What is Ethereum? ETH, smart contracts and gas, explained simply

If bitcoin is digital money, Ethereum is closer to a global computer that anyone can use, with its own money built in. That difference explains almost everything about it: why it has so many tokens and apps, why fees work the way they do, and why it carries different risks.

This guide explains Ethereum from its official documentation at ethereum.org.

Ethereum in one sentence

ethereum.org describes it like this: “Ethereum is a decentralized blockchain network and software development platform, powered by the cryptocurrency ether (ETH).”

Like bitcoin, it’s a public blockchain that no single company controls. Unlike bitcoin, which is designed mainly to move value, Ethereum is designed to run programs.

A short history

ethereum.org’s history of the network marks the key moments:

See what is a hard fork? for the DAO fork and Ethereum’s recent upgrades for the latest changes.

Ether (ETH): what it’s for

ETH is Ethereum’s native currency. You need it for two main things:

1. Paying fees. According to ethereum.org, when you use Ethereum to send money, collect art or use an app, you pay a transaction fee, or gas fee, in ETH.
2. Securing the network. Validators lock up ETH as a stake to take part in confirming blocks.

People also hold ETH as an investment, use it in decentralized finance and trade it on exchanges.

Two kinds of account

ethereum.org explains that Ethereum has two types of account, and both can hold and send ETH and tokens:

• Externally owned accounts, controlled by whoever holds the private key. This is what an ordinary wallet gives you. Creating one costs nothing, and its address is a 42-character code starting with 0x.
• Contract accounts, which are smart contracts controlled by their code. They have no private key and can only act when they receive a transaction.

As ethereum.org puts it, you never really hold cryptocurrency: you hold private keys, and the funds are recorded on Ethereum’s ledger. See public keys, private keys and addresses.

Smart contracts: programs on the blockchain

A smart contract is a program stored on the Ethereum blockchain that runs exactly as written when someone calls it. ethereum.org says smart contracts let anyone create their own digital assets and decentralized applications (dapps) that run 24/7, globally.

Smart contracts power most of what happens on Ethereum:

• Tokens: thousands of other cryptocurrencies, including many stablecoins, are smart contracts on Ethereum.
• Decentralized exchanges: swap tokens directly from your wallet. See CEX vs DEX.
• Lending and borrowing: see what is DeFi?
• NFTs: unique tokens that represent ownership of a digital or physical item. See what are NFTs?

The flip side: code can have bugs. A flaw in a smart contract can be exploited, and transactions usually can’t be reversed.

Gas: how fees work

Every action on Ethereum needs computing power, measured in gas. According to the Ethereum documentation:

• Gas fees must be paid in ETH, usually quoted in gwei, a billionth of an ETH.
• Each fee has a base fee, which is burned (destroyed), and an optional priority fee (tip) that goes to the validator.
• The fee is paid whether the transaction succeeds or fails. If a transaction runs out of gas, the gas used is still consumed.

That’s why simple transfers cost less than complex app interactions, and why fees rise when the network is busy.

Layer 2 networks

Layer 2 networks process transactions off the main chain and settle them on Ethereum, sharing the cost among many users. The Dencun and Fusaka upgrades were designed to make that cheaper. See what is a layer 2?

Proof of stake: the 2022 switch

Ethereum originally used proof of work, like bitcoin. On 15 September 2022, in an upgrade known as The Merge, it switched to proof of stake. ethereum.org says The Merge reduced Ethereum’s energy consumption by about 99.95%.

Under proof of stake, validators deposit ETH as a stake. They propose and confirm blocks and earn rewards in ETH. Validators that go offline lose small amounts, and those that break the rules are slashed, losing part of their stake. A single validator needs at least 32 ETH. Our guide to staking explains the options for smaller amounts.

ETH supply and the fee burn

Bitcoin has a fixed cap; ETH doesn’t. Two forces shape its supply:

• New ETH is issued to validators as rewards for securing the network.
• The base fee is burned. Since the London upgrade’s EIP-1559 in August 2021, the base part of every transaction fee is destroyed rather than paid to anyone.

ethereum.org says proof of stake lets Ethereum pay for its security by issuing far fewer coins than under proof of work, and that ETH can reduce its inflation or even become deflationary when large amounts are burned. Whether supply grows or shrinks in a given period depends on how busy the network is.

Ethereum vs bitcoin

How regulators and tax authorities see it

• Tax: ETH is treated like other crypto. In the US, it’s property; selling, swapping or spending it is a disposal, and staking rewards are income. See our guides for the US, the UK and Canada.
• Funds: on 23 May 2024 the SEC approved exchange rules to list spot ether exchange-traded products, which began trading in July 2024. See bitcoin ETFs explained and crypto ETFs beyond bitcoin.
• Securities law: in March 2026 the SEC issued an interpretation listing ether among its examples of digital commodities, which it said aren’t themselves securities. See is crypto a security?

Getting started safely

1. Choose a reputable wallet from an official source, and back up the seed phrase offline. See hot vs cold wallets and seed phrase security.
2. Keep a little ETH for gas, even if you mainly hold other tokens.
3. Check the network before sending: mainnet and each layer 2 are separate. See how to send crypto safely.
4. Read every signature request, and limit token approvals. See token approvals and how to revoke them.

Risks to keep in mind

• Price volatility, like all crypto.
• Smart contract risk when using apps, tokens and DeFi.
• Phishing and malicious approvals: signing the wrong transaction can drain a wallet. See fake crypto apps and phishing.
• Fees: small transactions can cost a lot when the network is busy.

Next: what is DeFi?, or go back to what is a blockchain?