What Is Ethereum? ETH, Gas Fees & Smart Contracts Explained

Ethereum is the second-largest cryptocurrency by market cap, but comparing it to Bitcoin by price alone misses the point. Ethereum is not primarily a currency — it is a global, programmable computer. Anyone can write code that runs on it automatically and transparently, without any company controlling it. That capability has made Ethereum the foundation of most of what we call Web3: decentralised finance, NFT markets, stablecoins, and more.

To understand what Ethereum actually is, you need to understand three concepts: smart contracts, gas, and ETH itself.

What Are Smart Contracts?

A smart contract is a program stored on a blockchain that executes automatically when its conditions are met. There is no company, server, or human operator in the middle. Once deployed, the code runs exactly as written — permanently, transparently, and without the ability to be stopped or altered by any single party.

Here is a simple example: imagine a bet between two people. Instead of trusting each other (or a third party), they can write the terms into a smart contract: "If Team A wins, send the funds to Alice; otherwise, send them to Bob." The contract holds the funds in escrow and settles automatically based on real-world data fed in by a trusted source. No one can cheat, because no one controls the contract after it is deployed.

Real-world applications go much further. Decentralised exchanges like Uniswap are entirely smart contracts — no order book, no company, just code that matches trades and manages liquidity pools. Lending protocols like Aave let users borrow and lend crypto against collateral with no credit check, because the contract enforces repayment automatically.

What Is ETH (Ether)?

ETH — often called Ether — is the native currency of the Ethereum network. It has two main functions:

Paying for computation. Every action on Ethereum — sending tokens, executing a smart contract, minting an NFT — requires computational work from the network. The fee for that work is called gas, and it is paid in ETH. Gas prices fluctuate based on network demand: when Ethereum is busy, gas fees spike; when activity is low, they fall.

Securing the network. Since Ethereum switched from proof of work to proof of stake in September 2022 (the "Merge"), the network is secured by validators who lock up (stake) ETH as collateral. They earn staking rewards for honestly validating transactions and risk losing their stake if they try to cheat. This design replaced the energy-intensive mining process and cut Ethereum's energy consumption by over 99%.

How Ethereum Differs from Bitcoin

Bitcoin and Ethereum share DNA — both use a public blockchain, both have a native currency, and both are decentralised. But they are designed for different goals.

Bitcoin is a simple, conservative system optimised for one thing: reliably storing and transferring value. It changes slowly and deliberately. Ethereum is a programmable platform that trades some of Bitcoin's conservatism for flexibility — it is designed to support a constantly expanding ecosystem of applications.

One key mechanical difference: Bitcoin has a fixed supply cap of 21 million coins. ETH has no hard cap, though post-Merge economics (burning a portion of gas fees) have made the net issuance of new ETH quite low, and during busy periods the supply can actually shrink.

For a detailed comparison of the two biggest blockchains, see What Is Bitcoin.

The Ethereum Ecosystem

The breadth of what is built on Ethereum is difficult to overstate. Major categories include:

Decentralised Finance (DeFi). Lending, borrowing, trading, and yield generation — all running as open smart contracts, accessible to anyone with a wallet. Protocols like Aave, Compound, Curve, and Uniswap collectively hold billions of dollars of value.

Stablecoins. Most major stablecoins — USDC, DAI, and others — are ERC-20 tokens that run on Ethereum. They are issued, redeemed, and transferred through smart contracts.

NFTs. The ERC-721 token standard on Ethereum defined the original non-fungible token format, which became the basis for digital art markets like OpenSea and NBA Top Shot (though some of the largest NFT volumes have since shifted to other chains like Solana).

Layer 2 networks. High gas fees during congested periods drove developers to build "Layer 2" networks — fast, cheap chains that batch transactions and settle them on Ethereum's main chain. Arbitrum, Optimism, and Base are among the largest. They inherit Ethereum's security while offering much lower fees.

Gas Fees: What They Are and Why They Vary

Gas fees are often the biggest source of frustration for new Ethereum users. A simple token transfer might cost a few cents during quiet periods, but during peak demand — a popular NFT mint, a DeFi liquidation event, a market crash — fees can spike to $50 or more for a single transaction.

The fee is the product of two numbers: the amount of computational work required (in "gas units") and the current price per unit of gas (in ETH). Ethereum's EIP-1559 upgrade introduced a base fee that burns with every transaction (removing that ETH from supply) plus an optional priority fee (a tip to validators to process your transaction faster). This made fee estimation more predictable, though spikes still happen.

For most routine interactions, Layer 2 networks offer a solution. Transacting on Arbitrum or Base typically costs a fraction of a cent, while still benefiting from Ethereum's security guarantees.

Proof of Stake: How Ethereum Is Secured Today

Before September 2022, Ethereum used the same proof-of-work mining model as Bitcoin. Miners competed to solve computational puzzles, consuming large amounts of electricity.

The Merge replaced that system with proof of stake. Validators deposit a minimum of 32 ETH as a security bond. They take turns proposing new blocks of transactions and attesting (voting) on blocks proposed by others. Honest validators earn rewards in ETH; those caught misbehaving have a portion of their stake "slashed." The network currently has hundreds of thousands of active validators, making it one of the most decentralised proof-of-stake networks in existence.

How to Track Ethereum's Price

You can see the live Ethereum price on this site in real time. If you are wondering how ETH fits into the broader market, the market cap rankings show Ethereum's position relative to Bitcoin and every other major asset.

For context on adjacent coins built on Ethereum's model — including BNB Smart Chain, which is EVM-compatible — the guide on What Is BNB is a useful companion read. And if you want to understand decentralised exchanges that run on Ethereum, CEX vs DEX Explained walks through how AMM-based trading works in detail.

This is educational information, not financial advice. Cryptocurrency investments carry significant risk, including the potential loss of all capital. Always do your own research before investing.