Ethereum inevitably gets compared to Bitcoin, which makes it easy for beginners to understand. Without getting into too much technical detail, both Ethereum and Bitcoin are distributed public blockchain networks. Miners power each network by validating transactions, and earn bitcoin (for Bitcoin) or Ether (for Ethereum) in the process.
Generally speaking, Bitcoin and Ethereum run different versions of blockchain technology for different purposes. Bitcoin is a peer-to-peer payment network and a store of value. Ethereum, on the other hand, is a platform that facilitates applications and smart contracts, powered by its internal “currency”, Ether.
"Smart contracts" are a digital version of a traditional contract. They allow you to exchange money, property, or any valuable item through the blockchain, without a middleman or third party. In other words, a smart contract allows you to say, “if this happens, then this other thing happens.”
A bitcoin transaction is not a smart contract. On the Bitcoin network, you can send or receive money without going through a bank. (Example: if I send you bitcoin, then I no longer have the bitcoin in my wallet, and you own the bitcoin.)
On the Ethereum network, however, smart contracts have uses beyond exchanging money. You can actually use a smart contract to buy and sell a house, track your health, and more. (Example: if I sign my name here, then I own the house, and you no longer own it.)
Unlike bitcoin, the primary purpose of Ether isn’t to become an alternative to money or payments. Rather, its purpose is to pay for smart contracts, transaction fees, and other services on the Ethereum network. In other words, if you want to execute a smart contract through a decentralized application (DAPP) on the Ethereum network, you need to pay with Ether.