Ethereum is more than just a cryptocurrency—it's a decentralized platform that powers a new generation of applications without central control. If you’ve heard the name but aren’t sure what Ethereum actually does or how it works under the hood, you're not alone. This guide breaks down the inner mechanics of Ethereum in clear, approachable language—no advanced math or coding required.
Whether you're a curious beginner or someone looking to deepen your understanding, this article will walk you through Ethereum’s core components: from blockchain fundamentals and account types to gas, transactions, mining, and smart contract execution—all while maintaining technical accuracy and readability.
What Is a Blockchain?
At its core, Ethereum is a cryptographically secure transactional singleton machine with shared state. That’s a mouthful, so let’s break it down:
- Cryptographically secure means security is enforced through complex mathematical algorithms. Think of it like a digital fortress—tampering with data (e.g., forging transactions) becomes practically impossible.
- Transactional singleton machine implies there's only one source of truth. Every node on the network agrees on the same global state.
- Shared state means this single state is publicly accessible and synchronized across all participants.
This structure ensures trustless peer-to-peer interactions—no intermediaries needed.
Ethereum as a State Machine
Ethereum operates as a transaction-based state machine. It starts from an initial "genesis state" where no transactions have occurred. Each valid transaction triggers a transition to a new global state.
Transactions are grouped into blocks, forming a chain where each block references its predecessor. For a state change to occur, transactions must be verified—a process known as mining.
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Mining involves nodes (computers) competing to solve a cryptographic puzzle using computational power. The first miner to validate a block broadcasts it to the network along with a proof-of-work (PoW)—a mathematical guarantee of legitimacy.
The winning miner receives a reward in Ether (ETH), Ethereum’s native cryptocurrency. This incentivizes participation and secures the network.
But what prevents multiple competing chains from forming?
Preventing Chain Forks with GHOST Protocol
When multiple valid blocks emerge simultaneously, a fork occurs. To maintain consensus, Ethereum uses the GHOST (Greedy Heaviest Observed Subtree) protocol, which selects the path with the most accumulated computational effort.
In practice, this means choosing the chain with the highest total block difficulty. Longer chains reflect more work invested, making them the authoritative version of history.
This mechanism ensures network-wide agreement on the current state—critical for preventing double-spending and preserving integrity.
Ethereum’s Core Components
Let’s dive deeper into Ethereum’s foundational elements:
Accounts
Ethereum’s global state consists of accounts, each identified by a 20-byte address. There are two types:
- Externally Owned Accounts (EOAs)
Controlled by private keys. Used to send transactions. - Contract Accounts
Governed by code. Automatically execute logic when triggered.
Key Differences
- EOAs can initiate transactions; contract accounts cannot act autonomously.
- Transactions from EOAs to contracts trigger code execution (e.g., transferring tokens, updating storage).
- All actions on Ethereum originate from externally owned accounts.
Account State
Each account has four fields:
- Nonce: Transaction count (EOA) or contract creation count (contract).
- Balance: ETH balance in Wei (1 ETH = 10¹⁸ Wei).
- Storage Root: Hash of a Merkle Patricia tree storing contract data.
- Code Hash: Hash of EVM bytecode (empty for EOAs).
The World State: Merkle Patricia Trees
The global state maps addresses to their account states using a Merkle Patricia Tree—a cryptographic data structure that enables efficient verification.
Each block header includes three such trees:
- State Tree: Current state of all accounts.
- Transaction Tree: All transactions in the block.
- Receipts Tree: Results of transaction execution.
This design allows light clients (nodes that don’t store full blockchain data) to verify specific information using Merkle proofs—a compact set of hashes proving data inclusion without downloading everything.
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Gas and Transaction Fees
Every operation on Ethereum costs gas, a unit measuring computational effort. Users set:
- Gas limit: Maximum gas they’re willing to spend.
- Gas price: Amount of ETH per gas unit (measured in gwei).
For example:
50,000 gas × 20 gwei = 0.001 ETH
Unused gas is refunded. If execution exceeds the limit, the transaction fails, state reverts, and consumed gas isn’t returned.
Why Gas Exists
- Prevent Spam: Stops malicious actors from overloading the network.
- Mitigate Infinite Loops: Ethereum is Turing-complete, meaning smart contracts can loop indefinitely. Gas ensures halting.
- Fair Resource Allocation: Computation and storage cost money—just like real-world resources.
Even storage incurs fees. However, clearing storage generates refunds—a design choice encouraging efficient data use.
Transactions and Messages
Ethereum transitions states via transactions, cryptographically signed instructions from EOAs.
Two types:
- Message Calls: Transfer value or trigger contract functions.
- Contract Creations: Deploy new smart contracts.
All transactions include:
nonce,gasPrice,gasLimitto(recipient),value(amount in Wei)data(input for contracts),v/r/s(signature)
Contracts communicate via internal messages—virtual transactions not stored on-chain. These inherit the original sender’s gas limit and enable complex interactions (e.g., one contract calling another).
Blocks and Their Structure
Blocks bundle transactions and include:
- Block header
- List of transactions
- Ommer (uncle) block headers
What Are Ommers?
Due to Ethereum’s fast ~15-second block time, orphaned blocks (“ommers”) are common. To reduce waste, miners can include recent ommers (up to 6 generations back) and earn partial rewards.
This boosts security and decentralization by rewarding otherwise discarded work.
Block Header Fields
The block header contains metadata critical for validation:
parentHash: Links to previous block.stateRoot,transactionsRoot,receiptsRoot: Merkle roots.difficulty,number,gasLimit,gasUsedtimestamp,nonce,mixHash
These ensure immutability, traceability, and consensus.
Transaction Execution Process
When a transaction is processed:
- Pay upfront cost; increment sender’s nonce.
Execute operations while tracking:
- Self-destructed accounts
- Logs
- Refund balance (for freed storage)
Finalize:
- Return unused gas and refunds
- Reward miner
- Update block gas counter
- Delete self-destructed accounts
Smart contract creation runs initialization code (init). On failure, state rolls back—but sent ETH is returned.
Message calls pass input data and may return output data. Prior to the Byzantium update, out-of-gas errors consumed all gas. Now, the REVERT opcode allows graceful failure with gas refund.
Inside the Ethereum Virtual Machine (EVM)
The EVM executes all transactions. It’s:
- Turing-complete but gas-limited
- Stack-based (256-bit items, max 1024 depth)
- Equipped with memory (volatile) and storage (persistent)
Developers write contracts in high-level languages like Solidity, compiled into EVM bytecode.
Execution begins with empty stack/memory and PC=0. Each step consumes gas until:
- Success: Output generated, state updated
- Failure: State reverted, gas lost (unless
REVERTused)
Mining and Proof-of-Work (PoW)
Ethereum uses Ethash, a memory-hard PoW algorithm designed to resist ASIC dominance.
Miners:
- Generate a per-block “seed”
- Create a lightweight cache and large dataset (DAG)
- Use DAG to compute
mixHashuntil it meets difficulty target
High memory requirements prevent large-scale centralization, promoting fairer mining access.
PoW secures the chain by making chain rewrites computationally prohibitive—requiring over 51% of network hash power.
It also distributes ETH rewards:
- Base block reward (currently 3 ETH post-EIP-649)
- Gas fees from included transactions
- Uncle inclusion bonuses
However, Ethereum is transitioning to Proof-of-Stake (PoS) for greater scalability and energy efficiency—a shift explored in future discussions.
Frequently Asked Questions
What is the difference between Bitcoin and Ethereum?
Bitcoin focuses on peer-to-peer digital cash. Ethereum extends this by enabling programmable logic via smart contracts—supporting decentralized apps (dApps), NFTs, DeFi, and more.
Can smart contracts run forever?
Technically yes—but every operation consumes gas. Infinite loops will eventually halt when gas runs out, ensuring network safety.
Why do I need gas to send ETH?
Gas covers computational resources used to validate and record your transaction. It prevents spam and ensures fair usage of network capacity.
How are new ETH created?
New ETH is minted as block rewards for miners (or validators in PoS). This issuance decreases over time through protocol upgrades like EIP-1559 and the transition to PoS.
What happens if I lose my private key?
Losing your private key means losing access to your account—there's no recovery mechanism. This underscores the importance of secure key management.
Is Ethereum switching from PoW to PoS?
Yes. The merge has already occurred, ending energy-intensive mining and replacing it with staking-based validation—improving sustainability and scalability.
Ethereum represents a paradigm shift in how we think about trust, ownership, and computation. By combining blockchain security with programmability, it opens doors to a decentralized future—one transaction at a time.