Ethereum, what it is, how it works and differences with Bitcoin

In the crypto world, knowing what is Ethereum and how does it work is essential.

In fact, it is the second cryptocurrency by market capitalization after Bitcoin. Ethereum is also a decentralized processing platform capable of managing a wide variety of applications, including the entire DeFi universe.

2025 is a year under the microscope for the performance of digital currencies and, therefore, also for Ethereum. With the US presidency led by Trump, in fact, the regulatory landscape in the United States could represent a long-term bullish catalyst for these assets.

The tycoon has signed an executive order to create a presidential working group on digital asset markets, highlighting greater attention to the regulation of cryptocurrencies at the federal level.

Investors interested in this sector and anyone who is approaching the crypto world must know in detail what is Ethereum and how does it work.

What is Ethereum?

Ethereum is a platform based on blockchain technology, best known for its cryptocurrency, or native token, Ether (ETH) also called Ethereum.

The blockchain on which Ethereum is based can support many other cryptocurrencies and applications. Users of the network can create, publish, monetize and use a wide range of decentralized applications.

The Ethereum project dates back to 2013 from the idea of Vitalik Buterin, a Russian boy born in 1994 who lived in Canada, who officially launched the platform in 2015 together with Joe Lubin, founder of the blockchain software company ConsenSys.

From these few lines it is immediately clear that Ethereum is much more than a cryptocurrency as understood by neophytes.

It is in fact a decentralized blockchain platform that allows the creation and execution of smart contracts and decentralized applications (dApps) without the need for intermediaries.

It should also be noted that the Ethereum 2.0 update has improved scalability, security and energy efficiency, reducing energy consumption by 99.95% thanks to the transition from Proof of Work (PoW) to Proof of Stake (PoS).

How Ethereum Works

Ethereum works through a blockchain, where all the operations carried out are stored in a public register. Each new block must be validated by other users participating in the platform before being registered.

The Ethereum network is characterized by a decentralized virtual computer, also known as EVM (Ethereum Virtual Machine). To function, the network needs (real) computers that are constantly turned on, which give the network a portion of their computing power.

In turn, computers need to acquire energy to perform their function. The platform’s "fuel" is represented by Ether, which is essential for running smart contracts.

Ethereum stands out for its Ethereum Virtual Machine (EVM), an environment that runs smart contracts, or self-executing programs that work without the need for intermediaries.

Smart contracts are written in languages like Solidity and run automatically on the blockchain.

Every operation on Ethereum (transactions, smart contract execution, etc.) requires the payment of gas fees, a fee in ETH to compensate validators who process the network.

Ethereum also allows the creation of:

• ERC-20 tokens: Standard for cryptocurrencies and financial projects;
• ERC-721 tokens (NFTs): Standard for unique digital objects, such as art and collectibles;
• dApps (Decentralized Applications): distributed applications without central control, used in DeFi, gaming, metaverse and more

Since the transition to Ethereum 2.0, the network uses Proof of Stake (PoS) instead of Proof of Work (PoW), reducing energy consumption and increasing scalability.

Differences between Ethereum and Bitcoin

Bitcoin and Ethereum are cryptocurrencies traded on exchanges and stored in digital wallets.

Both are decentralized tokens, that is, not issued or regulated by central banks or a State, and both use the distributed ledger technology called blockchain and the consensus protocol called Proof of Work (PoW), which consists of adding new blocks to the blockchain by solving complex problems through enormous computing power, an activity called mining, which is rewarded in BTC or ETH.

However, there are some key differences between the two, which we can better understand by starting from the birth of Ethereum.

When Vitalik Buterin, then 17, founded Bitcoin Magazine, a magazine that covers cryptocurrencies, he quickly realized the limitations of Bitcoin. He then thought of founding a new more flexible blockchain on which anyone could build new applications and cryptocurrencies.

In the words of Vitalik Buterin, “the big difference between Ethereum and Bitcoin is that Bitcoin is a platform where the value of the ecosystem comes from the value of the currency, while in Ethereum the value of the currency comes from the value of the ecosystem”.

In an interview, the founder of Ethereum explained in very simple words what is the difference between Bitcoin and Ethereum, comparing a pocket calculator to a smartphone, where Bitcoin is the first and Ethereum is the second.

“Think about the difference between a calculator and a smartphone: the calculator does one thing and does it well, while on a smartphone you have a calculator as an app, you can listen to music, surf the web and do many other things”.

To recap, while Ethereum has as its main objective the functioning of smart contracts and the creation of decentralized apps, Bitcoin wants to be an alternative to classic money as we know it today and a store of value (the so-called digital gold). This is the fundamental difference between Ethereum on the one hand and Bitcoin on the other.

Another substantial difference lies in the structure. The blockchain underlying Ethereum is fully programmable, and for this reason more efficient than the Bitcoin blockchain.

To put things in order, we can identify these differences.

1. The block creation time for Bitcoin is 10 minutes while the block time for Ethereum is 4-15 seconds. Therefore, while Bitcoin transactions typically take a few minutes to implement, Ethereum transactions are processed immediately and within seconds;
2. Ethereum has a slightly different economic model than Bitcoin - the rewards for creating a block on the blockchain by Bitcoin miners are halved every 4 years, while Ethereum releases the same amount of Ether every year ad infinitum;
3. Ethereum uses a Turing Complete programming language and Turing Complete internal code, thanks to which almost anything can be computed given enough data and a certain amount of time;
4. Both Ethereum and Bitcoin use different hashing algorithms. While Bitcoin uses the SHA-256 algorithm that produces a number in hexadecimal format, Ethereum uses the Ethash algorithm;
5. Ethereum uses a Ghost protocol that prevents the use of centralized mining (currency "mining" centers). While Bitcoin still uses the concept of mining, thanks to which companies can be created and, with the right technology, start issuing Bitcoin;
6. Ethereum has a different method of charging transactions based on computational complexity, bandwidth usage, and storage needs. Bitcoin transactions cost the same to each other. The cost is called "Gas" in Ethereum and occurs per block while for Bitcoin it is limited by the block size;
7. Ethereum was funded by crowdfunding while Bitcoin came directly to the market and early miners own most of the cryptocurrencies that will ever be mined

How to buy Ethereum

Traditional banks do not allow you to buy Ethereum, although there are banking apps, such as Revolut, that allow you to invest in Ethereum and other cryptocurrencies.

Generally speaking, the most popular way to buy Ethereum is through cryptocurrency exchanges. One of the most popular exchange sites is Coinbase, where users have the opportunity to buy the digital currency. Other well-known exchanges include Binance, Kraken, Bitstamp, and Bittrex.

You can also buy Ethereum through online trading brokers or by investing in crypto funds.

How to cash out Ethereum?

To use Ethereum as a payment method, you can rely on a cryptocurrency exchange, where you can convert crypto into fiat currency. To cash out Ethereum, you need to connect a bank account to the Ethereum wallet, transfer the cryptocurrency to the exchange, sell Eth in exchange for another currency, and withdraw the money from the bank account. Keep in mind that this process can take several business days depending on the times of your bank and that the withdrawal involves commission costs that vary depending on the platform chosen.

Cashing out Ethereum through cryptocurrency exchanges is the most common way to change crypto into fiat currency. But you can also sell Ethereum directly to other users through peer-to-peer exchanges, which however represents a higher risk of running into scammers.

Original article published on Money.it Italy. Original title: Ethereum, cos’è, come funziona e differenze con Bitcoin