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This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.
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Ethereum was a game-changer in blockchain protocol development in many ways. It created the first general-purpose blockchain network on which any type of smart contract could be easily developed at the application layer. It also transitioned from Proof-of-Work to Proof-of-Stake, paving the way toward a more modular blockchain architecture. Ethereum’s system architecture has been subject to both criticism and mimicry over the years, inspiring many other blockchain networks to create similar smart contract infrastructures or complementary Web3 protocols that meet the needs of increasingly complex decentralized applications.
Ethereum was conceptualized by Vitalik Buterin with the idea of expanding the capabilities of the Bitcoin protocol with a more versatile scripting language, which would allow the development of any type of decentralized application beyond currency transfers. The first version of the Ethereum white paper, titled “Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform,” was written and circulated by Vitalik Buterin around November 2013. This document was shared privately with a small group of early crypto enthusiasts and developers to gather feedback. It laid out the core vision for Ethereum as a general-purpose blockchain with a built-in Turing-complete programming language to support a wide range of decentralized applications. Vitalik publicly presented the Ethereum concept at the Bitcoin Miami conference in January 2014, helping to attract attention from potential collaborators and early contributors like Gavin Wood, who authored the Ethereum Yellow Paper that was published in April 2014. This yellow paper was a more formal technical specification that defined the Ethereum Virtual Machine and gave developers the low-level blueprint for how the network would function. A final version of the white paper, dated December 2014, is referenced on Ethereum’s official website. This version consolidated and clarified earlier drafts.
Unlike Bitcoin—which was launched by an anonymous creator without a formal fundraising process and was developed solely through voluntary code contributions—Ethereum’s development was funded through a token sale later in 2014, in which 18 million USD paid in BTC were raised. In this process, approximately 60 million ETH were issued and sold to investors. An additional 12 million ETH were issued and allocated to early project contributors and the Ethereum Foundation, which was established as a non-profit organization to manage the raised funds and oversee protocol development. The funds were used to pay developers and for other necessary operations. The network was launched on July 30, 2015, with the release of the Frontier version. This marked the beginning of Ethereum as a live blockchain network.
From a technical perspective, Ethereum was significant as it was the first general-purpose blockchain network that allowed smart contracts to be created with just a few lines of code—eliminating the need for developers to build their own special-purpose blockchain infrastructure from scratch. Over the years, the Ethereum ecosystem has contributed a considerable amount of innovation to the crypto space at both the protocol and application level. Ethereum developers also created the first token templates for various types of token contracts. This sparked a wild west period of peer-to-peer fundraising where people would use the Ethereum infrastructure to issue their tokens and sell them to crowd-investors, which in turn incubated many Web3 projects, some of which have profoundly shaped the crypto landscape. Ethereum also spurred innovation in non-fungible tokens and decentralized financial applications and played a key role in the evolution toward a modular blockchain architecture.
The concept of smart contracts, consensus mechanisms, and the evolution of scaling solutions were already discussed in previous chapters of this book. This subchapter summarizes the general concepts of Ethereum's technical, economic, and social design that were not previously discussed. It also describes how the system architecture transitioned over time.
Network stakeholders: From a socio-economic perspective, the Ethereum network is complex and dynamic with a vibrant and diverse ecosystem of independent stakeholders that have driven its evolution over the years. Vitalik Buterin, the living founder, continues to play a pivotal role in shaping Ethereum’s vision. Other key players include core developers, such as those employed or contracted by the Ethereum Foundation, as well as independent client developers, wallet developers, and applications developers. Full node and staking node operators secure the network under Proof-of-Stake and are incentivized to do so with newly minted protocol tokens. Layer 2 solution providers, other Web3 protocols competing or interacting with Ethereum, as well as investors and users all influence the platform’s robustness and market dynamics. External policymakers also influence the ecosystem by shaping the legal and regulatory framework governing ETH as an asset class, which in turn affects its adoption and the long-term viability of its economic system.
Ethereum Virtual Machine (EVM): From a technical perspective, Ethereum was a game-changer because it merged the concept of a virtual machine with P2P networks, which enabled the decentralized processing of much more complex applications beyond currency transfers. Virtual machines are software-based emulations of physical computers, serving as isolated environments to run software on a physical server. Before Ethereum, virtual machines were primarily used for cloud computing, software testing, and enterprise virtualization, but only in centralized environments. Ethereum introduced a decentralized virtual machine that operates across thousands of independent network nodes. This decentralized execution allows smart contracts to be securely and consistently executed by all network participants without relying on a central server. Unlike Bitcoin, which only supports predefined operations through its limited scripting language, Ethereum’s EVM enables general-purpose computation, making it the foundation for much more complex and versatile decentralized applications. Over time, the EVM’s capabilities have been continuously improved to enhance performance, security, and user-friendliness.
Turing completeness: The Ethereum Virtual Machine is designed to be “Turing-complete,” meaning developers can write code capable of executing a broad range of computational tasks. Turing-complete programs can theoretically solve any problem that a traditional computer can solve, given sufficient time and resources. In the context of blockchain networks, Turing completeness enables the execution of complex smart contracts that automate conditional logic, loops, and other programmatic behaviors essential for decentralized applications. However, more complex contracts require more network resources from node operators to execute. Bitcoin, by contrast, is not Turing-complete. Its scripting language is intentionally limited to ensure predictability and security, reflecting its narrower goal of facilitating P2P currency transfers.
EVM-compatible networks are blockchain networks that are designed to be compatible with the Ethereum Virtual Machine. This means that they can execute Ethereum-based smart contracts and run decentralized applications in the same way that Ethereum does. The primary reason for a blockchain protocol to be EVM-compatible is to leverage Ethereum's developer tools, existing codebase, and the vast ecosystem of decentralized applications. EVM-compatible networks can easily port over Ethereum-based projects, reducing the friction of application developers of building on a new blockchain infrastructure. Ethereum, on the other hand, benefits from interoperability with these networks, the more networks choose to be EMV-compatible, ensuring a steady demand for network resources and including the protocols currency ETH. These network effects also benefit Layer 2 solutions and dapp development. While in early years, many new blockchain networks chose to be EVM-compatible, in recent years the rise of non-EVM blockchain networks have diverted some attention and resources away from Ethereum.
Network currency (ETH): The native token, ETH, is the primary currency of the Ethereum network. Similar to Bitcoin, the protocol uses newly minted ETH to reward node operators for providing security services by verifying transactions and executing smart contracts. Users also need ETH to pay for network services each time they interact with an Ethereum-based application. However, while Bitcoin prices transactions based on their size in bytes, Ethereum prices transactions according to the exact computation required, since the cost of using network services can vary greatly depending on the complexity of the executed tasks. Simple token transfers consume fewer resources than complex operations involving one or multiple smart contracts.
Unit of Account (gas): To account for these differences, Ethereum introduced a unit of account referred to as “gas,” which measures the computational steps required to execute a transaction or contract. The total cost of an operation is calculated as “Gas Used” multiplied by “Gas Price.” Gas prices are denominated in gwei, where 1 gwei equals one-billionth of an ETH. Gas and gwei are not currencies themselves but units of measurement used to price computational effort—similar to how kilowatt-hours measure electricity usage and are priced in a local currency—making them essential for ensuring that users pay proportionally for the resources they consume. The gas mechanism also plays a crucial role in protecting the network from denial-of-service attacks. Without network costs, malicious actors could flood the network with computation-heavy transactions, potentially overloading the system. By requiring gas fees, Ethereum ensures that every computation has a cost, which discourages abuse and promotes fairness in the use of network resources.
Gas limit: When interacting with a smart contract, users must set a gas limit, which is the maximum amount of gas they are willing to allow the Ethereum Virtual Machine to consume during execution. If the gas limit is set too low, the EVM halts the operation once the gas runs out, reverts all changes made during the transaction, but still charges the user for the gas that was consumed up to that point. The gas limit is a critical safeguard because Ethereum smart contracts are Turing-complete—meaning they can, in theory, run forever if not properly constrained. To prevent this kind of “runaway computation,” Ethereum requires users to explicitly define how much computational effort they are willing to pay for. By imposing a gas limit, the network ensures that all computations eventually stop, even if the logic in a smart contract is flawed. While the gas limit sets a cap on resource usage, the gas price determines how much the user is willing to pay per unit of gas.
Gas wars & gas prices: Each block also has a block gas limit, which is the maximum amount of computation (gas) that can be included in a single block. This limit is what causes transactions to compete for space when demand is high. Users can choose how much they are willing to pay per unit of computation, which helps validators decide which transactions to include in the next block. Users who offer higher gas prices (not higher gas limits) can prioritize their transactions by making them more appealing to validators who process them in exchange for fees. When many users try to get their transactions processed at the same time, this can lead to a “gas war,” where users compete by offering higher gas prices to prioritize their transactions. In the early years of Ethereum, users sometimes paid several times the average fee just to get included in the next block during peak demand, effectively outbidding one another for faster processing. Gas wars still occur during periods of extreme network congestion. However, recent protocol upgrades such as EIP-1559, which introduced a base fee mechanism, have helped reduce their frequency and intensity. Under EIP-1559, users can also include a small ‘tip’—called a priority fee—to further incentivize validators to include their transactions quickly.
Gas-fee burden: Having to think about gas fees when using a decentralized application complicates usability. To reduce the burden of gas fees on users, many dapp developers have implemented various solutions, such as meta-transactions. In this model, a third party—typically the dapp operator—covers the gas fees and submits the transaction on behalf of the user, allowing the user to interact with the dapp without needing to hold ETH or understand gas mechanics. Another approach involves gas tokens, which allow users to pre-purchase and store gas at lower prices during periods of low network demand, then redeem them during high congestion to save on fees. Most gas token mechanisms have become obsolete due to protocol changes such as EIP-2929, which made gas refunds less favorable. Both methods aim to simplify the user experience by abstracting away the complexity and unpredictability of gas pricing, while still enabling interaction with decentralized applications. On a technical level, developers can furthermore adopt gas-efficient coding practices by optimizing smart contract logic to minimize computational steps and storage operations—reducing overall transaction costs. Layer 2 scaling solutions—such as rollups—have been another way to reduce the gas fee burden by processing data off-chain on more scalable and cheaper networks, settling only the final results on Ethereum’s mainchain.
Monetary policy of ETH: Unlike Bitcoin, Ethereum does not have a hard cap on its total supply of ETH. Its monetary policy is flexible and can be adjusted through Ethereum Improvement Proposals (EIPs) and on-chain governance by the Ethereum community. The total supply of ETH in circulation can be calculated by the sum of all pre-issued ETH allocated at project genesis and all newly issued ETH since the network launched. Approximately 72 million ETH were pre-mined before Ethereum went live in 2015, distributed to early contributors, the Ethereum Foundation, and crowdsale participants. Following the launch, ETH issuance occurred through block rewards—initially under a Proof-of-Work consensus mechanism. The Proof-of-Work block reward began at 5 ETH per block, later reduced to 3 ETH (in 2017 via EIP-649) and then to 2 ETH (in 2019 via EIP-1234) to moderate inflation. With Ethereum’s transition to Proof-of-Stake, completed in September 2022, issuance mechanics changed significantly. There is no longer a fixed block reward. Instead, ETH issuance now depends on the total amount of ETH staked: the more ETH is staked, the higher the aggregate issuance, though returns per validator decrease proportionally. Currently, the average reward per block proposer is estimated between 0.1 and 0.3 ETH, but this amount fluctuates based on staking participation and network conditions. In addition to the drop in issuance, EIP-1559, introduced in August 2021, fundamentally changed Ethereum’s fee model by introducing a base fee burn mechanism. With each transaction, a portion of the fee (the base fee) is permanently burned, reducing the total ETH supply. When network activity is high and burned fees outpace new ETH issuance, Ethereum becomes deflationary—a dynamic made possible by the combination of Proof-of-Stake and EIP-1559. As a result, Ethereum’s monetary policy is now shaped by both validator-driven issuance and usage-driven fee burns, resulting in a flexible but increasingly deflationary supply model. At the time of writing, the total ETH supply is approximately 120.52 million.
Application tokens: In addition to its network currency ETH, the Ethereum infrastructure allows anyone to issue and distribute their own application token via smart contracts (aka token contracts). At the time of writing this book and since the network went live, over 1.5 million different application tokens have been issued over the Ethereum network. Their use cases can vary greatly—from stable tokens to crypto-collectibles, tokenized art, tokenized real estate, tokenized KWh, tokenized entry tickets, tokenized driver's licenses, to purpose-driven tokens that incentivize protocol contributions. The technical, economic, legal, and ethical aspects of various token use-cases as well as their design, issuance, and distribution—are discussed in greater detail in part two and part three of this book.