Hey you!
Welcome back to “that’s what she said”, the newsletter which translates crypto into human language so you can join the conversation for real. Last time, we talked about hash functions and Byzantine Fault Tolerance — the invisible guardians that keep blockchain from falling apart (if you missed it, go back and catch up).
Today, we're diving into Ethereum — the network that turned blockchain from a ledger into an operating system.
If Bitcoin is digital gold, Ethereum is a global computer that runs on math. It's where DeFi was born, where NFTs went mainstream, and where developers build entire economies without asking permission from any bank or government.
So let's yap about it.
⏳ History Behind
In late 2013, programmer Vitalik Buterin published the Ethereum whitepaper proposing a new type of blockchain. His core idea was to create a blockchain that could execute code, not just process transactions.
Bitcoin's blockchain was designed specifically for peer-to-peer payments. Its scripting language is intentionally limited to prevent complex operations. Buterin saw this as a constraint. He wanted a blockchain that developers could program to run any application — a decentralised global computer where code executes exactly as written, with no central authority able to interfere. The concept centred on smart contracts: self-executing agreements encoded directly into the blockchain.
To fund development, Ethereum conducted a crowdsale in mid-2014, raising over $18 million by selling Ether (ETH) for Bitcoin. The network officially launched on July 30, 2015.
Ethereum's programmability made it the foundation for the 2017-2018 ICO boom. Projects could easily create tokens on Ethereum using its standardised protocols and raise capital through Initial Coin Offerings (ICOs). Between 2017 and 2018, ICOs raised over $10 billion combined. While many projects were legitimate, a significant portion were poorly conceived or outright scams, eventually attracting regulatory scrutiny.
Despite the ICO fallout, Ethereum had proven its utility. It established itself as the dominant platform for building blockchain applications, cementing its position as the infrastructure layer of the crypto ecosystem.
⚖️ Ethereum VS Bitcoin
Bitcoin and Ethereum serve fundamentally different purposes, though both use blockchain technology.
Bitcoin is a peer-to-peer electronic cash system. Its primary function is transferring value without intermediaries. The protocol is deliberately simple and secure, optimised for one use case: being sound money. Bitcoin's supply is capped at 21 million coins, creating programmed scarcity. New blocks are added approximately every 10 minutes through Proof of Work mining.
Ethereum is a programmable blockchain platform. Its primary function is executing smart contracts and hosting decentralised applications. The protocol is designed for flexibility and extensibility, enabling developers to build financial systems, marketplaces, games, and organisational structures directly on-chain. Ethereum has no hard supply cap on ETH. Blocks are added approximately every 12-14 seconds.
Key technical differences:
- Consensus mechanism: Bitcoin uses Proof of Work (PoW). Ethereum transitioned from PoW to Proof of Stake (PoS) in September 2022.
- Computational capability: Bitcoin's scripting language is intentionally limited to basic operations. Ethereum is Turing-complete, meaning it can execute any computable function.
- Transaction model: Bitcoin uses an unspent transaction output (UTXO) model, similar to physical cash. Ethereum uses an account-based model that tracks balances, similar to bank accounts.
- Network purpose: Bitcoin optimises for security and decentralisation as a monetary system. Ethereum optimises for programmability and application development as a computing platform.
Both networks are decentralised, open-source, and censorship-resistant. They complement rather than compete: Bitcoin focuses on being the hardest money, Ethereum focuses on being the most programmable platform.
📄 Smart Contract Era
Smart contracts are the defining feature of Ethereum. As we learnt before, they're self-executing programs stored on the blockchain that automatically enforce their terms when conditions are met.
The technical mechanism: A smart contract is code deployed to a specific address on Ethereum. When users send transactions to that address with specific data, the contract executes its programmed logic. The Ethereum Virtual Machine (EVM) processes the code in a deterministic way — the same inputs always produce the same outputs, on every node simultaneously.
This enables trustless agreements. Traditional contracts require legal enforcement and intermediaries. Smart contracts enforce themselves through code execution. Once deployed, contract code generally cannot be altered, unless it was explicitly designed to be upgradeable
Practical applications:
- Decentralised Finance (DeFi): Protocols like Uniswap and Aave are smart contracts that facilitate trading, lending, and borrowing without banks or brokers. Users interact directly with the contract code.
- Non-Fungible Tokens (NFTs): Smart contracts define ownership, transferability, and royalty structures for unique digital assets.
- Decentralised Autonomous Organisations (DAOs): Smart contracts encode governance rules, treasury management, and voting mechanisms, enabling organisations to operate without centralised management.
- Supply chain verification: Companies use smart contracts to create immutable records of product origins, custody transfers, and authenticity verification.
Smart contracts eliminate counterparty risk in many scenarios. The code executes as written, regardless of any party's intentions or desires. This makes them particularly valuable for coordinating between parties who don't trust each other.
The tradeoff: Code is law. Bugs in smart contracts can be exploited, and there's no way to reverse malicious or erroneous transactions after they execute. This requires rigorous auditing and testing before deployment.
💰 ETH
Ether (ETH) is Ethereum's native cryptocurrency. It serves three essential functions in the network:
- ETH pays for computation. Every operation on Ethereum — from simple transfers to complex smart contract interactions — requires computational resources. Users pay transaction fees (called gas) in ETH to compensate validators for processing these operations. Without this economic mechanism, there would be no incentive to secure the network or process transactions.
- ETH is required for staking. Validators must lock up 32 ETH as collateral to participate in consensus. This stake can be slashed (destroyed) if validators act maliciously or fail to perform their duties. Economic security through staked capital is fundamental to Ethereum's Proof of Stake consensus.
- ETH functions as collateral in DeFi protocols. Users lock ETH to borrow other assets, provide liquidity to exchanges, or participate in various financial applications.
Unlike Bitcoin's fixed supply of 21 million, Ethereum has no hard cap on total ETH issuance. However, since the transition to Proof of Stake and the implementation of EIP-1559 (Ethereum Improvement Proposal) in August 2021, Ethereum burns a portion of transaction fees. During periods of high network activity, more ETH is burned than issued, making the supply deflationary.
🪙 ERC-20
ERC-20 (Ethereum Request for Comments) is the technical standard that defines how fungible tokens operate on Ethereum. It specifies a common set of rules that all tokens must follow to be compatible with wallets, exchanges, and applications.
Before ERC-20, each token project implemented custom logic, creating fragmentation. Wallets and exchanges had to write unique code to support each token. This was inefficient and limited adoption.
ERC-20 solved this through standardisation. Proposed by Vitalik Buterin and Fabian Vogelsteller in November 2015 and finalised in September 2017, the standard defines functions each token must have:
- Total supply (how many tokens exist).
- Balance of an address (how many tokens an account holds).
- Transfer (send tokens from one address to another).
- Approve and transferFrom (allow third parties to spend tokens on your behalf).
ERC-20 tokens are fungible, meaning each token is identical and interchangeable with another. One USDT is always equal to another USDT. One LINK is always equal to another LINK.
This standard made it trivially easy to create new tokens, which fueled the ICO boom. At its peak around 2020, the vast majority of top cryptocurrencies by market cap were ERC-20 tokens.
Today, ERC-20 tokens represent everything from stablecoins (USDC, DAI) to governance tokens (UNI, AAVE) to utility tokens that power specific platforms. Other token standards exist now (like ERC-721 for NFTs and ERC-1155 for hybrid tokens), but ERC-20 remains the foundation of Ethereum's token economy.
⚡️ Transition to PoS
Ethereum launched in 2015 using Proof of Work, the consensus mechanism Bitcoin pioneered. Miners competed to solve cryptographic puzzles, with the winner adding the next block and earning rewards.
PoW proved the network's security but had fundamental limitations. It required massive energy consumption — specialised mining hardware running 24/7. The computational difficulty of mining limited transaction throughput.
Ethereum's roadmap always included transitioning to Proof of Stake. In PoS, validators replace miners. Instead of computational puzzles, validators are randomly selected to propose blocks based on the amount of ETH they've staked as collateral. Dishonest behaviour results in slashing — partial or total destruction of staked ETH.
The transition occurred in phases:
- Phase 0 (December 2020): Launch of the Beacon Chain, Ethereum's PoS consensus layer, running parallel to the PoW mainnet. Validators began staking 32 ETH to participate, with no ability to withdraw until the networks merged.
- The Merge (September 2022): The PoW execution layer was connected to the PoS Beacon Chain. Ethereum stopped using mining entirely, completing the transition to Proof of Stake.
The transition achieved three objectives:
- Energy reduction: PoS reduced Ethereum's energy consumption by approximately 99.95%. Validators run on standard hardware without requiring intensive computation.
- Security model: Attacking a PoS network requires acquiring and staking over 50% of total staked ETH, then having that stake destroyed when the attack is detected. This is economically prohibitive compared to acquiring 51% of mining hardware.
- Scalability foundation: PoS enables future upgrades like sharding, where the network splits into parallel chains to process transactions simultaneously, dramatically increasing throughput.
The transition is complete, though additional scaling improvements are in development.
⛽ Gas Fees
Gas is the unit measuring computational work required for Ethereum operations. Every transaction, smart contract interaction, and state change consumes gas. Users pay for gas in ETH.
The gas system serves three purposes:
- Validator compensation: Gas fees pay validators for processing transactions and maintaining network security. Without financial incentive, there would be no reason to run validator nodes.
- Spam prevention: Attaching cost to every operation makes it economically infeasible to flood the network with frivolous transactions. An attacker would need to pay substantial ETH to execute a denial-of-service attack.
- Resource allocation: During high demand, users can pay higher fees to prioritise their transactions. This creates a market-based system for allocating limited block space.
Since EIP-1559 (August 2021), gas fees follow a base fee + tip structure:
- Base fee: Algorithmically calculated based on network congestion. If blocks are more than 50% full, the base fee increases. If less than 50% full, it decreases. This fee is burned (permanently destroyed), removing ETH from circulation.
- Priority tip: Optional payment to validators for faster inclusion. During congestion, higher tips move transactions to the front of the queue.
The formula: (Base Fee + Priority Tip) × Gas Used = Total Fee
Simple transactions (like sending ETH) are cheap. Complex transactions (like interacting with DeFi protocols) cost more because they require more computation. Current gas prices are measured in gwei (1 gwei = 0.000000001 ETH).
Gas fees fluctuate based on network demand. When everyone wants to transact at once (during NFT drops, market volatility, or DeFi surges), fees spike. When the network is quiet, fees drop.
High gas fees have driven the development of Layer 2 scaling solutions. Networks like Arbitrum, Optimism, and Base process transactions off the main Ethereum chain, bundling hundreds of transactions into single batches that settle on Ethereum. This reduces per-transaction costs while maintaining Ethereum's security guarantees.
Key Takeaways
- Ethereum is a programmable blockchain platform that executes smart contracts — self-enforcing agreements written in code that eliminate the need for intermediaries.
- ETH is Ethereum's native currency, used to pay transaction fees (gas), stake for network security, and serve as collateral in DeFi protocols.
- ERC-20 standardised token creation on Ethereum, enabling thousands of projects to build interoperable digital assets without custom infrastructure.
- Ethereum transitioned from PoW to PoS in September 2022, reducing energy consumption by 99.95% and establishing a foundation for future scaling improvements.
- Gas fees compensate validators, prevent network spam, and allocate computational resources through market-based pricing that fluctuates with network demand.
- Smart contracts enable trustless coordination between parties, powering applications in DeFi, NFTs, DAOs, and supply chain management without centralised control.
Final Thought
Banks hold your money. Lawyers enforce your contracts. Corporations run your platforms. All of these require trust that someone won't screw you over.
Ethereum says: What if we didn't need that trust? What if code just executed, agreements just enforced themselves, and no one could shut it down or change the rules?
It's not flawless. Gas fees suck when you're trying to make a $50 transaction, and it costs $30 in fees. Smart contracts get hacked. The network is still slower than Visa. Regulators are still figuring out what to do with it.
But here's what matters: you don't need anyone's permission to use it. No bank account required. No credit check. No terms of service that change when it's convenient for the company.
Ethereum gave us the infrastructure. What we build with it (whether it's the future of finance or just expensive JPEGs), that's on us.
If you learnt something new today, pass it on. Share it with your community. Let's spread the knowledge and level up together.
That's a wrap, normies. Next time, we'll continue talking about Ethereum. Stay tuned 😏
Cookies She Left Behind
If you'd love to dig deeper into the topic, I'd also recommend reviewing the following:
- What is Ethereum Gas? by Whiteboard Crypto
- What is the EVM? Ethereum Virtual Machine Explained by Whiteboard Crypto