The Crypto Linkup

Learn / Lesson 6

What is Ethereum?

Ethereum is a public blockchain that lets developers build and run small programmes called smart contracts. While Bitcoin was designed mainly to move value, Ethereum was designed to be a general-purpose platform — a kind of global computer that nobody owns and nobody can shut down.

Think of Bitcoin as digital cash and Ethereum as a digital app store that comes with its own currency. That currency is called ether (ETH), and it is used to pay the fees that keep the network running.

Where Ethereum came from

In late 2013, a young programmer named Vitalik Buterin published a whitepaper proposing a new kind of blockchain — one that could do more than simply record payments. He was only 19 years old at the time.

The idea attracted a team of co-founders, including Gavin Wood (who later created Polkadot), Joseph Lubin (who founded ConsenSys), and Charles Hoskinson (who later created Cardano). Together they raised roughly 18 million US dollars in a public sale of ether during July and August 2014 — one of the first large "initial coin offerings" (ICOs) in crypto history.

The Ethereum network went live on 30 July 2015, in a phase called Frontier. Since then it has become the second-largest cryptocurrency by market capitalisation, behind only Bitcoin.

What are smart contracts?

A smart contract is a set of rules written in computer code and stored on the blockchain. Once deployed, it runs automatically — no person, company, or court needs to enforce it.

Here is a simple example. Suppose two friends in San Fernando make a bet on tomorrow's cricket score. They could write a smart contract that says: "If the West Indies score more than 250, send the money to Friend A; otherwise, send it to Friend B." Each friend sends their stake to the contract. When the result comes in (fed to the contract by a data source called an "oracle"), the contract pays the winner instantly. No trust required.

Real-world smart contracts power much bigger things:

The Merge: from proof of work to proof of stake

When Ethereum first launched, it used the same energy-intensive proof-of-work mining process as Bitcoin. For years the community planned a switch to a more efficient system called proof of stake.

That switch finally happened on 15 September 2022, in an event known as the Merge. The existing Ethereum chain merged with a parallel proof-of-stake chain called the Beacon Chain, which had been running since December 2020.

The result: Ethereum's energy consumption dropped by an estimated 99.95 per cent overnight. Instead of miners competing with powerful hardware, the network is now secured by validators who lock up (stake) their ETH as collateral. If a validator tries to cheat, they lose some of their staked ETH — a penalty called "slashing."

This change did not make Ethereum faster or cheaper to use on its own, but it laid the groundwork for future upgrades designed to do exactly that.

Gas fees — the cost of using Ethereum

Every action on Ethereum — sending ETH, swapping tokens, minting an NFT — costs a small fee called gas. Gas is paid in ETH, and the price goes up when the network is busy, much like surge pricing on a ride-sharing app.

During busy periods, gas fees have been high enough to make small transactions impractical. This has driven the development of layer-2 solutions — separate networks that handle transactions off the main Ethereum chain and then settle the results back, reducing congestion and cost. Popular layer-2s include Arbitrum, Optimism, and Base.

Ethereum versus Bitcoin

People often compare Ethereum and Bitcoin, but they serve different purposes:

They are not really competitors in the way Pepsi competes with Coca-Cola. Many people hold both, because each does something different.

Keep in mind

Common mistakes beginners make

Ignoring gas until the last step. Fees are shown just before you confirm. Beginners sometimes approve a transaction without reading the fee and are surprised by the cost. Check it first, and consider whether a cheaper layer-2 network suits what you are doing.

Approving every request their wallet shows. Some apps ask you to give a smart contract permission to spend your tokens. A malicious one can empty your wallet. If you do not understand what a request does, decline it.

Treating "smart contract" as "guaranteed safe." The code does exactly what it says, including its mistakes. Bugs and badly designed projects have cost users a great deal of money.

Chasing the newest token. Anyone can create a token on Ethereum in minutes. Having a token on a respected network says nothing about whether the project behind it is honest.

Try it yourself

Open a public Ethereum block explorer such as etherscan.io and look at any recent transaction. Find the sender, the receiver, the amount and the fee. Then search for a well-known smart contract and see that its code and history are public. This shows what "open and checkable" really means: you do not have to take anyone's word for what a contract does, if you or someone you trust can read it.

Key terms from this lesson

Sources and credits

Sources: the Ethereum whitepaper and Ethereum Foundation material at ethereum.org, including its explanation of the Merge, and contemporary reporting from Fortune and Decrypt. Education only, not financial advice.

Module quiz

3 questions. Tap an answer to see if you are right and why. Get 2 right to complete the module.

1. What can people do on Ethereum that Bitcoin was not designed for?

2. What is the coin of the Ethereum blockchain called?

3. What should you keep in mind when using Ethereum?

Next lesson: What is Solana? →