How Ethereum REALLY Works in 2026

Added: 2026-05-23

[00:00:00]Even if you've only been in crypto for 5 minutes,  you'll have heard of Ethereum. But not everyone understands what it is, how it works, how much  it's changed in recent years, or why it's the second largest crypto after Bitcoin. So today,  we're going to look at everything you need to know to understand Ethereum as it stands in 2026.  My name is Guy and this is the coin bureau. Okay, let's start of all places from the beginning.  Ethereum was created by Vitalic Buterin, one of eight co-founders. Yes, eight. It was  founded in 2013 and officially launched in 2015.

[00:00:45]And its goal wasn't to replace money, but  to act as a global decentralized computer, enabling functions and decentralized applications  or DAPs that just aren't possible on the Bitcoin network. Like Bitcoin though, Ethereum originally  launched as a proofof work blockchain with miners earning the network's native coin, ETH. However,  in 2022, Ethereum transitioned to proof of stake.

[00:01:14]Now in simple terms this means the network is  now secured by validators instead of miners.

[00:01:22]And incidentally this is also where ETH gets  its value. Validators secure the network by locking up or staking ETH. In return they  earn a yield on that staked ETH along with network fees for validating transactions. In  short, Ethereum's native asset, ETH, is used to secure the network itself. ETH is also used  to pay gas fees, run smart contract functions, and of course, send money to other users. On  top of that, a small amount of ETH is burned, that is removed from circulation with every  transaction, making it a scarcer asset over time.

[00:02:03]We'll come back to Ethereum's transactions and  smart contracts in just a moment, though. Now, originally, Ethereum ran as a single blockchain,  handling everything on that one chain. Over time, though, it became clear it had hard  scalability limits. The more people used it, the slower and more expensive it became. So to  solve this, other blockchains were built on top of Ethereum's mainet, known as layer 2s or L2s.  These layer 2s were developed to help process Ethereum transactions off-chain or semioffchain  while still inheriting Ethereum security. Now, layer 2s dramatically reduce fees, increase  throughput, and enable realworld apps to actually function at scale without sacrificing  decentralization on the Ethereum mainet. Today, there are dozens of layer 2 blockchains, each with  their own capabilities. As a result, Ethereum is now best understood as a layered network made up  of mainet, layer 2s, wallets, validators, bridges, and DAPs. Each component has its own role, but  how they work together is what makes Ethereum the largest ecosystem in crypto. So that's Ethereum  in a nutshell. But how does it actually work? To refresh your memory, Ethereum is essentially a  shared global computer. It's not owned by a tech giant, government, or indeed any other single  entity. Anyone with an internet connection can access it and no one can switch it off or control  it. When you interact with Ethereum, you're sending instructions to this global computer and  paying for them to be processed. That payment is made in ETH. Ethereum's aforementioned native  currency, and ETH is essentially the fuel that powers the entire ecosystem. Every time you send  a transaction, swap tokens, or use an application, you pay a small fee in ETH. These fees are called  gas, and they reflect how much computational work your transaction requires. Now, remember how I  said that Ethereum was slow and expensive. Well, to some extent, that is still true. The  good news, though, is that fees have dropped dramatically since the early days. As I record  this, the average transaction fee on the Ethereum mainet is around40, which is nothing compared to  what it used to be. During the 2021 bull market, paying close to $100 just to swap some tokens  wasn't unusual. And yes, I am serious. Still, 40 cents is pretty high compared to many other  blockchains, which is why most people prefer using layer 2 networks where fees can be just a fraction  of a cent. But you might be wondering why gas fees exist at all. Well, without gas, the network  would be vulnerable to spam, infinite loops, and resource abuse, all of which could cause major  congestion and ultimately network failure. So think of gas as an economic guardrail that keeps  the global computer running. You want to run code, you pay for it. You want to run more complex code,  you pay more. Simple as that. Now to interact with Ethereum, you need a wallet which holds the  private keys proving you control a specific address. Broadly speaking, wallets fall into two  categories, hot and cold. Hot wallets are usually apps or browser extensions. They're normally  free, but they stay connected to the internet at all times, so they are more exposed to potential  hacks and exploits. That's why cold wallets are arguably the better solution in many cases. These  are hardware devices that keep your private keys safely offline, protecting against those same  risks. Yes, you have to pay for one, but they're not very expensive and are probably the best  investment you'll make throughout your crypto journey. Think of the cost as an insurance policy  worth every penny. The real magic of Ethereum, though, is smart contracts. In a nutshell, smart  contracts are self-executing bits of code that run on Ethereum automatically without human  intervention. There's no company processing your request and no employee clicking approve,  just code that runs without question. Now, smart contracts enable something awesome called  decentralized finance or DeFi. DeFi lets you do many of the same things you'd expect from a  centralized exchange, but without the middleman.

[00:06:50]So instead of sending your tokens to an  exchange, trusting them with your funds, and waiting for them to process your trade, a  smart contract handles everything in a single transaction. If the necessary conditions  aren't met, then nothing happens and your funds are returned. If those conditions are met,  however, the transaction executes. Either way, counterparty risk is massively reduced. In any  case, Ethereum may be slower and more expensive than most, but it's also the most secure smart  contract blockchain out there. Its capabilities are second to none, and the fact that it's never  suffered a major outage since launching in 2015 says a lot. That's more than you can say for many  of its competitors. Now, Ethereum's strong track record is exactly why it's home to a massive chunk  of the DeFi ecosystem. a huge number of stable coins and the largest share of the broader crypto  market. Even with growing competition, there's no sign of it being overtaken anytime soon. And by  the way, if you want to keep up with the crypto market as these chains compete, then you should  sign up for the Coinb's weekly crypto newsletter.

[00:08:06]That's where our research team breaks down the  biggest stories shaping the crypto market and highlights key catalysts for the week ahead. And  best of all, it's completely free. Hey, what's not to love? So, sign up today using the link below  or by scanning the QR code on screen now. Okay, I want to pick up on something I mentioned  earlier. One of Ethereum's biggest problems has always been scalability since it's historically  been slow and expensive. Ironically, this is a result of Ethereum's own success. As more crypto  projects and tokens have launched on the network, more users have been attracted worldwide. As a  result, each user is effectively competing against other users to have their transactions approved by  validators. However, only so much transaction data can fit into one block. So, these blocks start  to back up. This creates long transaction cues.

[00:09:04]Hence why Ethereum is slow. And the only way to be  prioritized is to pay more for gas fees. Hence why Ethereum is expensive. But here's the problem.  Every blockchain has three major focus points: security, decentralization, and scalability.  The catch is that it's impossible for all three of these things to thrive at the same time. It's  something that Ethereum creator Vitalik Berin has dubbed the blockchain trillemma. and Ethereum is  no exception. For context, Ethereum is extremely decentralized with hundreds of thousands of  validators globally. This also makes it secure since it would be very difficult for attackers  to manipulate those validators. However, having a system spread across so many machines also  leads to slower performance. Decentralization, check. Security, check. Scalability, well, not  so much. So, how do you scale a decentralized network without making it less decentralized?  Well, Ethereum's answer is roll-ups. Here's how they work. Instead of executing every transaction  directly on the Ethereum mainet, a rollup takes a large batch of transactions, processes them as one  rolledup transaction on its own separate network, then posts a summary back to Ethereum. This way,  the Ethereum mainet, the layer 1, doesn't need to verify every individual transaction. It just needs  to confirm one transaction summary. This also makes layer 2 transactions much faster and cheaper  than they are on the layer 1. Notably though, layer 2 blockchains inherit their security from  Ethereum. So, it's the best of both worlds. Now, there are lots of layer 2 out there, and each  one works differently. Broadly speaking though, there are two main types. Optimistic roll-ups and  zero knowledge or ZK roll-ups. Optimistic roll-ups like arbitum and base are optimistic because they  assume transactions are valid by default and only run a verification process if someone raises a  challenge within a set window. ZK rollups like ZKSync and Starknet take a different approach,  generating a cryptographic proof for each batch of transactions that confirms they were executed  correctly. Ethereum doesn't need to check each transaction one by one. It just verifies this  single proof along with a small summary of the results. Now, both approaches work and both are in  active use. ZK roll-ups are seen as more effective but are far more complex. As such, optimistic  roll-ups dominate by sheer volume. Specifically, three optimistic rollup solutions, base, arbitrum,  and optimism currently process nearly 90% of all layer 2 transactions. As for Ethereum itself, it  hasn't been left behind. It's simply evolved its role. Rather than being the place where every  swap and transfer happens, Ethereum is now best understood as a settlement and security layer  where rollups post their data. And this brings us to Ethereum's user experience. And honestly,  for most of its history, actually using Ethereum was pretty painful, even for those who knew what  they were doing. Thankfully though, Ethereum's user experience in 2026 is far better than it  once was with multiple upgrades bringing major improvements. These upgrades take the form of hard  forks which are basically simultaneous upgrades to Ethereum's consensus layer called the beacon  chain and its execution layer. For context, one of the biggest upgrades to Ethereum was the merge  in September 2022, marking Ethereum's transition from proof of work to proof of stake. As a fun  fact, the merge was such a huge technological achievement that it was even compared to  rebuilding the engine of an aircraft mid-flight.

[00:13:19]And yet, it was carried out without a hitch.  Anyhow, these hard forks are major upgrades to the Ethereum mainet that incorporate multiple Ethereum  improvement proposals or EIPs. And best of all, these EIPs focus on both network scalability and  revamping the user experience to make Ethereum as competitive as possible. One of these major  upgrades was Pectra, rolled out in May last year.

[00:13:49]It introduced 11 EIPs focused on network  performance, validator deposits, and changes to how data blobs are handled. And for those  wondering, blobs are basically cheap data packets that layer 2 attach to mainnet blocks. They're  a bit outside this video's scope, but the point is that Peterra improved how these blobs work,  making layer 2 rollups even faster and cheaper as a result. But perhaps the most exciting change  was EIP7702 which had a major impact on Ethereum wallets. It introduced something called account  abstraction allowing wallets to temporarily act as smart contracts during transactions. This lets  them run custom code unlocking new possibilities like more secure transactions, gasless  transactions, transaction batching, and improved recovery options. Now, another major Ethereum  hard fork that brought major improvements to the user experience was the Fusaka upgrade, which  was rolled out in December last year. Fusaka is Ethereum's most recent upgrade and brought 13 EIPs  that built on the Pectra upgrade to make Ethereum even more scalable. The EIP in the spotlight  this time was EIP7594 which introduced peer data availability sampling or peer DS. It's not  quite as sexy as the EIPs introduced in Pectra, but it was just as important. That's because  it's essentially the holy grail of scaling.

[00:15:27]Instead of downloading an entire data blob, Fusaka  made it so validators only need to download a slice of it to confirm it exists. This reduced the  amount of data that a node needs to download by roughly 87%. This also means that layer 2s can  now post more frequently to the mainet at just a fraction of the cost. But that's not even the  most exciting part. The upgrade also introduced the first ever rollup improvement proposal  or RIP. While that might sound a bit ominous, what it did was introduce pass key authentication.  This means that you can now use biometrics like your fingerprint or facial recognition to  authorize transactions. Now, collectively, these upgrades have reduced barriers like high  fees and complex key management while making layer 2 even more efficient than they already were. Now,  these changes don't just help current users. They also ensure that future adopters won't be put  off by clunky user experiences or high fees. And today, Ethereum isn't such a nightmare to navigate  anymore. In fact, it's becoming fairly seamless.

[00:16:42]So then this raises the question of what  Ethereum's 2026 road map looks like. Well, the next hard fork upgrade is Glamsterdam, which  sounds like a music festival with far too much glitter involved. It's scheduled for the first  half of this year, and with not much of that left, that suggests it could happen very soon. Now, in  a nutshell, Glamsterdam sets the stage for future upgrades focused on improving Ethereum's layer  1 scalability. And to do this, Glamsterdam will introduce a concept called parallelization, which  isn't the easiest thing to say after a few drinks.

[00:17:18]But what does it actually mean? Well, right now,  Ethereum processes transactions one after another, like cars in a single lane. Glamsterdam changes  this so multiple transactions can be processed in parallel, so like multiple lanes. This will make  the network faster even during busy periods. Then after Glamsterdam comes the Hegota upgrade  scheduled for the second half of this year, most likely around Q4. Heota follows Glamsterdam  on Ethereum's road map, shifting focus from block production to statelessness and state expiry.  It's a mouthful, but in simple terms, this means Ethereum nodes won't need to store the entire  blockchain history anymore. much more efficient.

[00:18:08]In other words, beyond these upgrades though,  developers are already considering how Ethereum might evolve through the rest of this decade. In  February of this year, the Ethereum Foundation, the nonprofit coordinating Ethereum's development,  put forward a so-called straw map. Essentially, a road map exploring possible future directions  rather than committing to anything concrete. Now, essentially this straw map outlines five different  goals, each one being very ambitious. So, these goals are near instant transaction finality,  dramatically higher throughput, built-in privacy features, increased interoperability between  Ethereum and its layer 2s, and quantum resistance features. These are all huge targets that would  make Ethereum more scalable while preserving its longevity. More importantly though, these pathways  would essentially make Ethereum the most capable blockchain out there, setting it leagues above  even its top competitors. And intriguingly, this comes shortly after Vital Butarin suggested  that outsourcing Ethereum scalability to layer 2 doesn't make sense as a long-term solution.  Instead, he proposed a more balanced approach focused on both the base layer and the layer  2 supporting it. Whatever the case, though, Ethereum is set to change significantly before  2030. And these changes sound very bullish. So, where does this leave Ethereum in 2026? Well,  the answer isn't as clear-cut as you might think.

[00:19:47]Ethereum continues to dominate the radar of both  retail and institutional investors and the chances of it being overtaken feel increasingly unlikely.  However, there are still some significant unresolved issues. Let's start with the bull  case since it's the most obvious. Right now, Ethereum controls around 52% of all total value  locked or TVL across the entire DeFi ecosystem.

[00:20:14]And that's not even including its layer 2  ecosystem. That dominance is hard to ignore and points to real adoption from institutional  investors. It's a similar story with stable coins where just over 50% in circulation  live on the Ethereum mainet. And Ethereum dominates again with tokenized real world assets  or RWAs accounting for 53% of the market share.

[00:20:40]Put simply, Ethereum remains central to DeFi,  stable coins, and RWAs. And the reason is simple. Ethereum may not be the fastest smart  contract blockchain or the cheapest to use, at least not yet. But it is the most secure, and  that's what institutions value most. They don't mind paying a bit more or waiting a bit longer  if it means their funds are better protected.

[00:21:07]However, Ethereum also faces important challenges  and one of the biggest is liquidity fragmentation.

[00:21:14]As Ethereum has scaled using roll-ups and layer 2  networks, assets and users have spread across many different chains. While this improves performance,  it can make the user experience confusing and inefficient. Moving funds between networks often  requires bridges, which add complexity, cost, and security risks. For beginners especially,  this fragmented landscape can feel overwhelming compared to simpler, more centralized  platforms. And to make matters worse, layer 2s are inherently centralized. Remember what  we said earlier about the blockchain trillemma.

[00:21:52]Layer 2s are obviously scalable and inherit the  security of Ethereum. Logically, this means that decentralization takes a hit. And this is very  much the case. That's because most layer 2s are able to gain their high performance by running  on just a single sequencer node. Obviously, that means these sequencer nodes are also a  single point of failure. And some have even argued that this technically makes Ethereum itself  more centralized as a result. An even larger risk is where market demand ultimately settles. If  users and traders increasingly prefer centralized DeFi platforms or CDI, or if they prefer private  chains or standalone networks like Hyperlquid, then Ethereum could still shape the industry's  technology without capturing much upside. In that scenario, Ethereum's ideas and standards  might be widely adopted, but activity, fees, and profits could flow elsewhere. This would be a  huge dampener on ETH's upside potential. Even if Ethereum's influence continues to grow. So overall  then, Ethereum is showing real strength in 2026, but not much certainty. Its technology, ecosystem,  and credibility give it a clear advantage. While competition, fragmentation, and shifting user  preferences still pose real concerns. So the challenge now is to simplify the user experience,  reconnect liquidity, and stay dominant. But with everything in the pipeline, Ethereum is likely to  capture enough mind share and capital to maintain its place at the very forefront of the crypto  industry. Whether that's reflected in ETH's price, though, is well, another question entirely. And  that's about all from me for today, folks. But before we go, what do you think? Are you bullish  on Ethereum? Let us know in the comments. Now, if you want to see what would happen if ETH were  to go to zero, then check out the video over here.

[00:23:59]But if you're wondering if ETH presents a good  opportunity, then check out the video right here.

[00:24:04]Okay, thank you all so much for watching and  I'll see you again soon. This is Guy. Over and