If Bitcoin is digital money, Ethereum is closer to a global, shared computer. Launched in 2015, it lets developers deploy programs called smart contracts that run exactly as written, without a company operating them. This programmability is the foundation for tokens, DeFi, NFTs, and much of the wider crypto ecosystem.
A programmable blockchain
Ethereum extends the blockchain idea beyond simple payments by letting anyone deploy code that the network runs. Its native currency, ether or ETH, is used to pay for that computation and to help secure the network. Thousands of nodes execute the same code and agree on the result, so the outcome does not depend on trusting any single operator. This is why Ethereum is often called a world computer or a settlement layer for applications.
What a smart contract is
A smart contract is a program stored on the blockchain that automatically executes its rules when conditions are met. Because the code and its results are public and enforced by the network, a well-written contract runs without needing a middleman to hold funds or approve steps. For example, a contract can hold money in escrow and release it only when agreed terms are satisfied. The trade-off is that bugs are also enforced faithfully, so flawed contracts can lose funds permanently.
Tokens, DeFi, and NFTs
Smart contracts make it possible to create new tokens, and shared standards let wallets and apps handle them consistently. Fungible tokens follow the ERC-20 standard, while unique NFTs commonly follow ERC-721. These building blocks power decentralized finance, where people lend, borrow, and trade without a bank, plus countless other applications. Most of this activity runs on Ethereum or on chains built to be compatible with it.
Proof of stake and gas
In 2022 Ethereum switched from proof of work to proof of stake in an upgrade known as The Merge, cutting its energy use dramatically. Every action that changes the blockchain requires a fee called gas, paid in ETH, which compensates validators and prevents spam. When the network is busy, gas fees rise, which is why so-called layer-2 networks exist to process transactions more cheaply. Understanding gas is essential to using Ethereum without overpaying.
A decentralized exchange is just a set of smart contracts: you send tokens to the contract, and its code automatically swaps them for another token at a formula-based price. No company holds your funds during the trade, because the contract executes the swap and returns the result in one transaction, charging a gas fee for the computation.
Key takeaways
- Ethereum is a programmable blockchain, not just a currency.
- Smart contracts are self-executing programs enforced by the network.
- Token standards like ERC-20 and ERC-721 enable DeFi and NFTs.
- Ether pays for computation through fees called gas.
- Ethereum moved to proof of stake in 2022, sharply reducing energy use.
Common mistakes
- Assuming smart contracts are safe simply because they are automated, when bugs and exploits are common.
- Confusing Ethereum the network with ether the currency.
- Ignoring gas fees, which can exceed the value of a small transaction when the network is congested.
FAQ
Is Ethereum a good payment coin like Bitcoin?
It can be used for payments, but its main purpose is running applications and smart contracts, with ETH paying for that computation.
Are smart contracts legally binding contracts?
Not necessarily; they are self-executing code, and whether they carry legal force depends on jurisdiction and how they are used.