Overview
Ethereum is the world's leading programmable blockchain, launched in 2015 by Vitalik Buterin. It pioneered the concept of smart contracts and decentralized applications (dApps), creating an entirely new paradigm for trustless computation. Today, Ethereum hosts the largest DeFi ecosystem, the most active developer community, and serves as the settlement layer for a growing network of Layer 2 rollups.
Technology
Architecture
Ethereum operates as a global state machine where every node maintains a complete copy of the blockchain state. The Ethereum Virtual Machine (EVM) executes smart contracts written in Solidity and Vyper, providing a Turing-complete computation environment. The state model uses an account-based system (as opposed to Bitcoin's UTXO model), which simplifies smart contract development.
Consensus Mechanism
Following "The Merge" in September 2022, Ethereum transitioned from Proof-of-Work to Proof-of-Stake. Validators must stake 32 ETH to participate in block production and attestation. The beacon chain coordinates validators using the Casper FFG finality mechanism combined with LMD-GHOST fork choice. This transition reduced Ethereum's energy consumption by approximately 99.95%.
Scalability
Ethereum's Layer 2 ecosystem has become the primary scaling strategy. Major rollups include:
- Optimistic Rollups: Arbitrum, Optimism, Base
- ZK Rollups: zkSync Era, Scroll, Linea, Polygon zkEVM
Combined L2 throughput exceeds 100 TPS, compared to Ethereum L1's ~15 TPS. The Dencun upgrade (March 2024) introduced "blob" transactions via EIP-4844, dramatically reducing L2 data posting costs by 10-100x.
Security
Audit History
The Ethereum protocol has undergone extensive formal verification and auditing. Major upgrades go through multiple audit firms, public testnets, and bug bounty programs. The Ethereum Foundation maintains one of the largest bug bounty programs in crypto, with rewards up to $250,000.
Track Record
Notable incidents include the 2016 DAO hack ($60M exploit due to a smart contract reentrancy bug, resolved via hard fork), but the base protocol itself has never been compromised. The Proof-of-Stake transition was executed flawlessly despite being one of the most complex upgrades in blockchain history.
Known Vulnerabilities
- MEV (Maximal Extractable Value) remains a systemic concern, with validators able to reorder transactions for profit
- Smart contract vulnerabilities are a persistent risk at the application layer
- Client diversity has improved but Geth still runs on ~60% of execution nodes
Decentralization
Validator Distribution
Over 900,000 validators secure the Ethereum network, making it one of the most decentralized Proof-of-Stake chains. However, liquid staking protocols concentrate staking power:
| Provider | Stake Share |
|---|---|
| Lido | ~28% |
| Coinbase | ~14% |
| Binance | ~4% |
| Solo stakers | ~20% |
| Others | ~34% |
Governance
Ethereum follows an off-chain governance model through EIPs (Ethereum Improvement Proposals). Core developers discuss changes in public calls. There is no on-chain voting mechanism, which some view as a feature (avoids plutocracy) and others as a limitation (slower decision-making).
Ecosystem
Developer Activity
Ethereum consistently leads in developer count with over 7,000 monthly active developers according to Electric Capital's 2025 report. The ecosystem benefits from extensive tooling (Hardhat, Foundry, Remix), documentation, and educational resources.
Key Applications
- DeFi: Uniswap ($5B+ TVL), Aave ($12B+ TVL), MakerDAO/Sky ($8B+ TVL), Lido ($15B+ TVL)
- NFTs: OpenSea, Blur, Foundation
- L2s: Arbitrum, Optimism, Base, zkSync Era
- Infrastructure: Chainlink, The Graph, ENS
- Social: Farcaster, Lens Protocol
The total value locked (TVL) across Ethereum and its L2s exceeds $80 billion, representing over 55% of all DeFi TVL.
Tokenomics
Supply Model
Post-merge, ETH has become deflationary during periods of high network usage thanks to EIP-1559 fee burning. The net issuance rate fluctuates but has been approximately -0.5% to +0.5% annually since the merge. During high-activity periods, more ETH is burned than issued, creating deflationary pressure.
Distribution
Initial distribution via the 2014 crowdsale allocated ~60M ETH to early participants. Ongoing issuance goes to validators as staking rewards (~3.5% APR). There is no maximum supply cap, but the burn mechanism creates an effective supply ceiling. Current total supply: ~120.2M ETH.
Risk Factors
- Gas fees: L1 transactions remain expensive ($5-50+) during congestion periods
- Regulatory risk: ETH's classification as a security remains debated in some jurisdictions
- Centralization vectors: Lido controls ~28% of staked ETH; Geth dominance among execution clients
- Complexity: Protocol complexity increases with each upgrade, expanding the attack surface
- L2 fragmentation: Liquidity and users are split across multiple L2s, creating UX friction
- Competition: High-throughput L1s (Solana, Sui) offer faster and cheaper alternatives for some use cases
Conclusion
Ethereum remains the dominant smart contract platform with unmatched ecosystem depth, developer activity, and institutional adoption. Its Layer 2 scaling strategy is proving effective, with combined rollup TVL and throughput growing rapidly. The deflationary tokenomics post-merge strengthen the investment thesis. Key risks center around gas fee economics, liquid staking centralization, and increasing competition from alternative L1s. Overall, Ethereum maintains a strong position as the foundational settlement layer for decentralized applications.