The purpose of this article is to give you a simple overview of the second largest cryptocurrency in the world, Ethereum.
In this article, we will go in depth on what Ethereum is, how it works and what plans lie ahead for Ethereum in the future. Launched in 2015, Ethereum is the world's second largest cryptocurrency based on market value. Ethereum's associated cryptocurrency is called Ether (ETH). You can easily both buy and sell ETH at Firi
Ethereum is a decentralized blockchain and computing framework that makes it easy for people to create their own decentralized applications and cryptocurrencies. Ethereum enables developers to create decentralized applications that can take advantage of the security and decentralization of Ethereum's blockchain. These apps "live" on the ethereum blockchain, and they can again have their own cryptocurrencies. In this way Ethereum's network becomes the "rails" and infrastructure for the "new Internet" built with blockchain technology.
Why is Ethereum important?
The reason why Ethereum is so important is because it is an innovation that introduced completely new solutions and applications for cryptocurrency and blockchain technology. Ethereum has paved the way for crypto and in many ways set the standard for the blockchain technology of the future. In the wake of Ethereum, development accelerated and it got what can be described as a "tidal wave" with new innovations and projects in crypto.
Before Ethereum was launched in 2015, it was common for developers to create their own blockchain when building new solutions based on blockchain technology. Ethereum removed this necessity, making it easy for developers to create decentralized applications (dApps) without having to create their own associated blockchain. Think of these as apps or apps, like the ones you have on your mobile phone, but which are built on Ethereum's blockchain. Read on and we will explain more about this.
The majority of all decentralized applications, cryptocurrencies and NFTs that exist today log data and transactions on Ethereum's blockchain.
For many, Ethereum is also seen as a good investment object, both because the cryptocurrency Ether has increased in value over time, but also because the currency Ether is needed to be able to interact with cryptocurrencies based on the Ethereum blockchain. ETH thus becomes the "oil" or "currency" that makes this network work.
Ethereum which is referred to as "Ether" or "ETH" when it comes to the cryptocurrency, and "Ethereum" when it comes to the network or protocol. However, it is common for people to also use the term Ethereum even when talking about the cryptocurrency.
The term for the smallest unit of Ethereum is defined as a wei. One Ether = 1,000,000,000,000,000,000 wei. This allows very small transactions that traditional money can not perform. Transaction costs on the Ethereum network are often measured in gwei. One gwei equals 0.000000001 Ether.
Because Ethereum is a divisible cryptocurrency, it is not uncommon to own, for example, 0.01 Ether, and one must not own an entire Ether. This is something that separates crypto from shares, that one must own an entire share. In crypto, you can easily own 0.0002 of a cryptocurrency, which means that you can easily trade for the amount you want.
Together with Bitcoin, Ethereum is the standard against which all other cryptocurrencies are measured. Many developers choose to create Ethereum-based applications because of their network's long-term security and stability. Ethereum has its own programming language, Solidity, which makes it easy to create Ethereum-based decentralized applications.
Ethererum based applications are created through so-called smart contracts. A smart contract is, in short, a contract (agreement between two parties) which is stored in a blockchain, and which can be performed without trust without the involvement of a key player. It is thus a computer program that is governed by a set of rules (the contract). Very simply, you can imagine something like this: "If X + Y happens, then the contract must perform Z"
Summary:
Ethereum is the world's second largest cryptocurrency and protocol based on blockchain technology. Ethereum enabled developers to create decentralized applications through smart contracts on the Ethereum blockchain. The majority of all applications and cryptocurrencies that exist in crypto today are built on Ethereum's framework. Like Bitcoin, Ethereum's cryptocurrency is decentralized, and Ethereum can be sent and received without the involvement of a key player.
Firi explains: What is a blockchain?
A blockchain is simply explained as a database that contains data, and which is secured through a distributed network of participants. A database is a collection of information. This data is stored in blocks, and each block of data is linked together and forms a chain - that is, a block chain. The most common data in a blockchain is transactions.
Instead of a key player being responsible for storing the data, the majority of blockchains are secured using cryptography and through a decentralized network of people around the world. An important factor that distinguishes blockchains from regular databases is that the information in a blockchain cannot be manipulated or changed.
Who created Ethereum and what is the story behind it?
Ethereum was first conceptualized through a so-called white paper (a research document), published entitled "A Next-Generation Smart Contract and Decentralized Application Platform" by the 19-year-old Russian-Canadian Vitalik Buterin in 2013. Vitalik, which was quickly declared a genius by many within the crypto community, was able to quickly assemble a team of talented developers and crypto-enthusiasts.
Ethereums founding team in addition to Vitalik Buterin include Gavin Wood (founder of Polkadot and Kusama), Charles Hoskinson (founder of Cardano), Anthony Di Lorio, Joseph Lubin, Amir Chetlit, Jeffrey Wilcke and Mihai Alisie.
In late 2013, Vitalik Buterin shared his vision and goal of building decentralized applications. At the time, he worked for Bitcoin magazine and wrote articles about Bitcoin. His argument to several developers in the Bitcoin community was that blockchain technology could be used for other applications in addition to creating digital currencies.
Vitalik also confirmed that he believed there was a need to create a more robust programming language that enabled blockchains to be linked to traditional assets, such as stocks and real estate, and that could support all possible transactions.
After presenting Ethereum at a Bitcoin conference in 2014, Vitalik Buterin ended up collaborating with a number of what would become future co-founders to build on Ethereum's vision, infrastructure and technology.
A key figure who was instrumental in building Ethereum's technology was Gavin Wood, who created the software that enabled developers to build decentralized applications on Ethereum.
In 2014, Gavin Wood published a so-called yellow paper (a research document), published entitled "ETHEREUM: A SECURE DECENTRALIZED GENERALIZED TRANSACTION LEDGER" which designed the details of "Ethereum Virtual Machine", which is the technical framework of Ethereum.
In August 2014, Ethereum launched its token (cryptocurrency) Ether through an ICO (Initial Coin Offering) that enabled people to invest in the currency. The price per Ether at that time was $ 0.31 and 50 million Ether were sold.
So what is an "Initial coin offering (ICO)"?
Well, it's a term that was borrowed from traditional finance where one talks about "Initial Public Offering (IPO)" where new company shares are being offered to the public.
In a similar way, a solution was found in crypto where investors were given the opportunity to buy into the cryptocurrency ETH. (However, it is important not to compare ETH with a stock, as there are some significant differences.)
Anyway, Ethereum DAO (Decentralized Autonomous Organization) ended up raising more than $ 150 million from more than 11,000 investors, making it one of the largest crowdfunding campaigns in history.
On July 30, 2015, the Ethereum network went live.
Summary Ethereum was conceptualized by Vitalik Buterin in 2013, who together with 7 others created the Ethereum protocol. Gavin Wood (founder of Polkadot and Kusama) played a major role in developing Ethereum's technical framework in 2014. Ethereum raised money from investors in a successful “ICO” and the Network went live in 2015. Several of Ethereum's founders have since created other well-known protocols, including Cardano and Polkadot.
How does Ethereum work?
Like Bitcoin, Ethereum is a solution based on blockchain technology. A blockchain is, in short, a log of transactions and data secured by an open, global, decentralized network using computing power.
Similar to Bitcoin's blockchain, where you can send and receive bitcoins, Ethereum's blockchain is used to send and receive Ether globally, without a third party being able to see or enter unexpectedly.
Where Bitcoin was developed for the purpose of being a digital currency, Ethereum was created as a more flexible blockchain that makes it easy for developers to build decentralized applications, also known as dApps on top of the Ethereum blockchain.
New Ether comes into circulation in the form of rewards to miners who secure the Ethereum network. There are today approx. 120,000,000 Ether in circulation.
This flexibility is due to the fact that Ethereum makes it easy for developers to publish software on Ethereum's blockchain through smart contracts. Software that in practice is significantly more complex than what Bitcoin's blockchain can handle.
A smart contract is simply explained a contract (agreement between two parties) that is stored in a blockchain. The contract is written with a data code. Smart contracts on Ethereum make it possible to automate the implementation of an agreement or contract without the involvement of a third party or to need trust in the other player with whom you have a contract.
Smart contracts are based on "if, then" logic, so if X action is performed, then Y action is performed. With smart contracts, you can be sure that the outcome of what has been agreed will be implemented through the blockchain automatically, without the risk of downtime, fraud, censorship and involvement from third parties.
Other cryptocurrencies are being built on Ethereum.
If you visit coingecko.com and browse through the long list of cryptocurrencies available, a large proportion of these will be built on Ethereum's network. As we have talked about above, Ethereum has made it possible for other developers to build their own apps on Ethereum's blockchain. This gives them access to the network's security and size, and they do not have to build everything themselves from scratch. They use Etherum as infrastructure and framework for their own project.
We can try to draw a comparison to traditional IT. Imagine how Microsoft has created an operating system that provides a platform for other software developers to build things on. Microsoft "is at the bottom", while other software companies can in turn build new programs based on, and work with the standards in Microsoft's system. For example, you make a computer game for Microsoft, a video editing program, or you "host" your website with Microsoft's services. These other programs have their own companies, but they are built with Microsoft as a framework. The existence of an ecosystem of programs based on Microsoft, in turn, contributes to Microsoft becoming very valuable.
Similarly, other crypto projects can build on Ethereum, and they may in turn have their own cryptocurrency that has a function in their system. Ethereum has developed a technical standard for such cryptocurrencies, and these are called "ERC-20 tokens". These cryptocurrencies are intended to have a practical function in the project to which they belong, such as voting rights, the right to payments, rewards, security and more. However, not all ERC-20 tokens will have any function beyond being an instrument for speculating in price. It is relatively easy for a person with the right technical skills to launch such a cryptocurrency, so be careful what you invest in if you are going to buy such "tokens".
We can also mention that there is also a technical standard for NFTs on Ethereum (ERC-721). This means that if you are going to buy an NFT, this is most likely also stored on the Ethereum blockchain.
Summary:
Ethereum is an open, global and decentralized network based on blockchain technology. In this blockchain, all information and transactions are stored on the network, and no central unit alone can control or manipulate this. Ethereum offers a network and infrastructure on which other developers can build their own projects. These are apps that are based on Ethereum and use "smart contracts" to automate various functions and services. These projects again have the ability to create their own cryptocurrencies on the Ethereum blockchain.
How is Ethereum's blockchain secured?
Ethereum Virtual Machine (EVM) is used to store all information about transactions, accounts and smart contracts that exist in Ethereum's blockchain.
The information stored in Ethereum Virtual Machine is verified through a decentralized global network of participants who use their computers to ensure that all information is accurate at all times. These participants are either known as nodes or miners.
A node stores a copy of all data in the Ethereum blockchain, and comes to a common agreement with other nodes that the information is correct using that data power and power. A miner secures the blockchain using computing power and power, but unlike nodes, miners do not store a copy of the blockchain.
This way of securing a blockchain is called Proof of Work, and was first introduced through Bitcoin. Ethereum primarily uses Proof of Work to secure its blockchain.
The computers that nodes and miners have to set up are referred to as a mining rigs. It is these computers that perform the registration and storage of new transactions in the blockchain.
In practice, these computers are used to solve a cryptographic math problem for each new block extracted in the Ethereum blockchain. This is how Ethereum is structured, and for each new block there is a new math problem that must be solved by the mining rig.
It solves the problem with its mining rig first, can receive a prize in the form of ether. In practice, this means that Ethereum's blockchain is secured through the use of incentives. People can earn ether (ETH) by securing the network and by using computing power and power.
In addition to receiving prizes in the form of Ether from the network itself, nodes and miners also receive additional prizes in the form of transaction fees paid by people who use the Ethereum network.
Migrating to Proof of Stake
In September 2022, Ethereum made the transition to a so-called "Proof of Stake" system instead of using mining. Thus, the "mining" of Ethereum is now over.
It will mean over 99% lower energy use for Ethereum because "Proof of stake" does not require the same electricity use and computing power, but rather is a mechanism where participants come to a common agreement on the information in the block by using the cryptocurrency ether as security. You can read more about this later in this article.
Summary:
There are "nodes" and "miners" who together secure the network by coming to an agreement that the information is trustworthy. Ethereum today uses a system called "proof of work" and is based on the same mining system that Bitcoin uses. Miners or "miners" are paid in Ethereum to secure the network by using electricity and computing power. In addition, they get paid in transaction fees when others use the Ethereum network. Ethereum has in September 2022 replaced this "proof-of-work" model with another model that does not require so-called "mining". The new model is called "proof-of-stake" and will not require as much computing power and electricity as "mining". We will return to this later in the article.
How does Ethereum work for users?
Ethereum is an open protocol. Anyone can use the network to send, receive and store ether. In practice, this is done by creating a decentralized Ethereum wallet, and by using digital signatures.
In order to participate and interact with the Ethereum network and applications built on Ethereum as a user, you must pay for those who secure the network to verify the transactions you perform. This payment is made in the form of Ether and the transaction fees paid are defined as "gas" (just like needing gas for the car).
Because the majority of all decentralized applications are smart contracts built on Ethereum, this means that you need to have Ether in your digital wallet if you are to use most of the services that exist in the crypto world today.
How much you have to pay in "gas" depends on how much traffic there is on the Ethereum network. Increased traffic means higher competition to have their transactions verified on the blockchain, which results in more expensive fees.
In recent times, the number of applications based on Ethereum's blockchain has increased significantly, which has also resulted in sky-high prices for transaction fees because the network is congested. In a way, it can be said that Ethereum has had scaling problems as a result of its own success.
One of the most important challenges that one is working to solve is namely to have both fast and cheap transactions on the network at the same time as it is decentralized and ensures top security.
Work is now underway to address these scaling challenges for Ethereum. We will return to this later in the article.
Summary:
Ethereum is a flexible blockchain that can be easily interacted with through smart contracts. With smart contracts, developers can easily create decentralized applications (dApps) that store their data on the Ethereum blockchain.
To interact with Ethereum and decentralized applications (dApps) built on Ethereum, you must create an Ethereum wallet and pay a transaction-fee in ETH, also called "gas".
Ethereum's blockchain was originally secured with a "Proof of Work" consensus mechanism, which involves so-called "mining", but in September 2022 Ethereum completed the migration to another solution called "Proof of Stake".
This solution does not use "mining". We will explain this in further detail later in this article.
How to buy and store Ethereum (ETH)?
There are primarily two ways you can buy ether (ETH). You can either buy ether through a crypto exchange, or you can buy ether from a private individual who wants to sell their ether.
Regardless of which method you use, you must store your ether in a digital wallet for cryptocurrency.
You can choose between creating an account on a crypto exchange and letting the crypto exchange take care of your cryptocurrency for you, or creating a decentralized Ethereum wallet where you are responsible for the storage and security of your ether.
Buy and store ether (ETH) with a crypto exchange such as Firi.
An easy and cheap way to buy and store ether is through a crypto exchange such as Firi. Firi makes it easy to buy, sell and store your ether and other cryptocurrencies.
When you create an account through Firi, an Ethereum wallet is automatically generated for you. In practice, this means that Firi safely stores your ethers for you and that you do not have to worry about the security of your Ethereum wallet.
You can access your Ethereum wallet by logging in to your user by e-mail or vipps, and by verifying yourself with BankID or MidID. You can easily send and receive ether to your Firi wallet from other exchanges or other Ethereum wallets.
Cryptocurrency can be bought every day 24/7, and Firi makes it easy to switch between ether and NOK/DKK. In less than one business day, you can also sell your ether and several other cryptocurrencies for NOK/DKK to your bank account if you wish.
Store ether (ETH) in a decentralized wallet.
Because Ethereum is a decentralized network, it is possible to create a separate, private Ethereum wallet where you can store your ether.
Only you have access to this. When you create a digital wallet directly on the Ethereum network, you receive what is called a public key and a private key that is associated with your wallet.
A public key can be compared to an account number for your Ethereum wallet. For example, if someone is going to send you ether, they need access to your public key associated with your Ethereum wallet.
A public key might look like this: 0xab5801a7d398351b8be11c439e05c5b3259aec9b
You can safely send others your public key. A public key is a combination of letters and numbers that are unique to your Ethereum wallet.
A private key can be compared to the password of your digital wallet. A private key is a combination of letters and numbers that are unique to your Ethereum wallet.
A private key can also be generated in the form of a seed phrase, which in practice is 12 words that acts as a backup of your private key. If someone has access to your private key or your seed phrase, they will also have access to all of your cryptocurrency.
It is therefore important not to share your private key with anyone.
Under ser du ett eksempel på en såkalt "seed phrase". (Bildet er hentet fra Wikimedia commons.)
Keep track of which addresses you send crypto to.
It is important to note that an Ethereum wallet only supports cryptocurrency on Ethereum. This means that it can be used for ether (ETH) or other cryptocurrencies built on ethereum (ERC-20 tokens), but not for eg Bitcoin which has its own blockchain.
For example, if you send ether from an Ethereum wallet to a Bitcoin wallet, the money you sent will be gone forever without access to it.
It is very important that you pay attention to which public key you send and receive cryptocurrency to.
To be able to interact with the majority of decentralized applications such as Uniswap or OpenSea, you need a decentralized Ethereum wallet. For example, if you are going to buy an NFT, you must have a wallet with ETH, go to Opensea or Uniswap's website, connect, and then you have the opportunity to shop by exchanging ETH for what you want to buy.
After you have purchased cryptocurrency from Firi, you can choose whether you want Firi to store your cryptocurrency for you (which is easier), or whether you want to send it to a separate decentralized wallet.
When you create an Ethereum wallet, a public key is generated which acts as an account number and a private key which acts as a password for your wallet. If someone gets hold of your private key, they will have access to all of your cryptocurrency. No one can help you get your money back.
What is Ethereum 2.0 and what is Proof of Stake?
Ethereum 2.0 is an upgrade to the Ethereum network which in several phases will try to solve the biggest scaling challenges that Ethereum faces today. Due to Ethereum and cryptocurrency's huge increase in popularity, activity on Ethereum's network has grown so fast that its struggling with congestion. This has made transactions slow and expensive.
Among other things, the purpose of Ethereum 2.0 is to make transactions cheaper and faster. In addition, they want to make Ethereum more environmentally friendly by cutting its energy use dramatically.
In short, Ethereum 2.0 is a change in Ethereum's "consensus mechanism". A "consensus mechanism" is the methodology for how a blockchain is secured.
The purpose of "the merge" was to change the consensus mechanism of Ethereum from Proof of Work, which depends on "miners" who secure the network using computer power, to Proof of Stake, where the network will be secured by participants locking up and "staking" their ETH.
Somewhat simplified, this means that participants who try to manipulate the network will lose their staked ETH, which will create a strong financial incentive to only broadcast truthful information on the network. Broadcasting false information will result in a financial penalty that outweights the potential financial gain the attacker might get from manipulating the network.
Why did Ethereum switch to Proof of Stake?
Bitcoin was the first working implementation of Proof of Work, but Ethereum also adopted Proof of Work as a "consensus mechanism". The network made use of Ethereum "miners" who secured the network and was paid in ETH.
Over time, it has become clear that the Proof of Work model is not optimal. With Proof of Work, enormous amounts of electricity is used, which puts a burden on the environment. And more importantly, Ethereum suffers from scaling issues due to it popularity.
In August 2021, software update "EIP-1559" was implemented on Ethereum. The "EIP 1559" name is short for "Ethereum Improvement Proposal #1559"
This upgrade included a mechanism that “burns” a large portion of Ether fees that are usually given to miners. In practice, this will mean that Ethereums cryptocurrency ETH will become deflationary after Ethereum 2.0 is fully rolled out.
Ethereum 2.0 and the transition to proof of stake is also called "The Merge" and was carried out in September 2022.
This can be considered one of the most important events the history of Ethereum, and in the crypto sphere, in recent years. Expectations are high for Ethereum in the years to come.
The transition between the two consensus mechanisms has happened gradually and has taken several years to complete. The reason why so much time has been spent is that they wanted to make sure that everything works flawlessly and that they have had plenty of time to discover and solve the problems that could arise in such a transition.
Up until December 2020, Ethereum's blockchain only depended on "Proof of Work" to store data in the Ethereum blockchain.
From 2020 until "the merge" was completed in September 2022, Ethereum has used a hybrid of "Proof of Work" and "Proof of Stake".
After the completion of "The merge", Ethereum only uses the proof of stake model, and has thereby reduced energy consumption by over 99%
What does Proof of Stake mean for Ethereum's future?
Scaling: The transition to the consensus mechanism Proof of Stake means that the network should in theory go from handling 10-15 transactions per second to up to 100,000 transactions per second. This will result in significantly lower transaction costs.
Environmental friendliness: Ethereum's blockchain is going to be significantly more environmentally friendly. Because Proof of Stake is not a resource-intensive consensus mechanism that requires a high power consumption, Proof of Stake will ensure that Ethereum becomes more sustainable.
Democratization: With Proof of Stake, it becomes easier for users to participate in securing the network, as in practice you only need to commit ether in the protocol, instead of setting up a physical computer and using electricity.
Security and decentralization: With sharding, Proof of Stake will make Ethereum's blockchain more secure and decentralized.
Firi explains: The difference between Proof of Work and Proof of Stake
Here we will go a little more in-depth on the differences between the two different systems Ethereum uses to secure the blockchain.
What is Proof of Work?
Proof of Work is a mechanism that enables consensus on a blockchain. "Proof of Work" helps the network of participants come to a common agreement on whether the information on the blockchain is correct or not by using computer power and energy as a security mechanism.
These network participants are either referred to as "nodes" or "miners". A node stores a copy of all the history of data in the blockchain and secures the blockchain using data power and power. A "miner" secures the blockchain using computing power and electricity, but does not create a history as a node does.
In practice, nodes and miners use their computers to solve cryptographic math problems that are embedded in a blockchain's blocks. To make this work, they receive a prize in the form of a cryptocurrency such as ETH
What is Proof of Stake?
We mentioned earlier in the article that Ethereums rapid growth in popularity has congested the network.
The congestion makes it expensive, time-consuming and resource-intensive to use the network. It is slower and more expensive to send Ether (ETH) between addresses, or to use the many apps built on Ethereum.
As a way to solve this, Ethereum migrated to a "Proof of Stake" solution. This transition was completed in September 2022. The transition took place during several phases, and work began already in December 2020.
Its worth mentioning that the merge did not, and was not, supposed to immediatly solve all of Ethereums scaling issues. Rather, it is part of a long-term process. And after this transition it will be easier to address and solve Ethereums scaling issues going forward.
Here are the key changes that come with Proof of Stake:
Unlike Proof of Work, Proof of Stake is not based on transactions being verified using electricityand computing power. Instead, "Proof of Stake" is designed so that one can use the cryptocurrency ether (ETH) to secure the network.
Locking up your ETH to secure the network is called "staking" (you have a "stake" in the network). And as a reward, you get paid an interest (yield) on the values you have locked up. (On-chain ETH staking yields are currently around 5% annual percentage yield).
To be able to help secure the network, you must become a validator. It requires locking up 32 ETH. Random validators are selected to secure the information in a block in the block chain.
It is also possible to participate in securing the network with smaller amounts of ETH by joining a so-called pool (where you join together with others). If you do this, you will then receive payments in proportion to how much ETH you have contributed to the pool.
The validation of blocks in a "Proof of Stake"-blockchain takes place with a process called sharding. In practice, sharding is a division of the data that is in a block. The information in a block is divided into smaller parts, and different validators verify each part separately.
Sharding makes "Proof of Stake" in theory even more secure and decentralized, as each block is verified by a multitude of validators that verify different shards of the block.
Unlike Proof of Work, where participants who try to validate incorrect information are penalized for using electricity to no avail, Proof of Stake uses a mechanism called slashing. This is a mechanism that in practice penalizes validators who validate incorrect information in a block by removing a portion of the ether that they have unlocked as security.
Firi Explains: "The Merge"
The Merge is Ethereum's transition from proof-of-work to proof-of-stake that was completed in September 2022.
The Merge reduced Ethereum's energy consumption by approx. 99.95%.
The Merge will also lay the foundation for Ethereum's scaling plans, such as sharding. Sharding is a process where a database is split up to spread the load. For Ethereum, this means that network congestion is reduced and transaction speed is increased.
