Note · Bitcoin and crypto
What is Ethereum? The blockchain that runs programs
Ethereum is a blockchain that runs programs called smart contracts as well as payments. Its currency, ether, pays for the computing, and it has used proof of stake since 2022.
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Contents · 6 sections
Ethereum is a public blockchain that runs programs as well as payments. Bitcoin's ledger records who owns which coins; Ethereum's also stores small programs, called smart contracts, that anyone can use and nobody can quietly change. Its currency, ether (ETH), pays for the computing those programs need. It was proposed by the programmer Vitalik Buterin in 2013 and launched in 2015.
In short
- Ethereum is a shared computer as well as a shared ledger: programs on it run exactly as written, for anyone who calls them.
- Every action costs a fee in ether, measured in units of computing called gas.
- Since September 2022, Ethereum has been secured by proof of stake instead of mining, which cut its energy use by about 99.95%.
What does Ethereum do that Bitcoin doesn't?
It runs general-purpose programs. Bitcoin was built to do one job, move bitcoin, and its scripting language is kept deliberately limited. Buterin's white paper, released on 27 November 2013 according to ethereum.org's timeline, proposed a blockchain with a full programming language built in, so that people could write their own rules for money, ownership and agreements and have every computer on the network enforce them.
| Bitcoin | Ethereum | |
|---|---|---|
| Main purpose | Digital money | A platform for programs, and money to pay for them |
| Launched | January 2009 | July 2015 |
| How blocks are agreed | Proof of work (mining) | Proof of stake (since September 2022) |
| Time between blocks | About 10 minutes | 12 seconds per slot |
| Supply | Capped at 21 million | No fixed cap; new issuance partly offset by burned fees |
| Programs | Limited scripts | Smart contracts in full programming languages |
Both are public blockchains that anyone can read, and both are run by thousands of independent computers. The difference is what the ledger is for.
What is a smart contract?
A smart contract is a program stored on Ethereum that runs automatically when someone sends it a transaction. Once deployed, its code is public and runs the same way for everyone, with no company in between. The word "contract" is a little misleading: it is not a legal document, but more like a vending machine. Put in the right input and you get the output its code promises.
A worked example: a crowdfunding contract
Suppose a group wants to raise 100 ETH for a project by 1 March, with refunds if the target isn't met. On Ethereum, the rules can be a smart contract:
- Deploy. The organizer publishes the contract. Its code says: accept ETH until 1 March; if the total reaches 100 ETH, let the organizer withdraw it; if not, let each contributor withdraw what they put in.
- Contribute. People send ETH to the contract's address. The contract records each amount against the sender's address, in public.
- The deadline passes. Suppose 80 ETH came in. No one decides what happens next; the code already has.
- Refunds. Each contributor calls the contract's refund function and gets their ETH back. The organizer can't take the 80 ETH, because the code doesn't allow it.
No bank or platform holds the money in between, and no one can change the rules halfway. The same property cuts both ways: if the code has a bug, the bug also runs exactly as written. In June 2016 an attacker exploited a flaw in a large investment contract called the DAO and drained a third of its funds. The community split over whether to undo it; most of it reversed the theft with a change to the chain on 20 July 2016, and those who refused carried on the original chain as Ethereum Classic.
What is ether, and what is gas?
Ether is the network's currency. Every transaction pays a fee in ether, and the fee depends on how much computing the transaction uses, measured in gas. A plain transfer of ETH from one account to another uses 21,000 gas, according to ethereum.org's guide to gas; a call to a complex contract uses more. Prices are quoted in gwei, a billionth of an ether.
Since an upgrade in August 2021, set out in EIP-1559, each fee has two parts: a base fee set by the network, which rises when blocks are full and falls when they aren't, and an optional tip to the validator. The base fee is burned, destroyed rather than paid to anyone. For a plain transfer when the base fee is 3 gwei and the tip is 0.5 gwei:
| Step | Calculation | Result |
|---|---|---|
| Gas used | Plain transfer | 21,000 gas |
| Price per unit of gas | 3 gwei base fee + 0.5 gwei tip | 3.5 gwei |
| Total fee | 21,000 × 3.5 gwei | 73,500 gwei = 0.0000735 ETH |
| Burned | 21,000 × 3 gwei | 0.000063 ETH |
| Paid to the validator | 21,000 × 0.5 gwei | 0.0000105 ETH |
The gas used stays at 21,000, but the base fee moves with demand, so the same transfer can cost many times more on a busy day than on a quiet one.
How is Ethereum secured?
By proof of stake. Until 2022 Ethereum used mining, like Bitcoin. On 15 September 2022, in an upgrade called the Merge, it switched to validators: participants who lock up at least 32 ETH as a deposit, are chosen to propose and confirm blocks, and lose part of their deposit if they cheat or go offline. Ethereum.org puts the resulting fall in energy use at about 99.95%. The trade-offs between the two systems are set out in proof of work vs proof of stake.
Ethereum keeps changing through named upgrades. The list of upgrades kept by ethereum.org records, among others:
| Date | Upgrade | What changed |
|---|---|---|
| 30 July 2015 | Frontier | The network launches |
| 20 July 2016 | DAO fork | Reverses the DAO theft; Ethereum Classic splits off |
| 5 August 2021 | London | Base fees are burned (EIP-1559) |
| 15 September 2022 | The Merge | Proof of stake replaces mining |
| 12 April 2023 | Shapella | Validators can withdraw staked ETH |
| 13 March 2024 | Dencun | Cheaper data space for layer 2 networks |
| 7 May 2025 | Pectra | Changes to accounts and staking |
| 3 December 2025 | Fusaka | More data capacity for layer 2 networks |
Many of these aim at the same problem: Ethereum itself handles a limited number of transactions, so much everyday activity has moved to layer 2 networks, separate chains that bundle many transactions and post the results back to Ethereum.
What is Ethereum used for?
Most of what is built on it falls into a few groups. Stablecoins, tokens meant to stay worth one dollar, are among the most used, and many of them run on Ethereum. Decentralized finance covers lending, borrowing and trading through smart contracts instead of banks. NFTs, tokens that record ownership of unique items, were built on Ethereum standards. And names, games, voting systems and other apps fall under the broader idea of Web3.
Still argued
Whether running programs on a public blockchain is worth the cost and complexity is argued. Supporters point to financial services open to anyone, and to stablecoins that move dollars around the world in minutes. Critics point to hacks of contract code, fees that spike when demand does, and how much activity is speculation. This note explains how Ethereum works; it isn't financial advice.
Check yourself
- Without looking back: what does Ethereum's ledger store that Bitcoin's doesn't?
- Walk through what happens to a crowdfunding contract's money if the target isn't met, and who decides.
- What is gas, and where do the two parts of a fee go?
Sources
- Ethereum Whitepaper — Vitalik Buterin, via ethereum.org, 2013
- Gas and fees — ethereum.org
- EIP-1559: Fee market change for ETH 1.0 chain — Ethereum Improvement Proposals, 2019
- The Merge — ethereum.org
- Timeline of all Ethereum forks — ethereum.org