Ethereum 101: How Ethereum Works
Start with a one-minute film. Then follow a digital agreement from its rules to its recorded outcome.
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Ethereum in one minute
A silent film with on-screen explanations, from digital agreements to shared settlement.
Read the transcript
- Ethereum is a shared network. Imagine courts for digital agreements.
- Agreement terms → smart contract. Precise conditions, expressed in code.
- Signing tool → wallet. Authorise an instruction.
- Authorisation → signature. Your account approves the instruction.
- Signed filing → transaction. Submit an instruction to the system.
- Applying the terms → execution. The code calculates the outcome.
- Delivery versus payment. Both digital assets move, or neither does.
- Registry offices → nodes. Independent computers check the records.
- Like certifying a record: validators propose and attest to batches.
- An accepted record → consensus. The network agrees on its history.
- Shared constitution → protocol. Common rules every office must follow.
- Local courts → L2 rollups. More activity under their own procedures.
- Shared settlement → Mainnet. Local results connect back to Ethereum.
- Constitutional amendment → protocol upgrade. Proposed, tested and adopted, not imposed.
- Outside evidence → oracle input. A source reports real-world facts.
- Code applies conditions. Evidence can still be wrong.
The court system is a teaching analogy. Ethereum runs code; it does not interpret law or settle legal disputes. Mainnet is not an appeals court, and rollup guarantees vary. Automated exchanges can reduce reliance on a counterparty, but code, evidence sources and intermediaries can still introduce risk.
The film gives us a useful starting point: a court system for digital agreements. Let's follow one agreement through it. The key difference: Ethereum applies code, rather than interpreting law.
What does Ethereum do?
It lets people run digital agreements on a shared network, with rules and records that anyone can check.
Think of the registry offices in the film. Each keeps records and checks that updates follow the same rulebook. On Ethereum, independent computers called nodes do that work. The shared rules are the protocol.
No single office controls the whole system. Anyone can use the network or build an application on it, although individual applications can set their own access rules.
Agreements become instructions the network can run.
A smart contract is a program that expresses an agreement's conditions in code. It can update balances, token ownership, and other stored information: the network's state.
An exchange that completes together.
A seller offers an asset token for payment tokens. The contract requires both transfers to succeed in the same transaction, or neither completes.
Illustrative example · Both tokens are on the same chain. Fees are separate.
The agreement's coded conditions are satisfied. Ownership and payment records change together.
If a required balance or approval is missing, the coded terms stop this exchange. Both transfers revert; processing can still incur a fee.
Contracts can also call other contracts. This lets applications combine existing services, such as an exchange and a loan, in one transaction. That ability to work together is called composability.
More about smart contracts ↗We have the agreement. Next, how do we ask the network to carry it out?
How does an agreement become a record?
Like submitting a signed filing, you send an instruction called a transaction. Here is its path on Ethereum's base network.
You sign and send an instruction.
Your wallet helps you authorize a transaction with a digital signature. For our exchange, the instruction asks the contract to transfer the tokens. The wallet is your signing tool; the assets are recorded on the network.
The instruction joins a batch.
A validator commits ETH as a financial stake to help secure the network. A selected validator proposes a batch of transactions called a block. Think of a group of filings being added to the registry for checking.
Independent computers check the result.
Nodes run the instructions and check the rules. This is execution. Our exchange completes only if the contract's conditions are met. Other validators vote on the proposed chain of blocks.
The network agrees on the history.
The rules for reaching agreement are called consensus. With sufficient validator votes, the history becomes finalized, like a certified record. Reversing it would violate consensus rules and put substantial staked ETH at risk.
Why is there a fee?
Processing a filing takes work. On Ethereum, gas measures that work, and fees on the base network are paid in ETH, Ethereum's native asset. Fees vary with demand, and a transaction that fails can still pay for the work it used.
More about transactions ↗ Gas and fees ↗That is the base network. How can the system handle more activity?
How does Ethereum make room for more activity?
The film introduces local courts: places that handle their own workload while connecting to a shared system. On Ethereum, Layer 2 rollups play that scaling role.
A rollup processes transactions on a separate network and bundles records together. It posts data and results to Ethereum's base network, Mainnet, also called Layer 1. Sharing that cost across many transactions can make using applications less expensive.
Directly on Layer 1
Mainnet processes your transaction and records the result.
Through a Layer 2 rollup
The rollup processes your transaction, then posts data and results to Mainnet.
Checks protocol rules, makes posted data available, and establishes the accepted history.
The network can check its records. What about the people and facts behind them?
What still depends on people?
A dependable record does not make every agreement dependable. The terms, the people authorized to act, and the evidence still matter.
The system can apply evidence. It cannot witness events.
Suppose our agreement changes: payment is released when a physical package arrives. Someone must report the delivery. An oracle supplies that outside information to the contract, much like evidence submitted with a filing.
Ethereum can check that the code used the report correctly. It cannot establish whether the package arrived, hear witnesses, or decide whether the agreement is fair.
For a real service, ask three questions.
- Who can act?
- Decide who can sign, control accounts, change application code, or pause the service.
- What are we relying on?
- Check the contract, outside data, and any intermediaries. Decide when a transaction counts as settled for your service.
- What happens if something goes wrong?
- Plan for lost keys, unavailable operators, withdrawals, and disputes outside the network.
Ethereum provides shared rules, programmable agreements, and a history people can verify. Applications bring those pieces together, and people remain responsible for the services built with them.
Optional: explore the technical details
Applying the terms and accepting the record: why two jobs?
Applying an agreement and establishing the accepted record are related jobs. On Ethereum, execution computes what an instruction does; consensus establishes which history the network agrees on. Nodes run software for both. Validators additionally propose blocks and vote.
Separating these jobs lets different software implementations check the same rules. No participant gets to make an exception just because it operates a node.
Source: Node architecture ↗How can a local result be checked?
In the analogy, a local result could come with a defined challenge procedure or evidence that can be checked directly. Optimistic rollups use a challenge period; ZK rollups supply a cryptographic validity proof. Both are software mechanisms, not judicial review.
A sequencer resembles the filing clerk: it orders a rollup's transactions and can acknowledge them early. That acknowledgement, acceptance on L1, and withdrawal are separate milestones.
Optimistic rollups ↗ ZK rollups ↗Who assembles and publishes the batches?
- Transactions
- Builder
- Relay
- Proposer
- Independent verification
Think of separate roles for assembling a batch, carrying a sealed offer, and publishing it. In the external MEV-Boost route, builders assemble blocks, relays mediate their exchange, and the selected validator proposes a block. A proposer can also build locally. Searchers may supply bundles to builders.
Transaction ordering can affect economic outcomes. Separate who orders transactions from who verifies them, and evaluate concentration and censorship risks. The proposer does not finalize a block alone.
Source: Block building and MEV ↗What makes the record-keepers accountable?
The offices do not simply take one another's word for the record. Nodes independently check updates. Validators also put ETH at economic risk: rewards and penalties influence their behaviour, and some consensus violations can destroy part of their stake. This is protocol accountability, not a professional licence or legal sanction.
Smart contracts make state programmable, and the base network operates continuously. Institutions still need to evaluate custody, privacy, access, and recovery at the application layer.
Source: Proof of stake ↗How does the shared constitution change?
The film compares a protocol upgrade to amending a shared constitution. Ethereum changes are proposed, debated, implemented, tested, and adopted through coordination. No single office can impose new rules on the whole network. A proposal is not a shipping commitment.
Explore the Ethereum Atlas → See the EIP Matrix → Ethereum roadmap ↗