Table of Contents
- Bitcoin Basics
- Ethereum Basics
- What Bitcoin and Ethereum have in common
- Difference between Bitcoin and Ethereum
- Bitcoin vs. Ethereum future
Bitcoin and Ethereum are undisputedly the oldest and most popular digital currencies. Both are digital assets that can be traded on crypto exchanges and stored in wallets. Both coins are decentralized and use a distributed ledger technology known as the blockchain. Even though Ether and Bitcoin share similar characteristics, significant differences set Bitcoin and Ethereum apart. Let’s look at what these two assets have in common and what makes them different.
Bitcoin Basics
Satoshi Nakamoto founded Bitcoin in January 2009, introducing a new peer-to-peer digital currency and a payment system. It is also the first decentralized cryptocurrency, and its design is based on an open-source protocol with a public transaction log using the blockchain. There are no physical Bitcoins, only credits linked to a cryptographically secured public ledger. It wasn’t the first attempt to create such a currency. However, it was the most successful in its early years and became the precursor to all cryptocurrencies developed in recent years.
Bitcoin was created as a P2P money system that does not require banks or other intermediaries to process transactions. It is a digital currency not managed by a central entity but created through a network of computers worldwide that exchange encrypted data. The first block of data on bitcoin’s blockchain, known as the Genesis block, was created in January 2009. Since then, Bitcoin’s circulation has steadily increased over time.
Ethereum Basics
In July 2015, the Ethereum network was launched as one of the more ambitious projects in the crypto space. The network’s goal of the platform is to decentralize everything on the Internet. Like Bitcoin, Ethereum is a decentralized platform that uses PoW to prevent attackers from manipulating the blockchain data.
Vitalik Buterin, the co-founder of Ethereum, authored a white paper in 2013 that described the use of smart contracts — self-executing agreements written in code. Ethereum is an open-source, decentralized, distributed computer network based on the ETH currency. It is traded on crypto exchanges and used on the Ethereum network to run applications.
Ethereum has a programming language, Solidity, which can be used to develop various applications that run on top of the blockchain. Smart contracts are the backbone of Ethereum’s potential applicability, as they enable the creation of applications on its infrastructure. Non-fungible tokens (NFTs) or Decentralized Finance (DeFi) are examples of smart contracts’ applications.
What Bitcoin and Ethereum have in common
The Bitcoin protocol uses decentralization — one of the core principles of blockchain technology — to distinguish itself from centralized digital currencies such as the US dollar backed by the government. In 2008, Satoshi Nakamoto created Bitcoin to decentralize currency control when centralized financial organizations failed. Ethereum has updated Bitcoin by adding smart contracts, making it a more versatile cryptocurrency. While Bitcoin is primarily used as a store of value, Ethereum’s flexibility gives its blockchain network unlimited potential.
Both Bitcoin and Ethereum run on blockchain platforms that use Proof of Work consensus validation for new transactions. PoW is a type of consensus protocol that allows participants in a cryptocurrency network to agree on the state of all information stored in their public ledger. Both systems rely on the work of a decentralized network of people around the world, called miners, who are rewarded for their contributions if at least 51% of the network agrees that a valid transaction is permanently uploaded to the blockchain.
The main criticism of Proof of Work is that it requires a lot of processing power. In 2022, Ethereum will move to an upgrade called Proof of Stake as part of Eth2, a series of updates designed to make Ethereum more scalable, secure, and reliable. PoS replaces computing power with staking, making it less energy-intensive. Instead of miners mining blocks, validators use their cryptocurrency holdings to create new blocks.
Bitcoin and Ethereum have the most extensive networks, making them the two most valuable cryptocurrencies by market capitalization. While Bitcoin has greater institutional adoption than Ethereum, Bitcoin has a smaller active user base and lower daily transaction volume than Ethereum. Both cryptocurrencies are widely used, so these networks should be highly resilient as the blockchain industry evolves.
Bitcoin and Ethereum currently enjoy a first-mover advantage but are still vulnerable to newer, faster, and more stable cryptocurrencies. Ethereum may be faster than Bitcoin, but both coins are relatively slow. For comparison, one of the fastest cryptocurrencies currently is Solana (SOL), which can process 50,000 transactions per second.
Both the Bitcoin and Ethereum networks allow token issuance. The Bitcoin network uses the Omni layer to issue new currencies on the Bitcoin blockchain. The Ethereum network issues tokens using its built-in smart contract capabilities. Tokens issued on the Ethereum network conform to a different standard, the ERC-20. The ERC-20 standard defines a list of rules for Ethereum tokens. It includes functions that developers must implement before their tokens can be released to the market. The functions include displaying the token’s total supply, displaying account balances on users’ addresses, and the ability to move funds between addresses.
Difference between Bitcoin and Ethereum
The most significant distinction between Bitcoin and Ethereum is the purpose for which each was created. While Bitcoin functions as a medium of exchange, Ethereum was created to serve as a platform for decentralized applications. Ethereum’s smart contracts capabilities make it a programmable platform. Smart Contracts allow developers to develop applications and other cryptocurrencies on the Ethereum network.
The Bitcoin network is slower than the Ethereum network when it comes to confirming transactions, as blocks on the Bitcoin blockchain are added every 10 minutes. In contrast, the Ethereum blockchain adds new blocks about every 15 seconds. Furthermore, Bitcoin and Ethereum use different algorithms. BTC uses SHA -256, and ETH uses Ethash.
In addition to public keys, public wallet addresses also differ on the two networks, Bitcoin and Ethereum. These are unique identifiers that allow users to receive funds, similar to an international bank account number (IBAN) used by financial institutions to identify the bank and country to which a customer’s account belongs. For Bitcoin, addresses can start with a 1, a 3, or with “bc1”; for Ethereum, they start with “0x.”
The total supply of Bitcoins is limited as there will never be more than 21 million issued. On the other hand, Ethereum has a 4% inflation rate and a token burn mechanism to offset this release rate. After the launch of Ethereum 2.0, the supply of Ether will most likely decrease as the issuance of new coins should be reduced from 4% per year to about 0.5%.
As of January 31, 2022, Bitcoin’s market capitalization was $702 billion, compared to $300 billion for Ethereum.
Thanks to the popularity of its decentralized applications in areas such as finance, art and collectibles, gaming, and technology, Ethereum is making great strides in adoption. ETH value increased 510% in 2021, compared to 93% for BTC. When Ethereum entered the market in early 2020, its market capitalization was only $7 billion, about 10% of Bitcoin’s $74 billion market capitalization. However, as Ethereum gained popularity, it grew to be worth $528 billion by November 2021, half the value of Bitcoin.
While Bitcoin and Ethereum rely on a PoW consensus, Ethereum switches to a Proof of Stake consensus algorithm. PoS consensus algorithms reduce the energy required to achieve consensus by attributing mining power to the proportion of tokens held by validators rather than having miners with specialized computers. PoS uses a validation method that depends on the amount of currency a transaction validator holds. To become validators on Ethereum, entities that verify transactions to ensure the network is not tampered with, users must post a deposit.
Bitcoin vs. Ethereum future
Simply put, Bitcoin can be thought of as a store of value, while Ethereum can be thought of as a platform to host decentralized applications. In the Electric Capital’s 2020 Cryptocurrency Developer Activity Report, Ethereum has 2325 monthly active developers, and Bitcoin has 361. Though the gap between Bitcoin and the other cryptocurrencies is significant, Bitcoin still ranks second in overall developer activity.
The Ethereum team is working on a major upgrade called Eth2. The system has been facing network congestion and high fees and doesn’t scale well to meet demand right now. Eth2 uses a different, more scalable model that will significantly reduce its carbon footprint.
While Ethereum is going towards the PoS direction, Bitcoin strengthens its position as a payment option. El Salvador was the first country to allow its citizens to use the cryptocurrency for all transactions, alongside the US dollar. Furthermore, in 2022, the Bitcoin network passed through the Taproot update that consists of three Bitcoin Improvement Protocols (BIPS) — BIP 340, 341, and 342. It should bring more privacy, improved smart contracts, and lower transaction costs to Bitcoin. The Taproot upgrade Bitcoin may open the door for Bitcoin to the world of decentralized finance (DeFi) and non-fungible tokens (NFT).
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