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Asset primer

Ether (ETH): what it is and how it shows up in DeFi

A plain-language primer on Ethereum and ether: gas, staking, ETH as DeFi collateral, the key risks and the Canadian rules that apply to holders.

Green circle · beginner7 min readFacts checked 2026-10-31
Mitey the yeti, blue-eyed with a blond tuft, holding out an open paw, with a chain block
Mitey says: Ether pays the toll on Ethereum’s roads, so keep a little aside for gas before you set out.

Trail notes

  • Ethereum is a programmable blockchain; ether (ETH) is its native token, used to pay transaction fees called gas.
  • Ethereum runs on proof of stake, so ETH can be staked to help secure the network.
  • In DeFi, ETH is widely used as collateral, as a trading pair and, in staked or wrapped forms, as a building block.
  • Using ETH as collateral brings liquidation risk if its price falls.
  • Ether is a “specified crypto asset” in one example OSC platform decision (2026-03-25); CDIC does not cover it.

What Ethereum and ether are

Ethereum is a public blockchain that runs programs called smart contracts. Once deployed, a smart contract’s code runs exactly as written when someone sends it a transaction. That makes Ethereum a base layer for applications: tokens, exchanges, lending markets, DAOs and more. The ethereum.org DeFi overview describes many of these building blocks.

Ether (ETH) is the network’s native asset. You need it to pay for any transaction on Ethereum, from sending tokens to interacting with a lending protocol. Validators who secure the network are rewarded in ETH.

Ethereum’s design goal is general-purpose programmability, where Bitcoin’s is a narrowly focused payment network. That flexibility is why most DeFi started on Ethereum, and also why it has more moving parts to understand.

Gas, staking and layer 2

Every transaction uses computation, measured in gas. You pay for gas in ETH. Under Ethereum’s fee design, each block has a base fee that is burned, and you can add a priority fee, or tip, to the validator. When the network is busy, the base fee rises. Our gas fees guide covers this in detail.

Ethereum uses proof of stake. Validators lock up ETH as a stake and are chosen to propose and confirm blocks. According to ethereum.org, running your own validator requires 32 ETH; pooled options and centralized services let people stake smaller amounts, each with different trade-offs. Validators that break the rules can be penalized, including through slashing.

Layer 2 networks, such as rollups, process transactions off the main chain and post data back to Ethereum. Many of them also use ETH to pay fees, which is why ETH often turns up on several networks at once.

Keep a gas buffer

If you hold tokens on Ethereum or a layer 2 network but no ETH on that network, you can’t move them. Keep a small amount of ETH for fees on each network you use.

The DeFi stackYou + your walletyou sign; you hold keys (or a platform does)Apps & aggregatorswebsites that route transactionsProtocolslending · trading · staking · bridgesAssetscoins · stablecoins · tokensSettlement layerthe blockchain orders and recordsProtection?No CDICNo ombudsmanNo chargebacksNo password resetRegistered platform:some safeguardsProtocol: noneEditorial diagram · DecentralizedFinance.ca · facts checked 2026-10-31
The DeFi stack, and who protects you at each layer. Each layer depends on the ones below it. Protections Canadians may expect from a bank do not carry over into DeFi.

See the full infographic with notes.

How ETH shows up in DeFi

  • Collateral: ETH is commonly deposited in lending protocols so you can borrow other assets against it.
  • Trading pair: many decentralized exchange pools pair a token with ETH.
  • Wrapped ETH: a token version of ether that follows the same ERC-20 standard as other tokens, so smart contracts can treat it like any other token.
  • Liquid staking tokens: some staking services issue a token that represents staked ETH plus rewards. That token can then be used elsewhere in DeFi, adding another layer of risk.
  • Gas: every one of these actions costs ETH in fees.
Example: ETH as collateral (hypothetical numbers)
You deposit ETH worth $2,000 into a lending protocol and borrow $1,000 of a stablecoin.
Suppose the protocol lets you borrow up to 80% of collateral value before liquidation. Your liquidation point is when your ETH is worth $1,250.
If ETH’s price falls 37.5%, your collateral can be sold to repay the loan, usually with a penalty.
Adding collateral or repaying part of the loan moves that point further away.

The health factor infographic and the liquidation risk page explain this mechanism step by step.

Key risks

  • Smart contract risk: the protocols you use ETH in can have bugs. See smart contract risk.
  • Liquidation: borrowing against ETH means a price drop can trigger a forced sale.
  • Approvals and signing: signing a malicious approval can let a contract take tokens from your wallet. Read wallet approvals and signing.
  • Staking risks: validator penalties, service failures and liquid staking tokens trading below the value of the ETH they represent.
  • Network and bridge risk: ETH on a layer 2 or another chain depends on that network and on how it got there.
  • Price swings: the CSA warns crypto assets can be very volatile and you could lose some or all of your money.

Questions to ask before you use ETH in DeFi

A handful of questions catch most of the problems people run into with ETH in DeFi.

  1. Which network am I on? ETH on Ethereum and ETH on a layer 2 network can look the same in a wallet but live in different places, and moving between them costs fees and time.
  2. Do I have enough ETH left for gas to exit? A position you can’t afford to close is a trap when the network is busy.
  3. If I’m borrowing, what is my liquidation price, and how far is it from today’s price?
  4. If I’m staking, who runs the validator, how do withdrawals work, and what happens if the service fails?
  5. If I’m holding a liquid staking token or wrapped ETH, how do I convert it back to ETH, and could it trade at a discount?
  6. What approvals am I granting, and to which contract address?

The first DeFi transaction checklist walks through these one at a time, and the protocol risk scorecard helps you compare protocols without relying on their marketing.

Canadian notes

On Canadian platforms

In an example OSC director’s decision for one authorized platform dated 2026-03-25, Ether is one of the “specified crypto assets” (with Bitcoin, Litecoin, Bitcoin Cash and Solana) exempt from that platform’s $30,000 net 12-month investment limit. That is one platform’s decision terms, and the limit does not apply in Alberta, British Columbia, Manitoba, Québec or Saskatchewan under it.

CDIC does not cover cryptocurrencies, so ETH is not deposit-insured anywhere.

For tax, the usual disposition rules apply: selling ETH, swapping it for another token and spending it are dispositions. The CRA says staking rewards received on a centralized platform are generally income when credited. As of 2026-10-30, it has not addressed self-custody staking, liquid staking, wrapping ETH or using it in lending and liquidity pools. Gas you pay can matter to your cost and proceeds, so record it. One-half of a capital gain is taxable.

Your checklist

Questions people ask

What is the difference between Ethereum and ether?

Ethereum is the blockchain network, and ether (ETH) is its native token. You use ETH to pay gas fees on Ethereum, and validators stake ETH to secure the network.

Why do I need ETH to use DeFi on Ethereum?

Every transaction on Ethereum costs gas, and gas is paid in ETH. Without ETH on the network you are using, you can’t send tokens or interact with smart contracts there.

How is ETH staking taxed in Canada?

The CRA says staking rewards received on a centralized platform are generally income when they are credited. As of 2026-10-30, the CRA has not published guidance on self-custody or liquid staking, so many people ask a tax professional about those cases.

Is ETH limited on Canadian crypto platforms?

It depends on the platform’s decision. In one example OSC decision dated 2026-03-25, Ether is a specified crypto asset, which means it is exempt from that platform’s $30,000 investment limit for most retail clients.

Sources and dates

  • Decentralized finance (DeFi) — ethereum.orgreference
    No date shown on page · checked 2026-10-31. Overview of DeFi building blocks on Ethereum.
  • Introduction to smart contracts — ethereum.orgreference
    No date shown on page · checked 2026-10-31. What a smart contract is and how it executes.
  • Gas and fees — ethereum.orgreference
    No date shown on page · checked 2026-10-31. How transaction fees (gas) work on Ethereum.
  • Ethereum staking — ethereum.orgreference
    No date shown on page · checked 2026-10-31. Solo, pooled and centralized staking options and their trade-offs.
  • Layer 2 — ethereum.orgreference
    No date shown on page · checked 2026-10-31. Rollups and other scaling networks.
  • Investor tools — crypto assets — Canadian Securities Administratorsreference
    Page date 2025-10-22 · checked 2026-10-30. Crypto assets can be very volatile and risky; you could lose some or all of your funds.
  • Director's decision — Newton Crypto Ltd. (example of platform terms) — Ontario Securities Commissionin force
    Page date 2026-03-25 · checked 2026-10-30. Example terms: $30,000 net 12-month limit for most retail clients on non-specified crypto assets; not applied in AB, BC, MB, QC, SK; BTC, ETH, LTC, BCH, SOL listed as specified.
  • What's covered — Canada Deposit Insurance Corporationin force
    No date shown on page · checked 2026-10-30. Up to $100,000 per category per member institution; cryptocurrencies, including stablecoins, are not covered.
  • Reporting income from crypto-asset transactions — Canada Revenue Agencyin force
    Page date 2025-12-02 · checked 2026-10-30. Business income vs capital gains is case by case; lists business indicators; crypto-to-crypto trades are dispositions; half of a capital gain is taxable.
  • Reporting income from crypto-asset mining and staking activities — Canada Revenue Agencyin force
    Page date 2025-11-10 · checked 2026-10-30. Mining is usually a business; staking rewards on a centralized platform are generally income when credited. Silent on self-custody/DeFi staking.
  • Prime Minister Carney cancels proposed capital gains tax increase — Prime Minister's Officein force
    Page date 2025-03-21 · checked 2026-10-30. The proposed increase in the capital gains inclusion rate was cancelled; the one-half rate continues.

Education only. Nothing on this page is financial, investment, tax or legal advice, or a recommendation to buy, sell, stake, lend or borrow any crypto-asset. Crypto-assets can lose some or all of their value and are not covered by CDIC. Canadian rules change: check the dated sources above and talk to a qualified professional about your situation. Full disclaimer.