Key Takeaways
Ethereum is an open-source platform powered by blockchain technology. It supports smart contracts and decentralized applications, enabling developers to create a wide range of products and services.
Ether (ETH) is Ethereum’s native cryptocurrency. Launched in 2015, it is the second-largest cryptocurrency by market capitalization.
Ethereum originally operated on a Proof of Work (PoW) consensus mechanism, much like Bitcoin. However, the network transitioned to Proof of Stake (PoS) in 2022 for improved energy efficiency and scalability.
What Is Ethereum?
Ethereum, conceptualized in 2014 by programmer Vitalik Buterin, is a decentralized, open-source platform powered by blockchain technology. Unlike Bitcoin, which is mainly about sending digital money, Ethereum lets people build all kinds of applications and services, such as games, financial products, digital art collections, and much more.
Ethereum’s native cryptocurrency, ether (ETH), is the second biggest cryptocurrency after Bitcoin, with a market cap of $220 billion as of May 2025.
How Is Ethereum Different From Bitcoin?
While both Ethereum and Bitcoin function as platforms facilitating digital money transfers, Ethereum's distinction lies in its broader utility. Ethereum serves as a platform for deploying smart contracts, which are autonomous computer programs that automatically execute actions when certain conditions are met. Let’s explore some of the key differences between Ethereum and Bitcoin.
1. Origin and purpose
Bitcoin, introduced in 2009 by Satoshi Nakamoto, was conceived primarily as a digital alternative to traditional currencies. Bitcoin is envisioned as a decentralized form of money immune to governmental interference or inflation. Its primary function is to serve as a medium of exchange, a store of value, and, for some, a unit of account.
Ethereum, on the other hand, was created in 2014 by Vitalik Buterin with a broader vision. While it does have its own cryptocurrency, ether (ETH), Ethereum's purpose extends beyond facilitating transactions. It's designed as a platform for developers to build and deploy smart contracts and decentralized applications (DApps).
2. Smart contracts and DApps
While Bitcoin does offer a form of smart contract functionality, Ethereum is more flexible and generalized, allowing for an array of applications. These allow for programmable transactions and a multitude of applications beyond currency transfers.
3. Tokenomics
Bitcoin has a capped supply, with a maximum of 21 million coins ever to be mined into existence. This scarcity principle is one of its core value propositions. Ethereum, in contrast, doesn't have a hard-capped supply.
In summary, while both Bitcoin and Ethereum leverage blockchain technology, they cater to different domains. Bitcoin aims to disrupt the way we perceive and use money, while Ethereum seeks to revolutionize how applications and agreements function in a decentralized setting.
How Does Ethereum Work?
Ethereum is a bit complicated, but it’s made up of a few main parts: the blockchain, smart contracts, a special computer called the Ethereum Virtual Machine, a way to agree on transactions, and fees for using the network. Let’s look at each one.
The Ethereum blockchain
The blockchain is like a public diary that records everything that happens on Ethereum. It’s stored on thousands of computers, called nodes, that work together to keep it accurate. Every transaction, like sending ETH or using an app, gets put into a “block.” These blocks are connected in a chain, which is why it’s called a blockchain.
Because the blockchain is shared and public, anyone can see what’s happening. It’s also built to be safe, so it’s hard for anyone to cheat or change the records. Ethereum uses a special way to organize data, called a Merkle-Patricia Trie, to keep track of things like how much ETH someone has.
Smart contracts
Smart contracts are one of Ethereum’s coolest features. They’re like automatic agreements that do what they’re supposed to without needing someone to manage them. For example, if you put money into a smart contract to buy a digital item, it will send the item to you and the money to the seller automatically. Another example is a smart contract that automatically sends out a message whenever someone sends ETH tokens.
Smart contracts were first thought up by a guy named Nick Szabo years ago. On Ethereum, they’re written in a coding language called Solidity. They power all kinds of apps, like ones that let you borrow money, trade digital art, or even vote in a group. They’re super useful but need to be coded carefully to avoid mistakes.
The Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine, or EVM, is like the brain of Ethereum. It’s a virtual computer made up of all the nodes in the network. When someone makes a smart contract or app, the EVM runs it to make sure it works right. It’s what lets Ethereum handle complicated tasks, not just simple money transfers.
Running the EVM costs money, paid in ETH. These payments are called “gas fees,” and they go to the people who keep the network running. Developers have to write smart contracts in a way that doesn't use too much gas, or they may get too expensive to use.
How Ethereum agrees on transactions
Ethereum needs all its computers to agree on what’s happening, like which transactions are valid. Ethereum originally operated on a Proof of Work (PoW) consensus mechanism, much like Bitcoin. However, the network successfully transitioned to Proof of Stake (PoS) with the Ethereum 2.0 upgrades in 2022.
In PoS, validators replace miners in the creation and verification of blocks based on the amount of cryptocurrency they stake or lock up as collateral. In other words, people stake their ETH (kind of like putting down a deposit) to help run the network. If they do a good job, they earn rewards. If they try to cheat, they lose their ETH. This new way offers increased scalability and energy efficiency.
PoS is the second-most-popular consensus algorithm, adopted by BNB Chain, Solana, Cardano, and many other blockchain networks.
Gas fees
Every time you do something on Ethereum, like send ETH or use an app, you pay a small fee called gas. Gas is paid in tiny bits of ETH, called gwei. The fee depends on how busy the network is and how complicated your action is. For example, sending ETH costs less gas than running a big smart contract.
Gas fees have two parts: a base fee that gets destroyed (taken out of circulation) and a tip that goes to the people running the network. Destroying fees helps keep the amount of ETH from growing too fast. Gas fees are usually under $1, but they can go up when the network is busy. You can use sites like Etherscan to estimate gas fees and check network activity.
What Is Ethereum 2.0?
Ethereum 2.0 (aka Eth2 or "Serenity”) was a series of long-awaited upgrades to the Ethereum network that were aimed at improving the network’s scalability.
The roll-out of Ethereum 2.0 was a gradual process with three main phases: phase 0, phase 1/1.5, and phase 2.
Phase 0 saw the successful introduction of the Beacon Chain, launched in December 2020. It runs parallel to the mainnet and focuses on accepting validators (stakers) through a one-way deposit contract.
Phase 1/1.5 was the combination of two phases. Phase 1 introduced shard chains, which enabled validators to create blocks on the blockchain through PoS. Phase 1.5 began rolling out in 2021 and marked the official transition from PoW to PoS.
Phase 2, the final phase, enabled Ethereum 2.0 to support fully formed shards and become the official Ethereum network. Shard chains also work with smart contracts, allowing seamless integration of DApps and other technologies with Ethereum 2.0.
Pectra Upgrade, May 2025
Building on the foundational changes introduced by Ethereum 2.0, the Pectra upgrade represents the next major step in Ethereum’s ongoing evolution. Released 7 May 2025, Pectra combines two previously planned upgrades-Prague (execution layer) and Electra (consensus layer) into a single, comprehensive update that focuses on improving network scalability, user experience, and staking efficiency.
Key features of Pectra include:
Enhanced Staking Flexibility: Pectra significantly raises the maximum amount of ETH a validator can stake from 32 ETH to 2,048 ETH (EIP-7251). This allows large stakers to consolidate multiple validator slots into one, simplifying validator management and improving capital efficiency without forcing smaller validators out.
Account Abstraction and Smarter Wallets: The upgrade introduces smart contract capabilities to externally owned accounts (EIP-7702), enabling wallets to batch transactions and pay gas fees using tokens other than ETH, such as stablecoins like USDC. This greatly enhances wallet usability and lowers onboarding friction for new users.
Faster and More Flexible Validator Operations: Pectra streamlines validator activation and withdrawal processes, reducing activation time from hours to minutes and allowing validators to initiate withdrawals directly via the execution layer, improving overall validator experience.
Increased Network Efficiency and Scalability: By doubling blobspace and optimizing call data costs, Pectra supports greater throughput, benefiting Layer 2 solutions and reducing transaction fees, which is crucial for scaling Ethereum’s ecosystem.
Pectra builds on the transition to Proof-of-Stake completed by Ethereum 2.0 and subsequent upgrades like Shanghai and Dencun, refining the network’s infrastructure to make Ethereum more scalable, efficient, and user-friendly. This upgrade not only improves the staking experience, potentially attracting more institutional participation, but also enhances transaction flexibility and wallet functionality paving the way for broader adoption and future innovations such as Verkle trees.
The Ethereum Ecosystem
Since the inception of Ethereum, countless applications and products have been developed on the platform, making it the second most popular cryptocurrency. Here are some of the most common use cases and features.
1. Decentralized finance (DeFi)
DeFi refers to financial applications developed on top of blockchain networks. The unique feature of DeFi is that it functions without central authorities, providing an open and programmable financial ecosystem.
Examples include lending platforms, decentralized exchanges, and stablecoins. DeFi aims to make financial services faster, cheaper, and more accessible. Some notable DeFi platforms include MakerDAO, Compound Finance, Aave, and UniSwap.
2. Gaming
Gaming and virtual reality have become a large part of the Ethereum network. Decentraland and Sandbox are two examples of platforms that have created virtual worlds. The Ethereum blockchain is used to secure tokenized ownership of land, avatars, wearables, and other goods.
3. Non-fungible tokens (NFTs)
Non-fungible tokens (NFTs) are tokenized versions of digital or real-world assets that function as verifiable proof of authenticity and ownership. They can be used by decentralized applications (DApps) to allow for the creation of unique digital items and collectibles in many different fields, such as video games, digital identity, licensing, certificates, or fine art.
Why ETH Price Keeps Falling
Ethereum’s price has been declining in 2025, dropping from a high of $4,100 in December 2024 to around $1,844 by May 2025.
It’s hard to point out the exact reasons, but the price drop is likely related to a few major factors, including macroeconomic pressures, weaker network activity, and market sentiment.
Macroeconomic uncertainty
Global economic conditions are impacting ETH’s price, as cryptocurrencies are considered high-risk assets.
Trump’s tariff policies: US President Donald Trump’s 2025 tariffs have created market uncertainty. These tariffs, announced in March and April 2025, have spooked investors, who seem to be moving away from risky assets like ETH to safer investments like gold.
Fear of recession: Investors worry that tariff wars could lead to a US recession, reducing demand for volatile assets like ETH. This “risk-off” sentiment has slashed the crypto market’s total capitalization by $800 billion since January 2025.
Weakened network activity
Ethereum’s network is seeing less usage, which lowers the demand for ETH.
Wallet activity: Ethereum experienced a 33% drop in active wallets and a 40% decrease in transactions in March 2025.
Lower transaction fees: Ethereum’s transaction fees hit record lows in 2025, reducing the amount of ETH burned (removed from circulation). The Dencun upgrade in 2024 made transactions cheaper, but this made ETH more inflationary. With less ETH being burned, the supply tends to grow faster than demand.
Competition: faster and cheaper blockchains like Solana and Tron are also drawing users and developers away, eroding Ethereum’s market share.
Liquidations and market sentiment
Investors are showing less interest in ETH, both retail and institutional. The liquidation of leveraged positions also helped push the price lower.
Massive liquidations: Sharp price drops, like the 5% decline to $1,900 on March 28, 2025, were driven by forced liquidations of leveraged positions. Over $88.7 million in long ETH positions were wiped out in a single day, accelerating the downturn.
Spot ETF outflows: Ethereum’s spot exchange-traded funds (ETFs) have seen consistent outflows. In April 2025, ETFs recorded $94.1 million in net outflows over two weeks, with $3.3 million exiting on April 8 alone. This contrasts with Bitcoin ETFs, which have seen stronger inflows.
Underperformance vs. Bitcoin: ETH has lagged behind Bitcoin, with the ETH/BTC ratio falling 80% since 2022.
Potential for recovery
While Ethereum’s role in DeFi and NFTs remains strong, these challenges, combined with Bitcoin’s dominance and broader crypto market declines, are making it hard for the ETH price to recover. A rebound may depend on better network activity combined with an easing of global economic tensions.
Frequently Asked Questions
1. Is Ethereum a cryptocurrency?
Ethereum is the platform, and ether (ETH) is the cryptocurrency. Many refer to the cryptocurrency as Ethereum, but that’s technically incorrect.
2. How can I buy ether (ETH)?
In order to buy ether, you can use cryptocurrency exchanges such as Binance. Ethereum is supported by all major centralized and decentralized exchanges. You can create your account at an exchange you trust, deposit fiat or cryptocurrencies, and then use them to buy ETH.
3. Is Ethereum a good investment?
As with any investment, it depends on things like your risk tolerance, financial situation, goals, and time horizon. ETH can be a highly volatile investment, and its price will likely vary according to the long-term performance of the project and the crypto markets as a whole. You should conduct your own research to determine if ETH is a good investment for you.
4. How does Ethereum make money?
As a decentralized platform, Ethereum does not make money like a traditional organization. However, those who participate in securing and maintaining the network as stakers and validators get rewarded
5. Can you convert ETH into cash?
Yes. You can use cryptocurrency exchanges like Binance to cash out your ETH. You can create your exchange account and link your bank account to it. Once this has been done, you can send ETH to your exchange account from an Ethereum-compatible wallet. Once the ETH has arrived, you can place an order to sell it and then transfer the fiat currency to the linked bank account.
6. What happens if I lose my ETH?
Since there aren’t any banks involved, you’re responsible for your own funds. When you buy cryptocurrencies, you can store your coins on an exchange like Binance or in your own crypto wallet. If you use your own wallet, you must take care of your seed phrase. If you lose your funds or access to your wallet, chances are you won’t be able to recover your crypto. If you store your ETH on Binance or another crypto exchange, try contacting the official customer support for assistance.
Further Reading
Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Products mentioned in this article may not be available in your region. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.