diversity of the blockchain
ecosystem determines the diversity of the corresponding risks, which could be used by criminals for
money laundering, fraud or other criminal acts. In the process of introducing blockchain technology,
the central bank has to promote the innovation of the technology on the one hand; on the other hand,
the central bank has to ensure the stability of the existing payment system, hence the central bank has
to strike a good balance between these two aspects [15]. The widespread use of blockchain will
complicate the regulatory environment and require matching regulatory mechanisms, which is a huge
potential systemic risk. Despite the risks, Canada can minimize them by taking certain measures. For
example, the practice of blockchain technology has been gradually optimized to form a sound
regulatory strategy to match it. The electronic retail payment instrument requires strong connections
with private sectors and individuals. Once private accounts are involved in frequent transactions, the
burden of management and record-keeping becomes extremely large.
However, the verification of different identities of a large sum of individuals is not the comparative
advantage of the central bank. Addressing the problems of identification can be costly for the central
bank to set up an e-money system based on accounts. Even though DLT, blockchain, and mobile
computing technologies create a chance for the central bank to build up a distributed system of
accounts that tracks and updates records, the central bank still has to take the liability. Despite the
comparative disadvantage in retail payment sectors, commercial banks and private institutions tend
to be more customer-focused than government sectors, as part of the government body, the central
bank may face low customer satisfaction when involving transactions with the public.
Combining the viewpoints and studies of many scholars, we can find that many questions have not
been answered. The most important of these is the impact on the industrial organization of payment
service providers, especially banks. There is still a lot of work to be done on the quantitative
implications of the central bank's new token system for bank deposits and loans. Hever, it is worth
noting that almost all scholars believe that the advantages of opening the electronic payment industry
outweigh the disadvantages, despite the uncertainties. Hence, Canada's economy remains robust after
the pandemic, as electronic retail payment tools have been used in most entertainment, business, food
and beverage services and areas [17].
7. Summary
In conclusion, this paper discusses the feasibility and develop routine for applications of Ethereum.
Specifically, the development of the cryptocurrency market and working principle of Ethereum based
on blockchains are introduced and clarified. Subsequently, the economic usage, costs and benefits as
well as the functions are demonstrated clearly. Moreover, the current shortcomings and prospects are
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proposed accordingly. In the future, it is feasible to witness the wide-range applications of the Ether.
Overall, these results offer a guideline for implementation of the cryptocurrency in real life.
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[12] Curry B., Rodeck D. What Is Ethereum And How Does It Work? Forbes ADVISER, 2022, March 26.
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ResearchGate has not been able to resolve any citations for this publication.
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