Ethereum 101 explains how Ethereum made blockchains programmable. It covers smart contracts, accounts and the EVM, ETH and gas fees, Proof of Stake, network upgrades, and how alternative Layer 1s trade off security, decentralization and scalability.
While Bitcoin is viewed as digital gold, an inflation hedge, or digital money, other crypto entrepreneurs wanted to push the envelope further. A few years after Bitcoin, Ethereum outlined infrastructure for smart contracts, decentralized applications, and new financial systems. This guide explains Ethereum’s premise, ecosystem, advantages, and the hurdles Layer 1 blockchains face.
What you’ll learn
The lesson summaries below give a short overview of the full course content. Take the full interactive Ethereum & Layer 1s 101 course to explore each lesson in more depth through guided explanations, examples, and activities.
Course introduction
Positions Ethereum as the next step after Bitcoin, adding smart contracts, decentralized applications, and new approaches to Layer 1 design.
Lesson 1 - Introduction to Ethereum
Explains how Ethereum made blockchains programmable through smart contracts and decentralized applications.
Lesson 2 - The Ethereum Model
Covers externally owned accounts, contract accounts, account balances, Bitcoin’s UTXO contrast, and the Ethereum Virtual Machine.
Lesson 3 - The Rise of DeFi
Shows how Ethereum supports automated financial services such as trading, lending, borrowing, and collateral management.
Lesson 4 - Ethereum Basics
Introduces ETH, gas, gwei, network congestion, base and priority fees, and the role of EIP-1559.
Lesson 5 - Proof of Stake
Explains Ethereum’s move away from Proof of Work and the roles of validators, staking, and slashing.
Lesson 6 - Ethereum Improvement Proposals
Describes how EIPs move from a documented idea through public review and possible network implementation.
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Compares Ethereum with other Layer 1 and Layer 0 designs through the blockchain trilemma.
Lesson 8 - Blockchain Economics
Connects native tokens and blockspace to validator incentives, wallets, RPC nodes, oracles, and other Web3 infrastructure.
Lesson 9 - Scaling and Conclusion
Introduces the scalability problem and explains why Layer 2 systems are the natural next topic.
What Ethereum added after Bitcoin
Bitcoin proved that a decentralized network could maintain money and a transaction ledger without a central authority. Ethereum extended that idea by making the blockchain programmable. Instead of only transferring value, Ethereum made it possible to run code on-chain.
The core innovation is the smart contract: a piece of code that runs on a blockchain and automatically executes predefined actions when specific conditions are met. In the vending-machine analogy, you insert money, and the machine dispenses your snack without needing human intervention.
Smart contracts make decentralized applications, or dApps, possible. These applications function without traditional intermediaries, with use cases that range from financial services to games.
How Ethereum tracks balances
To understand how a vending machine can live inside a blockchain, start with Ethereum’s accounts. Ethereum has two main account types. Externally owned accounts, or EOAs, are user-controlled accounts secured by a private key. They can send and receive ETH, interact with smart contracts, and initiate transactions.
Contract accounts are controlled by smart-contract code, not private keys. They cannot initiate transactions on their own. Instead, they act in response to transactions sent by EOAs or other contracts, executing predefined code when triggered.
Ethereum also uses an account-based model, where balances are stored directly in accounts, similar to a bank ledger. This differs from Bitcoin’s UTXO model, which tracks individual transaction outputs. The account-based approach makes it easier for smart contracts to check balances and interact with users or other contracts.
The platform driving smart contracts
Smart contracts execute inside a virtual environment called the Ethereum Virtual Machine, or EVM. The EVM resembles a universal translation service: just as a translation service helps everyone in a multilingual meeting understand the same message, the EVM provides a framework where smart contracts run the same way on every node in the network.
That consistency matters because every participating node needs to agree on what the smart contract did. Ethereum’s application-focused account model and the EVM together power decentralized applications, including the broader ecosystem of decentralized finance.
How Ethereum enabled DeFi
Ethereum’s infrastructure was not set up this way by accident. The aim was to go beyond decentralized money and expand how financial services could work. This is where decentralized finance, or DeFi, comes in.
DeFi aims to replace or rework financial functions such as lending, borrowing, trading, and earning interest with blockchain-based protocols. Instead of relying on a bank or broker, users interact with smart contracts that enforce rules automatically.
ETH and gas fees
ETH, or Ether, is the fuel or incentive that powers the Ethereum network. Every interaction, from sending tokens to deploying smart contracts, requires ETH to pay gas fees.
Gas fees are the cost that comes with every transaction or interaction with a smart contract. They serve two main purposes: they compensate validators for keeping the network running, and they help prevent spam by making every action on the network carry a cost.
Gas fees work like a toll system. Ethereum has limited blockspace, and when more users want to use the network at the same time, the cost of getting into the next block can rise.
Gas prices are commonly quoted in gwei. Under EIP-1559, a transaction fee includes a network-determined base fee and may include a priority fee for the validator. This gives users a clearer fee structure, although the total cost still changes with demand and the amount of computation required.
Proof of Stake and validators
Ethereum initially operated with Proof of Work, where miners validate transactions by solving complex computational puzzles. It later transitioned to Proof of Stake in the upgrade known as The Merge.
Proof of Stake works differently. Instead of miners competing with hardware, validators are selected to create new blocks, with their role tied to ETH staked as collateral. Staking acts as a financial commitment to follow the rules, because dishonest behavior can put a validator’s staked funds at risk through slashing.
How Ethereum upgrades
Ethereum Improvement Proposals, or EIPs, are formal proposal documents that describe potential changes to the Ethereum network. They resemble blueprints for upgrading a city bridge: an idea is written down, reviewed, debated, and, if accepted, implemented as a network upgrade.
Alternative Layer 1s and the blockchain trilemma
Ethereum was one of the first major highways built for smart contracts, but as more people used it, traffic jams and higher tolls became common. That opened the door for other blockchain platforms to emerge with different design choices.
Chains such as Bitcoin and Ethereum are called Layer 1 chains because they are base, independent networks that do not rely on another blockchain for operation. Other Layer 1s may optimize for speed, cost, decentralization, developer experience, or specific use cases.
The common challenge is the blockchain trilemma: improving two of the major cornerstones often comes at the cost of the third.
Native tokens and Web3 infrastructure
Layer 1 tokens such as ETH are not only traded assets. They play operational roles in paying for blockspace, incentivizing validators, and securing the network through rewards and fees.
Other important topics include Web3 infrastructure: wallets as user access points, middleware such as RPC nodes and oracles, and security/audit services that help applications interact with blockchain networks. These surrounding tools fill needed roles around the base blockchain.
Why scalability comes next
Balancing the blockchain trilemma is difficult. To support broader adoption, scalability becomes a critical problem: without effective scaling solutions, blockchains can become too slow or too expensive for everyday use.
In a city-road analogy, a single-lane road works when only a few people drive, but if everyone starts driving at once, the road becomes gridlocked. Blockchains face a similar challenge when demand rises faster than the base layer can process activity.
Key takeaways
Ethereum expanded blockchain use cases by introducing smart contracts and decentralized applications.
Ethereum uses EOAs, contract accounts, an account-based model, and the EVM to make smart-contract execution consistent across the network.
ETH is the native currency used to pay gas fees, which price computation and help prevent spam.
Proof of Stake replaces miners with validators who stake ETH and can be penalized for dishonest behavior.
EIPs provide a structured way to propose and coordinate Ethereum upgrades.
Alternative Layer 1s make different trade-offs across decentralization, scalability, and security.
Scaling is the natural next topic because base-layer blockchains face throughput and cost limits as adoption grows.
Before you start
This 101 subject is designed for readers who already have a basic grasp of Bitcoin and blockchain terminology. It helps to understand what a blockchain is, why decentralization matters, how wallets and private keys work, and why blockchains need consensus before moving into Ethereum and Layer 1 design.
Glossary
Ethereum: A Layer 1 blockchain designed to support smart contracts and decentralized applications.
Layer 1: A base blockchain network that does not rely on another chain for its core operation.
Smart contract: Code that runs on a blockchain and automatically executes predefined actions when conditions are met.
dApp: A decentralized application that uses smart contracts instead of relying only on traditional intermediaries.
EOA: An externally owned account controlled by a private key.
Contract account: An Ethereum account controlled by smart-contract code.
EVM: The Ethereum Virtual Machine, where smart-contract logic executes consistently across the network.
Gas fee: The cost paid in ETH to process a transaction or smart-contract interaction.
Gwei: A small unit of ETH used to price gas.
Proof of Stake: A consensus model where validators stake ETH and participate in block creation and validation.
Slashing: A penalty mechanism that can reduce a validator’s stake for dishonest or faulty behavior.
EIP: An Ethereum Improvement Proposal describing a possible network change.
Blockchain trilemma: The trade-off among decentralization, scalability, and security.
Web3 infrastructure: Wallets, RPC nodes, oracles, and related services that help users and applications interact with blockchains.
Continue learning
After Ethereum & Layer 1s, useful next topics include Scaling & Layer 2s, DeFi, Market Structure and the deeper Ethereum & Layer 1s 201 guide.
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