What is Ethereum?

Ethereum is a decentralised, open-source blockchain platform that enables developers to build and deploy smart contracts and decentralised applications, known as dApps. It was proposed by Vitalik Buterin in 2013 and launched in 2015. Ethereum has its own native cryptocurrency called Ether, or ETH, which is used to pay for transactions and computational operations on the network. While Bitcoin is primarily a digital currency, Ethereum is better described as a programmable blockchain, a global computing platform that runs code in a trustless environment.

Bitcoin was designed primarily as a decentralised digital currency and store of value, with a fixed supply of 21 million coins and a simple scripting language. Ethereum was designed as a programmable blockchain that allows developers to write complex smart contracts and build decentralised applications on top of it. Ethereum has no hard supply cap, uses a proof of stake consensus mechanism since its 2022 Merge upgrade, and processes transactions faster than Bitcoin. Both are major cryptocurrencies, but they serve fundamentally different primary purposes.

Ether is the native cryptocurrency of the Ethereum network and serves two main purposes. First, it is used to pay gas fees, the transaction costs required to execute any operation on the Ethereum blockchain, from sending ETH to running a smart contract. Second, ETH functions as a store of value and investment asset, widely traded on cryptocurrency exchanges globally. Since the Merge in 2022, ETH holders can also stake their coins to help validate the network and earn staking rewards.

A smart contract is a self-executing program stored on the Ethereum blockchain that automatically carries out the terms of an agreement when predefined conditions are met. It requires no human intermediary, no bank, and no lawyer. For example, a smart contract can be set up to release payment to a supplier automatically when goods are confirmed as delivered, or to distribute tokens to investors when a funding target is reached. Smart contracts are transparent, tamper-proof, and run exactly as written, making them a foundational building block of decentralised finance and Web3.

The Merge was a landmark upgrade to the Ethereum network that occurred in September 2022. It transitioned Ethereum from a proof of work consensus mechanism, which required miners using large amounts of energy, to a proof of stake mechanism, where validators lock up ETH as collateral to participate in block validation. The Merge reduced Ethereum's energy consumption by approximately 99.95 percent and laid the foundation for future scalability upgrades. It was one of the most technically complex transitions ever executed on a major blockchain network.

Gas is a unit that measures the computational effort required to perform a specific operation on the Ethereum network, such as sending ETH, executing a smart contract, or minting an NFT. Users pay gas fees in Ether to compensate validators for the computing resources they contribute. Gas prices fluctuate based on network demand. When the network is busy, gas fees rise as users compete to have their transactions processed first. High gas fees have historically been a criticism of Ethereum and a key driver of the development of layer 2 scaling solutions.

Ethereum is the second-largest cryptocurrency by market cap and has a significant and growing ecosystem of applications built on it. Whether it is a suitable investment depends on your individual financial situation, risk tolerance, and investment goals. Ethereum carries the same volatility risks as other cryptocurrencies. It also has a clear use case in powering the growing world of decentralised finance, NFTs, and Web3 applications. As with any investment, you should research thoroughly and consider speaking with a financial adviser before committing funds.

Ethereum staking is the process of locking up ETH in the Ethereum network to help validate transactions and secure the blockchain. Since moving to proof of stake, Ethereum validators must stake a minimum of 32 ETH to run a full validator node and earn staking rewards. Smaller holders can participate in staking through pooled staking services or liquid staking protocols that allow participation with any amount. Staking rewards are paid in ETH and represent a yield on your holdings, though your staked funds are subject to lock-up periods and slashing risks if a validator behaves dishonestly.