Is Ethereum Money? A Guide to ETH

Ethereum used to be referred to as Bitcoin’s foremost rival, but in reality, the two cryptocurrencies serve very different purposes. Bitcoin is a decentralised, peer-to-peer payments network, designed as a store of value and an alternative to traditional fiat currencies. Ethereum, on the other hand, is a programmable blockchain that enables decentralised applications (dApps) and smart contracts, acting as an infrastructure for a new digital economy.

While Bitcoin focuses on providing secure, trustless transactions, Ethereum seeks to replace third-party internet vendors that store data, facilitate agreements, or track complex financial instruments. This difference in purpose has shaped their respective technological frameworks, adoption, and long-term potential.

What Is Ether and How Does It Work?

Ethereum relies on a native cryptocurrency called Ether (ETH). While often mistaken for Ethereum itself, Ether is the fuel that powers transactions and smart contracts on the Ethereum network.

Ether has seen massive price increases in recent years, partly due to its growing adoption in decentralised finance (DeFi) and Initial Coin Offerings (ICOs). Some even speculate that Ether could one day surpass Bitcoin as the most valuable cryptocurrency.

Despite its increasing financial use, Ether is not primarily designed as a store of value or a digital payment system. Instead, it serves as a token necessary to pay for computational resources on Ethereum’s decentralised network. This has led to Ether being described as “digital oil,” in contrast to Bitcoin’s reputation as “digital gold.”

The Role of Ether in the Ethereum Network

Ethereum operates as a global decentralised computing platform, where users have full control over their data and can build decentralised applications. Instead of relying on centralised servers, Ethereum runs on thousands of independent nodes, forming what is often called the “world computer.”

Each transaction or smart contract execution on Ethereum requires computational power, which is measured in GAS. The network charges users GAS fees to process transactions, with Ether acting as the payment method for these fees.

How is GAS Related to Ether?

GAS represents the computational effort required to process a transaction or execute a smart contract on Ethereum. The cost of GAS fluctuates based on network demand and the complexity of the transaction.

Ether itself is used to pay GAS fees, ensuring that developers and users can access Ethereum’s computational power without excessive volatility. By separating Ether from direct computational costs, Ethereum prevents sudden market fluctuations from making transactions unaffordable for developers and users.

Could Ether Be Used as a Currency?

Ether does not have a hard cap on its total supply. Instead, Ethereum’s monetary policy is evolving, particularly with the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) under Ethereum 2.0.

At present, no more than 18 million Ether can be minted per year, but with Ethereum’s upgrades, the issuance rate has been significantly reduced, making Ether more scarce over time. This has led to debates over whether Ether could function as a mainstream currency, despite originally being designed as a utility token for Ethereum’s network.

While some vendors and platforms accept Ether as payment, its primary function remains within the Ethereum ecosystem. That said, if Ether continues to appreciate and maintain lower transaction fees, it could become a more widely accepted means of exchange.

The Relationship Between Ether and ICOs

Ethereum’s role in Initial Coin Offerings (ICOs) has contributed to significant price growth over the years. Many ICOs launched on Ethereum’s network required investors to contribute Ether in exchange for new ERC-20 tokens.

This demand created a reflexive relationship where the success of ICOs drove Ether’s price higher, further increasing interest in Ethereum as a blockchain platform. The phrase “ICOs are Ethereum’s killer app” emerged to describe how Ethereum enabled the explosion of blockchain-based startups.

While the ICO boom of 2017-2018 led to regulatory scrutiny, Ethereum has since pivoted towards supporting DeFi, NFTs, and institutional blockchain solutions, proving its long-term value extends beyond fundraising.

Is Ether a Better Form of Money Than Bitcoin?

Bitcoin remains the dominant store of value in the cryptocurrency market, benefiting from its first-mover advantage, fixed supply, and widespread adoption. Ethereum, however, offers several advantages that Bitcoin lacks, making it more versatile for financial applications.

Faster Transactions

Bitcoin has an average block time of 10 minutes, meaning that transactions can take several minutes to hours to confirm, depending on network congestion. In contrast, Ethereum processes transactions within 14-15 seconds, making it far more efficient for real-time payments and smart contract executions.

The faster settlement time makes Ethereum a preferred network for decentralised applications (dApps), decentralised finance (DeFi), and NFT transactions, where speed is essential. As Ethereum continues to implement scalability upgrades, transaction speeds are expected to improve further, reducing congestion and lowering fees.

Programmable Money

Ethereum is built to support smart contracts, which are self-executing agreements that run automatically when pre-defined conditions are met. This feature allows Ethereum to serve as a foundation for decentralised finance (DeFi) applications, lending protocols, and automated agreements.

Bitcoin, on the other hand, primarily functions as a store of value and a peer-to-peer payment system, with limited programmability. While Bitcoin’s Layer 2 solutions, such as the Lightning Network, enable some additional functionality, Ethereum remains the dominant network for programmable blockchain-based applications.

Scalability Upgrades

Ethereum is undergoing major scalability improvements to enhance its transaction capacity and lower fees. Key developments include Ethereum 2.0 and Layer 2 solutions like Optimistic Rollups and zk-Rollups, which allow for faster and cheaper transactions while maintaining security.

Bitcoin, meanwhile, relies on the Lightning Network, a Layer 2 scaling solution that enables off-chain transactions for faster payments. While effective for microtransactions, Bitcoin’s flexibility in handling complex smart contract functionality remains limited compared to Ethereum’s evolving ecosystem.

Deflationary Supply Model

Ethereum’s EIP-1559 upgrade introduced a fee-burning mechanism, where a portion of transaction fees is permanently removed from circulation. This process reduces the total supply of Ether over time, making it a deflationary asset.

By contrast, Bitcoin has a fixed supply of 21 million BTC, making it inherently scarce. While Bitcoin relies on its hard cap for scarcity, Ethereum’s new model dynamically reduces supply, potentially increasing its long-term value as demand grows.

Diverse Financial Ecosystem

Ethereum has become the backbone of decentralised finance (DeFi), stablecoins, and NFT marketplaces, enabling a vast range of financial applications beyond just payments. It supports lending platforms, decentralised exchanges (DEXs), tokenised assets, and yield farming, making it a vital infrastructure for blockchain-based financial innovation.

Bitcoin, while dominant as a secure digital asset and store of value, does not offer the same level of programmability or financial application diversity. Its primary role remains a decentralised alternative to fiat currency, while Ethereum drives a broader blockchain economy that extends beyond traditional transactions.

Ethereum’s Role in Crypto

While Bitcoin remains the leading store of value, Ethereum leads innovation through smart contracts, DeFi, and NFTs.

Ether’s potential as a currency, investment, and utility token is growing as Ethereum upgrades its network. With the introduction of Ethereum 2.0 and deflationary supply mechanisms, Ether has become an increasingly valuable asset both as a means of exchange and as a long-term investment.

While it may not directly replace Bitcoin, Ethereum’s adaptability ensures that it will remain a central player in the evolving blockchain landscape.