Explainer · Crypto Basics
What is Ethereum, and how is it different from Bitcoin?
Ethereum is a public blockchain that runs programs as well as payments, and ether (ETH) is the coin you spend to use it. This page explains how it works in plain English, starting with what can go wrong.
Quick answer
Ethereum is a public blockchain launched in July 2015 that can run programs called smart contracts. Its coin, ether (ETH), pays the fees for every transaction. Since 2022 it uses proof of stake instead of mining [1]. US regulators call ether a highly speculative investment [8].
Key points
- Ethereum is a blockchain network and software platform; ether (ETH) is the coin used to pay its fees [1].
- Bitcoin was designed as electronic cash; Ethereum was designed to run programs on a blockchain [5] [2].
- Every action costs gas: units of gas used × (base fee + priority fee), and the base fee is burned [4].
- Since September 15, 2022, validators who lock up ETH secure the network instead of miners [3].
- Bugs in smart contracts have cost users an estimated amount easily over $1 billion, and stolen funds are mostly unrecoverable [11].
On this page
What is Ethereum in plain English?#
Ethereum is a decentralized blockchain network and software development platform, powered by a coin called ether (ETH) [1]. A blockchain is a shared record of transactions kept by many computers at once (see what is a blockchain for how that record is protected). Ethereum adds one thing on top: the record can also store and run small programs.
Those programs are called smart contracts. The original 2014 whitepaper described the goal as a blockchain with a built-in, fully general programming language for writing "contracts" [2]. Today, ethereum.org says smart contracts let anyone create digital assets and apps that run 24/7, globally [1]. This is what lets anyone create their own tokens on Ethereum [1], which is why each token needs checking on its own.
How is Ethereum different from Bitcoin?#
The two are often mentioned together, but they were built for different jobs. The Bitcoin whitepaper describes electronic cash that lets online payments go directly from one party to another without a financial institution [5]. Ethereum's whitepaper describes ether as the "crypto-fuel" that pays for running programs on a shared computer [2]. The table compares them on the points a beginner meets first. If you have not read it yet, start with what is bitcoin.
| Bitcoin | Ethereum | |
|---|---|---|
| Designed for | Peer-to-peer electronic cash | Programs (smart contracts) and apps, plus payments |
| Native coin | bitcoin (BTC) | ether (ETH) |
| Who adds new blocks | Miners, using proof of work | Validators who lock up ETH, using proof of stake |
| Target time between blocks | 10 minutes | Not covered by our sources |
| How fees are set | Input value minus output value of a transaction | Gas used × (base fee + tip); the base fee is burned |
| Smallest unit | 1 BTC = 100,000,000 satoshi | 1 ETH = 10^18 wei |
Sources: Bitcoin whitepaper [5], Bitcoin Core code [6] [7], ethereum.org [1] [3] [4], Ethereum whitepaper [2].
One thing they share: the US Securities and Exchange Commission calls both bitcoin and ether highly speculative investments and tells investors to consider the volatility of their prices [8]. A well-known name does not make ether safer. The EU's financial supervisors noted in March 2022 that bitcoin and ether together made up about 60% of the total crypto market value, out of more than 17,000 crypto-assets at that date [9].
What is a gas fee, and how is it calculated?#
Gas is the unit that measures how much computing work an action on Ethereum needs [4]. Sending ETH, swapping a token or using an app all cost gas, and you pay for it in ETH. The fee exists for a reason: charging for every computation stops bad actors from spamming the network [4]. Our gas fee glossary entry has the short version.
fee = units of gas used × (base fee + priority fee)
The base fee is set by the network for each block and works like a reserve price; it is burned, meaning removed from circulation. The priority fee is a tip that goes to the validator who includes your transaction [4]. The EIP-1559 specification, which introduced this design, confirms that the base fee per gas is burned [10].
Fees are not fixed. When blocks are busier than their target size, the base fee can rise by up to 12.5% per block, and when they are quieter it falls [4]. When demand is very high, users also raise their tips to outbid each other [4]. The chart shows how fast the same transfer gets more expensive if every block is full and the base fee rises by the maximum each time.
In words: after ten full blocks in a row the base fee is about 32.47 gwei and the same transfer costs about 723,937 gwei, roughly 2.9 times the starting fee (calculated). Always read the fee your wallet shows before you confirm.
How does proof of stake keep Ethereum running?#
Ethereum started with proof of work, the mining system Bitcoin uses, and moved to proof of stake in 2022 [1]. The switch, called the Merge, was executed on September 15, 2022, and permanently replaced proof of work [3]. The proof-of-stake chain itself, the Beacon Chain, had been running separately since December 1, 2020 [3].
Validators lock their ETH as a security deposit to earn the right to process transactions; honest validators earn ETH rewards and dishonest ones lose part of their stake [1]. The Merge page estimates that Ethereum's energy consumption dropped by about 99.95% [3].
You will see "staking" offered as a way to earn a return on ETH. Our sources give no reward rate and do not say staking is risk-free [1]. A deposit that can be cut for misbehaviour is, by design, money at risk, and when someone else stakes for you, you also depend on that firm.
What are the main risks of Ethereum for a beginner?#
Start with the price. US regulators call ether highly speculative, and say trading in bitcoin and ether has been driven substantially by speculation, which can lead to heightened volatility [8]. Our page on why crypto is so volatile explains what that means in numbers.
Then there is a risk that comes with running programs: smart contract bugs. ethereum.org itself estimates that value stolen or lost to security defects in smart contracts is easily over $1 billion [11]. Deployed contract code usually cannot be changed to fix a flaw, and stolen assets are mostly irrecoverable [11]. One case the page names, the DAO hack, saw 3.6 million ETH stolen [11].
- Decide what you can afford to lose
EU supervisors put this question first: can you afford to lose all the money you invest [9]? If the answer is no, stop here.
- Learn where your ETH will be held
On an exchange, you depend on that firm; in your own wallet, you depend on your keys [13].
- Send a small test first
Check the address and the network, and read the gas fee your wallet shows before confirming.
- Treat apps and tokens with suspicion
Apps on Ethereum run as smart contracts that may have bugs, and fraudsters use crypto's popularity to lure retail investors [12]. See common crypto scams.
Mistakes beginners make with Ethereum#
- Thinking ETH and Ethereum are the same thing
Ethereum is the network; ether (ETH) is the coin used on it [1]. Many other tokens also live on Ethereum, and they carry their own risks.
- Treating the 2014 whitepaper as a manual
ethereum.org notes the original whitepaper no longer reflects what Ethereum is today [2]. It predates proof of stake and today's fee system.
- Ignoring the fee until it is paid
The base fee can rise up to 12.5% per block [4]. In busy periods a small transfer can cost a noticeable share of what you send.
- Assuming a mistake can be undone
Contract code usually cannot be patched, and assets stolen through a flaw are mostly irrecoverable [11]. Check before you click, not after.
Frequently asked questions#
Is Ethereum the same as ether?
No. Ethereum is the blockchain network and software platform; ether (ETH) is its native coin, used to pay transaction fees [1].
Who created Ethereum?
ethereum.org says Ethereum was launched in July 2015 by a software developer called Vitalik Buterin and a small team of co-founders, after Buterin published a white paper in 2013 [1].
Why do Ethereum fees change so much?
Fees depend on demand for space in each block. The base fee rises when blocks are above their target size and falls when they are below it, by up to 12.5% per block, and users add higher tips when the network is busy [4].
Is staking ETH safe?
Our sources do not support calling it safe. Validators who act dishonestly lose part of their stake [1], and none of our sources gives a guaranteed reward rate. Treat any advertised return as a claim to check, not a fact.
The bottom line#
Ethereum is a blockchain that runs programs, and ether is the fuel you pay to use it. It differs from Bitcoin in purpose, in how blocks are produced and in how fees work, but it shares the same core risk: regulators call it highly speculative. Add smart contract bugs and the lack of deposit protection, and the sensible first step is to learn how it works with no money at stake. Next, read what is a blockchain and our risk disclosure.
Sources
- What is Ethereum? | ethereum.org.
- Ethereum Whitepaper | ethereum.org.
- The Merge | ethereum.org.
- Gas and fees | ethereum.org (developer docs).
- Bitcoin: A Peer-to-Peer Electronic Cash System.
- bitcoin/src/kernel/chainparams.cpp (Bitcoin Core, master branch) - CMainParams.
- bitcoin/src/consensus/amount.h (Bitcoin Core, master branch).
- Exchange-Traded Products (ETPs) Providing Exposure to Bitcoin and Ether - Investor Bulletin.
- ESA 2022 15 - Joint ESAs Warning on Crypto-assets (EBA, ESMA, EIOPA).
- EIP-1559: Fee market change for ETH 1.0 chain.
- Smart contract security | ethereum.org (developer docs).
- Exercise Caution with Crypto Asset Securities: Investor Alert.
- Crypto Asset Custody Basics for Retail Investors - Investor Bulletin.
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
