What is ethereum?

So if you’re new to cryptocurrency and want to learn more, ethereum is a great place to start. In this post, we'll be going over:

• What’s the idea behind ethereum?
  • Blockchain
  • Decentralised
  • Open source
• The ethereum story: Who created ethereum?
  • Ethereum today
• The bright future – ethereum 2.0
  • Explanation of proof-of-work
  • Explanation of proof-of-stake
• How to get started with trading ethereum

What’s the idea behind ethereum?

Ethereum is a decentralised, open-source blockchain. Let’s go over those three words one by one - starting with blockchain.

Blockchain

A blockchain is a publicly distributed database of transactions taking place in the crypto-world.

The word blockchain can be broken down into two words: ‘block’ and ‘chain’. ‘Block’ is a collection – a block – of transactions being made between two digital wallets – or just wallets, as they’re called.

So, if you were to transfer 10 ethereum to Christian for example, it would be written down in the blockchain. When enough transactions have been completed and registered, they will be compiled into a block and all new transactions from there will be compiled into a new block.

‘Chain’ means that the new block will be chained together with the previous block.

And like that the blockchain is a long chain of transaction information, that is constantly pointing back towards the previous block. The first block in a blockchain is also called a “genesis block”.

If you want to know more about blockchain technology, then you can read more here

Decentralised

Decentralised means that ethereum is a financial system that works around the central authorities. Centralised authorities are banks and stock exchanges for example, where transactions and trades must go through them before going to the end-user. In the crypto-world, the opposite is the case. Here, it’s everyday individuals that are in charge of validating transactions and trades.

Let’s look at two examples, highlighting the differences between a centralised system and a decentralised system.

Example 1:

You transfer 100 DKK to Amanda through your bank. The bank has the responsibility to receive your transfer, approve it, and forward the money to Amanda. The entire transaction depends on the bank’s ability to complete it.

Example 2:

You transfer 100 ethereum to Benedict. Here, the transfer is completed through ethereum’s blockchain, where it’s approved by regular people who actively maintain the blockchain.

There’s an entire network of participants who are actively maintaining the blockchain. They do so, because they’re being rewarded with a fee – a so-called gas fee – for their trouble.

After the first participant validates the transaction, they will send the information to the next person in the network, who will then also validate the transaction.

And it keeps going like that until more than 50% of the network has validated the trade. If it’s not possible to get more than 50% consensus in the network to validate the transaction, it must be a case of fraud, and the transaction is then denied.

Open source

The fact that ethereum is ‘open source’ means that the developers behind it have made it possible for developers to keep building on the technology. Among others, it’s very popular to develop crypto projects such as smart contracts, decentralised apps, and NFTs .

The opportunities enabled by open source made it possible to develop 2,970 crypto projects as of June 2022 based on ethereum’s blockchain, according to numbers from stateofthedapps.com .

The ethereum story: Who created ethereum?

The brain behind ethereum is a Canadian man by the name of Vitalik Buterin. Buterin was one of the first-movers within cryptocurrency.

In 2013, when he was 19 years old, he came up with the idea for ethereum. The year after, the project was funded and developed, and in 2015, ethereum was online. Buterin was captivated by bitcoin, but he thought that the cryptocurrency and the underlying blockchain technology had more potential than ‘just’ being used as a payment method.

The idea of ethereum was to give people the opportunity to build new projects on top of the blockchain, that didn’t necessarily have anything to do with money, but where the projects would need to register transactions either way.

For example, this could be a registry proving ownership of physical objects such as art.

Here, a piece of art can be provided with a digital barcode. Each time the artwork is re-sold, the digital barcode is registered on the blockchain. In that way, you can always tell whether the artwork is real, and who used to own it before you.

Ethereum today

Buterin’s dream of making the blockchain more accessible was so successful, that it’s actually become a problem for ethereum. It’s evident from the price of gas fees, since they’re so high today that regular people actually have trouble affording to use the technology. And the fact that only the wealthiest people have the resources to develop the technology and use it for transactions, is tearing apart the entire idea and concept of open source. In April 2022, the price of a gas fee was around 20 USD according to bitcoin.com .

This means that to complete a simple transaction in the blockchain, it would cost 20 USD. Buterin’s original dream to give the people the opportunity for cheap, lightning-fast trades with each other, began to tear apart at the seams.

Here, other crypto projects came to ethereum’s rescue. Other developers have since built solutions directly on top of ethereum’s blockchain technology.

These projects are also called layer 2 blockchains – because they’re actually laying on top of ethereum as a secondary layer. Layer 2 blockchains are simply an extension of the existing blockchain.

Polygon for instance, is a layer 2 crypto project based on ethereum, and here people can complete transactions in seconds with a price of a few cents. Ethereum’s blockchain supports around 15-30 transactions per second, while polygon’s support up to 60,000 every single second.

The bright future: Ethereum 2.0

At the moment, ethereum is developing the blockchain to version 2.0, which should make the solution cheaper, faster and better.

Vitalik Buterin’s plan is making ethereum shift from proof of work to proof of stake.

Proof-of-work - explained

Before transactions can be added to a blockchain, they need to be validated with a hash-code. The code is unknown, and the only way to figure out the code is by guessing.

The reward for guessing correctly is being paid with the blockchain’s coin - such as ethereum. Naturally, some people are very eager to be rewarded with that. 

Only one person can guess correctly and get rewarded. That’s why there’s also a fight to be the first to guess correctly. 

In turn, it also means that several supercomputers around the globe are running around the clock to crack the correct code. That takes up a lot of energy. 

In the end, only one of the supercomputers will be rewarded for cracking the code - even if there may have been thousands of computers using power to figure out the code. 

That’s how proof-of-work validation works.

Proof-of-stake - explained

Proof-of-stake validation works differently. Every participant in the network also participates in a raffle or draw to be responsible for finding the next code. Like that, there won’t be thousands of different computers trying to crack the same code. Here, there’s only one person/computer per block, which makes proof-of-stake less energy-intensive than proof-of-work. “Stake” refers to a ticket in the raffle or draw. The more stakes you have, the bigger your chances are of winning the draw. Stakes are based on how many coins or tokens you have - the more matics you have, the more stakes you have in the draw. When a person is selected to validate a transaction, they will charge a fee - a gas fee - for their work.

So, the motivation for participating in the draw is the collection of gas fees.

Reward for proof-of-work: Here, participants are rewarded with new crypto coins, and are expanding the amount of existing coins at the same time.

Reward for proof-of-stake: Here, participants are rewarded with a cost fee - a so-called gas fee - the accumulated amount of coins or tokens are decided internally by the developers of the blockchain.

How to get started with trading ethereum

With Lunar Block , it’s easy to get started with trading ethereum. All you have to do is download the Lunar app and sign up to Lunar Block. You need to take a test in connection to your sign up, where we will ask questions about the risks of cryptocurrency. You can get to know the risks in the Lunar app before you take the quiz.

Once you’ve been approved, you can get started with trading crypto immediately.

Cryptocurrencies can rise and fall

When you trade cryptocurrencies, you need to be aware that it carries a large risk. The value of your cryptocurrency can both rise and fall, and you can risk losing the entire amount you’ve invested in cryptocurrencies.

Cryptocurrency trading is done through Lunar Block. Lunar Block is not regulated by the Danish Financial Supervisory Authority (Finanstilsynet). That means you won’t have the same protection as when trading e.g. stocks or other regulated assets.

We do not counsel

We do not advise on currencies and do not make recommendations for either buying or selling. We can provide factual information about the different currencies, but past price developments are not an indication of future developments.

No information from Lunar Block should therefore be considered as recommendations and all decisions are up to you alone.