What is Ethereum?

More than a currency

Bitcoin proved that you could create digital money without a central authority. Ethereum, proposed by Vitalik Buterin in 2013 and launched in 2015, asked a bigger question: what if you could run any program on a blockchain, not just financial transactions?

The answer is Ethereum. It is a decentralized computing platform -- sometimes called the "world computer" -- that executes programs called smart contracts. ETH is the network's native token, used to pay for computation, but Ethereum the platform is far more than ETH the currency.

Smart contracts: programs that run themselves

A smart contract is a program deployed to the Ethereum blockchain that executes automatically when certain conditions are met. The analogy people reach for most often is a vending machine: you insert the correct amount, select your item, and the machine delivers it. No negotiation, no intermediary, no trust required. The machine follows the rules every time.

Smart contracts work the same way, but for financial operations. A lending protocol's smart contract might say: "If a user deposits 1 ETH as collateral, let them borrow up to $2,000 worth of USDC. If the value of their collateral falls below $2,200, automatically liquidate it." These rules are transparent, verifiable, and enforced by the network itself.

This is what makes Ethereum different from Bitcoin. Bitcoin can transfer value. Ethereum can execute arbitrary logic.

What you can do on Ethereum

The Merge: from mining to staking

In September 2022, Ethereum completed "The Merge" -- the most significant upgrade in its history. The network transitioned from Proof of Work (mining with energy-intensive hardware) to Proof of Stake (validating with staked ETH). The result was a 99.95% reduction in energy consumption overnight.

Under Proof of Stake, validators lock up (stake) 32 ETH to participate in block production. They are chosen to propose and attest to blocks based on their stake. Honest behavior is rewarded with ETH; malicious behavior is punished by "slashing" -- confiscating some or all of their staked ETH.

Staking ETH

Staking is how you earn yield on ETH while helping secure the network. There are several approaches:

• Solo staking. Run your own validator with 32 ETH. Maximum decentralization, but requires technical knowledge and reliable hardware.
• Liquid staking. Services like Lido (stETH) and Rocket Pool (rETH) let you stake any amount of ETH. You receive a liquid staking token that represents your staked ETH plus accumulated rewards. You can use this token in DeFi while your ETH earns staking rewards.
• Exchange staking. Centralized exchanges like Coinbase offer staking with minimal setup. Convenient, but you trust the exchange with your ETH.

Current staking yields are approximately 3-4% APR, paid in ETH.

Gas fees

Every action on Ethereum costs gas -- a fee paid in ETH to compensate validators for processing your transaction. Simple transfers cost less gas than complex smart contract interactions. During periods of high demand, gas fees can spike to $50 or more per transaction.

This is why Layer 2 networks exist. They batch many transactions together and submit them to Ethereum as a single transaction, reducing per-transaction costs to pennies. For a deeper understanding of gas mechanics, see our guide on gas fees.

Layer 2s: cheaper Ethereum

Layer 2 (L2) networks are separate blockchains that inherit Ethereum's security while offering dramatically lower fees and faster confirmation times. The major L2s include:

• Arbitrum -- The largest L2 by TVL. Optimistic rollup with a thriving DeFi ecosystem.
• Optimism -- Optimistic rollup powering the "Superchain" vision. Home to Velodrome and other native protocols.
• Base -- Built by Coinbase. Rapidly growing, particularly for consumer applications.
• zkSync -- Uses zero-knowledge proofs for faster finality than optimistic rollups.

Most new Ethereum users interact primarily with L2s, where a swap might cost $0.05 instead of $5.

ETH vs. BTC

These are complementary assets, not competitors. Bitcoin excels as a monetary asset with a credibly fixed supply. Ethereum excels as a platform for building decentralized applications. Most diversified crypto portfolios hold both.

ERC-20 tokens

ERC-20 is the standard for creating tokens on Ethereum. When you hold USDC, UNI, LINK, AAVE, or any of the thousands of other tokens on Ethereum, you are holding ERC-20 tokens. The standard defines a common set of functions (transfer, approve, balanceOf) that all tokens implement, making them compatible with every wallet, exchange, and DeFi protocol in the ecosystem.

This standardization is one of Ethereum's greatest strengths. A new token can be instantly tradable on Uniswap, lendable on Aave, and visible in any Ethereum wallet -- all without any integration work -- because it follows the ERC-20 standard.

ETH as "ultrasound money"

EIP-1559, implemented in August 2021, changed how Ethereum's fee market works. Instead of all fees going to miners (now validators), a portion of each transaction fee -- the "base fee" -- is permanently burned, destroying ETH. When more ETH is burned in fees than is created through staking rewards, the total supply of ETH decreases. This makes ETH potentially deflationary -- fewer tokens over time, the opposite of inflationary currencies.

During periods of high network activity, ETH has been consistently deflationary. The Ethereum community calls this "ultrasound money" -- a play on Bitcoin's "sound money" narrative, arguing that a deflationary asset is even harder money than one with a fixed supply.

The Ethereum ecosystem

Ethereum has the largest developer community, the most DeFi protocols, and the highest total value locked of any blockchain ecosystem. This creates a powerful network effect: developers build on Ethereum because that is where the users are, and users come to Ethereum because that is where the applications are.

Understanding how the Ethereum ecosystem fits together -- mainnet, L2s, DeFi positions, staking rewards -- is essential for managing a crypto portfolio. For the foundational concepts, start with our blockchain basics guide.