By Steven Krohn · August 19, 2018
“When I came up with Ethereum, my first first thought was, ‘Okay, this thing is too good to be true.’ As it turned out, the core Ethereum idea was good – fundamentally, completely sound.” – Vitalik Buterin
ICOs use Ethereum as their cryptocurrency of choice. However, throughout cryptocurrency history, Bitcoin has been the primary currency from which other coins are based. When new ICOs were launched, funding was mostly based on Bitcoin investments.
Things have changed significantly in the last couple of years. Most new ICOs now rely on funding through ETH (Ethereum) for development of crypto platforms.
In this article, we take a look at why ICOs use Ethereum for funding new companies and concepts.
At its core, an ICO is a financing event where developers collect cryptocurrency (or fiat) from investors. There is usually a target amount, defined as the hard cap, which is the maximum amount that can be raised through the ICO.
ICOs are easily performed using and existing currency platform through coding and software. People who have coins on the platform may invest in the ICO.
The system distributes the newly generated tokens to investors without additional outside input. The ICO executes by using common programming commands such as “if-else conditional statements” and loops.
The program is automated and free from human control. Programming code is integrated with the blockchain platform on which the ICO is built. ICOs use Ethereum for the financial structure of the program.
To understand why ICOs use Ethereum, we should understand three main shortcomings of Bitcoin for Initial Coin Offerings.
First, Bitcoin was created as a currency system that would make day-to-day transactions simpler. Its inherent programming state is a ledger of account balances. This makes it very easy to set up a new Bitcoin wallet for an ICO.
However, it is entirely a different matter to write a program that can calculate and distribute new tokens for the wallet. To execute ICO contracts, we need a more general purpose program stat.
Bitcoin simply doesn’t offer this feature.
Second, relative to security, Bitcoin is not a complete Turing scripting system. A Turing-complete system is capable of calculating the answer to any computable problem given enough time and system resources.
In most cases, Turing-complete systems require two things.
Most programming languages are Turing-complete, Bitcoin platform is not.
The third reason Bitcoin is not a good choice for ICOs is its block time. Bitcoin was built to execute each new block at 10 minutes.
It could take over an hour for new crowd sale transactions to clear on the network. All that does is cause delays in verification and processing.
What separates Ethereum from Bitcoin is that it wasn’t designed as a currency. Ethereum was structured as a blockchain platform made for additional features and better execution speed.
First, Ethereum is built on a complex data structure module called a Merkle Patricia Tree. This module allows the platform to store multiple program states.
It allows quicker modification and verification of different states that are needed to process an ICO.
Ethereum is not just a transaction ledger. ETH is a program that allows multiple execution states using smart contracts.
Smart contracts automatically calculate the amount of funds raised. They also verifiy and confirm transactions to distribute newly generated tokens to investors post crowdfunding.
Second, ICOs use Ethereum because it is Turing-complete. The platform uses something known as “gas” payment to execute instructions in program code.
Gas is a protocol giving incentives to people for supplying their CPU power to process the code on the Ethereum blockchain.
When a program runs out of gas during execution, it gets aborted. This safety check prevents infinite loops and DOS attacks against ICOs because every process is designed to terminate eventually.
The benefit is that ICOs are more secure on an Ethereum network. A hacker can’t block service to a crowd sale by using a denial of service (DoS) attack.
Ethereum’s “Greedy Heaviest Observed Subtree” (GHOST) protocol enables faster block creation times without compromising blockchain security.
This translates into ICO transactions getting processed faster and more efficiently.
Taken together, it becomes clear why ICOs use Ethereum for their projects.