If you are new to blockchain you have likely come across the names Bitcoin and Ethereum. You might not have known till now that Bitcoin is one type of digital currency, and there are so many other options. Ethereum is one such option, but why is it liked so much, and how does it compare to Bitcoin?
First of all, it’s good to know that both Bitcoin and Ethereum work on blockchain. Blockchain is a series of data blocks that add overtime to create a single public ledger. The blockchain also contains a network of computers called nodes. These nodes help to add new blocks and verify network actions. Although Bitcoin and Ethereum both work on blockchain, they work very differently.
Table of contents
- Blockchain 1 and Blockchain 2.0
- Transaction, Smart Contracts, and DApps
- Smart Contracts
- Currency Comparison
Bitcoin is the pioneer of digital currencies. A mysterious person or persons known as Satoshi Nakamoto created Bitcoin in 2009. Bitcoin, as a concept, is an alternative to fiat currencies. In fact, it aspires to be a currency for daily pay use for products and services, store value, and serve as a transfer of wealth.
On the other hand, Ethereum started as a network. Vitalik Buterin, the creator of Ethereum, used to work for Bitcoin. He saw the potential of blockchain and wanted to explore it. The idea was for Ethereum to work with and not compete against Bitcoin. However, in the process of growth, Ethereum has become the second-largest digital currency based on popularity and market share.
Blockchain 1 and Blockchain 2.0
When Bitcoin started in 2009, it introduced blockchain technology to the world as well. Blockchain is an entirely free and decentralized network that is both public and secure. Blockchain 1 acted solely as a conduit for Bitcoin transactions. Bitcoin failed to fully utilize blockchain ability, based on its critics. Blockchain 2.0, aka Ethereum, is the answer to this oversight.
Blockchain 2.0 is a more robust version of Blockchain 1. In other words, it is Blockchain 1 on steroids. Where Blockchain 1 utilizes only one coding language C++, blockchain 2.0, on the other hand, utilizes several. These languages include C++, Python, Ruby, Go, Java, and Solidity, a language native to Ethereum. Solidity is the language Blockchain 2.0 uses for writing smart contracts.
It has been claimed that Ethereum is so robust that given enough time and memory, anyone can run any program on it. That is, regardless of language.
Network, Coins, and Tokens
A common error is thinking that Ethereum is just a cryptocurrency. This can be confusing when trying to learn how it works. As initially stated, Ethereum is firstly a network. First, the network used Ether to fuel transactions. Later Ethereum conducted an Initial Coin Offering (ICO) and set up Ether as its coin.
Similarly, the Bitcoin network has a coin also called Bitcoin. Bitcoins can be called BTC because this is its ticker name. Ether’s ticker name is ETH. A ticker is the abbreviation of the company name and is mostly used for trading.
Where coins are native to the blockchain to which they belong, tokens are not. Anyone can create tokens on existing blockchains. Although Bitcoin has a network and coin, it, however, does not have an official token. Ethereum, on the other hand,has an official protocol for proposing improvements to its network, called ERC-20.
So far, we have figured out that both Bitcoin and Ethereum are networks on blockchain. But, how do the networks differ? Let’s look at a few traits to answer this question.
Bitcoin has a starting advantage over Ethereum. Bitcoin was the first of its kind, and Ethereum itself is based on Bitcoin technology. Both networks use open-source software that can be viewed publicly.
Bitcoin uses C++, a coding language programmed to follow a limited number of rules. This trait further ensures network security. Ethereum, on the other hand, uses several coding languages and has no language or command limit. It is for this very reason that it is programmable software.
Anyone can review the Bitcoin code and even propose improvements. Open-source software has the distinct benefit of being open to anyone, anywhere, and anytime as long as one has internet access.
However, Ethereum software goes a little further. In fact, the software is programmable and can be used to program other applications. This makes Ethereum not just a digital asset, but a digital market that hosts other cryptos, financial services, games, and applications. Best of all, everything programmed using Ethereum is secure and cannot be censored.
Blockchain can solve the following real-world problems:
i) Weapons tracking.
ii) Efficient energy trading.
iii) Intellectual property protection.
iv) Digital voting.
v) Retail and supply chain management.
vi) Medical and drug record keeping.
The bitcoin protocol is based on two underlying rules:
i) Decentralized trust.
ii) Digital scarcity.
This essential rule governs how Bitcoin operates. Because Bitcoin is made up of a series of global computers that come together as ‘nodes’ to create the network. This means, there is a need for these scattered nodes to work in consensus. To reach consensus, Bitcoin has specific rules that all nodes must follow. This is where the trust protocol comes into play. When two parties contract on the network, they put their mutual trust in the network. This trust extends to even the bugs in the Bitcoin code. If one party acts to correct these bugs, it can be seen as a breach of contract.
Ethereum uses a truthless protocol instead. Clients or users on Ethereum nodes have more privacy and are truly self-sufficient. Clients can verify data themselves and thus do not need to trust the network.
Nodes are vital to the survival of the blockchain network’s ecosystem. As the guardians of the blockchain, nodes do more than setting apart real from fake transactions. Nodes also perform the following tasks:
i) Prevent attempts to double-spend bitcoin that has already been spent.
ii) Serve as an archive or record of the blockchain.
Furthermore, there are several node types. Full nodes either contain master records or ‘pruned’ records of the blockchain. Light nodes do not store the entire blockchain. Their role is to verify transactions using simplified payment verification. Light nodes also depend on full nodes to function.
Both Bitcoin and Ethereum use nodes.
The Bitcoin consensus protocol is based on the Proof-of-Work (PoW) protocol. This protocol requires that nodes solve hard maths problems or algorithms to verify transactions. This process is called ‘mining’, and it uses a lot of time and energy. The Bitcoin network is not cost-effective and is inefficient because of PoW. In return for their mining efforts, Bitcoin rewards miners with new bitcoin. The Bitcoin blockchain releases new bitcoin at a decreasing rate for each block added to the blockchain.
In comparison, Ethereum is in the process of entirely moving to a Proof-of-Stake (PoS) protocol. PoS, unlike PoW, does not reward miners. Ethereum miners verify transactions by putting a stake of their coins as proof of the block’s accuracy. In this way, miners are not witnesses or passive players like Bitcoin miners. By ensuring that miners have a stake in the accuracy of transactions, Ethereum added to its system’s accuracy.
Ethereum miners are not without reward, though. They earn rewards in the form of transaction fees and interest. Specifically, the network’s users pay to make transactions and use Smart Contracts on the system. Miners receive these payments made in ether.
Also, by placing stakes on transactions to validate them, Ethereum miners earn interest in their stakes as a reward for the risk they bear by supplying this vital service.
Ethereum initially started off using a PoW system like Bitcoin. Due to the PoW efficiency problems, Ethereum moved to a hybrid system made of PoW and PoS. Now Ethereum is in the process of moving to a fully PoS protocol. The final stage of moving began at the end of 2020 and is still ongoing. This project is called Ethereum 2.0 or Eth2.
Using PoS makes Ethereum faster and less costly to mine. Ethereum can process an average of 15 transactions per second and takes 15-20 seconds to add a new block. In comparison, Bitcoin requires an average of 10 minutes to add or hash a new block.
Both Bitcoin and Ethereum have faced some scaling problems. The crypto-sphere sees processing 15 transactions per second to be slow. Ethereum is also unable to support its current user capacity fully.
Once Ethereum 2.0 is fully operational, it should solve the current Ethereum limits. Eth2 reportedly will be able to process 1000 transactions per second and will be cheaper to use.
Another principle that enables the success of the blockchain ecosystem is the concept of digital scarcity. Part of the Bitcoin protocol is that the blockchain will stop rewarding miners with new Bitcoin at some point. This doesn’t just affect miners but means that the number of total bitcoin in the network is finite.
As a part of this protocol, Bitcoin releases a decreasing number with every 210,000 blocks mined. This event is known as Bitcoin Halving. A Bitcoin Halving, simply put, means that with each addition of 210,000 blocks, the blockchain gives out half the number of new coins it gave out the last time the goal was reached.
With a finite number of Bitcoin, this adds an extra incentive for miners to work hard to add new blocks. This also acts as a security measure for the network. Although hard, it is not impossible to attack the network. It would require at least 51% network control to succeed. But, such an attack would be very costly. It is more efficient to gain as much bitcoin reward as possible, rather than work against the network.
Ethereum, on the other hand, has an infinite supply. Where Bitcoin releases new coins at a decreasing rate, Ethereum releases them at a constant rate of 5 new coins per block.
This is because Ethereum doesn’t require miners to help the way Bitcoin does.
Transaction, Smart Contracts, and DApps
Bitcoin transfers send data from the sender to the receiver in the form of a ‘header.’ Transfer approval takes six checks. The input (sender), output (receiver), and the header (transfer data) must all be verified and approved. The public ledger only contains approved transfers. This means that to confirm a transfer, the algorithm with the data must be solved six different times, hence taking an average of 10 minutes.
Ethereum, instead, allows users to make transfers by creating Smart Contracts and Decentralised Applications (DApps). Solidity is the coding language for smart contracts. The network’s EVM then verifies these contracts. The Ethereum network’s virtual machine (EVM) works to ensure non stop communication on the network. EVM executes all smart contracts. Like Bitcoin, to confirm transfers, computers in the Ethereum network must solve hard algorithms.
DApps are pieces of code that run on the decentralized peer-to-peer (P2P) network. They are fully independent and only use the Ethereum blockchain for data storage. DApps combine smart contracts or front-end code with user interfaces written in any language. All DApps have a given set of rules that enable them to do anything.
DApps work because of smart contracts. Smart contracts are the blockchain rules and can be seen by anyone.
Ethereum users can use smart contracts to perform pre-determined tasks as set by the specific contract. Smart contract logic is simple, “the right input guarantees a certain output.” It removes the need for a third party to verify or facilitate transactions.
Although anyone can write a smart contract, the writer needs ETH to use the contract. A deployed contract, however, cannot be changed. Solidity and Vyper are the ideal coding languages to use when writing smart contracts. This is because it’s easy for the EVM to understand and store contracts in these languages.
In short, both networks utilize many of the same tools and rules. The main difference is that Bitcoin uses the PoW protocol to execute transfers, while Ethereum uses the PoS protocol.
Merriam-Webster defines currency as “Something (such as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange.”
Before Bitcoin, only governments could issue and control money. The entry of Bitcoin in 2009, however, changed that, the virtual coin disrupted government monopoly over currency issue and control. Bitcoin was the first virtual currency, and it continues to defy external control.
Bitcoin currency goes by the names Bitcoin or by its ticker BTC. As a virtual currency, Bitcoin closely resembles physical money. Since Bitcoin was created to compete with fiat money, this is not surprising. From the start, Bitcoin was made to be a type of money that is free from control and inflation.
The decentralized nature of blockchain means that there is no center of control or failure. There is no one to impose rules on or punish if the rules are broken.
Ethereum currency, in contrast, goes by Ether or ETH but is commonly called Ethereum. Confusing, I know. Ethereum at first used Ether to fuel its transaction. With time Ethereum offered it as a coin after users had started trading it. Ethereum didn’t have a coin because it was meant to complement and not compete with Bitcoin. The vision for Ethereum was to explore and utilize the power of blockchain fully. As such, Ether is a by-product of Ethereum and not the main reason the network exists.
To properly compare and contrast BTC and ETH, let’s look at how they work as money.
Means of Transfer
ETH is generally the preferred means of transfer. This is partly because there is more ETH available (over 110 000 000 by Aug 2020). In comparison, there will only be a total of 21 million BTC, with 17 million currently in circulation.
The other reason is that ETH is easier to manage for regular use, like payments and transfers. Perhaps because Ethereum transfers are much faster than Bitcoin transfers
Store of value
Bitcoin’s scarcity and deflationary nature make it a good store of value. This has led some Bitcoin fans to call it “Digital Gold.” ETH as an infinite currency doesn’t have the same strength as BTC, but it is still stronger than fiat money. ETH, like all digital money, is scarce, deflationary, and free from control or influence. Political, social, and economic factors do not affect the price or supply of ETH, making it a good store of value.
Unit of account
Currencies must be able to measure the real economic value of goods and services. This trait allows assets to measure and interpret profit and loss. Although, acceptance of virtual currencies as a mode of payment is rising. It is still unusual to see prices quoted in bitcoin or other digital currencies.
While users still rate digital currencies against fiat money, they can still tell how much things cost in digital currency. Similar to how one would convert prices to foreign currency.
Both Bitcoin and Ether are divisible. This means both coins can be used to value goods and services and be exchanged. A single bitcoin is divisible up to the 8th decimal place. Satoshi or bit is the smallest unit of Bitcoin. Meaning, 1 satoshi = 0.00000001 BTC. Thus, it takes 100 000 000 satoshis to make 1 BTC.
Similarly, ETH is divisible to the 18th decimal place. This makes it a better or more flexible unit of account. Especially if we take into consideration that there is more ETH in circulation in comparison to BTC.
Ether has a dual purpose. It is money, but also the fuel that powers Ethereum. To make transactions or deploy smart contracts, Ethereum users must pay in Ether to activate these services. In fact, Ethereum initially created Ether for this sole job. The network had an ICO a year after deployment. This was after users had started trading ether among themselves. The origin hopefully explains the duality of the Ether function in the Ethereum network.
Further, Ether can make tokens called ERC-20. Where coins are native to their blockchains, tokens are created on existing blockchains. Anyone can create their own custom token on Ethereum as long as they have enough ether to deploy the new token.
Tokens can represent actual physical items on the blockchain. Physical goods and services are then easily traded as tokens.
In conclusion, it is clear that although Bitcoin and Ethereum are very similar, yet their differences are significant. This, however, allows the digital currencies to cater to a broader spectrum of user needs.
Although Bitcoin will always have the benefit of being the pioneer and as such enjoy greater market capitalization. Ethereum, however, has more flexibility, and with the rise of Ethereum 2.0, only time can tell just how far this cryptocurrency will go.
|Block time||10 min||2-3 seconds|
|New coins per block||6.25 BTC||5 ETH|
|Total number in circulation||17 000 000||111 000 000|
|Total number||21 000 000||Infinite|
Finally, which cryptocurrency is better between the two? The answer depends on your investment needs. Take into consideration what your needs are. If you are looking for a coin to use for daily routine transactions, then Ether might be the better choice. On the other hand, if you are looking for a long-term investment or store of value, then Bitcoin is the better fit.
The crypto industry is still in its infancy, and things evolve and change reasonably quickly. Hence, what might be right today might not necessarily apply tomorrow. It is therefore essential to stay up-to-date on current industry news and trends.