Ethereum: what it is, how it works, and why it matters

Ethereum: what it is, how it works, and why it matters
Lucas Anderson

28.04.2025

10 min read

Cryptocurrency Insights and Comparisons

Ethereum: what it is, how it works, and why it matters

Ethereum is much more than just another cryptocurrency. It’s the foundation of a revolutionary ecosystem. It powers decentralized applications, smart contracts, and an entirely new form of the internet. One that doesn't rely on banks, governments, or centralized platforms. In 2025, understanding what it is, how it functions, and what makes it valuable is essential. Anyone interested in digital currency, blockchain technology, or modern financial systems needs it.

This guide from 0xProcessing will walk you through the basics of Ethereum, its inner mechanics, the value it holds, and how to use, buy, or store it safely. Are you getting started or looking to sharpen your knowledge? This resource breaks it all down — concisely and with an expert’s eye.

Understanding Ethereum: the basics

The origins and evolution

How do you understand Ethereum? Let's look back at the broader history of cryptocurrencies. After the creation of Bitcoin in 2009, developers began to explore and use the blockchain. To use it not only for financial transactions. But for anything that could enjoy transparency and decentralization. Like contracts, identity, governance, and more.

It was proposed in 2013 and launched in 2015. It was launched as an open-source blockchain technology platform. Bitcoin was designed to be a peer-to-peer digital money system. Ethereum was built as a computing platform. A kind of global computer for running decentralized applications.

Over time, it has become the most widely used blockchain for smart contracts, DeFi protocols, NFTs, and Ethereum payments. Upgrades like Ethereum 2.0 improved scalability, security, and energy efficiency. How? By moving away from ETH mining.

Who created ETH?

The core idea behind Ethereum came from Vitalik Buterin. He is a programmer and writer deeply involved in the early Bitcoin community. Buterin believed that Bitcoin's scripting language was too limited. He invented a much more flexible system that could support general-purpose programming. Thus giving birth to Ethereum.

Several co-founders, including Gavin Wood, Joseph Lubin, and Charles Hoskinson, worked alongside Buterin. Together, they helped develop and launch the platform. Their vision was to create a decentralized digital currency and global infrastructure. So it could change how we use the internet and think about money.

Why Ethereum was created

The goal behind this crypto was to offer more than just a digital alternative to cash. It was designed to empower individuals and developers to build decentralized, censorship-resistant systems. That means no banks, no third-party approval, and no single point of failure.

Instead of relying on a centralized system, Ethereum allows users to interact from peer to peer. It enables users to transfer value, execute agreements, and deploy applications on a decentralized and secure network.

Ethereum also solves key problems that traditional systems face. Such as fraud risk, lack of transparency, and reliance on intermediates. In short, it’s not just another crypto. It’s an open financial system for the digital.

How ETH works: the technology behind it

How to understand how Ethereum functions? You first need to understand the concept of a blockchain. A blockchain is a public, digital ledger that stores data. E.g. transactions, contracts, or identities, across thousands of computers. This ledger is updated in real-time and is immutable. It means no one can alter the information once it’s recorded.

Traditional databases are owned by a single bank or company. Ethereum's blockchain network is maintained by thousands of participants across the globe. These nodes (computers) all follow a consensus protocol, ensuring that everyone agrees on the current state of the system.

Initially, Ethereum mining was done through proof of work. System, where miners used computing power to solve complex puzzles and confirm transactions. In return, they received ETH as a reward. Yet, in the transition to Ethereum 2.0, the network moved to proof of stake. The system, where validators stake ETH instead of solving puzzles.

In this new model, validators are chosen to confirm transactions and create new blocks. The system chose them based on how much ETH they hold and are willing to lock up as collateral. This shift not only increased efficiency but also reduced energy use. It made Ethereum more sustainable.

Smart contracts are another foundational element of how Ethereum works. These are self-executing programs stored directly on the Ethereum blockchain. They are capable of running everything. From decentralized exchanges to NFT drops, lending protocols, and complex financial instruments.

Why Ethereum has value

The value of Ethereum — from its utility, demand, and role in powering the broader digital economy. It’s not just a currency. It’s the fuel for decentralized innovation.

Scarcity, demand, and digital assets

Like Bitcoin, Ethereum has built-in scarcity, but unlike Bitcoin, it's not hard-capped at a fixed number of coins. Instead, Ethereum introduced mechanisms such as EIP-1559, which burn a portion of transaction fees, potentially reducing the overall supply over time, depending on network activity.

As more people use Ethereum for transactions, NFTs, and DeFi, the demand for ETH rises — pushing its price higher. We use ETH to pay gas fees (the cost of executing any action on the Ethereum blockchain). That makes it an essential asset for interacting with digital services.

This utility gives ETH strong fundamentals as both a currency and an investment.

Decentralization and trustless transactions

Traditional systems rely on banks, credit card companies, or governments to verify and process payments. Ethereum eliminates the need for these third parties by using decentralized, trustless verification.

When you send ETH or execute a smart contract, the network validates it using its cryptographic protocols. No one can fake a transaction, double-spend funds, or block your access. That’s why people trust Ethereum transactions globally — even between strangers.

This trustless model is one of Ethereum's greatest strengths. It gives individuals full control over their assets. Plus, it makes financial inclusion accessible to anyone with an internet connection.

How ETH compares to fiat & other cryptocurrencies

We'll compare ETH to traditional fiat currencies like the US dollar. The biggest difference lies in decentralization and programmability. Fiat relies on banks, inflationary policies, and government control. Ethereum, in contrast, operates on open-source code and consensus mechanisms driven by users.

Compared to other cryptocurrencies, Ethereum stands out because of its smart contract capability. Plus, it has a large developer community and a vast ecosystem of apps and financial tools. Newer cryptocurrencies offer speed or privacy. Few match Ethereum's maturity, network effects, and broad adoption.

There are plenty of projects building on top of Ethereum across sectors: gaming, identity, payments, and even supply chains. With these, ETH has become a cornerstone of the digital asset world.

How to buy and store ETH

Are you planning to invest in ETH long-term or use it for transactions? The first step — is understanding how to buy and store Ethereum safely. At 0xProcessing, we always emphasize security, simplicity, and smart platform choices. It's essential when dealing with digital assets.

Buying ETH: best methods and platforms

There are several reliable ways to buy Ethereum. It depends on your location, budget, and technical preferences. Here's a breakdown of the most popular methods:

  • Cryptocurrency exchanges. Platforms like Coinbase, Binance, Kraken, and Bybit allow users to buy Ethereum using fiat currencies like dollars, euros, or yen. These exchanges support various payment methods. E.g. credit cards, debit cards, bank transfers, and even PayPal.
  • Peer-to-peer platforms. P2P marketplaces such as LocalCryptos or Paxful let users buy ETH straight from others. You can agree on a price, choose a payment method, and complete the transaction without a middleman.
  • Broker apps and fintech platforms. Some mobile-first apps like Revolut and eToro also offer ETH trading. They do it though often with limited functionality or higher fees.

No matter where you choose to buy. Always check the exchange commission and security measures. Plus, check whether the platform supports withdrawal to a private wallet. Not just virtual balances on their servers.

For institutional or high-volume buyers, 0xProcessing offers access to secure, professional-grade solutions. It is useful for acquiring and managing large amounts of ETH with compliance and support built in.

Storing ETH: hot wallets vs. cold wallets

Once you’ve completed your buy, you’ll need a safe place to store Ethereum. This comes down to two main types of wallets: hot and cold.

  • Hot wallets are connected to the internet. They include mobile apps, browser extensions, and desktop software. They're ideal for quick payments, active trading, and daily use. Examples include MetaMask, Trust Wallet, and Rainbow.
  • Cold wallets are physical devices or offline storage methods. They’re more secure and perfect for long-term investments. Hardware wallets like Ledger or Trezor keep your private keys isolated from the online world. This will protect you from hacks and malware.

If you plan to store large sums of ETH or hold long-term, cold storage is a smart choice. For everyday use or small balances, hot wallets offer convenience with decent security. Especially when paired with two-factor authentication.

0xProcessing always recommends combining both for a hybrid solution. Use hot wallets for accessibility and cold wallets for capital protection.

Security tips for ETH HODLers

Keeping your ETH safe is crucial. Especially as crypto adoption grows and scammers get more creative. Here are key security practices every Ethereum user should follow:

  • Never share your private key or seed phrase. Not even with "support" teams.
  • Use strong, unique passwords and enable 2FA on all wallets and exchanges.
  • Often back up your wallet and keep recovery info offline.
  • Be cautious with unknown links, browser extensions, or unsolicited emails.
  • Avoid storing large amounts of ETH on centralized platforms. Unless you fully trust them.

0xProcessing takes security seriously. We offer enterprise-grade tools for clients. If you need help with storage, transaction routing, and fraud protection, you are in the right place. Whether you're a casual user or a serious investor, secure handling is non-negotiable.

Using ETH: payments, investing, and more.

Now that you know how to buy, store, and secure your ETH, let’s explore what you can actually do with it. Ethereum isn’t only a speculative investment. It's a functional digital currency that supports payments, governance, and powerful decentralized applications. At 0xProcessing, we help users and businesses alike find real-world use cases that go far beyond just holding.

Paying with Ethereum: where and how

Using Ethereum for payments is becoming increasingly common. More merchants, platforms, and service providers have begun to accept Ethereum. They use ETH to pay for:

  • Digital goods and subscriptions
  • Web hosting and cloud services
  • Freelance work and software development
  • Donations and crowdfunding
  • Real-world goods in select stores or marketplaces

Many businesses integrate Ethereum payments through platforms like BitPay or Coinbase Commerce. With these tools, users can send ETH for purchases just like a credit card or bank transfer, but with faster processing and often lower fees.

Because Ethereum supports peer-to-peer transfers, you can also send payments directly to anyone with a wallet. No bank account, ID, or third party is required. That makes ETH a powerful tool for borderless commerce and online transactions.

ETH as an investment: risks and rewards

Beyond daily payments, ETH is seen by many as a long-term investment. It is a core digital asset with strong fundamentals. But like all investments, it carries both rewards and risks.

Rewards of investing in Ethereum:

  • Exposure to the growth of the Ethereum blockchain
  • Demand from DeFi, NFTs, and enterprise adoption
  • Inflation resistance through deflationary mechanics
  • Institutional interest and mainstream credibility

Risks of Investing in Ethereum:

  • Price fluctuations: ETH is known for significant short-term volatility, which can impact both new and experienced investors 
  • Regulatory uncertainty in some regions
  • Competition from other cryptocurrencies and blockchain platforms
  • Smart contract bugs or network attacks

Still, many investors believe the potential upside outweighs the risk. As part of a diversified portfolio, ETH offers exposure to an innovative financial system. Early participation in an evolving technology stack.

Ethereum myths and misconceptions

Despite its popularity, Ethereum is often misunderstood. Let’s debunk a few myths:

  • “Ethereum is just like Bitcoin.” Not quite. While both are cryptocurrencies, Ethereum supports smart contracts, dApps, and a much wider use case.
  • “ETH is unlimited and inflationary.” Ethereum doesn't have a hard cap like Bitcoin. But the Ethereum network now burns fees, reducing supply. This is potentially making ETH deflationary over time.
  • “It’s only useful for tech people.” User-friendly wallets, mobile apps, and integrations make ETH accessible to anyone. Not only developers.
  • “Ethereum is unsafe or unregulated.” ETH is one of the most transparent blockchains in existence, and while regulation is still evolving, the ecosystem today is far more structured and mature than it once was. We'll explore this next. 

Ethereum continues to gain traction globally. Legal frameworks around cryptocurrency are becoming more defined. Understanding the regulation and compliance landscape is essential. Not only for businesses but also for everyday investors and users.

Is Ethereum legal? Global regulations overview

In most countries, Ethereum is legal to own, trade, and use. Yet, the regulatory status depends on how local governments classify digital assets.

  • United States. ETH is generally treated as a commodity, though some agencies argue that certain uses of Ethereum may qualify as securities. Especially this happens in staking-related services.
  • European Union. ETH is recognized as a cryptocurrency, with clear rules for taxation, money laundering, and investor protection under MiCA (Markets in Crypto-Assets).
  • Asian countries have mixed views. Japan and South Korea have legalized ETH trading and treat it like a virtual currency, while China has banned all public cryptocurrency trading.
  • In Latin America and parts of Africa. Ethereum is gaining adoption but often operates in legal gray zones.

Regulators are particularly interested in Ethereum payments, decentralized platforms, and the role of smart contracts in potentially replacing traditional financial services.

How ETH is taxed

Taxation is one of the most important legal concerns for ETH users. In many jurisdictions, any transaction involving ETH can create a tax event, including:

  • Selling ETH for fiat currencies
  • Trading ETH for other cryptocurrencies
  • Spending ETH to buy goods and services
  • Earning ETH through mining, staking, or rewards

Depending on the country you're in, you might have to pay capital gains, income tax, or both. The rate of tax typically relies on the duration you have held the asset (short-term or long-term) and the sum earned or realized.

Proper compliance requires keeping precise records of all your transactions, along with dates, prices, and wallet addresses. Automating this is possible using systems like CoinLedger, Koinly, and TokenTax.

Government stances

Governments around the world are gradually shaping their official stances on Ethereum. Some embrace it as a driver of innovation. Others approach it cautiously due to fraud, volatility, or lack of central control.

Key trends we’re observing at 0xProcessing:

  • Pro-innovation countries like Switzerland, Singapore, and Portugal are crafting crypto-friendly frameworks that attract startups and investors.
  • Conservative regulators in countries like India, China, and Turkey tend to restrict usage or impose tight controls over exchanges, wallets, and bank access.
  • The U.S. is divided: while many states support blockchain innovation, federal agencies continue to debate ETH’s securities classification.

The outcome of these debates will have major implications for ETH’s global adoption, use in financial systems, and its long-term value as a digital asset.

Ethereum has already transformed the way we conceptualize money, contracts, and even identity on the web. Its voyage, however, is not complete just yet. As the ecosystem continues to evolve, entrepreneurs, investors, and companies are wagering heavily on the next stage of development.

Will Ethereum replace other coins?

Ethereum will not likely completely displace any other cryptocurrency. It's evident increasingly that ETH will continue to be a juggernaut in the blockchain universe. Why?

  • Ethereum boasts the largest development community creating dApps, DeFi protocols, and NFT platforms.
  • It backs a strong smart contract platform that facilitates innovation beyond the peer-to-peer transaction space.
  • Major institutions are integrating ETH into payment systems, investment portfolios, and blockchain-based services.

Other blockchains may offer specific advantages. Like faster transactions, lower fees, or privacy features. But few can match Ethereum’s network effects, brand recognition, and digital infrastructure. We’ll likely see a multi-chain future, but Ethereum will remain central to it.

The merge to proof of stake was only the beginning. Further upgrades like sharding, layer-2 scaling solutions, and improved security will continue to enhance Ethereum's performance and sustainability.

Potential risks to ETH’s future

Despite its strengths, Ethereum faces several risks that could impact its growth:

  • Regulatory pressures. If major governments classify ETH or certain DeFi activities as illegal or too risky, it could slow adoption.
  • Scalability challenges. Ethereum’s main net still struggles with congestion and high fees during peak usage, although rollups and sharding aim to address this.
  • Competition. Blockchains like Solana, Avalanche, and Polkadot are innovating rapidly and could siphon off developers or investors.
  • Security vulnerabilities. Bugs in smart contracts or protocol upgrades could lead to exploits or loss of funds.
  • Market volatility. ETH’s price can experience sharp swings, which may deter new users or lead to emotionally driven investment decisions.

However, the Ethereum ecosystem has consistently shown its problem-solving capabilities and ability to iterate rapidly. Its robust developer base, decentralization philosophy, and momentum leave it in a prime position to evolve and flourish.

Conclusion: should you get into Ethereum?

If you believe in the power of open systems, global financial access, and programmable digital currency, the answer is a strong yes.

Ethereum represents more than only a technological breakthrough. It’s a movement toward a decentralized, transparent, and inclusive digital economy. It has thousands of developers, millions of users, and a fast-growing ecosystem. From payments and investments to smart contracts and decentralized apps. Ethereum powers much of the modern crypto economy.

Still, like any investment, ETH comes with risk. It’s not a get-rich-quick scheme, nor is it immune to market volatility. Use careful planning, strong security practices, and a long-term mindset. This way it can be one of the most promising digital assets you’ll ever interact with. Use trusted platforms, keep your wallets secure, and stay updated on regulations and best practices.

At 0xProcessing, we help individuals, businesses, and institutions understand, integrate, and benefit from Ethereum and the broader cryptocurrency landscape. From payments to security, strategy to execution. We’re your partner in the future of digital money.

Ready to join the new era of finance? Explore more at 0xProcessing.com and see how we help you make Ethereum work for you.

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