What is Ethereum?

The short answer

Ethereum is a public blockchain that can run programs, not just record payments. Those programs are called smart contracts, and they execute automatically when their conditions are met. Where Bitcoin was designed mainly to move value, Ethereum was designed as a shared computer that anyone can write software for and anyone can use without asking permission.

The network was proposed by Vitalik Buterin in late 2013 and launched in July 2015. Its native currency is called ether, with the ticker symbol ETH. Ether is used to pay for computation on the network, to secure the network through staking, and as a general asset that people hold and trade. When people say they bought Ethereum, they usually mean they bought ether.

Because developers can deploy their own applications on Ethereum, most of what people call crypto beyond Bitcoin was built here first: stablecoins, decentralized exchanges, lending protocols, NFTs, and many thousands of tokens. Ethereum is the largest smart contract platform by value and activity, though it has many competitors. Its long record and large developer base are its main advantages.

How Ethereum works

Like other blockchains, Ethereum keeps a shared record of transactions that thousands of independent computers agree on. The difference is what a transaction can do. On Ethereum, a transaction can send ether, or it can call a smart contract, which is code stored on the chain. The contract runs the same way on every node, so everyone ends up with the same result.

Running code costs resources, so every operation has a price measured in units called gas. Users pay gas fees in ether to have their transactions included. Fees rise when the network is busy and fall when it is quiet. A portion of each fee is permanently destroyed, or burned, which slightly reduces ether supply during periods of heavy use.

Tokens on Ethereum follow shared standards so that wallets and applications can handle them consistently. The ERC-20 standard defines interchangeable tokens, which is how stablecoins like USDC and governance tokens like UNI are built. The ERC-721 standard defines non fungible tokens, where each token is unique. Thousands of tokens follow these standards today.

The Merge and proof of stake

Ethereum originally used proof of work mining, similar to Bitcoin. In September 2022 the network completed an upgrade known as the Merge, which switched it to proof of stake. Instead of miners spending electricity to compete for blocks, validators lock up ether as collateral and are chosen to propose and confirm blocks. If they act dishonestly, part of their stake can be destroyed.

The Merge cut Ethereum's energy consumption by roughly 99.9 percent, according to the Ethereum Foundation, because it removed the need for power hungry mining hardware. It also changed how new ether is issued. Validators earn rewards for their work, but the total issuance is much lower than it was under mining, and combined with fee burning the net supply growth has been small.

To run a validator directly you need to stake 32 ETH and operate a node. Most people instead stake through an exchange or a liquid staking protocol such as Lido, which pools smaller amounts and issues a token representing the staked position. Each option has different tradeoffs in control, risk, and fees.

What Ethereum is used for

The most visible use is decentralized finance, or DeFi. Applications like Uniswap let people trade tokens directly from their wallets, Aave lets people lend and borrow against collateral, and MakerDAO issues the DAI stablecoin backed by crypto assets. All of these run as smart contracts, with no company holding your funds.

Stablecoins are another major use. A large share of all dollar pegged tokens such as USDT and USDC exist on Ethereum and move across it every day. NFTs, which represent unique digital items like art, collectibles, and in game assets, also started on Ethereum and remain closely associated with it.

Beyond finance, developers use Ethereum for decentralized organizations called DAOs, for identity and naming systems like ENS, and as the settlement layer for a growing set of layer 2 networks that process transactions more cheaply and then post results back to Ethereum. Many institutions have also tested tokenizing traditional assets such as bonds and funds on the network.

• DeFi: trading, lending, and borrowing without intermediaries
• Stablecoins: dollar pegged tokens used for payments and savings
• NFTs: unique digital items with verifiable ownership
• Layer 2 networks that scale Ethereum while settling on it

Risks and tradeoffs

Ethereum's biggest practical problem has been cost. During busy periods, gas fees on the main network have reached tens of dollars for a simple swap, which prices out small users. Layer 2 networks and upgrades such as the March 2024 Dencun release have brought fees down substantially, but the base chain is still more expensive than many competitors.

Smart contracts are only as safe as the code behind them. Bugs and exploits have drained billions of dollars from DeFi applications over the years, and because transactions are irreversible, stolen funds are rarely recovered. Using any application on Ethereum means trusting its code and the people who wrote it.

There are also broader concerns. Ether is volatile like other crypto assets. Critics argue that staking through large providers concentrates influence over the network. And Ethereum faces strong competition from faster or cheaper chains, so its lead is not guaranteed. The roadmap is ambitious and complex, and upgrades can be delayed.

How to get started

You can buy ether on any major exchange, and in the United States you can also get exposure through spot Ethereum ETFs, which began trading in July 2024. If you want to actually use the network, you will need a self custody wallet such as MetaMask or a hardware wallet, plus a small amount of ether to pay gas fees.

A good first experience is to try a layer 2 network like Arbitrum, Optimism, or Base, where fees are usually a few cents. Start with tiny amounts, learn how to check what a transaction will do before approving it, and get comfortable with how addresses and confirmations work. Never share your recovery phrase with anyone or any website.

Keep in mind that this content is educational. Ethereum is an experimental technology, and both its price and its applications carry real risk. Learn how the system works before committing anything you cannot afford to lose. Nothing here is a recommendation to buy or sell, and the sensible first step is a small, deliberate experiment rather than a large purchase.