What is Ether (ETH)?

Ether 101

Ethereum is a decentralized blockchain platform that enables users to transfer and exchange value and data without a third-party intermediary. This is made possible through Ethereum’s smart contracts, which are hard-coded rules of engagement that automatically execute within the network once certain pre-set conditions are met. While this setup obviates the need for centralized validators, it has resulted in a unique new challenge, i.e., determining how to pay for the costs of processing on-chain transactions in an equitable, yet trustless fashion. The solution is ether (ETH), the Ethereum platform’s native coin.

1. How is Ether different from Bitcoin?

While both are cryptocurrencies, Ethereum's primary focus is on smart contracts and DApps, whereas Bitcoin primarily serves as a digital currency for peer-to-peer transactions. Ethereum also uses a different technology called "proof of stake" (PoS) for its network consensus, while Bitcoin relies on "proof of work" (PoW).

2. What are smart contracts?

Smart contracts are self-executing agreements with the terms of the contract directly written into code. They automatically execute when predefined conditions are met, without the need for intermediaries. Ethereum is known for popularizing the concept of smart contracts.

3. How can I buy Ether (ETH)?

You can buy Ether from cryptocurrency exchanges, both online and offline. You will need to create an account, complete identity verification, and link a payment method to purchase ETH. For more details, checkout our guide on how to buy Ether.

4. What are popular use cases for Ethereum?

Ethereum is widely used for various decentralized applications, including decentralized finance (DeFi) platforms, non-fungible tokens (NFTs), supply chain management, and more. It has also found applications in gaming, identity verification, and social networking.

How Does Ether (ETH) Work? 

As the second largest blockchain by market cap, Ethereum hosts an ever-expanding ecosystem of decentralized applications (dApps) that facilitate peer-to-peer user interactions. Every action in the Ethereum network — whether you’re creating a digital collectible or collateralizing a crypto loan — involves a transaction, and each of these transactions requires a certain amount of computing power. These transactions are paid for with ETH.

The ETH fees that result from transacting on the Ethereum blockchain are referred to as gas. In this sense, ETH is the fuel that powers the Ethereum network. This provides a continued demand for ETH, as both service providers and end users on the Ethereum network must continually purchase and spend ETH in order to interact with one another via the network’s smart contract protocols.

Among Ethereum users, gas costs are denoted in gwei, a denomination of ether equal to 0.000000001 ETH. The exact size of this cost per on-chain operation depends on the computational effort required to complete that action, and can therefore be influenced by how congested the network traffic is at the time the action is initiated. For the sake of transparency, approximated gas fees are typically communicated to a user before they are prompted to initiate a transaction, and many services built on Ethereum allow users to pay a higher gas fee than is recommended in order to expedite their transaction or increase the likelihood that it will be successfully executed by the network.

Alternatively, since gas fees can fluctuate in accordance with network usage volatility, Ethereum users who want to avoid paying excessive ether transaction fees can set a gas limit for their transaction, which means that their proposed transaction will not be executed if the involved cost surpasses a certain value. ETH gas fees also act as a spam mitigation tool in the sense that nefarious actors who might otherwise attempt to disrupt the system via a cascade of low-quality transactions are financially deterred by the prospect of paying ETH gas fees.

Multifunctional ETH: The Lifeblood of the Ethereum Ecosystem

In addition to being used to compensate miners and pay transaction fees, ETH has also demonstrated its utility as an effective medium of exchange within the Ethereum ecosystem. Transacting with ETH can be significantly faster and potentially cheaper than traditional payment services, and given Ethereum’s decentralized architecture, the network’s transactions are also censorship-resistant. This means that third-party authorities are unable to intercept or prevent on-chain transactions. ETH is also integral to the functioning of the rapidly expanding decentralized finance (DeFi) ecosystem, in which ETH is commonly used as collateral to take out crypto loans and earn interest. Reports estimate that upwards of $22 billion dollars of ETH is locked in DeFi platforms as of October 2023.

As Ethereum continues to evolve and enable novel use cases, ether will continue to play a central role in the network’s operational success. With its growing use, thanks in part to the DeFi explosion, ETH will likely continue to be one of the world’s most used, trusted, and valued digital assets.