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What is Ethereum (ETH)?

Ethereum is the most prominent smart contract platform on the market. Vitalik Buterin is the founder and the frontman of Ethereum. Ethereum’s success has been driven by three megatrends: ICO, DeFi, and NFT.

Ethereum gained broader awareness thanks to the 2017 ICO boom. During the DeFi boom of 2020 and 2021, decentralized apps built on Ethereum gained millions of users. NFT collections on the Ethereum platform became a phenomenon in 2021.

Ethereum is built as an operating system for smart contracts and decentralized applications. Ethereum’s greatest strength is its network effect. The Merge, which took place in September 2022, was the most significant update of Ethereum. Ethereum’s future looks bright after major technical updates in the 2020s.

What is Ethereum (ETH)?

Ethereum is the most prominent smart contract platform on the market. Ethereum is an operating system for smart contracts and decentralized apps. Thousands of different applications have already been built on the Ethereum platform. Its biggest competitors are e.g. BNB Chain, Cardano, and Solana.

Ethereum has historically been called a second-generation cryptocurrency. Bitcoin was the first cryptocurrency, but Ethereum was the first smart contract platform that offered the ability to build decentralized applications. The Ethereum blockchain was launched in July 2015.

Ethereum initially used the Proof of Work consensus like Bitcoin, i.e., it was a mineable cryptocurrency. In 2022, Ethereum moved to Proof of Stake consensus with The Merge update. At the same time, Ethereum mining ended.

Ethereum’s native token is Ether (ETH). It is used on the Ethereum platform to pay transaction fees and staking.

Basic information about Ethereum:

Category Smart contract platform
Ticker in exchanges ETH
Circulating supply 122M ETH
Max supply No limit
All-Time High (date) $4890 (16-Nov-2021)
All-Time Low (date) $0.42 (20-Oct-2015)

Follow the price of Ethereum from here: Ethereum price.

Ethereum’s challenge has historically been poor scalability. This area has improved significantly with Layer 2 solutions. Arbitrum and Optimism are the most popular Layer 2 solutions with the Polygon sidechain. These technologies have shifted the transaction load off the Ethereum blockchain considerably and scaled the Ethereum ecosystem.

This article is an Ethereum beginner’s guide. It covers Ethereum’s history, technology, and future potential as an investment.

Ethereum’s history

Vitalik Buterin is the founder and the frontman of Ethereum. He described Ethereum’s white paper at the end of 2013. A group of individuals founded Ethereum, but Buterin has always been the person who gives the face and the voice to the Ethereum community. Below is a picture of Vitalik Buterin.

vitalik buterin

Cardano founder Charles Hoskinson and Polkadot founder Gavin Wood were also part of Ethereum’s core team in its early stages. However, the men went their separate ways to develop competing solutions.

Vitalik Buterin was under 20 years old when Ethereum was founded. Back then, Buterin worked for Bitcoin Magazine. He was well aware of Bitcoin’s limitations and possibilities.

Buterin argued that Bitcoin needs its programming language for building decentralized applications. He wanted to expand Bitcoin to be more than just a currency. Vitalik Buterin wasn’t alone. Many other platform projects were launched in 2014 and 2015 too.

Bitcoin is famous for its slow development process. Changes happen rarely, and they are difficult to make. This drove Buterin to create his cryptocurrency.

Do you know where the word Ethereum comes from? Buterin explains the origins in the following tweet.

Ethereum was funded through an ICO in August 2014. It gathered a lot of interest from many OGs in the crypto industry and raised about 20 million dollars. This is a small amount compared to funding rounds today, which are hundreds of millions of dollars.

The genesis block of the Ethereum blockchain was created in July 2015. The platform didn’t take off until 2016. This was also when Ethereum faced its worst crisis to date. An ambitious project called The DAO collapsed due to a vulnerability in its smart contract.

The aftermath of this hacking caused massive debates in online forums and social media. Should the victims be reimbursed? The crisis split Ethereum in half. The blockchain was hard forked into two chains. The Bitcoin community also did this in 2017 when Bitcoin Cash was born. The difference is that Ethereum is the new branch.

Many newcomers assume that Ethereum Classic was hard forked from Ethereum. It’s the other way around. Ethereum was the hard-forked chain, but it became so much more popular than Ethereum Classic that it became de facto Ethereum.

The ICO, DeFi, and NFT booms

Ethereum’s success has been driven by three megatrends: ICO, DeFi, and NFT. These booms (and busts) strengthened Ethereum’s market status and changed the entire crypto industry.

The ICO boom (2017-2018)

Ethereum got broader awareness thanks to the ICO boom of 2017. Crowdfunding was already a thing in the crypto industry, but ICOs held on the Ethereum platform gained extraordinary popularity in 2017. ICOs raised the price of Ether (ETH) so much that in the summer of 2017, it almost reached the Bitcoin market cap. Bitcoin’s market share fell from about 85% to 37% in months (March-June 2017).

The ICO boom made Ethereum a significant project in the crypto industry. Before 2017, altcoins didn’t receive much attention. Thanks to Ethereum, other altcoins gained status in the market previously dominated by Bitcoin.

The ICO frenzy that started in the spring of 2017 lasted about a year. Ethereum reached its all-time high ($1432) on January 13, 2018. The next time the Ethereum price crossed that line was three years later!

The DeFi boom (2020-2021)

During the DeFi boom of 2020 and 2021, decentralized apps built on Ethereum gained millions of users. The DeFi boom can be divided into two stages. The first one lasted just a few months in the spring of 2020. This means there were almost two years of silence (Q2/2018 – Q2/2020) in the market after the previous bubble (ICOs) burst.

DeFi comes from the words decentralized finance. The term is an umbrella that covers all decentralized financial applications. These include lending protocols, decentralized exchanges, and many other financial protocols. They operate independently through smart contracts. The end-user communicates with the apps using a Web 3 wallet like MetaMask.

The first stage of the DeFi boom raised a major problem for Ethereum: transaction fees (gas fees) went up significantly. This was due to massive traffic caused by the DeFi apps. Ordinary cryptocurrency transactions cost up to tens of dollars, and transactions in decentralized exchanges were in the 100-200 dollar region.

The first DeFi bubble burst in the autumn of 2020, but the sector came to life again in early 2021. At that time, there was also a significant change in Ethereum’s dominance. Competing platforms began to eat its market share. Many popular DeFi apps were launched on BNB Chain and other platforms. Ethereum’s market share dropped from around 97% to 60% in the DeFi sector during 2021.

The table below shows the ranking of smart contract platforms in terms of liquidity (TVL).

PlatformNative tokenTVLMarket share
Ethereum ETH $50.3 billion 57.0%
Tron TRX $9.5 billion 10.7%
BNB Chain BNB $5.7 billion 6.3%
Solana SOL $4.6 billion 5.2%
Arbitrum ARB $3.2 billion 3.6%
Blast BLAST $1.3 billion 1.5%
Avalanche AVAX 1.2 billion 1.4%
Base - 1.2 billion 1.3%

The data above is from It shows the state of the DeFi sector in March 2023. TVL stands for Total Value Locked. It tells how much liquidity is stored in different applications, measured in dollars. Ethereum dominates the market, but there are currently at least half a dozen viable alternatives to it.

The NFT boom (2021)

NFT collections on the Ethereum platform became a phenomenon in 2021. NFT (Non-Fungible Token) refers to technology that enables the creation of unique tokens. Digital art is a good example: an image or a video. Each work of art is a unique NFT, which can be stored in a cryptocurrency wallet just like regular cryptocurrencies.

The first part of the NFT boom occurred in the spring of 2021, but the sector exploded again at the end of 2021. Investors have paid millions for Cryptopunks and Bored Apes Yacht Club NFTs. You can view the most popular collections at

bored apes

The NFT boom has also boosted the popularity of alternative platforms. Their selling point is low transaction costs compared to Ethereum. However, the market is dominated by the OpenSea marketplace on the Ethereum platform. Ethereum has a well over 90% market share in the NFT sector.

The ICO boom brought much attention to Ethereum, but it was mainly about raising money and speculating. The DeFi sector introduced useful apps that millions of people use every day. NFTs brought in a lot of speculative money, but the technology is also related to the gaming world and metaverses.

Ethereum and smart contracts

Ethereum is built as an operating system for smart contracts and decentralized applications. It could also be described as an operating system, meaning you can compare Ethereum to Android, iOS, or Windows. The main function of an operating system is to provide a framework for developers to build applications. These are called dapps in the blockchain world.

Although Ethereum was the first known smart contract platform, the situation is different today. About 20 significant projects are competing in the sector. New ones are constantly being launched. All smart contract platforms offer the same thing, but differences arise from the technology used, the background team, and the programming languages.

Ethereum needs to attract as many application developers as possible. This group then builds dapps that end users are happy to use. The more developers there are, the more likely a “killer app” will be developed. In addition, the Ethereum platform itself must be developed further.

You can program almost anything on a platform like this. The question is more about what applications best suit the blockchain environment. The DeFi apps described above are the best examples. In addition, games built on Ethereum can take advantage of NFT technology and introduce a new kind of play-to-earn mechanism compared to traditional games.

Smart contracts are at the heart of decentralized applications. They are pieces of software stored in the blockchain that can be assigned different functions.

ethereum smart contract

The point of a smart contract is that it is a decentralized program that cannot be manipulated or altered. This piece of code carries out its orders with 100% certainty. No one can delete or destroy a smart contract, as it is stored in a decentralized manner on thousands of nodes on the Ethereum network.

Other smart contract platforms operate on a similar basis as Ethereum. However, Ethereum has the advantage of the network effect. Most of the world’s app developers build apps on the Ethereum platform.

It is essential to understand that Ethereum does not compete with Bitcoin. Ethereum is made to solve completely different problems. To compare Ethereum to something, compare it to other smart contract platforms.

Ethereum vs. competitors

Ethereum’s greatest strength is its network effect. Ethereum has gotten many developers and investors behind it over the years. Over time, the gap with the competitors grows even more. Ethereum has even more app developers than Bitcoin.

Although other alternatives have entered the market, Ethereum still has a massive lead. Most of the development is done continuously on the Ethereum platform. Competing projects are called third-generation solutions, which means platforms that scale to thousands of transactions per second.

The image below: Solana is one of Ethereum’s biggest competitors.


The main difference between Ethereum and third-generation platforms used to be the consensus algorithm. Ethereum’s Proof of Work required physical miners to run the block production, but this changed in September 2022 when Ethereum transformed to Proof of Stake consensus. In the following chapter, we’ll review the impact of this upgrade (The Merge).

Even if Ethereum is a PoS platform, it still has limited transaction capacity. The network can only process about 15 transactions per second, while competitors can handle thousands. This will change soon with scalability upgrades. In the meantime, Ethereum is using Layer 2 solutions. Bitcoin has made the same choice with its Layer 2 technology called the lightning network.

There are also differences in programming languages. All Ethereum smart contracts must be written in Solidity and developed for this purpose only. Some platforms support other programming languages.

Suppose we forget the technical differences; the main question is how to attract developers. Consider the difference between Android and iOS operating systems. After all, it’s a matter of which platform has the most popular applications.

Each platform strives to attract the best developers and provide them with support in application development. In addition, a huge number of coders are developing the actual system. Ethereum currently has four times more developers than the next project. Which is Bitcoin, by the way.

The Merge

The Merge, which took place in September 2022, was the most significant update of Ethereum. It had been prepared for years, and The Merge was also the most important event of 2022 in the crypto industry.

The most visible change in The Merge was Ethereum’s transition from Proof of Work consensus to Proof of Stake consensus, which means that Ethereum mining ended

In addition to mining, The Merge has another significant impact. Ethereum’s inflation has dropped to negative after the update, i.e., on the side of deflation!

The graph below shows the evolution of Ethereum inflation at the beginning of December 2023, i.e., 445 days after The Merge. As you can see, the number of ETH tokens in circulation is currently lower than at the time of The Merge update. The supply of Ethereum has been reduced by over 290,000 ETH.

ethereum supply

The more Ethereum is used, the more transaction fees are burned. If this burning exceeds the staking rewards paid to the validators, the amount of Ether in circulation will decrease. You can follow the exact numbers on the website.

Investors need to understand that giving up mining and switching to Proof of Stake consensus is not yet the key to scalability. Ethereum’s transaction capacity or block time did not change with The Merge.

There are still many important steps left in Ethereum’s roadmap. The scaling update is coming next, which will finally be improved in 2023. Before that, the transaction bottleneck is widened with Layer 2 solutions. The most popular L2s are Optimism and Arbitrum. Polygon Pos Chain, built as Ethereum’s sidechain, also significantly impacts scaling Ethereum.

Ethereum as an investment

Ethereum’s future looks bright after major technical updates in the 2020s. It has dominated the smart contract platform niche so far with outdated technology. The Merge update and the subsequent hard forks bring Ethereum technically to the level of its competitors.

In addition to the Ethereum “base layer,” there is massive development at Layer 2 platforms and sidechains. Optimism and Arbitrum have become the most popular Layer 2s, and both have also launched their native tokens. Polygon is a sidechain of Ethereum and has already become one of the top 10 cryptocurrencies.

By 2022, the Ethereum killers will have gained popularity with more advanced technology (transaction capacity). Soon, the most significant selling point of competing options will be gone. We believe that the combined market share of Ethereum plus its Layer 2s and sidechains will keep growing further.

We are likely to see specialization in the smart contract platform sector. Some projects can focus on games or the NFT sector, for example. Smart contract platforms tend to offer a little bit of everything right now. This is not sustainable in the long run.

The Merge update makes Ethereum an even more attractive investment for institutions. Ethereum is now ESG compatible, and the 4-5% yield from staking is a significant advantage compared to Bitcoin. Bitcoin mining also receives a lot of criticism from the public, and holding BTC does not pay any yield like holding ETH does.

Investing in Ethereum more and more with the help of other instruments is possible. For example, as many as three Ethereum ETFs were approved in April 2021 in Canada. Ethereum also receives institutional investment through Grayscale’s funds. It is the only cryptocurrency with Bitcoin that gets significant investments from institutional investors.

The future of Ethereum looks bright. The Merge update has been completed, Layer 2 solutions help the scalability, and Ethereum’s position as a leading platform is stable.

If you are interested in buying Ethereum, check this beginner’s guide: how to buy Ethereum.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.