What is Ethereum?

Launched in 2015, Ethereum is a decentralised, blockchain-powered platform known primarily for its cryptocurrency ether (ETH). It is the 2^nd largest cryptocurrency in the world by market value, with Bitcoin ranking first.

What was the goal?

Unlike Bitcoin which was originally designed as a payment method, Ethereum was founded as a programmable blockchain technology for building thousands of diverse applications and organisations. This makes Ethereum far more than just a payment network, but rather a decentralised marketplace of unlimited apps, services and games powered by blockchain.

How does Ethereum work?

In September 2022, Ethereum implemented a proof-of-stake algorithm which is a consensus mechanism through which the validity of new data on newly created blocks is verified by a network of participants (automated programs) known as validators. No changes can be implemented on the blockchain unless a consensus is reached by the participants. The process of validating new information is called attestation which involves a committee of validators verifying and voting for its validity.  

The consensus mechanism is called Gasper. It is comprised of a finalisation protocol called Casper-FFG and the algorithm LMD Ghost. Gasper uses the votes of the validators to accept or reject blocks on the blockchain. Gasper also monitors consensus and establishes how validators are rewarded for work or penalised in instances where they are found to have acted dishonestly.

Energy expenditure and environmental footprint

It is reported that Ethereum’s move to proof-of-stake from proof-of-work has reduced its energy consumption by 99.95%. Ethereum is now considered a green blockchain and is said to be moving even closer to its vision of boosting its security, scalability, and sustainability.

Ethereum wallets

Ethereum owners use wallets to interact with their Ethereum account, much in the way, conventional banking apps work.  A wallet is required to be able to send funds to an account and to access or manage ether (the digital currency of Ethereum apps).

The wallet has a digital address (much like an email address) and holds private keys that are used to access ETH and initiate transactions. Each ETH comes with its own private key.

Securing private keys

There are different storage methods used for securing the keys, one of the most common being cold storage which entails taking your cryptocurrency, in this case, ether, offline (i.e., not connected to the network or the internet). Cold storage is regarded as one of the most secure ways of securing cryptocurrency, albeit somewhat inconvenient. Commonly used cold storage methods include:

• Hardware wallets (like a USB drive that can be plugged into the specific device from which the wallet will be accessed)
• Paper wallets (printing keys on paper, sometimes adding a QR code)

More obscure cold storage methods include the use of sound wallets (recording private keys in encrypted audio files on CDs or vinyl disks), or deep cold storage (physically storing keys in a bank vault or even in a box deep underground).

How does Ethereum differ from Bitcoin?

• Bitcoin cryptocurrency was created for use as a payment method, whereas Ethereum’s founders Vitalik Buterin and Joe Lubin, saw the platform’s potential as a network with diverse applications beyond just virtual payments.
• The number of Bitcoins that can be issued is capped at 21 million. In contrast, an unlimited amount of ETH can be created. To date, there is more than 120 million ether in circulation.
• The way in which transaction processing fees are treated also differs between Bitcoin and Ethereum. While Ethereum fees (called gas) are paid by participants party to an Ethereum transaction, Bitcoin transaction fees are absorbed by the Bitcoin network.
• Another difference between Ethereum and Bitcoin is their use of consensus mechanisms. Ethereum switched to the proof-of-stake mechanism in September 2022, while Bitcoin continues to use the proof-of-work consensus method, which entails far more energy-intensive mining.

More on gas

Gas is a “fuel” that allows Ethereum to operate. It measures how much computational effort is needed to execute certain activities on the Ethereum network. Every transaction on the network requires computational resources. Gas refers to the fee required per transaction and is paid in ETH. Gas prices are denoted in gwei (each gwei is equivalent to 0.000000001 ETH (10-9 ETH).

Ethereum scalability

The development of sharding continues in 2023 in order to address the need for scalability. This multi-phase upgrade will involve the splitting (dividing) of the Ethereum database between its network to spread the workload and reduce computational time. Each section will be called a shard and they will be worked on by those who hold staked ETH. The benefit of the shards is that they will allow an increased number of validators to work simultaneously, reducing consensus time. This process will be called sharding consensus. 

What impacts Ethereum price?

Simply put, supply and demand, i.e., if the demand for ether increases, ETH prices will rise (and vice versa). But what impacts supply and demand?

• The potential for more transactions per second or lower transaction fees may make the network more appealing and possibly attract more users to the platform.
• A higher number of rewards for longer or larger stakes could also impact supply/demand.
• Platform upgrades may also have an effect, together with network congestion and gas fees.

Trading Ethereum CFDs

Like other cryptocurrencies, ETH can be traded through Contract for Difference (CFD) accounts, including ETH/USD CFDs using trading platforms like the MetaTrader 4 (MT4). In the course of trading CFDs, a trader will typically speculate on the price fluctuations (movements) of the cryptocurrency without actually owning it. Finding a trusted CFD broker is key, particularly one who delivers top-tier industry expertise and reliable customer support. Other factors to consider when choosing a CFD broker are the trading platform(s) they offer, the variety of educational resources to help you become a better trader, daily market news, and insights into global financial and geopolitical events. Also, look for a CFD broker that offers low-cost and consistent spreads.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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