Ethereum Core Concepts

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Understanding the foundational elements of Ethereum is essential for anyone diving into blockchain development, decentralized applications (DApps), or smart contract programming. This guide breaks down the core concepts of Ethereum in a clear, structured way—perfect for developers, enthusiasts, and newcomers alike.

What Is Ethereum and How Does Web3 Architecture Work?

Ethereum is a decentralized platform built on blockchain technology that enables the creation and execution of smart contracts and decentralized applications (DApps). Unlike traditional web applications that rely on centralized servers (client-server architecture), DApps operate on a peer-to-peer network of nodes.

In conventional apps like Alibaba or JD.com, all data is stored and managed by a central authority. With Ethereum-based DApps, users retain control over their data via digital wallets, while the backend logic runs on immutable smart contracts deployed across the blockchain. When a user initiates an action (called a transaction), it’s broadcasted to the entire network. Only after consensus is reached among nodes is the transaction confirmed and recorded.

This shift from centralized trust to decentralized consensus forms the backbone of Web3—the next evolution of the internet.

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Smart Contracts: The Engine Behind DApps

Smart contracts are self-executing programs running on the Ethereum blockchain. They contain both code and data, with the data representing the contract’s current state. Despite the name, "smart" doesn’t imply artificial intelligence—it refers to automated enforcement of predefined rules without intermediaries.

Originally conceptualized by Nick Szabo, smart contracts translate legal agreements into executable code, aligning perfectly with blockchain’s tamper-proof nature.

Ethereum’s smart contracts are Turing-complete, meaning they can theoretically perform any computation given enough resources. The two primary languages used are Solidity (most widely adopted) and Vyper. Solidity files use the .sol extension.

Here’s a basic example—a counter contract:

pragma solidity ^0.8.0;

contract Counter {
    uint counter;

    constructor() {
        counter = 0;
    }

    function count() public {
        counter += 1;
    }
}

This contract maintains a counter state variable. Each time count() is called, the blockchain state updates—increasing the counter by one. This change is permanent and verifiable by anyone on the network.

Ethereum Accounts: EOAs vs Contract Accounts

Every interaction on Ethereum involves accounts. There are two types:

  1. Externally Owned Accounts (EOAs) – Controlled by private keys (i.e., users). These can initiate transactions.
  2. Contract Accounts (CAs) – Controlled by code. They cannot start actions but respond to incoming messages.

Both account types share the same 20-byte hexadecimal address format: 0xea674fdde714fd979de3edf0f56aa9716b898ec8.

Key difference:

Only EOAs can originate transactions—and they must pay gas fees for all operations.

Contract accounts are created when a deployment transaction executes, and their addresses are derived from the creator’s address and nonce (transaction count).

Account State: The Four Components

Each Ethereum account has four key state components:

The global Ethereum state is essentially a mapping between account addresses and their respective states, maintained in the blockchain’s state tree.

Ether (ETH): The Native Cryptocurrency

Ether (ETH) is Ethereum’s native currency, used to pay for transaction fees and computational services. It comes in various denominations named after pioneering cryptographers:

Conversion:

1 ether = 10^18 wei  
1 ether = 10^9 Gwei  
1 ether = 1,000 finney

Developers often work in Gwei when setting gas prices, while users typically transact in ETH.

Ethereum Virtual Machine (EVM): The Global Computer

The EVM is a runtime environment where all smart contracts execute. It's a stack-based virtual machine designed specifically for blockchain operations.

When a contract runs:

The EVM ensures isolation and security—malicious code can't crash the system due to gas limits. Every operation consumes gas, preventing infinite loops and resource abuse.

Think of the EVM as a decentralized CPU shared across thousands of nodes worldwide—executing code exactly as written.

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Ethereum Clients: Connecting to the Network

An Ethereum client is software that allows a device to join the network as a node. Clients handle transaction processing, block validation, and smart contract execution.

There are two layers:

Geth is widely used due to strong community support and comprehensive documentation.

Most users don’t run full nodes due to hardware demands. Instead, they use third-party node providers like Infura or Alchemy—though direct node operation offers greater privacy and reliability.

Wallets: Your Gateway to Ethereum

Wallets don’t store funds—they manage cryptographic keys that prove ownership of assets on-chain.

Types:

Wallets allow you to:

Always keep your seed phrase offline and never share it.

Gas Mechanism: Paying for Computation

Gas measures the computational effort required to execute operations on Ethereum.

Key terms:

If a transaction runs out of gas, it fails—but fees are still charged. Any unused gas is refunded.

Example:

{
  "to": "0x...",
  "value": 0.001,
  "gas": 21000,
  "gasPrice": 20000000000
}

This mechanism protects the network from spam and ensures fair resource allocation.

Types of Ethereum Transactions

There are three main transaction types:

  1. Regular Transfer – Sending ETH between accounts

    {
  "to": "0x687422eEA2cB73B5d3e242bA5456b782919AFc85",
  "value": 0.0005,
  "data": "0x"
}

  2. Contract Creation – Deploying new smart contracts (to field is empty)

    {
  "to": "",
  "value": 0,
  "data": "0x6060604052..."
}

  3. Contract Interaction – Calling functions on existing contracts

    {
  "to": "0x687422eEA2cB73B5d3e242bA5456b782919AFc85",
  "value": 0,
  "data": "0x06661abd"
}

The data field encodes function calls using ABI (Application Binary Interface), specifying which method to invoke and its parameters.

Frequently Asked Questions

Q: Can a contract initiate a transaction?
A: No. Only externally owned accounts (EOAs) can create transactions. Contracts respond to incoming messages.

Q: What happens if I set too low a gas limit?
A: The transaction will fail with an “out of gas” error. The state reverts, but you still pay for computation used.

Q: Is Ether needed in a contract account?
A: Yes. Contracts may need ETH to call other contracts or send payments. They receive ETH via transactions or function calls.

Q: How do wallets interact with DApps?
A: Wallets inject a Web3 provider into the browser, allowing DApps to request signatures and read account data securely.

Q: Why is Gwei important?
A: Gwei determines how fast your transaction gets processed. Higher Gwei = higher priority in miners’/validators’ queues.

Q: Can I run my own Ethereum node easily?
A: While possible, it requires significant storage and bandwidth. Most developers start with services like Alchemy before self-hosting.

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By mastering these core concepts—accounts, gas, EVM, clients, wallets, and transactions—you lay a solid foundation for building and interacting with decentralized systems. Whether you're aiming to develop DApps or simply understand how blockchain works under the hood, Ethereum offers a powerful and transparent framework rooted in code-based trust.

Keywords: Ethereum, smart contracts, EVM, gas mechanism, blockchain development, decentralized applications, ETH, Web3