With the approval of spot Ethereum exchange-traded products in the U.S., many investors are seeking to understand the world’s second-largest cryptocurrency better. This development is expected to introduce more people to concepts like smart contracts, decentralized applications, and the broader potential of public blockchains to reshape digital commerce.
To help both new and experienced investors, we’ve compiled answers to ten of the most common questions about Ethereum—from its basic properties to its ecosystem and future outlook.
How Is Ethereum Different from Bitcoin and Other Smart Contract Platforms?
Bitcoin is primarily used as a store of value, while Ethereum serves as a platform for decentralized applications.
Bitcoin, launched in 2009, was the first public blockchain and is often viewed as a digital alternative to gold. Ethereum, introduced in 2015, expanded the use of blockchain technology by supporting smart contracts—self-executing code that enables a new category of crypto assets with use cases beyond digital money.
Think of Ethereum as a decentralized version of an app store. It provides the foundation for building applications that range from financial tools and games to identity management solutions. Compared to Bitcoin, Ethereum supports higher transaction throughput, faster block times, and comparable user fees.
Since Bitcoin and Ethereum serve different purposes, they belong to separate categories within the crypto sector. Bitcoin is a monetary cryptocurrency, while Ethereum is a smart contract platform. Ethereum leads its category in fundamental metrics like market capitalization, total value locked (TVL), and fee revenue.
What Is Ethereum’s Supply Growth and Issuance Rate?
Since transitioning to Proof-of-Stake (PoS) in 2022, the supply of ETH has remained relatively stable. The issuance rate depends on block rewards and transaction fees.
Ethereum’s shift from Proof-of-Work (PoW) to Proof-of-Stake—a upgrade known as “The Merge”—dramatically reduced its energy consumption and altered its emission model. Unlike Bitcoin, which has a predictable supply schedule, Ethereum’s supply is now influenced by network activity.
New ETH is issued as block rewards to validators, contributing to inflation. Transaction fees, known as gas, consist of a base fee (which is burned, reducing supply) and a priority fee (paid to validators). This balance helps maintain ETH’s scarcity.
What Is Gas and How Does It Create Value for ETH Holders?
Gas refers to transaction fees on the Ethereum network. These fees act as network revenue, and value accrues to token holders through mechanisms similar to stock dividends and buybacks.
Gas fees are paid in ETH to execute transactions or use applications on Ethereum. They serve two purposes: regulating network usage and rewarding participants. The base fee is burned (reducing supply), while the tip goes to validators.
This mechanism aligns network usage with token value. Increased transaction activity burns more ETH, benefiting all holders through reduced supply, while validators earn rewards for securing the network. Gas fees are essential for incentivizing participation and maintaining security.
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Why Do Developers Build on Ethereum and What Are Its Major Applications?
Ethereum attracts developers due to its network effects, security, and large ecosystem. Most of its major applications today are financial in nature.
Ethereum boasts the largest developer community and the most decentralized applications (dApps) of any smart contract platform. It leads in Total Value Locked (TVL), a key measure of ecosystem liquidity. These factors create a powerful environment for innovation and interoperability.
Ethereum’s security is another critical advantage. Its high attack cost makes it economically unfeasible to compromise the network. A decentralized node network further enhances robustness by eliminating single points of failure.
Popular applications on Ethereum include Lido (a liquid staking protocol) and Uniswap (a decentralized exchange). These dApps use Ethereum for secure, trustless settlement and illustrate the network’s capacity for hosting complex financial services.
What Does “Modular Blockchain” Mean for Ethereum?
Ethereum uses a modular design, meaning different layers of infrastructure specialize in distinct functions to improve scalability and user experience.
Blockchains, like physical infrastructure, can experience congestion. Ethereum’s modular approach divides the network into specialized layers: execution (processing transactions), data availability (storing data), and consensus (validating transactions).
This design allows targeted upgrades and improvements without overhauling the entire system. It contrasts with monolithic blockchains like Solana, which handle all functions in a single layer. Modularity helps Ethereum scale while maintaining decentralization and security.
What Are Ethereum Layer 2s and How Do They Work?
Layer 2s are scaling solutions built on Ethereum. They process transactions off-chain before bundling them for settlement on the mainnet, reducing cost and increasing speed.
Layer 2 networks execute transactions away from the Ethereum mainnet (Layer 1). They batch multiple transactions together, compress the data, and submit it to Layer 1 for final settlement. This approach leverages Ethereum’s security while dramatically improving throughput and affordability.
Major types of Layer 2s include Optimistic Rollups (e.g., Arbitrum, Optimism) and ZK-Rollups (e.g., zkSync, StarkNet). These networks now account for roughly two-thirds of all Ethereum ecosystem activity. The March 2024 Dencun upgrade further reduced data costs for Layer 2s, making them even more competitive.
How Does Ethereum Achieve Consensus and Measure Security?
Ethereum uses a Proof-of-Stake consensus algorithm. Its security can be measured by the amount of staked ETH and the number of validators.
After The Merge, Ethereum transitioned from Proof-of-Work to Proof-of-Stake. Validators now stake ETH to participate in block validation. This shift reduced energy consumption by ~99% while maintaining strong security.
Network security is often evaluated by the total value staked (over $112 billion as of mid-2024) and the number of active validators (around 1 million). These metrics reflect the economic commitment and decentralization of the network.
How Is ETH Ownership Distributed?
ETH ownership is diverse. As of mid-2024, roughly 27% of ETH was staked, 11% locked in smart contracts, 6% dormant, 3% held in ETPs, and smaller percentages in treasury assets or used for gas.
Approximately 17% of ETH supply is considered illiquid—either unmoved for over five years or locked in contracts. An additional 27% is staked, and 3% is held in exchange-traded products. Around 0.7% is held in protocol treasuries, and a similar percentage is used annually for gas fees.
This distribution reflects a healthy balance between active use and long-term holding.
What Are the Potential Flows into U.S. Ethereum ETPs?
Based on global trends, U.S. Ethereum ETPs could attract 25–30% of the assets under management (AUM) that Bitcoin ETPs gathered in their first four months—roughly $3.5 to $4 billion.
Outside the U.S., Ethereum ETPs typically hold 25–30% of the AUM of Bitcoin products. If U.S. investors behave similarly, Ethereum ETPs could see significant inflows. However, this is only an estimate—actual demand may vary based on market sentiment, regulatory developments, and macroeconomic conditions.
What Challenges and Opportunities Does Ethereum Face?
Ethereum benefits from strong network effects, high liquidity, and substantial security. However, it also faces challenges like Layer 2 centralization and growing competition.
Ethereum’ established ecosystem and high security budget make it attractive for high-value applications like stablecoins and tokenized assets. The approval of ETPs may further boost institutional adoption and awareness.
On the other hand, many Layer 2 solutions are still centralized. For Ethereum to fully realize its vision, these networks must continue decentralizing. Additionally, as activity moves off-chain, mainnet fee revenue has declined—highlighting the need for sustainable economic models.
Competition from other smart contract platforms remains fierce. Ethereum must continue innovating to maintain its leadership position.
Frequently Asked Questions
What is Ethereum?
Ethereum is a decentralized blockchain platform that enables smart contracts and decentralized applications. It is the second-largest cryptocurrency by market cap.
How does staking work on Ethereum?
Users can stake ETH to become network validators. This involves locking 32 ETH to participate in block validation and earn rewards. Alternatively, users can delegate smaller amounts through liquid staking services.
What are the risks of investing in Ethereum?
Key risks include regulatory uncertainty, technological vulnerabilities, market volatility, and competition from other blockchains. Investors should conduct thorough research and consider their risk tolerance.
Can Ethereum be upgraded?
Yes. Ethereum regularly undergoes upgrades to improve scalability, security, and functionality. These changes are decided through a community governance process.
What is the difference between Ethereum and Ethereum Classic?
Ethereum Classic is a separate network that originated from a 2016 split after a major hack. It continues to use Proof-of-Work, while Ethereum has transitioned to Proof-of-Stake.
How do I store ETH securely?
ETH can be stored in hardware wallets, software wallets, or custodial services. For large amounts, non-custodial cold storage is generally recommended for security.