Blockchain technology has evolved significantly since the inception of Bitcoin, with Ethereum emerging as a groundbreaking platform that introduced several transformative innovations. Unlike Bitcoin’s limited scripting capabilities, Ethereum expanded the possibilities of decentralized systems by enabling programmable transactions through smart contracts. This guide explores the foundational concepts behind Ethereum’s architecture—smart contracts, accounts, transactions, Ether, and gas—offering a clear understanding of how these elements work together to power one of the most influential blockchain networks today.
What Are Smart Contracts?
👉 Discover how smart contracts are revolutionizing digital agreements and trustless interactions.
Smart contracts are self-executing programs stored on the Ethereum blockchain that automatically enforce the terms of an agreement when predefined conditions are met. First conceptualized in the 1990s by cryptographer Nick Szabo, smart contracts remained largely theoretical until Ethereum provided a secure, decentralized environment for their execution.
Ethereum supports Turing-complete programming languages such as Solidity, Serpent, and Viper, allowing developers to write complex logic into contracts. These contracts run inside the Ethereum Virtual Machine (EVM), a decentralized runtime environment that ensures consistent execution across all nodes in the network.
When triggered by an incoming transaction or event, a smart contract can:
- Process data,
- Transfer funds,
- Interact with other contracts,
- Emit events for external applications to monitor.
Once executed, any changes to the blockchain state—such as updating balances or storing data—are permanently recorded and secured by network consensus. This immutability ensures transparency and eliminates the need for intermediaries in financial, legal, or administrative processes.
Why Smart Contracts Matter
Their ability to automate trustless interactions makes them ideal for use cases like decentralized finance (DeFi), supply chain tracking, voting systems, and non-fungible tokens (NFTs). As core components of decentralized applications (dApps), smart contracts form the backbone of Ethereum's ecosystem.
Understanding Ethereum Accounts
Unlike Bitcoin’s UTXO (Unspent Transaction Output) model, Ethereum uses an account-based model to track balances and states. This simplifies balance queries and enables more complex operations by directly associating each user or contract with a unique account.
There are two types of Ethereum accounts:
Externally Owned Accounts (EOAs)
Controlled by private keys, EOAs are user-controlled wallets used to send transactions. They contain:
- Nonce: A counter tracking the number of transactions sent from the account.
- Balance: The amount of Ether held.
- Storage Root: Usually empty; used only for contract metadata.
- Code Hash: Indicates no associated code (since EOAs aren’t programmable).
Only EOAs can initiate transactions, making them the starting point for all actions on the network.
Contract Accounts
These are automated accounts created when a smart contract is deployed. They hold:
- Executable code,
- Persistent storage,
- A balance (which can be used to pay gas fees).
Contract accounts cannot act independently—they only execute when called by an EOA or another contract. Their behavior is entirely determined by their code, ensuring predictable and tamper-proof operations.
Transactions: The Building Blocks of Interaction
In Ethereum, a transaction is the smallest unit of action—a signed message from an EOA that triggers state changes on the blockchain. Transactions can transfer value (Ether), deploy smart contracts, or invoke functions within existing contracts.
Each transaction includes key fields:
- to: Destination address (can be an EOA or contract).
- value: Amount of Ether to transfer.
- nonce: Prevents replay attacks by ensuring each transaction is processed only once.
- gasPrice: How much Ether the sender pays per unit of gas (measured in Gwei).
- gasLimit: Maximum gas allowed for the transaction.
- data: Optional field used to pass input parameters when interacting with contracts.
- signature: Cryptographic proof of authorization using ECDSA (R, S, V values).
Transactions must be broadcast to the network and included in a block by miners (or validators in proof-of-stake). Before execution, the sender must have sufficient Ether to cover gasLimit × gasPrice.
If execution exceeds the gas limit, all changes are reverted—though the gas fee is still paid, as computational resources were consumed.
Ether: The Fuel of Ethereum
Ether (ETH) is the native cryptocurrency of the Ethereum network. While often traded as a digital asset, its primary function is operational: it pays for computation and storage on the blockchain.
Key facts about Ether:
- Smallest unit: 1 wei = 10⁻¹⁸ ETH.
- Used to pay transaction fees and incentivize network participants.
- Distributed through block rewards and transaction tips (post-Merge, under proof-of-stake).
- Tradable on global exchanges, with dynamic market pricing influenced by supply, demand, and ecosystem growth.
Originally distributed via mining rewards (2 ETH per block plus fees), Ethereum transitioned to proof-of-stake in 2022, reducing issuance and environmental impact. Today, new ETH is minted as staking rewards rather than mining incentives.
👉 Learn how Ether powers decentralized innovation and secures one of the world’s largest blockchains.
Gas: Measuring Computational Work
Gas is Ethereum’s mechanism for measuring computational effort required to execute operations. Every action—from simple transfers to complex smart contract executions—consumes a specific amount of gas based on its resource intensity.
For example:
- Sending ETH: ~21,000 gas
- Writing data to storage: significantly higher
- Executing loops or recursive calls: varies with complexity
Users set both gasPrice and gasLimit when sending a transaction:
- gasPrice: Price per unit of gas (in Gwei).
- gasLimit: Maximum gas you’re willing to spend.
If actual usage is below the limit, unused gas is refunded. If exceeded, execution halts and reverts—preventing infinite loops and DoS attacks.
While gas costs for specific operations remain fixed, their real-world cost in USD fluctuates with ETH’s market price. This separation allows predictable execution costs while accommodating cryptocurrency volatility.
Frequently Asked Questions
Q: Can smart contracts be changed after deployment?
A: No. Once deployed, smart contracts are immutable. However, developers can design upgradeable patterns using proxy contracts.
Q: What happens if I run out of gas during execution?
A: The transaction fails, state changes are undone, but you still lose the gas used up to that point.
Q: How do I estimate gas fees before sending a transaction?
A: Wallets and dApps typically provide gas estimators. You can also check real-time data on block explorers.
Q: Is Ether the same as Bitcoin?
A: No. While both are cryptocurrencies, ETH powers smart contracts and dApps, whereas BTC primarily functions as digital gold or peer-to-peer cash.
Q: Can I earn Ether without buying it?
A: Yes—by staking ETH as a validator or providing liquidity in DeFi protocols.
Q: Why does Ethereum use gas instead of charging directly in Ether?
A: Gas decouples computation cost from ETH’s market price, ensuring stable pricing for developers regardless of token fluctuations.
The core concepts of Ethereum—smart contracts, accounts, transactions, Ether, and gas—form a robust framework for building decentralized applications. Together, they enable a trustless, transparent digital economy where code enforces rules without intermediaries.