Ethereum and smart contracts: how ether, gas and staking work

Ethereum is a public blockchain that runs programs as well as payments. Bitcoin's ledger mostly records who sent how many coins to whom. Ethereum's ledger also stores code, called smart contracts, and the state that code keeps: balances of other tokens, loan positions, order books, ownership records. Anyone can deploy a contract, and anyone can call it, by paying a fee in the network's own currency, ether (ETH).

That design made Ethereum the base layer for most of what people now call crypto beyond bitcoin: Stablecoins: how dollar tokens hold a $1 peg and how they fail, decentralized exchanges, lending protocols and tokens of every kind. It also makes ether a different asset from bitcoin. Its supply has no fixed cap, it has used proof of stake rather than mining since September 2022, and holders can lock it up to help secure the network in return for rewards.

This guide explains what a smart contract is, how gas fees are calculated (with a worked example), what changed in the 2022 Merge, and what five years of ether and bitcoin prices show. It assumes the basics in What is bitcoin? How it works, its supply cap and its price history.

What a smart contract is

A smart contract is a program stored at an address on the blockchain. It holds its own balance and its own data, and it runs when someone sends it a transaction. ethereum.org uses a vending machine as the picture: put in the right input and the machine gives a predetermined output, with no clerk involved. The term itself is older than any blockchain; Nick Szabo wrote about the idea in 1994.

A simple example is a token. A token contract keeps a table of addresses and balances and a rule: a holder may move part of their balance to another address, and the total stays the same. Many dollar stablecoins exist on Ethereum as contracts like this, with extra rules that let the issuer create and destroy tokens. More complex contracts hold deposits and lend them out at rates set by formulas, or swap one token for another from a shared pool.

Two properties make contracts powerful and risky at once:

• They execute as written. If the code has a flaw, the flaw executes too. There is no customer service desk that can reverse a contract's action.
• They can't be changed after deployment. Some contracts include upgrade paths controlled by a team, which reintroduces trust in that team; others can never be fixed.

Gas: what using Ethereum costs

Running code on thousands of computers isn't free, so every step a transaction asks the network to perform has a cost in gas. A plain ether transfer uses 21,000 gas; a call to a complex contract uses many times more. The fee is paid in ether, and it is owed whether the transaction succeeds or fails.

The base fee floats with demand. Each block has a target size equal to half its gas limit. When a block is fuller than target, the next base fee rises by up to 12.5%; when it is emptier, it falls by up to 12.5%. In busy periods fees can multiply within minutes.

Proof of stake and the Merge

Ethereum started with proof of work, like bitcoin. In December 2020 a separate proof-of-stake chain, the Beacon Chain, went live beside it. On September 15, 2022, in the upgrade called the Merge, the original chain joined the Beacon Chain and miners were replaced by validators.

Under proof of stake, validators lock up ether as a security deposit. The protocol picks validators to propose and check blocks; honest work earns new ether, and provably dishonest behavior can cost part of the deposit. Instead of spending electricity to make attacks expensive, the network puts the attacker's own capital at risk. ethereum.org puts the resulting fall in energy use at about 99.95%.

For an investor, staking changes what ether is. Ether that is staked earns protocol rewards, so a holder can receive a yield in ETH, but staked coins are locked under the protocol's rules, validator mistakes can be penalized, and the rewards are paid in an asset whose dollar price swings widely. Staking through an exchange or a staking service adds that firm's risks on top.

Ether's supply

Bitcoin's supply follows a fixed schedule. Ether's doesn't. ethereum.org describes it as dynamic: new ether is issued to reward validators, while the base fee of every transaction is burned. When the network is busy, burning can offset issuance; when it is quiet, issuance wins. The net supply change therefore depends on usage, and there is no cap to anchor long-run expectations the way the 21 million figure does for bitcoin.

Five years of ether against bitcoin

Both lines start at $100 in the week of October 25, 2021, close to the 2021 peak for both coins. Read the gap between them as relative performance, and the slope of each as its own path:

• Both fell hard in 2022. On weekly closes, ether dropped 76.8% from November 8, 2021 to June 27, 2022, when $100 had shrunk to about $25. Bitcoin's fall was 75.1%, from November 8, 2021 to November 14, 2022.
• They moved together. The correlation of weekly returns over the five years was about 0.82.
• Ether swung more. Annualized from weekly returns, ether's volatility was about 66%, against about 49% for bitcoin.
• Bitcoin pulled ahead. Ether's highest weekly close in the window was $4,779.65 (week of August 18, 2025); bitcoin's was $123,513.48 (week of September 29, 2025). By the end of October 2026, $100 in bitcoin was worth about $129 and $100 in ether about $52. One ether bought 0.070 BTC at the start and 0.028 BTC at the end.

Five years is one window, chosen here because it starts near a peak. A start date two years earlier or later would tell a different story, and none of it predicts the next five years.

Risks and limitations

• Smart contract risk. Bugs, flawed designs and stolen admin keys have drained contracts. An exploit can't be undone by appeal.
• Fee spikes. When demand surges, the base fee climbs block by block, and small transactions can become uneconomic.
• Staking risk. Locked coins, penalties, and the solvency of any third party you stake through.
• Volatility. Ether's drawdowns in our data have been at least as deep as bitcoin's.
• Blind signing. ethereum.org warns that wallets often ask users to approve raw transaction data they can't read; approving a malicious contract can hand over a wallet's tokens. See Crypto wallets and custody: keys, seed phrases, hot and cold storage.
• No investor protection. SIPC does not protect crypto assets that don't qualify as securities under its law, even at a member firm.

Ethereum compared with bitcoin

How Finabase does it

Finabase lists ether as ETH.X. The ETH.X quote page shows price, the day's change and range, volume, market cap, moving averages and news, and the chart tab draws its history. The crypto list shows ether beside bitcoin and other coins, including several tokens that live on Ethereum, with returns from one week to two years, so you can compare them on one screen. Finabase shows prices, not on-chain data: there are no gas-fee, staking or contract statistics in the app. The chart on this page is built from Finabase's own price data, frozen on October 30, 2026.

Frequently asked questions

What is the difference between Ethereum and ether?

Ethereum is the network and its software; ether (ETH) is the currency used on it to pay fees and to stake. People often use "Ethereum" for both.

Why do Ethereum fees change so much?

Because the base fee adjusts by up to 12.5% per block depending on how full the previous block was. A run of full blocks during a busy period compounds those increases quickly.

Does ether have a maximum supply?

No. New ether is issued to validators and part of every fee is burned, so the supply rises or falls depending on how busy the network is.

What did the Merge change for ether holders?

Nothing about balances: the same ether stayed at the same addresses. What changed was how blocks are made: validators who stake ether replaced miners, and the network's energy use fell by about 99.95% according to ethereum.org.

Summary

Ethereum is a blockchain that runs programs, called smart contracts, which execute exactly as written and can't be edited once deployed. Every action costs gas, priced in gwei, and the fee equals gas used times the sum of a burned base fee and a tip. Since the Merge on September 15, 2022, the network has used proof of stake, so validators who lock up ether, not miners, secure it. Ether has no fixed supply cap. In our five-year window from late October 2021, ether moved closely with bitcoin but swung more, falling 76.8% at its worst and ending at about half its starting value while bitcoin ended up about 29%.