Ether (ETH): Definition, Uses, and Comparison with Bitcoin

Ether (ETH): Definition, Uses, and Comparison with Bitcoin

Ether (ETH) is the native cryptocurrency of the Ethereum network. It powers transaction processing and smart contracts on Ethereum, serves as a medium of exchange and store of value, and is used as collateral for securing the network through staking.

Key takeaways

• Ether is the native token of Ethereum and functions as the “fuel” (gas) that pays for work on the network.
• Ethereum is a platform for decentralized applications (dApps) and smart contracts; ether funds computation and transactions on that platform.
• Validators stake ether to participate in consensus and earn rewards; staking also subjects collateral to penalties for misbehavior.
• Unlike Bitcoin, Ethereum does not have a fixed 21‑million‑coin cap; fee-burning (EIP‑1559) and minting together affect net issuance.
• Gas fees on Ethereum have two parts: a base fee that is burned and a tip rewarded to the validator.

How Ethereum and ether work

Ethereum is a distributed, global virtual machine that runs dApps and smart contracts. The network consists of nodes and a consensus mechanism that selects validators to propose and attest to new blocks. To participate as a validator, a user must lock (stake) ether as collateral; staked ether cannot be spent while locked. Validators are randomly selected to validate transactions and are rewarded with newly issued ether plus transaction tips.

Developers and the community commonly call ether “gas” because it is exchanged for the computational work required to execute transactions and smart contracts—similar to buying fuel to run a car.

Internal uses of ether

• Paying transaction fees (gas) for transfers and contract execution.
• Collateral for staking to secure the network and earn rewards.
• Incentivizing validators via issuance and tips.
• Serving as a unit of account and medium of exchange within Ethereum-based services and dApps.

Ether denominations

Ether can be divided into very small units. Common denominations include:
* Wei — the smallest unit (1 ETH = 1,000,000,000,000,000,000 Wei)
Gwei — frequently used for gas fees (1 Gwei = 1,000,000,000 Wei)
Other named units (Kwei, Mwei, Szabo, Finney) represent intermediate scales

Gas fees: what they are and who earns them

Gas fees compensate the network for processing transactions and running smart contracts. Under the current fee model, each transaction includes:
* A base fee (burned)—this portion is removed from circulation.
* A tip (priority fee)—paid to the validator who includes the transaction.

Gas fees fluctuate with network demand; they can be low when the network is quiet and rise during periods of heavy activity.

Ether vs. Bitcoin — key differences

• Purpose: Bitcoin was designed primarily as a digital store of value and a peer-to-peer payment system. Ethereum was designed as a programmable blockchain that supports dApps and smart contracts in addition to value transfer.
• Consensus collateral vs. mining: Ethereum’s security relies on validators staking ether; Bitcoin secures its network through proof-of-work mining.
• Supply policy: Bitcoin has a fixed supply cap of 21 million coins and scheduled block reward halvings. Ethereum does not have a comparable hard cap; its supply dynamics are influenced by issuance to validators and fee-burning mechanisms (e.g., EIP‑1559).
• Token role: Ether is used both as a transactional token and as collateral for consensus participation; Bitcoin is primarily used as a transactional/token asset and store of value.

Conclusion

Ether is central to the Ethereum ecosystem: it pays for computation, secures the network through staking, and acts as a tradable digital asset. While both ether and bitcoin are major cryptocurrencies, they serve different technical purposes and follow different monetary and consensus models. Understanding those differences — especially around gas, staking, and supply mechanics — is essential when comparing ETH and BTC.