Hot Wallet vs Cold Wallet: Which Do You Need?
Hot wallets are convenient; cold wallets are safer. How each works, the real risks, costs and a simple rule for splitting your crypto between them.
Ethereum Explained Simply
Ethereum explained in plain English: what makes it different from Bitcoin, how smart contracts and gas fees work, the switch to proof of stake and key risks.
Key takeaways
- Ethereum is a blockchain that runs programs called smart contracts; ether (ETH) is its native currency.
- Every action costs a fee called gas, paid in ETH; layer 2 networks make transactions cheaper.
- Since 2022, Ethereum has used proof of stake instead of energy-intensive mining.
On this page
If Bitcoin is digital money, Ethereum is a shared, global computer. Launched in 2015, it lets anyone run programs on a blockchain, programs that nobody can secretly change or switch off. Those programs power tokens, stablecoins, NFTs and much of decentralised finance.
Ethereum vs Bitcoin
| Bitcoin | Ethereum | |
|---|---|---|
| Main purpose | Digital money | Platform for apps and tokens |
| Native coin | BTC | ETH (ether) |
| How it’s secured | Proof of work (mining) | Proof of stake (validators) |
| Supply | Capped at 21 million | No fixed cap; some fees are destroyed |
| Programmability | Limited | Full smart contracts |
For the underlying technology both share, see how blockchain works.
Smart contracts in plain English
A smart contract is a program stored on Ethereum that runs exactly as written when certain conditions are met. Think of a vending machine: put in the right coins, and it releases a snack without a shopkeeper. Smart contracts can hold funds, swap tokens, run lending markets or record ownership of digital items. Apps built on them are often called dapps (decentralised apps).
Because anyone can deploy a smart contract, quality varies enormously. A bug, or a deliberately malicious contract, can drain funds in seconds. That’s how many rug pulls work.
Gas: the cost of using Ethereum
Every Ethereum transaction, from sending ETH to trading tokens, costs a fee called gas, paid in ETH. Fees rise when the network is busy. Part of each fee is “burned,” permanently removing that ETH from circulation.
To make things cheaper, many people use layer 2 networks, separate chains that bundle transactions together and settle them on Ethereum. Upgrades in recent years have made layer 2 transactions much cheaper.
From mining to staking
In September 2022, Ethereum completed the Merge, switching from proof-of-work mining to proof of stake. Instead of miners competing with computing power, validators lock up ETH as collateral to propose and confirm blocks. The Ethereum Foundation estimates the switch cut the network’s energy use by more than 99.9%. Learn how it works in our guide to staking.
What people use Ethereum for
- Tokens and stablecoins built on Ethereum’s standards
- Decentralised finance: lending, borrowing and trading without a traditional intermediary; see what is DeFi?
- NFTs: tokens that record ownership of digital items
- Payments and transfers, often using layer 2 networks
The risks
- Price volatility. ETH’s value can rise and fall sharply.
- Smart-contract risk. Bugs and malicious code can lose you funds for good.
- Wallet approvals. Signing a transaction can give an app permission to move your tokens. Only connect to sites you trust, and review what you sign.
- Scams. Fake airdrops, impersonated projects and phishing sites target Ethereum users constantly.
Frequently asked questions
Is ether the same as Ethereum?
Ethereum is the network; ether (ETH) is its currency. People often use “Ethereum” for both.
Why are Ethereum fees sometimes so high?
Fees depend on demand for space in each block. When many people transact at once, fees rise. Layer 2 networks usually cost far less.
Do I need a special wallet for Ethereum?
You need a wallet that supports Ethereum and the networks you use. Many wallets support Ethereum and several layer 2 networks.
Sources
Every article is edited by a human and checked against our editorial policy. Spotted a mistake? Tell us.
Keep reading
What Is a Stablecoin?
What stablecoins are, how fiat-backed, crypto-backed and algorithmic stablecoins try to hold their value, what they’re used for and the risks to understand.
What Is Staking?
What crypto staking is, how proof-of-stake validators earn rewards, the main ways to stake from solo validators to exchanges, and the risks behind the yields.