What is Ethereum? ETH, smart contracts and gas explained
Ethereum is a public blockchain network that runs programs called smart contracts, and ether (ETH) is the native cryptocurrency that pays for using it. Where Bitcoin was built mainly as digital money, Ethereum was built as a shared global network that anyone can deploy applications on, with no central authority in charge. It is the base layer for much of decentralised finance, stablecoins and non-fungible tokens (NFTs), and it has long been the second largest cryptocurrency by market capitalisation.
What is Ethereum in simple terms?
Ethereum is a network of thousands of computers (nodes) that all keep the same copy of a ledger and run the same code. Anyone can send a transaction, hold digital assets or build an app on it, and no single entity can switch it off or change your balance.
Three names often get mixed up:
- Ethereum is the network and the blockchain technology behind it.
- Ether (ETH) is Ethereum’s native cryptocurrency. Most people say “buying Ethereum” when they mean buying ETH, which is fine in everyday use.
- The Ethereum Foundation is a Swiss non-profit that funds research and development. It does not run the Ethereum network or control your ether holdings.
How does Ethereum work?
Ethereum works by grouping new transactions into blocks, which validators check and add to the chain in 12-second slots. Every node re-runs those transactions, so the entire network agrees on the result without trusting a middleman.
Since September 2022 Ethereum has used proof of stake as its consensus mechanism. Validators lock up (stake) 32 ETH each to take part. In every slot one validator is picked as the block proposer, and others vote that the block is valid. Validators earn new ETH and fees for honest work, and lose part of their stake for malicious activity such as signing two conflicting blocks. Before that, miners competed for a block reward with energy intensive mining, as Bitcoin still does.
The Ethereum Virtual Machine
The Ethereum Virtual Machine (EVM) is the software that runs smart contract code on every node. Developers write a contract, compile it into EVM code and deploy it to an account address on the public blockchain. Because many other networks copy the EVM, the same wallets and apps often work on them too.
Smart contracts
A smart contract is a program stored on the Ethereum blockchain that will automatically execute when its conditions are met. A simple example: a contract holds a buyer’s deposit and releases it to the seller once delivery is confirmed. The source code is usually public, which helps by providing transparency, but it also lets attackers hunt for bugs. Deployed code is hard to change, so one coding error can lock or lose funds.
What is ether (ETH) used for?
Ether is used to pay transaction fees on the Ethereum network, to stake as a validator, and as collateral or a trading asset in apps built on Ethereum. Unlike Bitcoin’s supply, which stops at 21 million coins, ETH has no fixed total supply.
New ETH goes to validators, while part of every fee is burned (destroyed) since the London upgrade of August 2021. Whether the supply grows or shrinks depends on how busy the network is, which is why you’ll see both “inflationary” and “deflationary” claims about ETH.
Ethereum gas fees
Gas fees are what you pay to get your transaction into a block, priced in tiny fractions of ETH called gwei. Every action needs a set amount of gas (a plain ETH transfer uses 21,000 units, a token swap far more), and you multiply that by the current gas price.
The fee has two parts: a base fee that the network sets and burns, and a tip for the validator. When demand is high, gas prices rise. Layer 2 networks bundle many Ethereum transactions and settle them on the main chain, which usually means lower transaction fees for the same apps.
On an exchange you rarely see gas directly. Instead you pay a withdrawal fee set by the exchange when you move ETH to your own wallet. Check it before you buy: if it equals €3, that is 3% of a €100 purchase. Our page on gas fees works through the maths.
What can you do on Ethereum?
Most activity on Ethereum falls into a few groups of decentralised applications (dapps).
| Use | What it means in practice |
|---|---|
| Stablecoins | Euro or dollar tokens that move on Ethereum like digital money |
| Decentralised finance (DeFi) | Lending, borrowing and swapping through smart contracts instead of a bank |
| Non-fungible tokens (NFTs) | Unique tokens used as ownership records for digital art, tickets or virtual real estate |
| DAOs | Decentralised autonomous organisations whose members vote with tokens |
| Tokenisation | Bonds, funds or other assets issued as tokens |
Some projects also build digital identity tools on Ethereum, but these are early. DeFi platforms and NFT markets add their own risks: smart contract bugs, hacks and prices that are highly volatile or collapse altogether.
Ethereum vs Bitcoin
Bitcoin is designed as scarce digital money, often called digital gold, while Ethereum is designed as programmable infrastructure for applications. The main differences:
| Bitcoin | Ethereum | |
|---|---|---|
| Main purpose | Store of value and payments | Platform for smart contracts and apps |
| Consensus | Proof of work (mining) | Proof of stake (staking) |
| Supply | Capped at 21 million BTC | No fixed cap: new issuance minus burned fees |
| Block rhythm | About 10 minutes | 12-second slots |
Neither is objectively better. Both are volatile, and the right choice depends on what you want exposure to.
Ethereum’s history and network upgrades
Vitalik Buterin described Ethereum in a white paper in 2013, and the network went live on 30 July 2015. In 2016 a hack of an early fund called The DAO led to a disputed fork: most of the community reversed the theft, creating today’s Ethereum, while the unchanged chain carried on as Ethereum Classic.
The biggest of Ethereum’s network upgrades came in September 2022, when Ethereum transitioned from mining to proof of stake in an upgrade called the Merge. According to the Ethereum Foundation, this cut the network’s energy usage by more than 99%, making it far more energy efficient. Later upgrades have focused on cheaper and faster transactions, for example by giving layer 2 networks cheaper space for their data in 2024.
How to buy ETH in Europe
In the EU you buy ETH through a crypto exchange or broker, and since 1 July 2026 that provider needs a MiCA licence to serve you.
- Check the licence. Look the provider up in the ESMA register or your national regulator’s register (AFM in the Netherlands, BaFin in Germany). Our Kraken review shows what a MiCA-licensed exchange looks like in practice.
- Verify your identity. Every licensed platform runs a KYC check before you can deposit.
- Deposit euros. A SEPA bank transfer is usually the cheapest route; card payments often cost more.
- Buy ETH and add up the costs. Count the trading fee, the spread and any withdrawal fee. A 0.25% fee on a €500 buy, for example, is €1.25.
- Decide where to keep it. Leave it on the exchange, or move it to one of the Ethereum wallets you control, where only your private key can move the coins. Send a small test transaction first.
Risks for European investors
ETH is a highly volatile crypto-asset, and you can lose all the money you put in. Before you buy, know these four points:
- No compensation scheme. Crypto-assets are not covered by investor compensation schemes such as the Dutch one. MiCA sets rules for how a licensed provider holds your coins, not for their price.
- Smart contract and wallet risk. In DeFi apps or with your own wallet, a bug, a scam approval or a lost seed phrase can cost you everything, and nobody can reverse the transaction.
- Staking risk. Staking through an exchange means trusting that provider, and rewards change over time.
- Tax. Rules differ by country. In the Netherlands crypto counts as an asset in box 3; in Germany gains on crypto sold after more than a year are generally tax-free. Check the rules where you live.
If you want exposure to the network behind stablecoins and DeFi and can sit through big price swings, ETH may fit a small part of your portfolio. If you need the money in the next few years, it probably doesn’t.
Related terms
Questions people ask
What is Ethereum in simple terms?
Ethereum is a shared public computer network where anyone can run apps and move digital assets without a bank or company in the middle. Its coin, ether (ETH), pays the fees for using it.
Is it better to buy Bitcoin or Ethereum?
Neither is better for everyone. Bitcoin is a bet on scarce digital money, Ethereum a bet on a platform for apps, stablecoins and DeFi. Both are volatile, so only invest what you can afford to lose.
How do you make money with Ethereum?
People hope to profit from a rising ETH price, or earn staking rewards for helping to secure the network. Neither is certain: the price can fall sharply and staking rewards change over time.
Is it worth putting €100 in Ethereum?
€100 is a reasonable amount to learn how buying and holding crypto works, as long as you can afford to lose it. Watch the costs: a flat €2 fee is already 2% of a €100 buy.
Is Ethereum going to overtake Bitcoin?
Nobody knows, and we don't make price predictions. Ethereum has been the second largest cryptocurrency by market value for years, but that says nothing about where either price goes next.