Ethereum (ETH): What It Is and How It Works

History of Ethereum

Bitcoin showed that a blockchain could run money without a bank, but its scripting language was deliberately narrow. Vitalik Buterin, then a 19-year-old programmer and writer in the Bitcoin community, proposed a blockchain with a full programming language built in, so developers could create any application on a shared, neutral computer. The Ethereum whitepaper appeared in late 2013, and a group of co-founders including Gavin Wood and Joseph Lubin joined to build it.

The network went live on July 30, 2015, with a release called Frontier. In 2016 a bug in The DAO, an early investment contract, let an attacker drain a large amount of ether. Ethereum hard-forked to return the funds, and the minority that rejected the fork kept the original chain running as Ethereum Classic.

Since then Ethereum has changed through named network upgrades:

The next upgrade, Glamsterdam, was listed on ethereum.org's roadmap in September 2026 as in development, targeted for the fourth quarter of 2026, with no activation date set.

The main network upgrades, with dates from ethereum.org:

According to the CCRI estimate cited by ethereum.org, The Merge cut Ethereum's annualised electricity use by more than 99.9%.

How Ethereum works

Ethereum is often described as a world computer: thousands of nodes run the same program, the Ethereum Virtual Machine (EVM), and agree on its state after every block.

Accounts. There are two kinds. Externally owned accounts are controlled by a private key held in a wallet. Contract accounts hold code, a smart contract, that runs exactly as written whenever a transaction calls it.

Gas. Every operation the EVM performs has a cost measured in gas, paid in ether. Gas stops spam and endless loops, because computation is never free. Since EIP-1559 each block has a base fee that rises when blocks are full and falls when they are empty. The base fee is burned, destroyed for good, and users can add a tip to be included faster. The full mechanics are covered under gas fee.

Validators and proof of stake. Since The Merge, blocks come from validators rather than miners. A validator locks 32 ETH as collateral and runs validator software. Time is divided into 12-second slots; in each slot one validator is chosen at random to propose a block and committees of others vote on it. After about two epochs (64 slots, roughly 13 minutes) a block is considered finalized. Validators earn newly issued ETH and fees for honest work, and can be slashed, losing part of their stake, for provably malicious behavior such as signing two conflicting blocks. Staking is the umbrella term for this process, including pooled and liquid staking for holders with less than 32 ETH.

Since The Merge, Ethereum produces a block every 12 seconds (one slot), and each block can carry hundreds of transactions: simple transfers, contract calls and layer-2 batches. In practice: a user who wants to trade on a layer 2 first bridges ETH from mainnet to, say, Arbitrum, paying mainnet gas once, then swaps there at a much lower fee, with the tokens arriving in seconds. Mainnet acts as the settlement layer; layer 2s carry the everyday activity.

Ether (ETH) and its supply

Ethereum is the network; ether is its currency, although people commonly say “Ethereum” for both. ETH has three main jobs: it pays for gas, it is the collateral validators stake, and it serves as money inside applications, where it is lent, borrowed and traded.

Unlike bitcoin, ETH has no fixed maximum supply. New ether is issued to validators as rewards, while the base fee of every transaction is burned. When network activity is high, the burn can exceed issuance and total supply shrinks; when activity is low, supply grows slowly. The net result changes over time and can be followed on public dashboards and the circulating supply figure.

Ether divides into very small units. The smallest is the wei (10⁻¹⁸ ETH), and fees are usually quoted in gwei, one billionth of an ether. Live quotes and charts are on the Ethereum price page.

Because EIP-1559 burns the base fee, the ETH burned during busy periods can exceed new issuance, making ETH net-deflationary for those periods; in quiet periods, net supply grows. ETH's supply therefore follows network usage rather than a fixed cap.

What Ethereum is used for

• Decentralized finance. DeFi applications such as Uniswap and Aave let people trade, lend and borrow through smart contracts instead of intermediaries.
• Stablecoins. Many dollar-pegged stablecoins are issued as tokens on Ethereum and move between wallets like any other token.
• NFTs. Standards such as ERC-721 made NFTs possible: unique tokens that represent art, collectibles, tickets or in-game items.
• Tokens of every kind. The ERC-20 standard defines how fungible tokens behave, which is why wallets and exchanges can support new tokens without custom work.
• Organizations and identity. DAOs run treasuries and votes on-chain, and the Ethereum Name Service maps readable names to addresses.
• Tokenized real-world assets. Funds, bonds and shares are increasingly issued or mirrored as tokens, as described under tokenized stock.

Layer 2 and scaling

Ethereum's main chain processes a limited number of transactions per block, and fees rise when demand is high. Its scaling plan relies on layer-2 networks, mainly rollups, which execute transactions off the main chain and post compressed data and proofs back to it.

• Optimistic rollups, such as Arbitrum and Optimism, assume batches are valid and allow a challenge window in which fraud can be proven.
• ZK rollups attach a zero-knowledge proof that mathematically shows each batch was executed correctly.

The Dencun upgrade of March 2024 gave rollups a cheaper place to post data (blobs), which lowered their fees considerably. Layer 2s inherit much of Ethereum's security, but each adds its own risks, such as upgradeable contracts or a single sequencer ordering transactions.

Ethereum vs. Bitcoin

The two are not direct competitors so much as different designs: Bitcoin keeps its base layer simple and conservative, while Ethereum accepts more complexity to host applications directly on-chain.

Risks to understand

• Smart-contract risk. Code runs exactly as written, including its bugs. Exploits of DeFi protocols and bridges have caused large losses, and on-chain transactions cannot be reversed.
• Fee spikes. During heavy demand, main-chain gas fees can make small transactions uneconomic.
• Staking risks. Validators can be slashed, withdrawals wait in a queue, and liquid staking tokens add their own contract and pricing risks.
• Volatility and regulation. ETH's price swings widely, and its legal treatment differs by country and continues to evolve.
• Approval scams. Malicious sites trick users into signing token approvals or blind-signing messages that let an attacker move funds.

How ether is stored

Any Ethereum-compatible wallet can hold ETH and Ethereum tokens, and the same address also works on EVM-based layer-2 networks. A hot wallet such as a browser extension or phone app suits everyday use with applications, while a hardware wallet or other cold wallet keeps keys offline for larger balances. Both depend on the seed phrase created at setup: whoever has those words controls every account derived from them.

Two habits matter on Ethereum in particular: read what a transaction or signature request actually allows before approving it, and review and revoke old token approvals that applications no longer need.