What is Ethereum? How it works and what ether is for

Ethereum is a blockchain, just like Bitcoin: a public ledger kept by thousands of computers at once. The big difference? On Ethereum you can also put programs. They're called smart contracts. They do exactly what's written in them, for everyone, with no company in the middle.

That makes Ethereum more than money. It runs exchanges with no company behind them (DeFi), stablecoins such as USDC and EURC, and plenty more besides. Ethereum is the network; ether (ETH) is the coin you need to use it.

Smart contracts: programs nobody can stop

A smart contract is a bit of code on the blockchain. Send something to it, and the network carries out whatever it says. For example: give this person coin A in exchange for coin B. Nobody has to approve it, and nobody can stop it halfway. Handy, but risky too: if there's a bug in the code, anyone can exploit it.

Ether and gas: paying for computing work

Everything you do on Ethereum takes computing work. You pay for that with transaction fees in ether: gas. The busier the network, the more it costs. Since the London upgrade in August 2021, part of those fees gets burned; that ether is then gone for good. Gas fees are often shown in gwei, a billionth of an ether.

Proof of stake: validators instead of miners

Until September 2022, Ethereum used miners, just like Bitcoin. Since The Merge, validators make the blocks. They lock up ether as collateral. Play fair and you get a reward; cheat and you lose part of your stake. A new block arrives every twelve seconds. You can become a validator yourself from 32 ETH, with a computer that's always on. With less, you can take part through a platform; what that earns and what the risks are is in staking explained.

Layer 2: cheaper via a side road

Because Ethereum itself can get busy and expensive, people have built layer 2 networks such as Arbitrum, Optimism and Base. They bundle up lots of transactions and only put the end result on Ethereum. Since the Dencun upgrade in March 2024, that's a lot cheaper.

In late 2013, programmer Vitalik Buterin wrote a white paper about a blockchain that could hold programs as well as money. He felt Bitcoin was too limited for that. Together with a group of co-founders he built Ethereum, and on 30 July 2015 the network went live with a first, bare-bones version: Frontier.

A year later, things went wrong. The DAO, a kind of investment fund built as a smart contract, was drained through a bug in its code. To get the money back, the majority decided to change the blockchain: the DAO fork of 20 July 2016. One group didn't agree and carried on with the old chain. That's now called Ethereum Classic.

The biggest change came on 15 September 2022: The Merge. Ethereum stopped mining and switched to proof of stake. According to an estimate by research firm CCRI, that cut its electricity use by more than 99.988% (ethereum.org). Upgrades followed that made staking more flexible and layer 2 cheaper.

Bitcoin mainly wants to be sound money: simple, predictable, and never more than 21 million coins. Ethereum is more of a platform: you can build all sorts of things on it, and the rules change more often through upgrades. Bitcoin runs on mining, Ethereum on staking. And while the number of bitcoin is fixed, ether has no fixed cap.

Which of the two suits you, or both, is in Should you buy Bitcoin or Ethereum?. There's more on Bitcoin itself at what is Bitcoin.

Just like bitcoin, ether itself has no issuer that needs an authorisation. Europe's crypto law MiCA does apply to the companies that buy or store ether for you: they need an authorisation. You can see which platforms have one in our authorisation register.

How staking rewards are taxed depends on the country. That's in our overview of crypto tax in Europe.

• Price risk. The value can drop a lot in a short time. Only put in money you can afford to lose.
• Bugs in smart contracts. A bug in the code can cost you money, and there's no undo.
• Fake sites and approvals. A fake site gets you to approve a contract that then empties your wallet. Never sign anything you don't understand.
• High fees when it's busy. When the network is busy, even a simple transaction can cost a fair bit of gas.
• Staking risk. Through a platform you're trusting that company, and as a validator you can lose part of your stake if something goes wrong.