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Ethereum is the smartphone of the blockchain world. Just as a smartphone is more than just a device for making calls—it can run apps, browse the web, handle games, and manage finances—Ethereum is more than just a blockchain for transactions like Bitcoin. It’s a platform where developers can build smart contracts and decentralized applications (dApps) that run on its network.
Hold up, what? That last sentence got a bit nerdy. Okay, let’s break that down.
Each “block” in the “chain” contains transactions and data, and just like real chains, they’re linked.
Ethereum has become the most widely used smart-contract network amongst all blockchain networks. There are plenty of other smart-contract networks out there now, but Ethereum leads the way, and it’s still the biggest player by a big stretch.
Alright, enough nerd talk. Here’s how you can impress your friends:
The term Ethereum is often used interchangeably with the cryptocurrency that powers the network. That’s not quite accurate — the fuel for the Ethereum network is called Ether (or $ETH for short).
$ETH is money in the Ethereum world. Ethereum is the network itself.
Think of it like a country. The country is the USA but the currency used is $USD. Similarly, the network here is Ethereum and the currency used is $ETH.
Vitalik Buterin — the Ethereum project’s best-known founder — published the Ethereum white paper in November of 2013, describing the soon-to-be network and how it would function. By 2015, the Ethereum network was live and processing transactions.
Vitalik Buterin is the most famous (and most memed) of Ethereum’s founders. (Don’t miss the Vitalik Pic of the Day in the Milk Road daily newsletter)
But the Ethereum project has several founders, including Charles Hoskinson, who went on to found IO Global, the company that’s now developing the Cardano project.
Many of Ethereum’s founders are still very active in the crypto space:
We already had Bitcoin, so why did we need Ethereum? Early crypto networks like Bitcoin and Litecoin offer peer-to-peer transactions without a bank in the middle. They were (and still are) effective as digital ledgers and payment rails. What they didn’t do was run programs. At least not well. The problem: they just don’t support enough programming commands.
The Ethereum white paper explains the reason for Ethereum in contrast to the existing crypto networks.
Here’s the TLDR: The Ethereum network was built to run decentralized applications (dApps), programs that run on a network of thousands of computers rather than on servers controlled by a single person, organization, or government.
The network runs on $ETH, which is the cryptocurrency you use to pay for using the network. So, $ETH is money. But the Ethereum network envisioned in the white paper would open up a new world of possibility beyond just payments from person A to person B — and it has.
In the white paper, Vitalik introduces the idea of smart contracts, which he describes as boxes that are only unlocked if certain conditions are met. Think of smart contracts like switches –- or like if-then statements. If this happens, do that.
Those smart contracts are what’s running under the hood of today’s dApps, including Aave, Uniswap, and more. We see a website that does cool crypto stuff. Behind the HTML and shiny buttons, there’s an app running on a blockchain — and it’s probably running on Ethereum or a Layer 2 network. We’ll cover Layer 2 networks in a bit.
Crypto prices (including Ethereum's Price) are volatile in the sense that they can explode to the upside or blow up your life savings. Since its launch, $ETH has made millionaires and billionaires — and broken more than a few hearts (and wallets) as well.
Like most markets, pricing is driven by supply and demand. Here’s how $ETH’s supply works:
Prior to 2022, $ETH was mined in a similar way to Bitcoin, using proof-of-work, a process that created ever-growing piles of $ETH. 2022’s change to proof-of-stake as the way to validate transactions changed the supply dynamics of $ETH. What was once an inflationary cryptocurrency is now closer to a stable supply.
But there’s another factor at play that affects $ETH’s supply. EIP-1559 (an Ethereum Improvement Proposal) introduced burning ETH. When you pay $ETH gas fees, the base fee is burned while the remaining fee (the tip) goes to network validators.
Burning just means sending $ETH to an unrecoverable address on the blockchain. Proof-of-stake creates new $ETH as staking rewards, but burning sees roughly the same amount destroyed. The result is a fairly stable or slightly deflationary supply — so far.
If you spend enough time in crypto, you’ll run across the phrase, “code is law,” which refers to the smart contracts being the final arbiter of whether something happens or doesn’t.
The transactions from these smart contracts are stored on the blockchain. Blockchains are a lot like databases, a way to store information. But here’s one big difference: Someone can delete a database or change its contents. Blockchains are designed to be immutable, meaning the records in each validated block of transactions never change. As new blocks of transactions and data are built and validated, they’re added to the chain.
Surely all of this can’t be free, right? That’s where $ETH comes in, which we’ll dig into next.
In the real world, nothing moves anywhere without energy. The same is true for Ethereum. Ether (or $ETH for short) is the fuel for the network, and that’s why network costs are called gas fees.
To make any transactions on the Ethereum network, you need to pay gas fees in the native currency - in this case, $ETH.
Think of it as a way to pay for processing power on the network. If you want to interact with a smart contract, you’ll have to part with some $ETH to do so. And the gas fees for using smart contracts can get spendy if the network gets busy.
Lastly, there’s another factor: the cost of $ETH itself. Imagine how much it might cost to do even simple transactions if the price of $ETH was spiking AND the network was busy. Yeah, that’s a problem.
Well, that’s why Layer 2 networks were developed. Basically, Layer 2 networks execute transactions at a lower cost and then send bundled transactions to the main Ethereum blockchain to be stored securely. Layer 2’s are a lot like taking the train for your city commute rather than driving. Layer 2’s move transactions in bulk.
$ETH is the fuel for the Ethereum network, but what are all these other crypto tokens, and what do they do? Well, tokens are other crypto assets on the network, and they have various uses. Some are used for voting, some track the value of other assets, like the US dollar or Bitcoin, others represent the ownership of an asset, like an NFT (non-fungible token).
To work with Ethereum, a token must follow standards, basically a set of rules. Otherwise, the network doesn’t know what to do on its own.
Here are the main token standard used by Ethereum:
In 2022, Ethereum switched from proof-of-work to proof-of-stake as the way the network validates transactions. Bitcoin, Litecoin, and Dogecoin still use proof-of-stake, which uses more energy compared to proof-of-stake, but both methods use financial incentives (or disincentives) to validate and secure transactions on the blockchain.
Let’s focus on proof-of-stake. In PoS, computers on the network check transactions to be sure they conform to the protocol, basically another set of rules. Each validator (also called a node) puts $ETH at stake.
If the other validators on the network catch one of the nodes approving blocks that don’t follow the protocol, the $ETH staked by that node can be slashed, meaning the network takes away part of the stake.
These validators don’t work for free. They earn rewards for validating blocks. And the entire community can participate. $ETH holders can stake their $ETH with a validator service to earn a yield from staking rewards.
After the switch from PoW to PoS, the Ethereum network reduced energy consumption dramatically. By comparison, Ethereum PoW uses an estimated 30,000 times more energy compared to PoS, and Bitcoin uses 50,000 times more energy.
Okay, so we understand that smart contracts are just programs that run on the network. But what can you do with them?
Aave is the biggest dApp in this category. The premise is simple. You deposit a supported asset like $ETH or $USDC to earn interest from borrowers. Often the returns are about 2% to 3%, but they can spike higher. You can also borrow by using your deposit as collateral.
If you want to swap some of your $ETH stack for another token you’ve been investigating, you can do that with a decentralized exchange (DEX) like Milk Road Swap or an aggregator that compares prices like OpenOcean. Read up on DEXs first, they’re not hard to use, but you’ll want to learn the ropes before you set sail.
Where do the tokens on DEXs come from? Traders like you. You can earn a solid return by providing tokens to a pool that other traders use for swaps. Again, you’ll want to learn about considerations like impermanent loss before you start randomly clicking buttons.
You can also provide liquidity for trading platforms like GMX, but you’ll need to use an Ethereum-compatible network. GMX supports the Arbitrum Layer 2 network, and Arbitrum can use $ETH natively.
Most of the big-name NFT collections are on the Ethereum network. You can buy NFTs on well-known platforms like OpenSea, but a new breed of NFT exchanges is going the decentralized route, using smart contracts so you can buy and sell without a middleman.
The new Blur NFT platform is a great example of this.
There are ways to bet on the future price of Ethereum and Bitcoin. Ethereum can run dApps that let you trade future prices right from your favorite recliner. Decentralized apps like GMX, which runs on the Arbitrum and Avalanche networks, let you bet your crypto with leverage of up to 50x.
Staking can have a lot of meanings in the crypto world. The most common in an $ETH context means putting some $ETH into a staking contract to help validate network transactions. In exchange, you can earn staking rewards.
One of the ways to stake your Ethereum is via liquid staking — lock up your $ETH to secure the network and receive a liquid staking token (LST) in return. You can then use these LSTs on other DeFi platforms to earn additional yield.
The most common platform for liquid staking on Ethereum is Lido in which you receive $stETH as your LST.
The decentralized crypto world runs on votes, like a true democracy. The Ethereum project itself uses votes to decide future changes to the project. $ETH holders can vote on Ethereum Improvement Proposals (EIPs).
Many projects in the Ethereum ecosystem issue governance tokens, making governance token holders the real owners. Uniswap is a great example. The $UNI token serves no other purpose other than voting on what comes next for the world’s biggest DEX.
How do you keep some of your crypto stack stable? Well, you can use stablecoins, which are ERC-20 tokens pegged to the value of a fiat currency or other benchmark. $USDC and $USDT are both examples of stablecoins that track the US dollar.
Ethereum is pretty amazing, but it has its drawbacks. First, it’s kind of slow… It’s faster than Bitcoin, but that’s not really an accomplishment. Second, it’s expensive – especially when the network is congested.
That’s why the universe gave us Layer 2 networks. These Ethereum-compatible networks let you do just about anything you can do on Ethereum for less money, and they’re faster too. The downside? You’ll have to bridge some funds into a Layer 2 network.
Layer 2 networks like Arbitrum and Polygon let you do more for less, and then they pass the transaction off to Ethereum in batches for its stellar security. It’s an Ethereum transaction in the end, but you saved a bunch of money by using a Layer 2.
| Decentralized Application | Category | TVL |
|---|---|---|
| Lido Finance | Liquid Staking | $25.5B |
| Aave | Lending / Borrowing | $11.7B |
| EigenLayer | Restaking | $10.9B |
| MakerDAO | Real World Assets / Stablecoin Issuer | $6.14B |
| Uniswap | Decentralized Exchange | $3.99B |
This is a ratio that compares the performance of $ETH directly to the performance of $BTC, instead of the U.S. dollar. Since most tokens generally move in the same direction, comparing these directly can give you a better sense of how $ETH is performing versus the OG crypto. Additionally, an outperformance from $ETH in this ratio can indicate that an alt-season may be coming.
A year after Ethereum launched, a debate broke out after a smart contract hack occurred. While the majority of Ethereum’s community voted to reverse the hack, others were opposed. And as a result of the two divided sides, the original blockchain was split in two. Ethereum is the new and improved blockchain that you hear about today, while Ethereum Classic represents the original deployment of the network.
Just like $WBTC represents the wrapped version of Bitcoin in DeFi, $WETH is a wrapped version of $ETH. This allows it to be used across other blockchains, while still holding value. This token is pegged to the value of Ethereum and can be redeemed for $ETH 1:1 at any time.
After Ethereum transitioned to proof of stake, all assets were replicated and business continued as normal on the new chain. However, the old chain still exists and is referred to as $ETHPOW, the proof of work version of $ETH. While this token still trades and may have a small community around it, there is no value left on this old blockchain.
The Ethereum project is constantly evolving and will likely take many years to fully play out. Regardless, it can be important to be aware of the next stages of its roadmap:
The price of $ETH is based on supply and demand, with demand dependent on macro conditions, and interest in the crypto sector. On the supply side, recent changes have made the supply slightly deflationary, meaning there are fewer $ETH to go around. Additionally, as more and more $ETH is staked, there will be less $ETH to buy on the open market.
Even after all of the progress, Ethereum is in the early stages of its deployment. If you believe in the future of Ethereum, it’s always a good time to buy. But it’s usually wiser to dollar-cost average or ease into your position. All cryptocurrencies are very volatile, but by buying a little bit at timed intervals, you can smooth out the highs and lows.
The most common way to buy Ethereum is through a centralized exchange like Coinbase or Binance. We’ve reviewed some of the best ways to buy Ethereum, exploring costs, security features, and more.If you use a wallet to explore DeFi, Ethereum is one of the most liquid assets across decentralized exchanges.
It’s generally a good idea to move your $ETH off centralized exchanges and into the safety of a wallet you control.Crypto wallets let you send and receive crypto but also open up a world of decentralized apps you can use with your wallet. If you have a larger amount of crypto, you can also use a company that provides crypto custody services or may want to consider cold storage.
Ethereum is decentralized, meaning the community votes on proposals for improvements to the network. This means that there’s no one person or organization that controls Ethereum.
Ethereum and Bitcoin serve different purposes and are rarely seen as competitors. Ethereum brings more functionality, while Bitcoin is regarded by many to be better as peer-to-peer money or a store of value. Both are considered to be “blue chip” cryptos and often move together in market upswings and downswings.
There are hundreds of thousands of ERC-20 tokens out there, with more being added daily. This is because on the decentralized web, any person or wallet can launch their own token in minutes. Additionally, each protocol running on Ethereum or a compatible network can have one or more tokens it uses for various purposes.
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