Ethereum is an open, decentralised blockchain platform designed to offer more than digital payments. It’s a programmable network where developers can build applications, automate contracts, and create new financial tools. Its native cryptocurrency, Ether (ETH), powers activity on the network and is the world’s second-largest digital asset by market capitalisation. This guide looks at how Ethereum works, what it’s used for, and what makes it different to Bitcoin.
The information presented here does not constitute financial advice but is for educational purposes only. Please do your own thorough research or consult a professional to better assess the risks of investing in cryptocurrencies.
A decentralised blockchain platform that processes payments and lets developers build applications and automate agreements using smart contracts.
Ether (ETH) is Ethereum’s native cryptocurrency and is used to pay for everything from simple transfers to complex smart contract interactions.
In 2022, Ethereum replaced its mining system with proof-of-stake, a mechanism where participants lock up ETH to validate transactions rather than competing with computing power.
Ethereum forms the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and thousands of applications that run without any central authority in control.
People often use the two terms interchangeably. However, Ethereum is technically the network itself, while Ether (ETH) is the cryptocurrency that runs on top of it and is needed to facilitate the network’s decentralised applications. Ether can be described as the energy source, or gas, that keeps the Ethereum network running.
Here’s the distinction between Ether and Ethereum explained simply:
Ethereum is the blockchain network that developers build on and users interact with.
Ether (ETH) is the cryptocurrency of the Ethereum network, used both as a digital currency that can be bought, sold, and transferred, and as the means of paying for any activity carried out on the network.
Ethereum runs on a blockchain, which is a form of digital ledger that records every interaction on the network. The blockchain gets its name from how it stores information. Transactions are grouped together into blocks, and each new block is permanently chained to the one before it, making past records practically impossible to alter.
The ledger is maintained by thousands of computers called nodes. Thanks to its decentralised nature, no single person or organisation is in control. When you send ETH to someone, that transaction is broadcast to the network, verified by nodes, and permanently recorded on the blockchain. Ethereum can also record entire programmes and agreements known as smart contracts.
A smart contract is an agreement written in code and stored on the Ethereum blockchain, and it only executes when a certain condition is met.
For example, a smart contract could automatically release payment to a freelancer the moment a piece of work is verified as complete, or instantly return funds to a buyer if a seller fails to deliver. Once deployed on Ethereum, smart contracts are difficult to alter or interfere with, but they are not risk-free. If the underlying code contains errors or vulnerabilities, the contract may behave unexpectedly or be exploited.
This is how the Ethereum blockchain supports fully functioning applications. Smart contracts can be chained together, with the output of one triggering another on Ethereum, meaning that developers can build entire programmes out of them with no central operator.
The engine that runs all this is called the Ethereum virtual machine, which is a shared processing environment.
When a developer sets up a smart contract, it gets translated into a set of instructions the virtual machine can understand. Every node on the network runs the virtual machine, processes those same instructions, and independently arrives at the same output.
The virtual machine is what makes Ethereum programmable in a way most blockchains aren’t. It can, in theory, run any application a developer can write, which is why it’s sometimes described as a “world computer”.
To cover the costs of keeping all the nodes running, Ethereum uses its own cryptocurrency, Ether (ETH). Every action, whether sending ETH or executing a smart contract, requires a small fee paid in ETH, known as a gas fee.
Gas fees fluctuate depending on how many people are using the network at any given time. Fees rise during busy periods as users compete to have their transactions processed first, and they fall when activity is lower. Plus, the more complex the action, the more gas it costs. With costs attached to every computation, Ethereum prevents the network from being spammed or overloaded.
A portion of every gas fee is permanently removed from circulation. This process, known as burning, affects the overall supply of ETH as time goes on.
For most of its early life, Ethereum ran on proof of work. This is the same energy-intensive system used by Bitcoin (BTC), where computers compete to solve complex puzzles to validate transactions.
In December 2020, Ethereum launched a parallel version of the network testing a new system called proof of stake. After two years running in parallel, the two chains were combined in 2022 in an upgrade known as The Merge. This switch led to Ethereum’s energy consumption falling by more than 99%.
Unlike Bitcoin mining, where miners compete with computing power, proof-of-stake relies on validators. These are participants who lock up, or stake, an amount of ETH as collateral to earn the right to confirm transactions and add new blocks to the chain. In return, they receive a share of transaction fees as a reward.
This approach is not only more energy efficient, it also means that users don’t need expensive mining equipment to participate in securing the network. To become a solo validator, you would need to run your own node and stake 32 ETH. However, pooled staking is also an option. Users can participate with smaller amounts through platforms like Bitpanda.
Disclaimer: Staking allows you to participate in transaction validation on Proof-of-Stake blockchains for which you will be rewarded. Please be aware that Staking carries risks and you may lose the entire capital invested. Make sure to do the necessary research before staking any coins. Bitpanda does not guarantee any reward. The estimated rewards presented include the application of Bitpanda fees respectively.
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Get started nowEthereum’s native cryptocurrency, Ether, functions as a means of payment in its own right. You can send it directly to anyone in the world without going through a bank or payment provider. As for Ethereum, businesses and developers use it to build all kinds of products and services.
Decentralised finance (DeFi): Ethereum powers financial services such as lending, borrowing, and earning interest on cryptocurrencies that anyone can access without a bank.
Non-fungible tokens (NFTs): Most NFTs are built on Ethereum, allowing people to prove ownership of unique digital items like artwork, music, or in-game collectibles.
Decentralised applications (dApps): From games to marketplaces, thousands of apps run directly on the Ethereum blockchain with no single entity in control of them.
Decentralised autonomous organisations (DAOs): Ethereum can be used for groups to run organisations collectively, where members vote on decisions using tokens and rules are enforced automatically by smart contracts.
Smart contracts: Two parties can agree to terms that execute automatically when conditions are met.
Stablecoins: Many stablecoins are issued on Ethereum, making it the backbone of a large portion of everyday crypto transactions.
These use cases collectively form web3, which is an internet built on decentralised infrastructure, where users own their data, identity, and assets rather than having them controlled by large corporations.
ETH is the native currency of the Ethereum network, meaning it derives its value from how widely the network is used. Because ETH is the only accepted form of payment for gas fees, anyone who wants to use the network must first own ETH. This means every new user creates direct demand for ETH simply by participating.
That demand is amplified by Ethereum’s dominance in two major crypto sectors: decentralised finance and NFTs, both of which run primarily on Ethereum. ETH is also increasingly held as an investment asset.
On the supply side, a portion of every gas fee is permanently removed from circulation in the burning process. When network activity is particularly high, ETH is burned faster than it is created. These dynamics can influence how market participants assess Ethereum’s potential price development.
As with all cryptocurrencies, ETH is a volatile asset and its price can fall as well as rise. Past performance is not a reliable indicator of future value.
Ethereum is regularly updated through major network upgrades. One upgrade, Pectra, introduced changes aimed at improving scalability, efficiency, and usability, including features designed to lower certain transaction costs and improve wallet functionality.
Other upgrades are focused on making the network faster and easier for everyday users to interact with. Discussions from the Ethereum Foundation centre on scaling Ethereum to support a greater number of transactions securely and reliably over time.
Get a wallet – a crypto wallet stores your public key (your address) and your private key (which authorises transactions), but many platforms will often manage these keys for users.
Choose a platform. Once registered with a platformsuch as Bitpanda, you can buy ETH with GBP.
Verify your identity.
Fund your account, usually by using a bank transfer or debit card.
Buy ETH – search for Ethereum, enter your amount, and confirm the purchase.
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