Ethereum (ETH) Explained: What It Is and How It Works

Ethereum is a decentralized blockchain platform that lets people do much more than send and receive digital currency. It enables developers to build smart contracts and decentralized applications (dApps) that run without the need for banks, lawyers, or other third parties. This makes Ethereum one of the most powerful and flexible technologies in the crypto world.

Unlike Bitcoin, which was designed as digital money, Ethereum was built to be programmable. This opens the door to many real-world use cases. From supporting NFTs and DeFi platforms to offering new ways to invest and interact online, Ethereum has become the backbone of the Web3 ecosystem.

Ethereum Explained: The Basics

Ethereum was proposed by Vitalik Buterin and launched in 2015. Like Bitcoin, it uses blockchain technology to store data securely and prevent tampering. But while Bitcoin was designed as “digital gold,” Ethereum was created as a platform for building applications.

Unlike centralized systems, Ethereum runs on thousands of computers worldwide. Its key feature is programmability: developers can create decentralized applications (dApps) directly on the Ethereum blockchain — from financial services and marketplaces to social platforms and games.

Ether (ETH) is the native currency of the network. It is used to pay for transactions and to run smart contracts, which is why ETH is often described as “digital fuel.”

At first, Ethereum may seem complex. But at its core, it provides an open alternative to traditional systems. Just as credit cards once transformed payments beyond cash, Ethereum takes the next step by replacing financial middlemen and gatekeepers with code.

Ethereum vs. Bitcoin

Ethereum and Bitcoin are both built on blockchain technology, but their goals and use cases are different.

Bitcoin was created as a decentralized form of money. Often compared to digital gold, it is mainly used to store value and protect against inflation.

Ethereum, by contrast, is a programmable platform for building decentralized applications (dApps), enabling smart contracts, tokens, and entire ecosystems to run directly on its blockchain.

Key Differences

Cryptocurrencies and Ethereum

Ethereum is fundamentally similar to its inspirator, Bitcoin. They’re both cryptocurrencies, they’re both decentralised, they both use blockchain technology. But Ethereum’s creator, Vitalik Buterin, recognised an untapped potential in Bitcoin that he described in an interview with Business Insider as 'the difference between something like a pocket calculator and a smartphone'. While Bitcoin is mainly focussed on being a payments network and a store of value, Buterin pioneered decentralised content, and now, Ethereum has the potential to be as vast as the internet itself.

But negating the specialisms of Ethereum is sort of irrelevant for those who are already intimidated by the mere mention of the word, ‘cryptocurrency’, so let’s strip it back. We find comfort in money in its physical, tangible form. If it looks like money, smells like money, feels like money, it is most probably money. But it only holds value because it is instructed to.

Money isn’t handled that much anymore. We liberally use credit cards; Apple Pay and the more mature, ‘seasoned’ of us may even still be using cheques. Essentially cryptocurrency is akin to these less physical forms of payment, except it is safer and more secure. In cryptocurrency, information is stored across thousands of encrypted nodes, making it almost impossible to hack.

What Makes Ethereum Special?

Smart Contracts

One of the key differences between Bitcoin and Ethereum is Ethereum’s use of ‘smart contracts’. Smart contracts are a computer code that outlines, monitors and manages certain conditions that must be met to facilitate a transaction.

‘You have my word’, ‘let’s shake on it’, ‘I swear on my mum’s life’. These are all examples of flimsy contracts we probably used when we were ten years old, all of them being easily retracted by claiming to have had your fingers crossed. Smart contracts don’t allow for such deceit. If a contract is fulfilled, then the transaction is automatically processed. All of this is done without needing a middle man to supervise or instigate. A common analogy is to think of it as a vending machine: only when the money is put in does the food come out. But fret not, while vending machines often require kicking, shaking and jiggling to retrieve your snack, smart contracts are much more reliable.

The benefit of smart contracts is that they eliminate the risk in Ethereum transactions, while still being cheap and easy. It’s riskless because transactions are witnessed by hundreds of people who validate the transactions' authenticity. Your documents are duplicated and displayed on a shared ledger so both parties are correctly informed and the information can’t be lost. The contract is yours rather than a (potentially biased) lawyer's. By cutting out the need for an intermediary, the process is cheaper but also even more reliable. Plus, rather than poring over pages of a contract littered with words we only pretend to understand, smart contracts don’t require manual processing, instead the process is automated by code.

While Bitcoin allows for the creation of smart contracts, Ethereum champions a robust and prominent smart contract framework that many cryptocurrencies have since recognised and adopted.

The scope of smart contracts could be incredible: It could revolutionise the mundanities of selling a house, eliminating the need for an estate agent; it could even confidently prevent votes and elections from being rigged or falsified.

DApps

DApps are why it would be rudimentary to describe Ethereum as just a competitor for Bitcoin. Both Ethereum and Bitcoin do use their own digital currency, however, Bitcoin typically only uses its data in a note capacity, whereas Ethereum can hold executable code. When it comes to Ethereum, a transaction doesn’t have to be financial, it can simply be anything that has value. The tokens that represent things with value that aren’t ETH (Ethereum’s currency, Ether) cannot be processed by Ethereum’s blockchain, they instead require a DApp. With its own coding language called Solidity (similar to Java Script), programmers have the potential to create Ethereum-powered apps that could eventually rival their centralised equivalents. This means our social media accounts, our legal tender bank accounts and our health records could be decentralised by Ethereum, keeping our data more ethically and logistically safe than the ones widely used today. These Ethereum apps are called DApps.

DApps require a smart contract back-end, but the front-end can have the user interface of a more traditional app. For developers, DApps are a playground. Because they are open source and depend on a peer-to-peer network, the codebase and data of each DApp should be available for scrutiny, and any changes must be agreed by the majority of the DApp’s users. This allows programmers to observe any market gaps or shortfalls of the DApps that are already out there. With widespread development, DApps evolve quickly, and all avenues of its potential are explored without censorship because it’s decentralised.

DApps might not yet have the style of their centralised rivals, but they are already more reliable. Because they are decentralised, DApps should never have downtime as they’re almost impossible to hack. This also means they don’t have to be so closely monitored for bugs, allowing developers to focus on developing.

With so many websites harvesting our data for marketing and fraudulent purposes, the idea of widely used, decentralised apps could change the game forever.

ICOs

Crowdfunding sites and methods are thriving, and inside the cryptocurrency sphere, it is no different. This has led to the rise of ICOs, initial coin offerings, that allow users to invest in ideas for DApps that they believe in. As creating, running and maintaining DApps needs Ethereum gas, they can prove quite costly. DApp developers can publish a white paper so investors can feel confident in what, why and who they’re investing in.

If an investor is interested in a concept, they can pay the developer an amount of ETH in exchange for a token. The token is often shares, use of the DApp or other promotional offers that you may be able to sell for a higher price further down the line. This transaction, of course, takes place as part of a smart contract.

Like in the ‘real world’, crowdfunding allows young entrepreneurs and developers to launch their ideas. It gives them funding that enables the idea to be developed, but also gives an indicator of how the DApp will be received when it is released.

Mining

Part of what makes Ethereum so secure is the need for multi-node consensus to validate a transaction. For the transaction to be validated, complex equations (that can require a lot of computational power) must be solved, and then the majority of nodes must agree on their calculation. If it is correct, the computer that solved the equation receives a reward that is proportionate to the computer power (or Ethereum gas) that was required to solve it. This process is called Ethereum mining. It is named mining because the reward is new ether, like mining gold finds new money, but it is also a bit like policing because the process of validating transactions ensures there is no foul play or ‘double spending’.

Mining is particularly popular on Ethereum’s platform among developers, as that new ETH can fund future DApp development.

Using Ethereum

The Bigger Picture

Detailing the advantages and disadvantages of Ethereum is tricky, much trickier than it is for Bitcoin because Ethereum has such a diverse range of purposes beyond currency exchange. Ethereum never actually intended to compete with Bitcoin as they have vastly different aims, but Ether's popularity with traders has made it a key competitor.

Ethereum has an incredibly exciting, up-and-coming scalability, offering unrivalled opportunities for developers and entrepreneurs alike. However, for DApp users, the applications aren’t particularly attractive or accessible yet, but neither was the internet thirty years ago. When you comprehend the enormity of what Ethereum is creating (dubbed Web 3.0), it is totally understandable for the finetuning to take time. In the meantime, it gives developers a chance to polish their skills and develop something that could very well end up being the next Facebook.

As we become increasingly aware of how our data is being exploited on centralized apps, the desire for decentralised platforms is growing exponentially. Ethereum could give us an uncensored, liberated internet that is collaborative rather than hierarchal. We might even see this decentralisation translate into business structures and government. In short, it could change the world.

One More Thing

Ethereum is more than just a cryptocurrency. It’s a platform that is reshaping how we think about ownership, trust, and the internet itself. Whether you are here to learn, invest, or build, understanding what Ethereum is gives you a front-row seat to one of the most important shifts in technology today.

We are still early in the evolution of blockchain. Just like the internet in the 1990s, Ethereum is growing, changing, and gaining new users every day. If you take the time to understand how Ethereum works now, you will be better prepared for the digital economy that is taking shape.

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