What is Ethereum?
How it works
Ethereum operates as a global, distributed state machine. Accounts (externally owned or contract-based) hold balances and execute code. Transactions change the state and are validated by nodes running the Ethereum Virtual Machine (EVM). Gas fees, paid in ETH, prevent spam and allocate resources. The EVM ensures deterministic execution across the network, enabling trustless, self-enforcing smart contracts.
Since the 2022 Merge, Ethereum uses proof-of-stake consensus. Validators lock 32 ETH as collateral to propose and attest to blocks. If they act maliciously, their stake is slashed. The protocol randomly selects one validator per slot (12 seconds) to propose a block, while committees attest to its validity. This mechanism is far more energy-efficient than proof-of-work and allows for finality in about two epochs (12.8 minutes).
Ethereum's scalability relies on layer 2 rollups (e.g., Optimism, Arbitrum) which batch transactions off-chain and post their compressed transaction data back to the mainnet for security. Inside the execution layer, EIP-1559 introduced a fee market that burns a base fee, making ETH deflationary under high usage. The network also supports standards like ERC-20 (tokens) and ERC-721 (NFTs), fostering a vast ecosystem of composable DeFi and dApps.
Why it matters
Ethereum is the foundational platform for decentralized finance (DeFi), non-fungible tokens (NFTs), and autonomous organizations (DAOs). Its programmability enables permissionless innovation, from lending protocols like Aave to prediction markets like Augur. By removing intermediaries, Ethereum fosters financial inclusion and censorship resistance. Despite challenges like high gas fees during congestion, ongoing upgrades and layer 2 solutions promise to make it a scalable settlement layer for the decentralized web.
Real-world examples
Real protocols built on Ethereum include Uniswap (automated market maker), MakerDAO (stablecoin DAI), and Compound (money market). Notable events: the 2016 DAO hack leading to a hard fork; the 2021 NFT boom via CryptoPunks and Bored Ape Yacht Club; and the 2022 successful transition to proof-of-stake (the Merge).
FAQ
What is the difference between Ethereum and Bitcoin?
Bitcoin is primarily a peer-to-peer digital currency with limited scripting. Ethereum adds a Turing-complete virtual machine, allowing developers to build decentralized applications (dApps) and smart contracts that run exactly as programmed.
How does Ethereum's proof-of-stake work?
Validators stake 32 ETH to participate in block production and consensus. They are randomly selected to propose blocks and attest. Honest validators earn rewards; dishonest ones lose their stake (slashing). This secures the network with minimal energy use.
What are gas fees on Ethereum?
Gas fees are payments in ETH required to execute transactions or smart contracts. They vary based on network congestion and transaction complexity. EIP-1559 burns the base fee, while a priority tip incentivizes miners/validators.
Related terms
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