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Ethereum is a software platform built on blockchain technology that is widely used for developing decentralized applications. While many people associate Ethereum with its native cryptocurrency, Ether (ETH), the term “Ethereum” technically refers to the broader blockchain network and ecosystem.
Ether (ETH) itself is widely traded and the second-largest cryptocurrency by market capitalization, behind Bitcoin. However, Ether — also referred to as “Ethereum” — and Bitcoin serve very different purposes. Below, we take a closer look at what Ethereum is, how it works, what it’s used for, and how you can get started.
Key Points
- Ethereum is a decentralized, open-source blockchain that supports smart contracts and dApps.
- Smart contracts are self-executing code that automates on-chain processes.
- DeFi apps on Ethereum enable peer-to-peer transactions without banks or other intermediaries.
- Ethereum now uses a proof-of-stake consensus system, relying on staking instead of mining.
- Ether (ETH) is used as “gas” on the Ethereum network but can also be bought or sold on exchanges.
What Is Ethereum?
Ethereum is an open-source, decentralized platform that enables developers to build applications that run without centralized authorities, middlemen, app stores, or other central companies. It is fundamentally built on a blockchain — a decentralized and transparent digital ledger that securely records all transactions and data across a network of computers.
The Beginning of Blockchain Smart Contracts
While digital smart contracts are believed to have been conceived in the 1990s by computer scientist Nick Szabo, Ethereum was the first blockchain to support smart contracts.[1] This expanded crypto’s potential beyond serving as a payment system or store of value to functioning as a type of programmable, global computer.
Ethereum enabled developers to write self-executing agreements directly into the blockchain code — enforcing terms without the need for intermediaries. This technology paved the way for the development of a web of decentralized technologies, including decentralized applications (dApps), financial services, messaging, and gaming.
The Difference Between Ethereum and Ether
A common point of confusion is mixing up Ethereum and Ether (ETH). While related, they are not the same thing:
- Ethereum: The blockchain network and platform.
- Ether (ETH): The cryptocurrency used on the Ethereum network and traded externally.
Every operation on the Ethereum network — whether executing a smart contract, sending a transaction, or interacting with a decentralized application — requires computational effort from the network’s validators. Users pay a fee in ETH (known as “gas”) to compensate these validators for their work.
Like other types of cryptocurrencies, Ether can also be used as a form of payment for goods and services. It’s also an asset that people can buy and sell to try to benefit from rapid price changes.
Ethereum vs Ethereum Classic
You may encounter both Ethereum (ETH) and Ethereum Classic (ETC). These two networks share the same origin but split following a major disagreement about protocol changes. Ethereum continued evolving with upgrades and governance changes, while Ethereum Classic aims to preserve the original blockchain principles.
Ethereum and Ethereum Classic are similar but operate as separate blockchain networks. Ethereum (ETH) is the most widely used chain.
Why Ethereum Has Value
Ether (ETH) has value for several reasons:
- Utility: ETH is required to power a large range of services on the Ethereum network.
- Deflationary: Ethereum “burns” a small amount of ETH with every transaction. If ETH is burned at a higher rate than it’s issued, it can reduce the total supply of ETH. By contributing to scarcity, burning has the potential to raise the price of the remaining ETH, assuming demand remains constant or increases, which can help control inflation.
- High demand: ETH is in demand because it serves as the foundational currency for the entire Ethereum network, which includes popular decentralized finance platforms, non-fungible token (NFT) marketplaces, and blockchain games.
How Ethereum Is Different From Bitcoin
Bitcoin was designed primarily as a digital currency and store of value. Etherium, as mentioned above, is a programmable blockchain meant to support additional projects, applications, and digital ecosystems, with ETH functioning as its native currency.
Recommended: What Is Bitcoin? How It Works and Getting Started
What Can You Actually Do on Ethereum?
Ethereum’s power lies in the applications built on top of it. Developers have built financial systems, games, marketplaces, and more — all without needing traditional servers.
Smart Contracts Are the Building Blocks of Ethereum
A smart contract, as noted, is a self-executing agreement with the terms of the agreement directly written into code on a blockchain. When pre-programmed conditions are met, the contract automatically executes, streamlining processes like payments or asset transfers without the need for a third-party intermediary.
Smart contracts operate on “if this, then that” logic. For example, a contract could be programmed to automatically release payment when work is completed or execute a trade when prices hit a certain level.[2]
Decentralized Finance (DeFi) vs Traditional Banking
Decentralized finance, or DeFi, includes financial tools that run on blockchain instead of through traditional institutions.
On Ethereum, you can:
- Borrow or lend crypto
- Earn interest on crypto holdings
- Trade assets on decentralized exchanges
- Take out crypto-backed loans
Examples of popular DeFi platforms on Ethereum include Uniswap, AAVE, and Sky (formerly MakerDAO).[3]
Non-Fungible Tokens (NFTs) Prove Digital Ownership
NFTs are digital assets that use blockchain technology to link ownership to one-of-a-kind digital or physical assets. They can represent ownership of art, collectibles, a piece of music, and more. Digital art is the most popular type of NFT.
While NFTs are not the same as cryptocurrency, they use the same blockchain technology. Ethereum remains the dominant ecosystem for NFTs.
Decentralized Apps (dApps) Are the App Store for the Blockchain
Decentralized apps (dApps) work similarly to traditional apps but run on blockchain infrastructure instead of centralized servers.
While traditional apps are usually owned and operated by a single entity, dApps leverage smart contracts to operate autonomously and transparently without intermediaries. Frequently run on Ethereum, dApps offer a range of services, including financial tools, games, and social media platforms.
How the Ethereum Network Works
Ethereum operates like other blockchains: Information is stored in “blocks” that are chained together chronologically, creating an immutable transaction history that is shared across the network. Network participants must agree on the validity of new transactions and blocks. Unlike Bitcoin, Ethereum now uses a proof-of-stake (PoS) consensus mechanism, which does not rely on crypto mining.
What Was “The Merge”? (The Upgrade to Ethereum 2.0)
In September 2022, Ethereum transitioned from a less efficient Proof-of-Work (PoW) system to a more sustainable Proof-of-Stake (PoS) consensus mechanism, an event known as “The Merge.” This upgrade combined the original blockchain with a new PoS consensus layer while preserving historical data, marking the shift to what is often called Ethereum 2.0.
The term “Ethereum 2.0” is no longer used, but “The Merge” was the core change enabling Ethereum’s future growth.[4]
Is the Ethereum Network Secure?
The core Ethereum network is generally considered secure due to its:
- Proof-of-stake (PoS) consensus mechanism: With PoS, participants called “validators” stake (lock up) a certain amount of ETH to have a chance to propose and validate new blocks. This creates a financial incentive to act honestly, as validators risk losing their staked ETH if they try to cheat the system.
- Decentralization: The network’s data is distributed across thousands of computers globally, so no single entity controls the data, which enhances security.
- Open-source transparency: Countless developers have been able to scrutinize Ethereum’s code since the network began running in 2015, making it well-tested.
While the core Ethereum network is thought to be secure, dApps running on the blockchain are only guaranteed to be as secure as their developers have made them.
Gas Fees Are the Cost of Using the Network
Gas fees are the cost users pay to process transactions and smart contracts on the Ethereum network. These fees are paid in Ether (ETH) and are given to network validators (crypto stakers) as compensation for the computational resources they use to validate and secure the network. The fee amount fluctuates based on the transaction’s complexity and network congestion.
Typical examples of actions that require gas:
- Sending ETH
- Buying/selling NFTs
- Running software on the blockchain (or “on-chain”)
Staking Is How the Network Stays Secure
As mentioned, Ethereum uses a proof-of-stake, or PoS, consensus mechanism, where users stake their coins as collateral for a chance to be selected as a validator. The network selects a validator based on the amount of ETH participants have staked and the length of time they’ve had it there. Once the winner has validated the latest block of transactions, other validators confirm the block is accurate. When a certain number of confirmations have been made, the network updates the blockchain.
If a validator engages in malicious activities or fails to perform their duties correctly, the PoS system automatically deducts a portion of their staked funds, a process called slashing. This penalty system incentivizes honest participation.
Should You Own Ethereum?
Any cryptocurrency has pros and cons, so it’s important to consider ETH’s potential advantages and disadvantages before buying it.
The Upsides
Ethereum has a number of positives to consider:
- ETH powers the Ethereum network, so it has real utility. You need ETH to pay for transactions, use apps, trade NFTs, and run smart contracts. This can support continued demand.
- You can earn rewards by staking. Instead of just holding ETH, you can lock it up to help secure the network and potentially earn passive income.
- It benefits from a large and growing ecosystem. Because many major blockchain projects run on Ethereum, ETH is often the “default” currency used to interact with them.
- It has potential long-term upside if blockchain adoption grows. If dApps and crypto finance continue expanding, ETH could play a major role in that future.
The Downsides
Downsides of Ethereum to be aware of include:
- The price is highly volatile: ETH can swing dramatically in value, and anyone who buys ETH should be prepared for the potential loss of their funds.
- Using the network can get expensive. When a lot of people are using the network, gas fees can run high.
- Crypto still faces regulatory uncertainty: Changes in government rules could impact how ETH is traded, taxed, or allowed to operate. This could significantly impact prices.
- Competition could reduce future demand: Other blockchains offer cheaper or faster networks, and developers could shift traffic away from Ethereum.
Recommended: How Will the Genius Act Impact Stablecoin and Bitcoin?
How to Get Ethereum
Acquiring ETH is relatively straightforward:
Step 1: Buying Ether (ETH)
You may buy Ether (ETH) from select financial institutions, cryptocurrency exchanges, certain payment apps, or other platforms that support ETH purchases. You open an account, provide proof of identity, and link a payment method, such as debit card or bank transfer. Once your account is verified, go to the “Buy” or “Trade” section, select Ethereum (ETH), enter the USD amount, and confirm your purchase.
Step 2: Storing Your ETH in a Wallet
While exchanges and other platforms often offer built-in wallets, many crypto users prefer to move their holdings into personal wallets for greater control.
Cryptocurrency wallets fall into two main categories: hot wallets (software-based and online) and cold wallets (hardware-based and offline). Cold wallets have the potential to offer greater security by keeping crypto assets safe from online threats.
Keep in mind that whatever type of wallet you choose, a crypto wallet does not store the actual cryptocurrency; instead, it holds the private keys — secret codes that prove you own the crypto and allow you to authorize (sign) transactions. The cryptocurrency itself exists on the blockchain.
Step 3: Earning Rewards by Staking Your ETH
Staking your ETH involves committing your holdings to support the Ethereum network’s security and transaction validation process in return for passive income. Depending on the platform or wallet, staking may be as simple as enabling a feature in your account.
Keep in mind that crypto staking comes with risks. These include market market volatility (a sharp price drop in ETH could undermine your rewards) and third-party platform risk (hacks or mismanagement could result in loss of funds).
The Takeaway
Ethereum is a powerful blockchain network built for decentralized applications and smart contracts, with Ether (ETH) serving as its native cryptocurrency. While ETH is one of the most widely used cryptocurrencies, it is not primarily designed as a medium of exchange like Bitcoin. If you’re considering buying, holding, and selling ETH, remember that ETH is volatile, carries risks, and should be approached with careful research.
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FAQ
What is the main difference between Ethereum and Bitcoin?
Bitcoin was mainly designed as a peer-to-peer payment cryptocurrency. Ethereum, on the other hand, is a programmable blockchain platform designed to host decentralized applications and smart contracts, with its native cryptocurrency, ETH, serving as the network’s fuel.
How are new ETH coins created and distributed?
New Ether (ETH) coins are created and distributed through the process of staking. Under Ethereum’s current proof-of-stake system, users who lock up their existing ETH to act as validators are rewarded with new ETH for correctly validating new blocks of transactions. This reward system is the primary method for creating and distributing new Ether.
Can ETH be converted to cash?
Yes, Ether (ETH) can be converted to cash. This is typically done by selling your ETH on a cryptocurrency platform for government-backed fiat currency, such as U.S. dollars. Once the sale is complete, you can then withdraw the cash to your linked bank account or other payment method, though processing times can vary.
What are gas fees and how do they work?
Gas fees are the cost users pay, in Ether (ETH), to process transactions and execute smart contracts on the Ethereum network. They function like tolls, compensating the network validators for the computational power required to verify and secure the transaction data. The amount of the fee fluctuates based on the transaction’s complexity and the current level of traffic, or congestion, on the network.
Who created Ethereum?
The Ethereum project was originally proposed in 2013 by a programmer named Vitalik Buterin. It was co-founded by several others, including Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin, and officially launched in 2015.
Is there a supply cap on ether?
No, unlike Bitcoin, Ether (ETH) does not have a fixed supply cap. The total supply of ETH is subject to an ongoing issuance rate that is determined by the network’s protocol. However, a mechanism called “burning,” where a portion of the gas fees paid in ETH are permanently removed from circulation, is implemented with every transaction. This deflationary pressure aims to balance the new ETH created through staking rewards and can potentially lead to a decrease in the overall supply of ETH over time.
What are some examples of dApps on Ethereum?
There are many types of decentralized apps (dApps) on the Ethereum blockchain. Some examples include games (CryptoKitties), financial transactions and trades (Matcha), crypto trading (Sushi), and NFT trading (DODO).
How does Ethereum handle security and fraud prevention?
The security of the core Ethereum network relies heavily on its decentralized nature and the proof-of-stake (PoS) consensus mechanism. Decentralization — distributing data across a global network of computers — makes it extremely difficult for any single party to tamper with the records. The PoS system requires validators to stake a significant amount of ETH as collateral. This makes acting maliciously economically unfeasible, as validators can have their staked ETH “slashed” (forfeited) for incorrect or fraudulent behavior. The network’s open-source code also allows for continuous scrutiny and testing by the developer community.
While the core Ethereum network is generally thought to be secure, the security of an application running on the blockchain is dependent on the skill and diligence of its developers, as well as the potential of users falling victim to crypto scams or fraud attempts.
About the author
Samuel Becker
Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.
Article Sources
- Bloomberg Law. Blockchain ‘Smart Contracts’ – A New Transactional Framework.
- Chainlink. What Are Smart Contracts and How Do They Work?.
- Koinly. 10 Biggest and Best DeFi Crypto Projects 2025.
- Ethereum. The Merge.
Photo credit: iStock/insta_photos
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