Ethereum is the world’s second-biggest cryptocurrency, but it was designed to be much more than digital money. Here’s what it is, how it works, and how it differs from Bitcoin.
Ethereum was proposed in 2013 by a young programmer named Vitalik Buterin and launched in 2015.
Bitcoin was designed mainly as digital money. Ethereum’s founders wanted something broader: a shared global computer that anyone could use to build applications, without a company or government in control.
Technically, Ethereum is the network, and its currency is Ether, often written as ETH. People use Ether to pay fees for transactions and for running programs on the network, and many investors also hold it as an asset.
Smart contracts and what’s built on Ethereum
Ethereum’s key feature is the smart contract. It’s a program stored on the blockchain that automatically carries out an agreement when certain conditions are met. For example, it could release a payment once both sides have done what they promised, without a bank or lawyer in the middle.
Developers use smart contracts to build apps on Ethereum. They include decentralised finance, or DeFi, which offers lending, borrowing and trading without banks, along with digital collectibles known as NFTs and many of the world’s stablecoins.
Ethereum’s popularity has made it congested at times, pushing up fees, known as “gas”. Other networks have been built on top of it to handle transactions more cheaply.
Proof of stake, and the risks
In September 2022, Ethereum completed an upgrade known as “the Merge”. It switched from proof of work, the energy-hungry mining system Bitcoin uses, to proof of stake.
Under proof of stake, people lock up, or “stake”, their Ether to help verify transactions, and earn rewards in return. The change cut Ethereum’s energy use by more than 99%.
Unlike Bitcoin, Ethereum has no fixed limit on how many coins can exist, although some Ether is permanently removed every time fees are paid.
Investors can buy Ether through crypto exchanges, and exchange-traded funds that hold it are available in the U.S. and on the ASX.
Like other cryptocurrencies, Ether’s price is highly volatile. Smart contracts can contain coding errors that hackers exploit, and scams are common. Regulators, including ASIC, warn people to invest only what they can afford to lose.
