What is Ethereum (ETH)?

Ethereum is one of the largest and best-known cryptocurrencies in the world. It is a smart contract platform, meaning that Ethereum functions as an operating system for smart contracts and decentralized apps. This article is a beginner’s guide to Ethereum. We’ll review what Ethereum is, how it functions, what it is used for, and how it differs from Bitcoin and other smart contract platforms.

What is Ethereum?

Ethereum is the market-leading smart contract platform. It functions as an operating system for smart contracts and decentralized apps. Ethereum can be understood as Android, iOS, or Windows built on top of a blockchain.

The native token of the Ethereum platform is Ether (ETH). It is used for paying transaction fees on the Ethereum network. In addition, ETH is staked in the Proof of Stake consensus mechanism used by Ethereum.

Ethereum is by far the best-known cryptocurrency after Bitcoin. Since the beginning of the 2020s, it has also been the second-largest crypto by market cap with a clear margin.

Ethereum is not a direct competitor to Bitcoin in terms of its use case. Its biggest competitors in the smart contract platform category are BNB Chain (BNB), Solana (SOL), and Tron (TRX).

Quick Ethereum facts:

You can find the current Ethereum price from here: Ethereum price in EUR & USD.

How does Ethereum work from a technical point of view?

From a technical point of view, Ethereum is a network of thousands of servers. Each server runs the required Ethereum client and the EVM (Ethereum Virtual Machine) for smart contract execution.

Ethereum uses blockchain as its distributed database. It contains all transactions sent to the Ethereum network, as well as smart contracts and decentralized apps built on Ethereum.

As its name suggests, a blockchain consists of blocks linked (chained) together. You can think of one block as a list of transactions on the Ethereum network. One block can hold a limited amount of information.

Below is an image of Ethereum network transactions from the Etherescan.io website.

Transactions on the Ethereum network are paid with Ether (ETH tokens). In practice, transaction fees are referred to as gas fees, which describes digital gasoline.

A transaction on the Ethereum network proceeds as follows:

1. A transfer request is made from address A on the Ethereum network to address B (for example, 10 ETH tokens).
2. A gas fee is paid to validators for the transfer, with a portion of the transfer fee being burned.
3. Validators verify the transfer.
4. Validators add the transfer to a new block of the blockchain.
5. Validators update the blockchain to the new version.

Ethereum uses a Proof of Stake (PoS) consensus algorithm. The consensus algorithm functions as a rulebook for transaction validation. From 2015 to 2022, Ethereum used a Proof of Work consensus algorithm, meaning it started as a mineable cryptocurrency. Ethereum switched to Proof of Stake consensus in 2022 with The Merge update.

Since the switch to Proof of Stake consensus, Ethereum miners have been replaced by validators. These are entities that maintain the blockchain and stake Ethereum’s native token (ETH). Staking essentially means locking tokens out of circulation.

Ethereum validators receive staking rewards for this work. The amount of rewards varies depending on the number of validators. Typically, staking rewards range between 2 and 4 percent (as an annual return).

At the time of publication, Ethereum has approximately 958,000 validators, who have staked a total of approximately 37.3 million Ether. You can check the current figures on this page.

Ethereum Virtual Machine (EVM) processes Ethereum’s smart contracts. Each validator on the network has its own identical copy of the EVM. This guarantees that all validators process smart contracts the same way and reach identical outcomes.

Tokens on the Ethereum platform

Token creation is one of the most widely used features of smart contract platforms. Cryptocurrencies that are created on a smart contract platform are called tokens. Tokens do not have their own blockchain. For example, Bitcoin or Dogecoin are not tokens, but Tether and Chainlink are.

Each smart contract platform has its own token standards. The most used token standard on Ethereum is ERC-20. Any Ethereum user can create their own token and assign it the properties they want.

To transfer tokens issued on the Ethereum platform, you must have Ether in your wallet. If you have, for example, AAVE or LINK tokens in your Ethereum wallet, you will also need a small amount of Ether (ETH) for transfer fees. Other smart contract platforms operate based on the same principle.

Ethereum was the de facto standard for tokens in the early years of the project. Today, a large part of tokens are created on competing platforms, such as Solana. This is because token creation and transfers are so much cheaper on Solana.

What is Ethereum used for?

Ethereum has a wide range of uses thanks to its technical implementation. As we mentioned at the beginning of the article, Ethereum functions as an operating system for smart contracts and decentralized apps. It is like iOS, Android, or Windows built on top of a blockchain.

Like other operating systems, Ethereum provides a development environment for building various types of apps. Ethereum offers its own programming language (Solidity), a decentralized environment (blockchain and validators), and a large developer community.

Ethereum is based on open-source code and is also an open network, meaning anyone can create applications on it. Let’s go through the most well-known applications for Ethereum.

DeFi

Decentralized Finance (DeFi) is the most popular use case for Ethereum. This is because a blockchain is an ideal operating environment for financial applications. A blockchain is both open (program logic can be verified) and very secure (data cannot be modified).

The DeFi industry can be divided into four main categories:

1. Lending
2. Decentralized exchanges (DEX)
3. Derivatives
4. Staking

At the time of publication, the largest DeFi app on the market is Aave. It currently has over $26 billion in liquidity locked in. Aave enables a decentralized lending and borrowing market.

NFT

NFT stands for Non-Fungible Token – a unique token. The most common NFT use case is digital art, such as images and videos. The NFT industry gained widespread public attention during the 2021 crypto boom.

While tokens are increasingly being created on competing smart contract platforms, Ethereum is still home to the most valuable NFT collections. These include CryptoPunks, Bored Ape Yacht Club, and Pudgy Penguins. Below is a picture of the Bored Ape Yacht Club NFT.

The most popular NFT marketplaces, such as OpenSea, also operate on the Ethereum platform.

Other use cases

In addition to DeFi applications and NFTs, Ethereum also has numerous other use cases. Popular categories include:

• Gaming
• Gambling
• Social Media
• RWA
• Identity

In theory, similar applications can be created for the Ethereum platform as for Windows, iOS, or Android operating systems. It is mainly a question of which use cases the decentralized environment is best suited for.

Ethereum vs. Bitcoin

Ethereum and Bitcoin are by far the two best-known cryptocurrencies. They also have a significantly larger market cap than other cryptos. Below is a summary of their most significant features and how they differ.

Let’s take a look at how Ethereum and Bitcoin differ. The main differences are:

• Use case
• Consensus algorithm
• Monetary policy
• Block time
• Position in the market

Bitcoin was initially launched as a digital currency, but its role has increasingly shifted to what is now called digital gold. Ethereum was founded for different purposes. It functions as an operating system for decentralized applications.

Ethereum and Bitcoin were launched as mineable cryptocurrencies, meaning they both used the Proof of Work consensus algorithm. However, Ethereum switched to Proof of Stake consensus in 2022, so this similarity no longer exists.

There are significant technical differences between Ethereum and Bitcoin. While Bitcoin’s supply is capped at 21 million bitcoins, Ethereum has no fixed supply. On the other hand, Ethereum’s ETH tokens are burned upon use, which has even made Ether a deflationary currency in recent years.

Below is a picture of the development of the Ethereum supply.

Ethereum’s block time is about 15 seconds, which is clearly faster than Bitcoin’s 10-minute block time.

Ethereum has cemented its position as the second-largest cryptocurrency in the market in the 2020s and has also gained popularity among institutional investors. Despite this, it does not threaten Bitcoin’s position as the leading cryptocurrency. Bitcoin is still in a completely different class in terms of market value and brand recognition.

For a beginner, the most important thing to understand is that Ethereum was created for very different purposes. Ethereum competes mainly with other smart contract platforms, not Bitcoin.

Ethereum vs. other smart contract platforms

Ethereum’s competitors are in the smart contract platform category. Its biggest competitors by market cap are BNB Chain, Solana, Tron, and Cardano. In practice, there are dozens of worthy platforms on the market that are trying to challenge Ethereum.

For a beginner, the most important thing is to understand Ethereum’s strengths and weaknesses. Ethereum’s strength lies in its network effect and market status. Ethereum has the most application developers, the most brand recognition, the most liquidity, the most applications, and so on. Ethereum has a huge advantage due to its size and long history.

Ethereum’s weakness is the scalability of its main chain. Ethereum’s competitors scale to tens of thousands of transactions per second with block times of less than a second. Ethereum has lagged far behind in this regard.

Ethereum has so far scaled using Layer 2s. The idea has been to move traffic from the main chain to Layer 2s. The idea is somewhat similar to Bitcoin’s Lightning Network.

Ethereum’s biggest challenge is the scalability of its mainnet. This is where its development work will focus in the coming years.

Ethereum’s history

Vitalik Buterin is the founder and front figure of Ethereum. He described the Ethereum white paper as early as late 2013. Strictly speaking, the founders were a group of people, but Ethereum has always been strongly personified by Buterin.

Vitalik Buterin was under 20 years old when Ethereum was founded. At that time, he also worked at Bitcoin Magazine, so Buterin was well aware of Bitcoin’s possibilities and limitations.

Buterin believed that Bitcoin needed a programming language to develop better applications. He wanted to expand Bitcoin beyond being just a digital currency. Buterin was not the only one with similar ideas. Many other platform projects also began to develop around 2014–2015.

The Ethereum blockchain was launched in July 2015. The project’s popularity took off in 2016, when it also faced its most serious crisis in history. The ambitious project known as The DAO collapsed after cybercriminals exploited a vulnerability in its code.

The DAO hack was much more than just a financial loss. The biggest debate was about the aftermath of the incident, i.e., should the losses caused by the hack be compensated by rolling back the Ethereum blockchain? The incident was so significant that the community and the Ethereum blockchain split in two. Thus, Ethereum Classic was born.

Ethereum gained widespread public awareness during the ICO boom of 2017–2018. ICOs were used to crowdfund new cryptocurrencies, and they were almost invariably organized on the Ethereum platform. This brought enormous demand and awareness to Ethereum.

Ethereum’s next spike in popularity was during the DeFi and NFT booms of 2020–2021. DeFi apps began to develop in 2020 and were initially built on the Ethereum platform. In 2021, NFTs also became known to the general public for the first time. The most valuable NFT collections are still on the Ethereum platform.

Ethereum’s first competitors entered the market during the crypto boom of 2020–2021. Platforms such as BNB Chain, Polygon, Tron, and Solana began to significantly capture Ethereum’s market share.

Ethereum’s position has remained stable despite increased competition. Its market share has settled in the 55–60% range in recent years (DeFi liquidity). Below is a table of the current situation.

In 2022, Ethereum underwent The Merge, which moved it to Proof of Stake consensus. The upgrade was the largest and most complex in the history of cryptocurrencies, and it required years of planning. The Merge went through without a hitch.

In 2024, Ethereum became the first cryptocurrency after Bitcoin to have spot ETFs in the United States. In 2025, institutional investors also discovered Ethereum when the first Ethereum Treasury companies were launched under the leadership of American Tom Lee.

Summary

Ethereum is the largest and best-known cryptocurrency after Bitcoin. It is also one of the oldest cryptocurrencies still in operation. The Ethereum blockchain was launched back in 2015.

Ethereum and Bitcoin are often compared because they are the giants of the crypto market in terms of market capitalization and popularity. It is important for a beginner to understand that Ethereum and Bitcoin are not competing with each other. They are two very different cryptocurrencies.

Ethereum’s position is threatened by other smart contract platforms, not Bitcoin. Solana in particular is seen as Ethereum’s number one challenger, with significantly better scalability.

Although competition has intensified enormously in recent years, Ethereum’s position has remained stable. Competing smart contract platforms have, in fact, competed more with each other. There are already dozens of highly scalable solutions available, so the challenge for competitors is to stand out from the crowd.

Ethereum’s position further strengthened in 2024–2025 with the launch of spot ETFs and Ethereum Treasury companies. It has also become increasingly popular with institutional investors.

If you want to buy Ether, you can check out this beginner’s guide. It will walk you through step-by-step instructions for buying Ether (ETH) on a domestic exchange.