Ethereum
Ethereum is a programmable blockchain that runs smart contracts, with ether (ETH) as its native asset. Learn how it works, proof of stake, gas and price drivers.
Ethereum is a blockchain designed not only to transfer value but to run programs called smart contracts. Proposed by Vitalik Buterin in 2013 and launched in 2015, it became the foundation for decentralised finance (DeFi), stablecoins, NFTs and thousands of tokens. Its native asset, ether (ETH), pays for computation on the network and is the second largest cryptocurrency by market value. Understanding Ethereum helps explain much of what happens across the crypto market beyond Bitcoin.
Key concepts#
| Concept | Meaning |
|---|---|
| Smart contracts | Code on the blockchain that runs automatically when conditions are met |
| Ether (ETH) | The native currency, used to pay fees and stake |
| Gas | The unit measuring computation; users pay gas fees in ETH. See Mempools and Gas |
| EVM | The Ethereum Virtual Machine, which runs smart contracts; copied by many other chains |
| Tokens | Assets created by smart contracts, such as ERC 20 tokens and NFTs |
| Proof of stake | Validators lock ETH to secure the network and earn rewards |
| Layer 2 networks | Separate networks (such as Arbitrum, Optimism, Base) that settle on Ethereum for lower fees |
The Merge and proof of stake#
In September 2022, Ethereum switched from proof of work mining to proof of stake in an upgrade called the Merge. Instead of miners, validators who stake 32 ETH propose and verify blocks. The change cut Ethereum's energy use by more than 99%, according to the Ethereum Foundation. Stakers earn rewards from new issuance and fees. See Staking and Restaking.
ETH supply#
ETH does not have a fixed cap like Bitcoin. Instead:
- Issuance: new ETH is paid to validators.
- Burning: since the EIP 1559 upgrade in August 2021, a portion of every transaction fee (the base fee) is destroyed.
When network activity is high, more ETH is burned than issued and supply can shrink. When activity is low, supply grows slowly. Since layer 2 networks moved much activity off the main chain and a 2024 upgrade cut layer 2 data costs, burning has been lower and supply has grown modestly.
What Ethereum is used for#
| Use | Example |
|---|---|
| DeFi | Lending, borrowing and trading without intermediaries. See DeFi Basics |
| Stablecoins | Dollar tokens such as USDC and USDT run on Ethereum. See Stablecoins |
| Tokens and NFTs | Creating and trading digital assets |
| Layer 2 settlement | Rollups post data to Ethereum for security |
| Tokenised assets | Treasury funds and other real world assets issued on chain |
What moves ETH's price#
- Bitcoin and overall crypto sentiment: ETH is highly correlated with Bitcoin.
- Network activity and fees: more usage means more demand for ETH and more burning.
- Staking yields and flows.
- ETF flows: US spot Ether ETFs began trading in July 2024.
- Competition from other smart contract chains such as Solana. See Altcoins.
- Regulation of DeFi and staking.
Risks#
- Smart contract bugs and hacks in applications built on Ethereum. See Bridge and Smart Contract Risk.
- High fees during congestion on the main chain.
- Regulatory uncertainty around staking and DeFi.
- Competition from faster or cheaper chains.
- Volatility, often higher than Bitcoin's.
Frequently asked questions#
What is the difference between Bitcoin and Ethereum?#
Bitcoin focuses on being a scarce digital currency, while Ethereum is a programmable platform for smart contracts and applications, with ETH as its fuel.
What was the Merge?#
The September 2022 upgrade that moved Ethereum from proof of work mining to proof of stake.
Does Ethereum have a supply cap?#
No. New ETH is issued to validators, while part of transaction fees is burned, so supply can rise or fall.
Next, explore the wider universe of tokens in Altcoins.
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