Ethereum, smart contracts and gas, explained

A computer nobody switches off

Ethereum is a network of thousands of computers that run the same programs and reach exactly the same result. That shared machine is called the EVM (Ethereum Virtual Machine). Nobody can switch it off, nobody can change a program's result to suit themselves and anyone can use it, paying for the computation it consumes.

The main network launched on July 30, 2015. On September 15, 2022 it switched from proof-of-work to proof-of-stake without stopping, and on March 13, 2024 the Dencun upgrade made data cheaper for layer 2 networks. Every change is discussed in public, in numbered proposals called EIPs.

What a smart contract is

A smart contract is a program that lives at an Ethereum address. It has rules written in code and a state —for example, who holds how many tokens. When someone sends it a transaction, the contract executes its rules and every node reaches the same result. Once deployed, its code can't be changed.

ethereum.org uses the best analogy there is: a vending machine. You choose, you pay and the machine delivers. There's no salesperson deciding whether to serve you. A smart contract is that logic applied to money, securities, votes or names.

Ethereum has two kinds of account: those a person controls with their private key, and contract accounts, which are controlled by their code. Only the former can start a transaction; contracts react to the ones they receive.

What gas is

Every operation the EVM executes —adding, storing a piece of data, checking a signature— consumes an amount of gas. Gas is the unit that measures work, and it is paid in ETH.

How the fee is calculated

Fee = gas used × (base fee + tip)

• A simple ETH transfer uses 21,000 units of gas.
• The base fee is set by the network according to demand and is burned: it leaves circulation. It has worked this way since the London upgrade of August 5, 2021 (EIP-1559).
• The tip goes to the validator that includes your transaction in a block.
• Prices are expressed in gwei: one billionth of an ETH.

An example with numbers: with a base fee of 10 gwei and a tip of 2 gwei, a simple transfer costs 21,000 × 12 = 252,000 gwei, that is, 0.000252 ETH.

Why it goes up and down

Each block has limited space and the network aims to fill it halfway. If blocks come in fuller, the base fee goes up, by up to 12.5% per block; if they come in emptier, it goes down. At times of high demand —a hyped launch, a market crash— the fee spikes for a while.

Layer 2s: the same base, cheaper

Layer 2 networks (L2s) process many transactions off the main network and publish a summary on Ethereum. That way they inherit a good part of its security and charge much less per operation. Since Dencun, L2s publish their data in a cheaper space called blobs (EIP-4844), and their fees dropped.

To you, an L2 looks like another network in your wallet: the same address works, but the assets live on that network and moving them between networks takes a bridge. Before sending anything, always check which network you're on.

ETH: fuel and collateral

ETH has two jobs. It pays the gas for every operation, and it is the collateral validators put at stake to secure the network: 32 ETH per validator. If a validator tries to cheat, it loses part of that collateral. That's why Ethereum's security doesn't depend on trusting someone, but on cheating costing more than behaving.

Where to go next

Now you know how it works. The next block answers the question that comes after: why Ethereum matters and why banks, asset managers and developers choose it.