What Is Ethereum? Smart Contracts, Gas and ETH Explained

Ethereum is a programmable blockchain that runs smart contracts, and ether (ETH) is its native currency, used to pay transaction fees called gas. Where Bitcoin focuses on being digital money, Ethereum works like a shared global computer that anyone can build applications on. Most stablecoins, many tokens and a large part of decentralized finance started on Ethereum.

Key takeaways

• Ethereum launched in 2015 and was co-founded by Vitalik Buterin and others.
• Smart contracts are programs stored on the blockchain that run exactly as written.
• Every action costs gas: fee = gas used × gas price, paid in ETH.
• Ethereum moved to proof of stake in September 2022, an upgrade called the Merge.
• ETH has no fixed supply cap; part of each fee is burned.
• Layer 2 networks (rollups) process transactions more cheaply and settle back to Ethereum.

How Ethereum works

Like Bitcoin, Ethereum is a public ledger kept in sync by many independent nodes. The difference is what the ledger stores. Besides account balances, Ethereum stores code and data. A program deployed to Ethereum is called a smart contract, and it runs on the Ethereum Virtual Machine (EVM), a standard execution environment that every node runs identically.

Because every node gets the same result, a smart contract can hold funds and enforce rules without a company in charge. For example, a contract can swap two tokens at a formula-based price, lend assets against collateral or track ownership of a token. These building blocks are the basis of DeFi.

Many other blockchains are EVM-compatible, meaning the same contracts and wallets work on them with little or no change.

Proof of stake and validators

Ethereum originally used proof of work, like Bitcoin. Since the Merge it uses proof of stake: instead of miners spending electricity, validators lock up ETH as collateral (a stake) to earn the right to propose and attest to blocks. Running a solo validator requires 32 ETH.

Validators earn new ETH and a share of fees for honest work. If they break the rules, for example by signing two conflicting blocks, part of their stake can be destroyed. This penalty is called slashing. Ethereum produces a block slot every 12 seconds, and blocks become final, meaning practically irreversible, after a couple of checkpoints. The general idea is covered in What Is Blockchain?

Gas and transaction fees

Every operation a transaction performs has a fixed cost in gas. A plain ETH transfer uses 21,000 gas. A token swap or a DeFi interaction uses more because it runs more code.

You pay: fee = gas used × gas price. Gas price is quoted in gwei, where 1 gwei = 0.000000001 ETH (one billionth). Since an upgrade in 2021, the gas price has two parts:

• A base fee set by the protocol based on demand. This part is burned, removed from supply.
• A priority fee (tip) that goes to the validator to include your transaction sooner.

Worked example: assume a base fee of 18 gwei and a tip of 2 gwei.

Transaction	Gas used	Gas price	Fee in ETH	Fee at an assumed $3,000/ETH
ETH transfer	21,000	20 gwei	21,000 × 20 = 420,000 gwei = 0.00042 ETH	$1.26
Token swap (assumed)	150,000	20 gwei	150,000 × 20 = 3,000,000 gwei = 0.003 ETH	$9.00

If network demand doubles the base fee, the same swap costs roughly twice as much. For traders, gas is a fixed cost per transaction, so it matters much more on small trades than on large ones.

ETH supply

ETH does not have a hard cap like Bitcoin's 21 million. New ETH is issued to validators, while base fees are burned. When activity is high, more ETH is burned; when it is low, issuance can exceed the burn. Net supply therefore depends on how much the network is used.

For example, assume that over one day validators receive 2,700 new ETH while 1,500 ETH is burned in base fees. Net change = 2,700 − 1,500 = +1,200 ETH, so supply grows. If a busy day instead burned 3,000 ETH against the same issuance, net change = 2,700 − 3,000 = −300 ETH, and supply shrinks. For how supply affects valuation, see What Is Market Cap?

Layer 2 networks

Ethereum's base layer can handle only a limited number of transactions per block, which pushes fees up when demand is high. Layer 2 networks, mostly rollups, execute transactions off the main chain, bundle them and post the results back to Ethereum. Users usually pay lower fees while relying on Ethereum for settlement. The trade-off is added complexity: moving funds between Ethereum and a rollup uses a bridge, and some withdrawals can take time.

How ETH is traded

ETH trades on spot markets on centralized and decentralized exchanges, and on derivatives such as perpetual futures. Many exchanges list USDT-margined linear ETH perpetuals, and funding rates for ETH often differ between venues, the same way they do for BTC.

On DEXs, ETH is usually traded as WETH (wrapped ether), a token version of ETH that follows the same standard as other tokens so smart contracts can handle it easily.

Risks

• Price volatility: ETH can move sharply, and leverage magnifies losses.
• Smart contract risk: a bug in an application's code can lead to lost funds, even if Ethereum itself works correctly.
• Gas spikes: during busy periods, fees can make small transactions uneconomic.
• Wrong network: sending ETH or tokens on the wrong chain, for example to an address on an unsupported layer 2, can make funds hard or impossible to recover.

This article is education, not financial advice.

How ArbTide helps

ArbTide compares ETH and other perpetual funding rates across centralized exchanges and perp DEXs on the live funding rates page. To see price gaps between centralized venues and on-chain markets, read the CEX-DEX arbitrage strategy.