Ethereum

Ethereum is a decentralized, public blockchain network launched in 2015. Its native asset, ether, is generally the second-largest cryptocurrency by market value after bitcoin, and it is the unit used to pay for activity on the network. What separates Ethereum from a payment-focused chain is that it is programmable: developers can deploy smart contracts, which are pieces of code that live on the blockchain and run automatically when their conditions are met. That capability is the foundation for a wide range of applications, from token issuance to lending arrangements, that operate without a central operator.

As a cryptocurrency, ether shares the general character of the category covered on the main cryptocurrency page: it is a digital asset recorded on a distributed ledger, treated as property for United States tax purposes, outside deposit insurance, and volatile in price. This page covers what is specific to Ethereum, so the general questions about what crypto is, how it is taxed, and how it is regulated are answered there and on the bitcoin page rather than repeated here.

The smart contract is the concept everything else depends on. A smart contract is code deployed to the blockchain that executes exactly as written when called, with no party able to stop it or alter its logic once it is live. This makes Ethereum a platform as much as an asset: the same network that records transfers of ether also hosts programs that other people write. A large share of activity in the broader digital-asset market, including many tokens, stablecoins, and decentralized finance applications, was built on Ethereum or on networks modeled on it. A token built on Ethereum is not the same thing as ether; it is a separate asset that relies on Ethereum to operate, which is a distinction that matters when judging what you actually hold.

Every action on the network consumes resources, and the network charges for them through a fee mechanism commonly called gas, paid in ether. The fee for a given transaction depends on how much computation it requires and on how much demand there is for block space at that moment, so the same transaction can cost very different amounts at different times. When the network is congested, gas fees rise, which has been a recurring practical complaint and the reason behind much of Ethereum's later development work.

In September 2022 Ethereum completed a change usually called the Merge, which switched its consensus mechanism from proof of work to proof of stake. Under proof of stake, validators are selected to confirm blocks in proportion to the ether they commit as collateral, and they earn rewards for doing so honestly and can lose staked funds for misbehavior. This cut the network's energy use dramatically. It is worth being precise about what it did not do: the Merge did not by itself lower gas fees or speed up transactions, which depend on separate scaling work. Staking lets a holder earn a yield on ether, but that yield comes with its own trade-offs, including lock-up periods, the technical or counterparty risk of however the staking is arranged, and the fact that the rewards are denominated in an asset whose own value can fall.

At its base, Ethereum works like other public blockchains: transactions are broadcast, validated by the network, grouped into blocks, and appended to the chain. What is added is a computing layer. When a transaction calls a smart contract, validators across the network run that contract's code and record the result on the ledger, and the sender pays a fee in ether for the computation used.

A worked example makes the fee mechanism concrete. Suppose, hypothetically, a simple transfer requires 21,000 units of gas, and the current gas price is 20 gwei per unit, where a gwei is one-billionth of an ether. The fee is 21,000 multiplied by 20, which is 420,000 gwei, or 0.00042 ether. If ether is trading at a hypothetical $3,000, that transaction costs about $1.26. Raise the gas price to 100 gwei because the network is busy and the same transfer costs 0.0021 ether, or about $6.30. The number of gas units is set by the work the transaction does; the price per unit is set by demand, which is why fees swing.

Staking works differently. Instead of spending ether, a validator locks it up as a commitment to follow the rules. The network pays staking rewards for correctly validating blocks, and can confiscate part of a validator's staked ether for provable misconduct. A holder who does not run their own validator can stake through a service or a pooled arrangement, which adds a layer of counterparty risk in exchange for convenience.

What is distinctive about Ethereum

• It is programmable, so it hosts smart contracts and the applications and tokens built on them rather than serving only as a payment ledger.
• It has the largest developer base and application ecosystem among smart-contract platforms, which is a large part of ether's investment case.
• Proof of stake lets holders earn a yield by staking, an option bitcoin does not offer.
• Ether is among the most liquid and widely accessible digital assets, with listed spot products among the routes to exposure.

What a holder is accepting

• Ether is a volatile digital asset with no cash flow of its own; its price rests on supply and demand, and a large loss is possible.
• Gas fees can be high and unpredictable when the network is congested, a real cost of using it.
• Staking rewards come bundled with lock-ups and with the technical or counterparty risk of the staking arrangement, and the rewards are paid in an asset that can itself fall in value.
• It is not deposit-insured, is treated as property for tax, and its regulatory classification is unsettled, as for crypto assets generally.