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What is Ethereum? ETH, smart contracts, proof of stake and layer 2

What is Ethereum? Ethereum is a public blockchain that runs programs called smart contracts, so it works as a shared global computer as well as a payment network. Its native currency, ether (ETH), pays for every operation on the network and is staked by validators who secure it under a system called proof of stake.

Key takeaways

Ethereum and ether

Ethereum was proposed in 2013 and its main network went live on 30 July 2015. Where Bitcoin focuses on being digital money, Ethereum was designed to be programmable: developers can deploy code to the blockchain, and that code runs on every node of the network in the same way.

The network's currency is ether, usually written ETH. It is used to pay transaction fees, called gas, to send value between users and as collateral in many applications. On 27 October 2026 ETH traded at about 2,350 dollars, with a market capitalization of about 287 billion dollars, according to CoinGecko, second only to Bitcoin.

Unlike Bitcoin, ETH has no fixed maximum supply. New ETH is issued to validators as a reward, while part of every transaction fee is destroyed (burned) under a rule introduced in August 2021. Depending on network activity, the total supply can rise or fall slightly over time.

What smart contracts are

A smart contract is a program stored on the blockchain that runs automatically when certain conditions are met. Once deployed, it follows its code exactly, and anyone can check that code and the transactions it has processed. No company can quietly change how it behaves, unless the code itself allows upgrades.

A simple example is a token: a contract that keeps a list of balances and lets holders transfer them. The ERC-20 standard defines how such tokens behave, which is why wallets and exchanges can support thousands of them in the same way. Stablecoins such as USDT and USDC exist as ERC-20 tokens on Ethereum.

Every operation costs gas, paid in ETH. Gas prices rise when many people want to use the network at the same time, which is one of the reasons layer 2 networks were built. Smart contracts can also contain bugs, so well known applications publish independent audits of their code.

How proof of stake works

Ethereum originally used mining, like Bitcoin. On 15 September 2022, in an upgrade known as the Merge, it switched to proof of stake. According to ethereum.org, this reduced the network's energy consumption by about 99.95%.

In proof of stake, validators lock up ETH as a guarantee (a stake) and take turns proposing and confirming blocks. Running a validator requires 32 ETH. Honest validators earn rewards in ETH; validators that try to cheat, for example by confirming two conflicting blocks, lose part of their stake, a penalty called slashing.

People who do not want to run a validator can join a staking pool or use a staking service from an exchange, which usually take a fee. In January 2026 almost 30% of all ETH was staked, a record at the time, according to The Block. Staked ETH earns a variable yield, but it is exposed to the price of ETH and, with third-party services, to the risks of that provider.

Layer 2 networks

The Ethereum main chain, called layer 1, handles a limited number of transactions per second, so fees can climb at busy times. Layer 2 networks, also called rollups, execute transactions off the main chain, bundle them together and post the result to Ethereum, which keeps the final record and its security.

Recent upgrades were designed for this. Dencun, on 13 March 2024, introduced a cheaper way for rollups to publish data (blobs). Pectra, on 7 May 2025, raised the maximum balance of a single validator to 2,048 ETH and improved wallets. Fusaka, on 3 December 2025, added PeerDAS, which increased the data capacity available to rollups, and raised the block gas limit from 45 to 60 million. The next upgrade, Glamsterdam, is in preparation according to ethereum.org.

On 27 October 2026 layer 2 networks secured about 39 billion dollars in value, according to L2BEAT. The largest were Base, with about 15.2 billion dollars, and Arbitrum One, with about 9.8 billion. Transactions on these networks often cost a few cents. When moving funds, it matters which network you use: the same token on Ethereum and on a layer 2 sits at different addresses on different chains.

What Ethereum is used for

Ethereum is the main base for applications built on smart contracts. The most common uses are:

Ethereum and private markets

ETH and ERC-20 stablecoins are also a way to fund investments outside the crypto market. Unicorn Club, the members-only club for accredited investors, accepts ETH, BTC, USDT and USDC (ERC-20) for its pre-IPO club deals; the guide on how to invest in pre-IPO companies with crypto explains how it works.

Risks to keep in mind

The price of ETH can be very volatile. Smart contracts can contain errors, and some applications have been hacked. Transactions sent to the wrong address or on the wrong network are hard to recover. Rules and taxes vary by country. Investing involves the risk of losing capital. This guide is educational and is not personalized investment advice.

Frequently asked questions

What is the difference between Ethereum and ether?

Ethereum is the network and its software; ether (ETH) is the currency used on it to pay fees and to stake.

Does Ethereum still use mining?

No. Since the Merge of 15 September 2022 blocks are produced by validators who stake ETH, not by miners.

How much ETH do I need to stake?

Running your own validator needs 32 ETH. Pools and exchange services accept smaller amounts, in exchange for a fee.

Why are fees lower on layer 2?

Rollups process many transactions together and post a compressed record to Ethereum, so the cost of the main chain is shared among many users.

What is an ERC-20 token?

A token that follows Ethereum's common standard for balances and transfers. USDT and USDC, for example, exist as ERC-20 tokens.

How do I store ETH?

In the same ways as bitcoin: on a regulated platform, in a software wallet or in a hardware wallet. One Ethereum address can hold ETH and all ERC-20 tokens, and the recovery phrase must be kept offline and never shared.

Related guide

Sources

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