What Is Ethereum? Smart Contracts, Gas and Proof of Stake
Lesson 3 of 10 · Beginner
What is Ethereum? From digital money to a shared computer
Bitcoin was built to do one job: move a digital currency securely. Ethereum, launched in 2015, took the idea a step further: if thousands of nodes can agree on account balances, why not agree on running programs? The result is a network you can picture as a single worldwide shared computer. Anyone can publish a program on it, anyone can use it, and every node verifies the result of running it.
The network's native coin is ether (ETH). It has two main jobs: paying fees for executing transactions and programs, and serving as the security deposit for validators under proof of stake. Unlike Bitcoin, Ethereum has no fixed supply cap; its supply results from the balance between new ether issued to validators and ether burned through fees, and it can shrink or grow in different periods.
Two kinds of account: wallets and contracts
Ethereum has two kinds of account:
- Externally owned account (EOA): the wallet you control with a private key. Only this type of account can initiate a transaction.
- Contract account: an address controlled by a program (code) instead of a key. When a transaction reaches it, its code runs.
Both types of address start with 0x and look alike. After the Pectra upgrade in May 2025, the EIP-7702 standard let ordinary wallets “delegate” code execution to a contract. This opens up new features, but attackers have exploited it too: according to ScamSniffer data cited by Wintermute, more than 80 percent of early 7702 authorisations were malicious. In other words, signing an unfamiliar message can hand control of your wallet to a sweeper contract.
Smart contracts: programs that execute themselves
A smart contract is a program published on a blockchain that runs according to its code, with no intermediary. The name is misleading: it is neither “smart” nor, in the legal sense, a “contract”. It is just code that does exactly what it was written to do, even if the author made a mistake.
A simple example: an ERC-20 token is really a contract that keeps a table of “this address, this amount”. When you send a token, nothing “leaves” your wallet; you ask the contract to reduce the number next to your address and increase the number next to the destination address. That is why a contract's creator can write rules such as freezing addresses, minting new tokens or pausing transfers into the code.
A few safety points follow from this mechanism:
- Contract code can have bugs, and because it lives on-chain, fixing it is not simple.
- Many contracts are “upgradeable”, meaning an admin key can change their logic. That means trusting whoever holds that key.
- For an application to move your tokens, you usually have to grant it an approval. An unlimited approval to a malicious contract can drain a wallet.
Gas: the fee for executing a transaction
Every operation on Ethereum consumes some gas: a simple ether transfer uses little, and a complex trade on a decentralised exchange uses more. The final fee is the amount of gas used multiplied by the price per unit of gas. Gas prices are usually quoted in gwei, one billionth of an ether.
Since 2021, Ethereum fees have two parts:
- Base fee: set automatically by the network based on how full recent blocks were. This part is burned, meaning it is removed from circulation.
- Priority fee (tip): a small amount paid to the validator so your transaction is picked up sooner.
Two practical points. First, to send any token on Ethereum (including USDT on the ERC20 network) you must hold a little ether in the wallet. Second, if a transaction fails, the gas already consumed is not refunded.
Proof of stake, and why DeFi lives here
In September 2022, in an event called The Merge, Ethereum dropped mining and moved to proof of stake. Under this system, validators put up 32 ether as collateral to take part in producing and attesting blocks. If they break the rules, for example by signing two conflicting blocks, part of their stake is penalised and removed (slashing). The network's energy use fell sharply with this change.
Why are most tokens, stablecoins and DeFi protocols built on Ethereum or Ethereum-compatible networks? There are three main reasons: Ethereum was the first major network with general-purpose programmability; shared tools and standards (such as ERC-20) made building easy; and contracts can be combined like Lego bricks. That composability has a flip side too: when one piece breaks, the pieces that depend on it can be damaged as well.
Common mistakes
- Not keeping a small amount of ether in the wallet, then wondering why an ERC20 token will not send.
- Assuming “smart contract” means error-free or legally binding; it is only code that runs as written.
- Granting unlimited approvals to every site you connect to and never revoking them afterwards.
- Signing unknown messages on the theory that “a signature is not a transaction”; some signatures, such as Permit or 7702, can hand over control of assets.
- Comparing Ethereum with Bitcoin on price alone, without noticing that their purpose and supply models differ.
What do volume and data say here?
Ethereum produces a great deal of public data that anyone can inspect without a paid service:
- Gas used and the base fee: shows how much demand there is for block space. A rising base fee means the network is busy; this is an activity indicator, not a buy or sell signal.
- Ether burned versus ether issued: public explorers and dashboards let you see whether supply grew or shrank over a period. The figure moves with network activity.
- Contract code: on Etherscan you can see whether a contract's code is “verified” and public, and whether it is a proxy that can be upgraded.
A balancing note: a large part of user activity has moved to layer 2 networks. So low fees or low activity on the main layer do not necessarily mean the ecosystem as a whole is being used less. For the full picture, look at main-layer and layer 2 data side by side.
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Frequently asked questions
What is Ethereum and how is it different from Bitcoin?
Ethereum is a programmable blockchain on which smart contracts and tokens can be built; Bitcoin was designed mainly to move one digital currency with a capped supply. Ethereum runs on proof of stake and has no fixed supply cap.
What is Ethereum gas and why does it sometimes get expensive?
Gas measures the computational work of a transaction. When demand for block space rises, the base fee rises. More complex operations also use more gas.
What do I need to send USDT on the ERC20 network?
Besides the USDT itself, you need some ether in the same wallet to pay the gas fee. Without ether, the transaction cannot be sent at all.
Education only, not a recommendation to buy or sell; we never give signals. Price examples are illustrative. Test any method on a demo account first, with strict risk management.