How Ethereum Works

Ethereum uses an account-based model where each address maintains a state object containing balance, nonce (transaction counter), code hash, and storage root. State updates occur via transaction execution; validators apply transactions sequentially, modifying state merkle trees. Unlike Bitcoin's UTXO model, Ethereum's approach enables complex contract interactions and stateful computations essential for DeFi protocols.

Gas prevents network spam and allocates computational resources fairly. Each EVM operation costs a specific gas amount; complex calculations (storage writes, cryptographic functions) cost more than simple operations (arithmetic). Users set gas price in Gwei; total transaction cost = gas used × gas price. This creates economic scarcity without central pricing authority.

Token standards (ERC-20 for fungible tokens, ERC-721 for NFTs, ERC-1155 for hybrid assets) define function interfaces and event signatures. Developers build on standardized templates rather than creating custom logic, enabling interoperability across wallets, exchanges, and protocols. This standardization accelerated DeFi growth and created network effects around Ethereum.

Solana prioritizes throughput (400k TPS) via parallel processing, sacrificing decentralization. Aptos uses Move language and DAG-based execution for safety. Cosmos SDK enables app-specific chains. Ethereum emphasizes decentralization and developer familiarity; trade-off is lower baseline throughput (15 TPS L1), offset by Layer 2 scaling capturing 65%+ of activity.

Smart contracts execute deterministically during transaction inclusion; all nodes execute identically, ensuring consensus. Execution happens within single block slot; finality occurs at epoch boundaries (32 blocks, ~6 minutes). Compared to Bitcoin (10 minutes), Ethereum provides faster settlement, enabling interactive applications like decentralized exchanges and lending protocols.