Ethereum, Explained: The Platform Behind Most of Crypto
What Ethereum actually does that Bitcoin doesn't, why 'a world computer' is closer to the mark than 'digital cash', and the risks that are unique to holding Ether.
By Firoz Khan|2 September 2026|Updated 26 September 2026|4 min read
Bitcoin was designed to do one thing extremely well: move scarce digital money without a bank. Ethereum was designed to do far more than one thing, at the cost of being harder to explain in a single sentence. It's a platform other applications run on, and Ether, its native asset, is closer to the fuel that powers them than to digital cash in its own right.
Programmable money, not just digital money
Ethereum introduced smart contracts, self-executing code that runs exactly as written once deployed, with no need for a third party to enforce the terms. That's the feature Bitcoin deliberately doesn't have. It's what turns a blockchain from a payments ledger into a platform capable of running entire applications, lending markets, exchanges, games, on top of it.
What actually runs on it
Most of DeFi, a large share of NFTs, and a huge number of tokens are built on Ethereum. ETH itself is used to pay the gas fee for every transaction and every smart contract interaction on the network, which means demand for it is tied to how much activity is actually happening on the platform, not purely to speculation about its price.
The Merge and proof of stake
On 15 September 2022 Ethereum switched its entire consensus mechanism from proof of work, the energy-intensive mining model Bitcoin still uses, to proof of stake, where validators lock up ETH as collateral instead of running mining hardware. Ethereum.org puts the fall in the network's energy consumption at about 99.95%. Validators earn staking rewards for securing the network, which is now the primary way new ETH enters circulation.
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How proof of stake works
To become a validator you deposit 32 ETH. Time is divided into slots of 12 seconds, and 32 slots make an epoch, about 6.4 minutes. In every slot one validator is chosen at random to propose a block, and a randomly chosen committee of validators votes on whether it is valid. Those votes are called attestations. A validator that behaves dishonestly, for example by proposing several blocks in one slot or sending contradictory attestations, can be slashed, meaning part of its staked ETH is destroyed. Most people do not run a validator themselves, and staking through a platform means trusting that platform with your ETH.
Gas fees are Ethereum's biggest UX problem
Popularity is Ethereum's own worst enemy on cost: when demand for block space spikes, gas fees spike with it, sometimes making small transactions uneconomical. Layer-2 networks, built on top of Ethereum specifically to process transactions more cheaply before settling back to the main chain, exist largely to solve this, and have meaningfully reduced typical costs for anyone using them instead of transacting directly on the base layer.
How a fee is calculated
Since the London upgrade, a fee has two parts. The base fee is set by the protocol and is burned. The priority fee is a tip you add to make validators choose your transaction. The total is units of gas used multiplied by the base fee plus the priority fee.
Say a transaction uses 100,000 units of gas, the base fee is 20 gwei and you tip 2 gwei. That is 100,000 × 22 gwei, or 2,200,000 gwei, which is 0.0022 ETH. If ETH were worth £2,000, the fee would be £4.40. The gas, the fees and the price are illustrative figures, not a live quote.
Risk profile versus Bitcoin
Ether tends to move with Bitcoin in broad market cycles but is generally more volatile in both directions. It carries a risk category Bitcoin largely avoids: smart contract exploits and bugs in the applications built on top of the network, which have caused genuine losses even when the underlying Ethereum protocol itself worked exactly as intended.
Tax on staking in the UK
HMRC's guidance says that, unless staking amounts to a trade, the sterling value of rewards at the time you receive them is taxable as miscellaneous income. If you keep the ETH, you may owe Capital Gains Tax when you later dispose of it. Swapping ETH for a different cryptoasset is also a disposal. The FCA says crypto is largely unregulated in the UK and that you should be prepared to lose all the money you put in.
A reminder
The FCA risk warning still applies to higher-risk crypto content. Always assess how much risk you are willing to take before buying.
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