Ethereum is a blockchain that runs programs, not only payments. Its native asset, ether (ETH), is the second-largest cryptocurrency by market value. Vitalik Buterin proposed the idea in late 2013, and the network launched on July 30, 2015. The original Ethereum whitepaper describes the goal: a single shared computer that anyone can use and nobody controls.
Smart Contracts and the EVM
A smart contract is a program stored on the blockchain. Once deployed, it runs exactly as written whenever someone sends it a transaction. It can hold funds, check conditions and pay out without a company in the middle. The ethereum.org smart contract documentation covers how they are written and deployed.
Contracts run inside the Ethereum Virtual Machine (EVM). Every node executes the same code and reaches the same result, which is what makes the outcome trustworthy. Most contracts are written in a language called Solidity. Because the EVM became a standard, many other chains, including BNB Chain, Polygon, Arbitrum and Base, run the same contract code.
Two token standards built on smart contracts shaped the whole market:
- ERC-20: the standard for fungible tokens such as USDC, LINK and UNI.
- ERC-721: the standard for NFTs, where each token is unique.
Proof of Stake and The Merge
Ethereum started with Proof of Work mining, like Bitcoin. On September 15, 2022, it switched to Proof of Stake in an upgrade called The Merge. According to the Ethereum Foundation, this cut the network's energy use by about 99.95%.
Under Proof of Stake, validators lock up ETH as collateral and take turns proposing and attesting to blocks. Running a validator requires 32 ETH. Honest validators earn rewards, and validators that cheat or go offline for long periods lose part of their stake, a penalty known as slashing. People with less than 32 ETH can join through staking pools or liquid staking protocols such as Lido and Rocket Pool. A new block is produced every 12 seconds.
Gas, Fees and the Burn
Every action on Ethereum costs gas, which measures how much computation it needs. A simple transfer uses little gas. A complex trade through several contracts uses much more. Gas is priced in gwei, a small fraction of one ETH, and the price rises when the network is busy.
Since the EIP-1559 upgrade in August 2021, each transaction pays a base fee that is burned, meaning removed from supply for good, plus an optional tip to the validator. When activity is high, more ETH can be burned than is issued to validators, and the total supply shrinks. When activity is low, supply grows slowly. ETH has no fixed cap like Bitcoin's 21 million.
Layer 2 Networks
The main chain can only process a limited number of transactions, so fees climb during busy periods. Layer 2 networks such as Arbitrum, Optimism, Base and zkSync process transactions on their own chain and post compressed data back to Ethereum for security.
The Dencun upgrade in March 2024 added a cheaper kind of data storage for these networks, called blobs (EIP-4844). Fees on most Layer 2 networks dropped sharply afterward, often to a few cents per transaction. A large share of everyday Ethereum activity now happens on Layer 2.
What Runs on Ethereum
- Decentralized exchanges such as Uniswap, where users trade against pooled liquidity.
- Lending markets such as Aave, where users lend and borrow against collateral.
- Stablecoins such as USDC, USDT and DAI.
- Liquid staking through Lido and similar protocols.
- NFTs and on-chain games.
Spot Ether exchange-traded funds began trading in the United States in July 2024, which gave traditional investors a regulated way to hold ETH exposure.
Ethereum vs Bitcoin
Bitcoin is designed to do one thing: act as scarce, hard-to-change money. Its scripting is deliberately limited. Ethereum is designed as a platform, so it changes more often and supports far more use cases. That flexibility brings more complexity and a larger attack surface. Many investors hold both for different reasons: Bitcoin as a store of value, ETH as exposure to on-chain applications.
Risks to Understand
- Smart contract bugs: code is public and holds real money, so mistakes get exploited.
- Competition: Solana and other chains compete for users and developers.
- Fragmentation: liquidity is spread across many Layer 2 networks and bridges.
- Regulation: the legal treatment of staking and tokens differs by country.
- Volatility: ETH has fallen more than 70% from its peak in past bear markets.
Nothing in this article is financial advice.
Key Ethereum Facts
- Launched: July 30, 2015
- Consensus: Proof of Stake since September 15, 2022
- Block time: 12 seconds
- Validator stake: 32 ETH
- Fee burn: active since August 2021 (EIP-1559)
- Supply: no fixed cap
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