Ethereum is a blockchain platform designed to execute programs called smart contracts. Where Bitcoin created a way to transfer value without intermediaries, Ethereum extended that idea to arbitrary computation—letting developers build applications that run on a decentralized network rather than on company servers.
That shift from "programmable money" to "programmable everything" opened a different category of possibilities. Bitcoin lets you send value according to fixed rules. Ethereum lets you encode custom rules that execute automatically when conditions are met. A loan that liquidates itself when collateral falls below a threshold. A marketplace where trades settle instantly without a clearinghouse. A voting system where the count is mathematically verifiable. These aren't hypotheticals—they're running today.
The distinction isn't always obvious to newcomers because Ethereum also has its own currency, ether (ETH), which trades on exchanges alongside Bitcoin. But ether's primary purpose isn't being digital money—it's paying for computation on the network. Think of it less like digital gold and more like the fuel that powers a global computer.
How Ethereum Works
Every Ethereum user interacts with the same shared computer—a "world computer" that exists across thousands of independent machines running the Ethereum software. When you use an Ethereum application, you're not connecting to some company's server. You're submitting instructions to this distributed system, which executes them and records the results.
The Ethereum Virtual Machine (EVM) is the runtime environment where all this happens. It's a specification for how computation should work, implemented identically across every node in the network. When developers write smart contracts, they compile them into EVM bytecode. When users interact with those contracts, they're sending transactions that trigger the EVM to execute specific functions. Every node runs the same computation and verifies the same results.
Smart contracts are just programs stored on the blockchain. They have addresses, like user accounts, and they hold state—variables that persist between transactions. When you call a function on a smart contract, you're asking the network to execute that code and update its state accordingly. The contract can hold funds, make decisions based on inputs, and interact with other contracts. Crucially, once deployed, a smart contract does exactly what its code specifies. No one can change the rules after the fact, including whoever wrote it.
Gas is how Ethereum prices computation. Every operation in the EVM has a gas cost—simple operations are cheap, complex ones expensive. When you submit a transaction, you specify how much you're willing to pay per unit of gas. Validators prioritize higher-paying transactions when blocks fill up. This creates a market for blockspace: when demand is high, fees spike; when demand is low, transactions are cheap. The gas mechanism prevents spam and infinite loops while letting the market allocate scarce resources.
Proof of stake is how Ethereum reaches consensus. Validators lock up ETH as collateral and take turns proposing blocks. Other validators attest to whether they agree the block is valid. Validators who behave honestly earn rewards; those who try to cheat lose their stake. This replaced Ethereum's original proof-of-work system in 2022, reducing energy consumption by over 99% while maintaining the network's security properties.
The outcome is a platform where anyone can deploy code that anyone else can use, with execution guaranteed by cryptography and economic incentives rather than trust in institutions.
Where Ethereum Differs from Bitcoin
The comparison is inevitable, so it's worth being precise about it.
Bitcoin optimizes for one thing: being a secure, decentralized ledger for transferring value. Its scripting language is intentionally limited. This isn't a bug—it's a deliberate choice to minimize attack surface and keep the system simple enough to remain secure for decades.
Ethereum optimizes for flexibility. The EVM can execute almost any computation, which means developers can build almost anything. This power comes with trade-offs: more complexity means more potential vulnerabilities. Smart contract bugs have caused significant losses. The attack surface is larger by design.
Bitcoin is trying to be digital gold—a stable store of value that doesn't change. Ethereum is trying to be the foundation for a new financial system—a platform that evolves as developers build on it. Neither approach is inherently better; they're solving different problems.
One practical distinction: Bitcoin transactions are final in about an hour. Ethereum transactions finalize faster (about 15 minutes for strong finality) but the platform handles more complex operations. The networks have different throughput characteristics, different fee dynamics, and different ecosystems of applications.
Where the Constraints Live
Scalability is the persistent challenge. The EVM executes transactions sequentially, and every node processes every transaction. This limits throughput to roughly 15-30 transactions per second on the main network. For a platform with global ambitions, that's not enough.
Layer 2 solutions address this by processing transactions off-chain and periodically settling to Ethereum. Rollups—both optimistic and zero-knowledge varieties—can handle thousands of transactions per second while inheriting Ethereum's security. Most new Ethereum applications are now deploying on these Layer 2 networks rather than the main chain.
Smart contract risk is real. Code is law cuts both ways. If a contract has a bug, that bug is also law. Billions of dollars have been lost to exploits over the years. This isn't a flaw in Ethereum itself—it's an inherent property of immutable code. Audits, formal verification, and battle-tested patterns help, but risk remains.
Gas costs fluctuate dramatically. During high-demand periods, simple transactions can cost tens or hundreds of dollars. This prices out small-value use cases and makes certain applications impractical on the main network. Layer 2 solutions largely solve this, but the fragmentation adds complexity.
What's Changing
Ethereum's roadmap focuses on scaling. The "Dencun" upgrade in early 2024 introduced blob transactions, dramatically reducing costs for Layer 2 networks. Future upgrades aim to increase blob capacity further.
Institutional involvement is growing. Ether ETFs now trade in several jurisdictions. Traditional finance is exploring tokenization on Ethereum and its Layer 2s. This shifts the user base from primarily retail and crypto-native to include institutional actors with different needs and expectations.
The application layer continues maturing. DeFi protocols handle billions in value with battle-tested code. Stablecoin settlement on Ethereum rivals traditional payment rails for certain use cases. NFTs have moved past the initial hype cycle into more sustainable applications.
What Would Confirm the Direction
Sustained growth in Layer 2 activity and declining main-chain fees as usage migrates. Successful execution of roadmap upgrades without security incidents. Continued institutional adoption and regulatory clarity. Growing diversity in validator set and client software.
What Would Challenge the Thesis
A successful attack exploiting the proof-of-stake mechanism. Major smart contract vulnerabilities in core DeFi infrastructure. Regulatory classification that restricts institutional participation. Competing platforms capturing developer mindshare with superior technology.
Timing Perspective
Now: The base layer is stable. Layer 2s are handling increasing transaction volume. Institutional infrastructure is developing.
Next: Scaling improvements will determine whether Ethereum can handle mass adoption. Competition from alternative platforms will test its network effects.
Later: Whether Ethereum becomes foundational financial infrastructure depends on continued execution and the absence of catastrophic failures.
What This Doesn't Mean
This explanation covers the mechanism. It doesn't address whether ETH is a good investment, which Layer 2 to use, or how to evaluate specific applications built on Ethereum. The system works as described. What you do with that information is a separate question.
