Ethereum explained: smart contracts, gas and staking

If Bitcoin is digital money, Ethereum is closer to a global computer that anyone can use and nobody owns. Launched in 2015 by a group of co-founders including Vitalik Buterin, it lets developers deploy programs — called smart contracts — that run exactly as written on a shared blockchain.

Smart contracts

A smart contract is code stored on the blockchain that executes automatically when its conditions are met. Think of a vending machine: put in the right input and you get a guaranteed output, without a shopkeeper. Smart contracts power most of what happens in crypto today:

• Tokens — stablecoins and thousands of other assets are smart contracts on Ethereum.
• DeFi — lending markets and decentralised exchanges (see DeFi 101).
• NFTs — unique tokens representing ownership of digital items.

Because the code is public and runs without an operator, it can’t be quietly changed — but bugs can’t be quietly fixed either. Smart contract exploits are one of the biggest risks in the ecosystem.

Ether and gas

Ether (ETH) is Ethereum’s native currency. Every action on the network — sending ETH, swapping tokens, minting an NFT — uses computation, measured in units of gas. You pay for gas in ETH, usually quoted in gwei (one billionth of an ETH).

Since an upgrade in 2021, each transaction pays a base fee that is burned (permanently removed from supply) plus an optional tip to the validator. When the network is busy, the base fee rises automatically. Many users now transact on layer-2 networks — separate chains that bundle transactions and settle them on Ethereum — to pay a fraction of the cost.

Proof of stake and “The Merge”

Ethereum originally used proof of work, like Bitcoin. In September 2022 it switched to proof of stake in an upgrade known as The Merge, cutting the network’s energy use by more than 99%.

Instead of miners, Ethereum is now secured by validators who lock up (stake) ETH as collateral. Running a validator requires 32 ETH. Validators who follow the rules earn rewards; those who act dishonestly can have part of their stake destroyed (“slashed”).

Staking as a user

Most people don’t run their own validator. They stake through an exchange or a liquid-staking protocol, which pools deposits and often issues a token representing the staked ETH. This is convenient, but it adds risks: the provider could fail, be hacked or face regulatory action, and staking rewards are variable rather than guaranteed.

Ethereum’s trade-offs

Ethereum’s strength — that almost anything can be built on it — is also its challenge. Fees and complexity can put off newcomers, and competing blockchains promise faster, cheaper transactions. As with any crypto asset, ETH’s price is volatile, and the technology is still evolving.