What is Ethereum (ETH) and how does it work?

Ethereum is a decentralized, open-source blockchain platform that enables the creation and execution of smart contracts and decentralized applications (dApps). Unlike simpler cryptocurrencies like Bitcoin, which are primarily designed as digital money, Ethereum was built as a programmable platform. This allows users to build and deploy a wide range of applications directly on the network, leveraging blockchain technology for features like transparency, security, and immutability.

At its core, Ethereum provides a foundation for a new type of internet application where users can interact directly with each other without relying on a central authority. It has its own native cryptocurrency, known as Ether or ETH, which serves as the fuel for the network, paying for transactions and computational services.

This network collectively maintains the state of the Ethereum blockchain, processes transactions, and runs the smart contracts and dApps deployed on it.

The concept of Ethereum was first introduced by Vitalik Buterin in late 2013. Buterin, a programmer and co-founder of Bitcoin Magazine, proposed a new blockchain platform that would go beyond the basic financial transactions supported by Bitcoin. He envisioned a system capable of running any type of decentralized application.

Ethereum runs on a decentralized peer-to-peer network, where thousands of global computers called nodes execute the software to maintain the blockchain and handle transactions. At its core, the blockchain is a growing digital ledger that records all transactions and smart contracts. Distributed across these nodes, it's highly resistant to censorship or tampering by any single party. Each new block cryptographically links to the previous one, ensuring a secure, verifiable history.

Consensus Mechanism

The network uses a "consensus mechanism" to ensure all the computers (called nodes) stay in sync on the blockchain's current status and agree if new transactions are valid. For many years, Ethereum used Proof-of-Work (PoW), just like Bitcoin. In PoW, participants known as miners used strong computers to solve tough math puzzles. This method needed a lot of computing power and used up huge amounts of energy.

In September 2022, Ethereum made a big upgrade called The Merge. This change moved the network from Proof-of-Work (PoW) to Proof-of-Stake (PoS). In PoS, participants called validators stake their ETH for a chance to be picked to create new blocks. The odds of selection depend on how much ETH they stake. Validators earn rewards if they propose valid blocks and confirm others' validity, but they lose part of their staked ETH if they behave dishonestly or go offline.

This switch greatly cut Ethereum's energy use, making the network much more eco-friendly and also sets the stage for future upgrades to improve scalability.

One of Ethereum's most powerful and innovative features is its support for smart contracts. A smart contract is essentially a self-executing contract with the terms of the agreement directly written into lines of code. This code resides on the Ethereum blockchain and automatically runs when predefined conditions are met.

Imagine a smart contract like a vending machine: insert the right money (condition 1), select an item (condition 2), and it automatically checks and delivers—no human involved. Smart contracts automate tasks through programmed rules, eliminating middlemen for greater efficiency and trust.

On Ethereum, they're written in blockchain-focused languages. Once deployed, the code is fixed and runs precisely as coded, resistant to outages, censorship, or outside meddling as long as the network stays up.

Smart contracts are fundamental to building applications on Ethereum. They handle everything from simple value transfers based on conditions to complex logic for managing digital assets, facilitating trades, or running entire decentralized organizations.

Ether (ETH) acts as "network fuel" through gas fees for Ethereum transactions. Every action on the network, such as sending ETH, interacting with a smart contract, or deploying an app, requires computational resources from validators. 

Gas fees in ETH compensate validators and prevent spam from overloading the system. Gas measures the computational effort needed for operations, with simple tasks using less gas and complex ones using more. 

The total fee equals the required gas multiplied by the current gas price, expressed in gwei (1 ETH = 1 billion gwei). Gas prices fluctuate with network congestion: during high demand, users bid higher prices to prioritize their transactions, similar to surge pricing in ridesharing.

The versatility of the Ethereum platform, enabled by smart contracts and dApps, has led to its adoption in numerous areas:

• Decentralized Finance (DeFi): Users can lend and borrow digital assets, trade on decentralized exchanges, earn yield through staking or liquidity provision, and access other financial services permissionlessly.
• Non-Fungible Tokens (NFTs): Ethereum became the dominant platform for creating and trading NFTs, revolutionizing digital ownership for art, music, collectibles, and gaming items.
• Supply Chain Management: Transparent and traceable supply chains, automating payments upon verified delivery or condition changes.
• Gaming and Metaverse: Decentralized gaming economies where players own in-game assets as NFTs and can trade them freely. It is also a foundational technology for some metaverse projects.
• Identity and Data Management: Use cases include self-sovereign identity solutions where individuals control their digital identity and data using blockchain technology.
• Prediction Markets: Bet on the outcome of future events using smart contracts to manage the wagers and payouts.
• Enterprise Solutions: Secure supply chain tracking, automated contracts, and efficient data management.

While both Ethereum and Bitcoin are blockchain networks and utilize cryptocurrencies, they have fundamental differences in their purpose, design, and capabilities.

• Purpose: Bitcoin is mainly for digital money and storing value like "digital gold," with basic code for simple transfers. Ethereum is a platform for building apps and smart contracts, with advanced code that runs complex programs.
• Technology: Both use blockchain tech, but Ethereum's is more flexible for smart contracts and apps. Bitcoin still relies on Proof-of-Work, while Ethereum switched to Proof-of-Stake for greater energy efficiency, security, and scalability.
• Transaction Model: Bitcoin's transactions primarily move value between addresses. Ethereum transactions can involve value transfers, but also the execution of code within smart contracts, making them far more versatile.
• Supply: Bitcoin has a fixed supply cap of 21 million coins. Ethereum's supply mechanism has been more dynamic. There isn't a strict, hard cap on the total supply of ETH, though mechanisms like burning aim to control inflation or even make ETH potentially deflationary under certain network conditions.
• Evolution: Bitcoin's protocol changes are infrequent and conservative. Ethereum has undergone more frequent and significant upgrades, reflecting its nature as a platform for innovation and ongoing development.

In essence, while Bitcoin pioneered blockchain technology and decentralized digital currency, Ethereum extended the concept to create a general-purpose decentralized computing platform capable of supporting a vast ecosystem of applications beyond simple payments.

The transition to Proof-of-Stake through The Merge was the most significant upgrade in Ethereum's history since its launch. It was a culmination of years of research and development and had profound impacts:

• Energy Efficiency: The shift eliminated the energy-intensive mining process, reducing Ethereum's energy consumption by over 99.9%.
• Enhanced Security: While PoW relies on computational power for security, PoS relies on the value staked by validators.
• Foundation for Scalability: The move to PoS is a necessary prerequisite for implementing future scalability upgrades, such as sharding.

Following The Merge, the Ethereum roadmap includes further upgrades aimed at improving the network's scalability, security, and sustainability. Key planned developments include:

• Sharding: A process that would divide the Ethereum blockchain into smaller, more manageable pieces called "shards." This would allow the network to process multiple transactions in parallel across these shards, significantly increasing transaction throughput.
• Rollups and Layer 2 Solutions: Sharding will help Ethereum scale on its main layer, but Layer 2 solutions like rollups are already boosting speed and lowering costs. They process transactions off the main chain and send back summaries, easing congestion. Future upgrades, such as Proto-Danksharding, aim to make these Layer 2 solutions even faster and cheaper.

Its price is mainly driven by supply and demand: when more people buy than sell, the price rises, and the reverse pulls it down. Network activity plays a big role too. Every Ethereum transaction requires a gas fee, and part of that fee is burned, reducing supply. Since the shift to Proof-of-Stake (The Merge), this mechanism has made ETH partly deflationary.

More than 120 million ETH tokens are in circulation, and adoption is climbing fast: around 136 million addresses now hold ETH, with up to 200,000 new addresses added per day during recent peaks. Ethereum also underpins roughly $47 billion in total value locked (TVL) in DeFi, showing its central role in crypto finance. Institutional demand is growing too: spot ETH ETFs have already attracted billions in inflows, bringing Ethereum into traditional investment portfolios.

Ethereum’s price also follows wider market patterns. It is strongly tied to Bitcoin (≈ 95% correlation, often moving in the same cycles) and reacts to global economic conditions. For example, when U.S. Treasury yields rose from 3.9% to 4.6%, ETH prices fell, as higher yields made riskier assets less attractive.

Looking ahead, a lot of forecasts for 2025 are bullish. Analysts see optimistic scenarios projecting $8'000–$10'000 if ETF demand stays strong. Still, risks remain, from competition with faster blockchains such as Solana to possible security issues or global policy shifts.

1. Open and fund your account
   First, you’ll need a Swissquote trading account. Make sure you also have funds in a supported fiat currency (EUR or USD) because ETH and most cryptos are traded vs those currencies.
2. Trade actual Ethereum (spot trading)
   If you want to own ETH directly, you can buy it via Swissquote’s crypto wallet and crypto trading service. There are over 40+ cryptocurrencies available, including Ethereum. You can trade 24/7, store ETH in the secure wallet, and enable transfers (deposit/withdraw via the Ethereum network).
3. Themed / certificate-based products (“Themes Trading”)
   If you prefer something managed or less directly volatile, Swissquote offers Thematic Certificates like Ethereum Active Mini, which mix ETH with cash (CHF) to reduce volatility. These certificates are traded on the SIX Swiss Exchange, so they’re more familiar to people used to stocks or traditional securities.
4. ETFs / ETPs and derivatives
   For those interested in more complex strategies, there are also crypto ETFs and ETPs (for diversified exposure to crypto-asset baskets) available. Plus you can access derivatives: e.g. mini-futures or other products that let you go short (bet ETH will drop) or long (bet ETH will rise) with leverage.

Be aware of volatility: the value of ETH can jump up or down a lot, especially with leveraged products such as Futures and Options.

The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations, or promotional material.