What is Ethereum?

By the Blockhorizon Editorial Team · Updated 2 October 2026 · How we check facts

This guide explains what Ethereum is and how it works, using the technical documentation published by the Ethereum Foundation on ethereum.org and the US National Institute of Standards and Technology (NIST). The risks come from financial regulators and from those documents — not from anyone selling ether.

What is Ethereum, in plain English?

ethereum.org describes it like this: “Ethereum is a decentralized blockchain network and software development platform, powered by the cryptocurrency ether (ETH).”

Two phrases in that sentence matter. Blockchain network means Ethereum keeps a shared record of transactions copied across many computers, like the blockchain behind Bitcoin. Software development platform means people can also put programs on that record and have the network run them.

The idea was set out in a white paper by Vitalik Buterin in 2013, according to ethereum.org, and the network went live in July 2015 — its first version, called Frontier, launched on 30 July 2015. ethereum.org says that “Today, no single person or company runs Ethereum.”

One naming point trips people up: Ethereum is the network; ether (ticker ETH) is the currency used on it.

How is Ethereum different from Bitcoin?

Both are public blockchains with their own currency, but they were built for different jobs.

• Purpose. Bitcoin was described in its 2008 white paper as peer-to-peer electronic cash. Ethereum was designed so that anyone can also run programs — smart contracts — on the network.
• Supply. Bitcoin’s software issues just under 21 million coins in total. Ether has no fixed cap: ethereum.org says new ETH is issued to the network’s validators “at a limited rate calculated by the protocol”, while part of every transaction fee is permanently destroyed (“burned”).
• Security model. Bitcoin uses proof-of-work (mining). Ethereum switched to proof-of-stake in September 2022, explained below.

What is a smart contract?

Despite the name, a smart contract is not a legal document. ethereum.org defines it simply: “A ‘smart contract’ is simply a program that runs on the Ethereum blockchain.” It is a bundle of code and data that lives at its own address on the blockchain. NIST’s 2018 blockchain overview describes smart contracts in the same way, as “software deployed on the blockchain and executed by computers running that blockchain”.

ethereum.org compares a smart contract to a vending machine: put in the right inputs and you get a set output — “money + snack selection = snack dispensed”. No shop assistant is needed, because the rules are written into the machine.

Three features are worth knowing before you use one:

• Anyone can publish one. “Anyone can write a smart contract and deploy it to the network.” That includes people with bad intentions.
• They are hard to undo. “Smart contracts cannot be deleted by default, and interactions with them are irreversible.”
• They cannot see the outside world on their own. A smart contract cannot fetch real-world information such as a price or a sports result by itself; it relies on outside services called oracles to supply that data.

Smart contracts are what let people create other tokens and apps on Ethereum.

What is ether (ETH) used for?

According to ethereum.org, ether has three main jobs:

1. Paying fees. Every transaction or smart-contract action on Ethereum costs a fee, paid in ETH.
2. Securing the network. Validators lock up ETH as a deposit (called staking) to earn the right to process transactions.
3. Payments and investment. ETH can be sent to other people like any other crypto-asset.

Like other crypto, ether is held through private keys. Whoever controls the key controls the ETH.

What are Ethereum gas fees?

ethereum.org explains: “Gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network.” A simple transfer of ETH uses 21,000 units of gas; more complicated smart-contract actions use more.

ethereum.org says gas prices are usually quoted in gwei. One gwei is one-billionth of an ETH (0.000000001 ETH). The fee is the units of gas used multiplied by the price per unit, which has two parts: a base fee, which is burned, and a priority fee — a tip you add so that validators choose your transaction.

Worked example (illustrative only). Suppose the total price is 10 gwei per unit of gas. A simple transfer then costs 21,000 × 10 = 210,000 gwei, which is 0.00021 ETH. The 10 gwei figure is made up for the arithmetic — real gas prices change from block to block.

One catch: ethereum.org notes that if a transaction runs out of gas partway through, its changes are reversed but all the gas provided is still consumed. A failed transaction can still cost you a fee.

What was “The Merge” in 2022?

Ethereum originally used proof-of-work, the same energy-hungry mining approach as Bitcoin. On 1 December 2020 a separate proof-of-stake chain, the Beacon Chain, was launched to run alongside it. On 15 September 2022 the two were joined in an upgrade called The Merge, and mining was switched off.

ethereum.org estimates that this cut Ethereum’s energy use by more than 99%. What The Merge did not do is make transactions cheaper. In ethereum.org’s words: “The Merge was a change of consensus mechanism, not an expansion of network capacity, and was never intended to lower gas fees.”

Staked ETH could not be withdrawn at first. Withdrawals were enabled by a later upgrade, known as Shanghai/Capella, in April 2023.

How does proof-of-stake work on Ethereum?

Instead of miners competing with computing power, Ethereum relies on validators who put up ETH as a security deposit. According to ethereum.org, a user must deposit 32 ETH and run three separate pieces of software to become a validator. Validators check that new blocks are valid and sometimes propose new blocks themselves. Time is divided into 12-second slots.

The deposit is what keeps validators honest: if they try to cheat the network, ethereum.org says “some or all of their staked ETH can be destroyed”. This penalty is called slashing.

You do not need 32 ETH, or to be a validator, to send or hold ether. Proof-of-stake is simply how the network agrees on which transactions are valid.

What are the risks of Ethereum?

• Price falls. The UK Financial Conduct Authority (FCA) gives Ethereum as an example: it peaked at £3,685.98 on 24 August 2025 and was £2,119.90 on 1 December 2025, a fall of 42.49%. The FCA says crypto-assets “are all high risk and speculative as an investment.”
• Smart-contract bugs. ethereum.org warns: “Deployed contract code usually cannot be changed to patch security flaws, while assets stolen from smart contracts are extremely difficult to track and mostly irrecoverable due to immutability.” NIST records a real case: in 2016 a smart contract on Ethereum called the DAO was attacked, and “Due to flaws in how the smart contract was constructed, an attacker extracted Ether, the cryptocurrency used by Ethereum, resulting in the theft of $50 million”.
• Irreversible mistakes. ethereum.org says interactions with smart contracts are irreversible, so a mistaken or malicious transaction usually cannot be undone.
• Lost keys. The US Securities and Exchange Commission (SEC) says that if you lose your private key, you permanently lose access to the crypto in your wallet.
• Little protection. The FCA says it is highly unlikely you would be covered by the UK’s compensation scheme, and EU supervisors say you will not benefit from compensation schemes under the EU’s MiCA rules.
• Fees and failed transactions. Gas costs change constantly, and a failed transaction can still use up gas.
• Scams. Anyone can deploy a smart contract — including scammers. Learn the red flags of crypto scams, and read the risks of crypto, in regulators’ words.

Blockhorizon is an education site. Nothing here is a recommendation to buy, sell, stake or hold ether or any other crypto-asset.