Ethereum 101: The World’s Supercomputer and Its Fuel

Before Ethereum, most people thought about blockchain technology mainly as a way to track digital money. Bitcoin showed that a decentralised ledger could record transactions without a bank or payment company in the middle.

However, early developers noticed that this shared database could do more than just simple transfers. They imagined a system that could run code, open to anyone with an internet connection, and harder for single organisations or governments to shut down.

This idea became Ethereum. Launched in 2015, it took the concept of a public blockchain and added a programmable layer, creating something like a shared "world computer" that no single company owns or fully controls. It is still experimental technology and it does not always work perfectly in practice.

What is Ethereum?

Ethereum is a public, permissionless blockchain. This means anyone can connect to it, read it, and in most cases interact with it, without needing approval from a central operator.

Like Bitcoin, it relies on a network of thousands of independent computers, called nodes, to verify transactions and maintain a shared history. If enough nodes agree that a transaction is valid, it becomes part of the permanent record.

Bitcoin is mainly designed as a form of digital money and a potential store of value. Ethereum, by contrast, is designed as a platform for building applications that run on top of the blockchain.

The core innovation that enables this is the smart contract.

Smart contracts

You can think of a normal blockchain transaction as a simple instruction: “I send you £10 worth of crypto, you receive £10 worth of crypto.” Once it is confirmed, that is the end of the story.

A smart contract adds logic. It is a small computer programme stored on the blockchain that runs when certain conditions are met. For example: “If User A sends 5 ETH to this contract, then send User A a digital deed to a house.”

No person presses a button to make this happen. The contract code enforces the rules automatically, as long as the network itself is operating correctly.

Because smart contracts run on a decentralised blockchain, they are meant to operate as written, without relying on one company to stay online or honest. In practice, there are still risks, such as coding mistakes, faulty data, or user error.

Smart contracts have led to decentralised applications (often called dApps). These may look like normal websites or phone apps, but the important parts of their logic run on smart contracts rather than on servers controlled by a single company. This can reduce reliance on central parties, but it also means users have fewer traditional protections if things go wrong.

What is ETH?

Ether (ETH) is the native cryptocurrency of the Ethereum network. You will often see it traded on exchanges and quoted against national currencies like GBP or USD.

Many people buy and sell ETH as a speculative investment, hoping its price will rise. The price is extremely volatile, it can move sharply up or down in a short period, and there is a real risk you could lose all the money you put in.

More fundamentally, ETH is a utility token that powers the Ethereum network itself.

Paying for gas

Every action on Ethereum, from a simple payment to a complex contract interaction, uses computing resources. Validators, the participants who run the network, need hardware, internet connections, and electricity to process transactions.

To compensate them, users pay a transaction fee known as gas. Gas is priced and paid in ETH.

If you want to send ETH, move a token, mint an NFT, or interact with a DeFi protocol, you need some ETH in your wallet to pay for gas. If you have no ETH, your transactions will not be processed.

Gas prices change constantly. When the network is busy, fees can become very high, and simple actions can cost several pounds or more. At quieter times, fees can be much lower. You should always check estimated fees before you confirm a transaction, as they can make certain uses uneconomical, especially for smaller amounts.

This ongoing need for ETH to pay for gas is one reason why the token has value within the Ethereum ecosystem. However, that does not mean the price will go up over time or that demand will always be strong.

Securing the network

ETH also plays a central role in securing Ethereum through a system called Proof of Stake.

In Proof of Stake, users can “stake” their ETH, which means locking it up in order to take part in validating transactions and creating new blocks. These users are called validators.

Validators that follow the rules may receive rewards paid in ETH. Validators that try to cheat or fail to stay online can have some of their staked ETH taken away, a process known as slashing.

This model is designed to create financial incentives for validators to act honestly. However, staking is not risk free. Risks include:

• A fall in the price of ETH, which can outweigh any rewards.
• Technical mistakes or misconfiguration that could lead to slashing or loss of access.
• Smart contract or platform risk if staking through third party services or pooled products.

Staking is a complex activity and is not suitable for everyone.

Ethereum tokenomics

Tokenomics refers to the economic rules that govern how ETH is created, destroyed, and used. These rules differ in several ways from Bitcoin.

• No fixed maximum supply
  Bitcoin has a maximum supply of 21 million coins coded into its rules. Ethereum does not have a strict supply cap. New ETH is issued to validators as rewards.

• The burn mechanism
  In 2021, Ethereum introduced a change known as EIP-1559. Under this system, a portion of every transaction fee is permanently destroyed, or “burned”.

  When network activity is high, the amount of ETH burned can at times be higher than the amount issued as rewards. During those periods, the total supply of ETH can fall, which people describe as deflationary.

  Some investors believe that this could make ETH more scarce over the long term. This is a theory, not a guarantee. The actual supply will depend on real usage, fee levels, and future changes to the protocol. Scarcity alone does not ensure price growth.

Real life examples

Ethereum is not just an idea on paper. It is used today by a wide range of projects and communities. Many of these uses involve high risk, rely on experimental technology, and are not covered by the usual consumer protections you may expect with UK-regulated financial services.

Decentralised Finance (DeFi)

Decentralised finance refers to financial services that run on blockchains using smart contracts instead of traditional banks or brokers.

On Ethereum, developers have built:

• Lending protocols, where users can lend crypto and receive interest.
• Borrowing platforms, where users can borrow against their crypto as collateral.
• Decentralised exchanges (DEXs) such as Uniswap, where users trade tokens directly with smart contracts rather than through a central order book.

These services are normally available at all times to anyone with an internet connection and a compatible wallet. There is no credit check and no central support desk.

The potential upside is greater control and access. The downside is significant risk. DeFi platforms can fail, be hacked, or behave in ways that are very different from traditional banks and brokers. You might lose access to your funds permanently if a smart contract is exploited or if you make a mistake when interacting with it. There is usually no recourse, no deposit insurance, and limited regulatory oversight.

Digital ownership (NFTs)

Non fungible tokens, or NFTs, are unique digital tokens on Ethereum and other blockchains. They are often used to represent ownership of digital items such as artwork, music, or collectibles. Some projects also use NFTs to represent rights linked to real world assets.

Ownership information is recorded on the blockchain so anyone can see which account currently holds a particular NFT. This public record is difficult to alter without detection.

However, several important points are often misunderstood:

• The image or file associated with an NFT is usually stored off-chain, for example on a web server or a distributed file system. If that storage fails, the NFT may point to a broken link.
• Buying an NFT does not always mean you own the copyright or commercial rights to the content. This depends on the specific terms set by the creator.
• NFT prices can be extremely speculative, illiquid, and prone to sharp crashes. Many NFT collections have fallen in value by more than 90 percent, and some may never recover.

You should treat NFT purchases and investments with care and never assume resale demand.

Stablecoins

Stablecoins are tokens that aim to track the value of a reference asset, most often a fiat currency such as the US dollar. Billions of pounds worth of stablecoins circulate on Ethereum.

They are popular with traders and DeFi users who want to move in and out of volatile positions without fully leaving the crypto ecosystem. For example, 1 USD stablecoin might aim to stay close to $1, while still being easy to transfer on-chain.

It is important to understand that not all stablecoins are the same. Key risks include:

• Issuer risk: You rely on the company or protocol issuing the stablecoin to manage reserves properly.
• Peg risk: A stablecoin can lose its peg and trade below its target value, sometimes by a wide margin.
• Regulatory risk: Rules around stablecoins are evolving and may affect how they operate or whether some products can be offered in certain regions.

Stablecoins can be convenient, but they are not cash in a bank account and may not be protected by compensation schemes such as the Financial Services Compensation Scheme (FSCS).

Risks and red flags

Ethereum and ETH are at the centre of a large and fast moving ecosystem. Alongside the innovation and potential benefits, there are serious risks that you should consider before getting involved. This is not an exhaustive list.

• Smart contract vulnerabilities
  dApps and DeFi protocols are controlled by code. If that code has bugs, attackers may be able to drain funds or manipulate the system. These exploits are often permanent because transactions on the blockchain are usually irreversible.

  Even audited contracts can fail. Past performance or security claims are not a guarantee of safety.

• High volatility
  The price of ETH and other cryptoassets can move sharply in either direction in very short periods. Double digit percentage swings in a single day are not unusual.

  You should be prepared for the possibility that the value of your ETH holdings could fall to zero. Cryptoassets are not suitable for everyone and you should only invest money you can afford to lose in full.

• Phishing and scams
  Anyone can create a token, dApp, or website that interacts with Ethereum. Scammers often copy the look and feel of real projects to trick users into giving away their wallet seed phrase, private keys, or token approvals.

  Common warning signs include unsolicited messages, pressure to act quickly, promises of guaranteed returns, or requests for your seed phrase. A genuine service will never ask for your seed phrase or private key.

  Always check URLs carefully, verify contract addresses from trusted sources, and treat social media recommendations with extreme caution.

• Technical and operational risk
  Using Ethereum often requires you to manage your own wallet and private keys. If you lose your seed phrase or send funds to the wrong address, you will probably not be able to recover them.

  Network congestion can lead to failed transactions, long waiting times, or unexpectedly high fees. Protocol changes or forks can also introduce new risks or complexities.

• Regulatory and legal uncertainty
  Cryptoassets, including ETH and many tokens built on Ethereum, are not covered by the same protections as regulated savings or investment products in the UK.

  Rules are developing and may change. New regulation could affect how certain services operate, whether they can be offered to UK customers, or how tokens are treated for tax or legal purposes.

The future of Ethereum

Ethereum is not a finished product. It is going through a long series of upgrades intended to improve performance and capacity.

In the past, when many people used the network at once, it often became crowded. Transactions could take longer and fees could rise to levels that made smaller transfers impractical.

To address this, the Ethereum ecosystem is increasingly using what are known as Layer 2 networks.

Layer 2 networks are separate blockchains that sit on top of Ethereum. Examples include Arbitrum, Optimism, and Base. They handle large numbers of transactions at lower cost, then periodically send a summary of these transactions back to Ethereum for final settlement.

In theory, this approach lets Ethereum focus on being a secure base layer, while Layer 2 networks handle high speed activity such as trading, gaming, or microtransactions.

This model is still developing. It introduces its own trade-offs and risks, such as additional smart contract complexity, potential withdrawal delays, and reliance on the security of the Layer 2 operator. There is no guarantee that Ethereum or any particular Layer 2 will achieve widespread mainstream use.

Ethereum upgrades

Ethereum continues to evolve through a series of carefully planned upgrades, each building on the last to improve performance, security and usability.

The Pectra upgrade, activated on May 7, 2025, brought several practical enhancements to staking and data handling.

One of the biggest changes was to staking rules. Previously, each validator was capped at 32 ETH. Pectra raised this limit to 2,048 ETH, allowing stakers to consolidate multiple validators into one. This reduces overhead for large operators, makes it easier for everyday users to compound their rewards, and helps keep the network efficient without adding extra load.

Pectra also increased the network's capacity for "blobs", the temporary data packets introduced earlier to support Layer 2 rollups. It doubled the target number of blobs per block from 3 to 6, with a maximum of 9, giving rollups more room to post their bundled transactions. This helped keep fees low even as activity grew.

Building directly on Pectra, the Fusaka upgrade went live on December 3, 2025. Its main feature is Peer Data Availability Sampling (PeerDAS), a smarter way for validators to check blob data.

Instead of every validator downloading and verifying entire blobs, they now sample small portions and share results with peers. This dramatically lowers the bandwidth and hardware needed to run a node — cutting requirements by around 80 to 85 percent — while still maintaining strong security guarantees.

Fusaka also laid the groundwork for gradually increasing blob capacity over time. Following Fusaka's activation, Ethereum introduced smaller updates called BPO (Blob Parameter Only) forks that increase capacity without requiring major network upgrades. BPO1 went live on December 9, 2025, raising the blob target to 10 per block with a maximum of 15. BPO2 is scheduled for January 7, 2026, and will further increase the target to 14 per block with a maximum of 21.

This approach means Ethereum can scale its data capacity smoothly as Layer 2 networks grow, without the coordination burden of major hard forks each time.

Together, these changes have made Layer 2 networks even more efficient. Transactions on chains like Arbitrum, Optimism and Base are now faster and cheaper than ever, often costing just fractions of a cent. Users get a smoother experience for DeFi, NFTs and everyday apps, all while relying on Ethereum's proven security as the settlement layer.

These upgrades show Ethereum's ongoing commitment to scaling responsibly: prioritising decentralisation, keeping costs low for users, and making the network easier to participate in for stakers and node operators alike. As adoption grows, further improvements are already in planning to push capabilities even higher.