Bitcoin and Ethereum are the top two cryptocurrencies by market capitalization which is why a lot of people want to compare them to understand which one is a better investment. Although they have some similarities, they do tend to have more differences than similarities and it feels like comparing apples to oranges. Bitcoin vs Ethereum will try to differentiate between the cryptocurrencies, so let’s take a look at the two different cryptocurrencies and their differentiating factors.
What is Bitcoin?
Founded in 2009, Bitcoin is a peer-to-peer electronic system for transferring cash without the need for a third party to act as an intermediary in a transaction and hence known as a decentralized system running on a network known as the blockchain.
Nowadays people hold Bitcoin as an alternative to cash which can be held outside a bank and also as a hedge in case its value goes up significantly.
What is Ethereum?
Blockchain technology is being used to develop applications beyond just a currency and Ethereum is the largest and well known crypto that is being used to develop decentralized applications rather than just being a store of value.
Ethereum is another cryptocurrency that many believe will go beyond Bitcoin as the biggest cryptocurrency given its many use cases and the prevalent development of smart contracts which can be very useful in the future.
Both use Proof of Work(POW) consensus mechanism to validate transactions on their blockchain, which means that you have to invest energy and hardware costs in order to secure the blockchain via mining or hash power.
Peer to Peer
Both Bitcoin and Ethereum can be used to conduct peer-to-peer transactions and many software wallets support both coins.
Both projects are open source and have a large community of developers coupled with huge amounts of independent nodes responsible for validating transactions which makes both coins highly decentralized in nature.
- Bitcoin was launched in 2009 when Satoshi Nakamoto published the white paper called “Bitcoin: A Peer to Peer Electronic Cash System” . There was fundraising required to start Bitcoin and miners had to mine on the Bitcoin network to receive the first Bitcoin. Satoshi mined around 1 million BTC and nobody knows if he spent any of it as he disappeared from the internet with no one knowing his real identity.
- Ethereum on the other hand was launched in 2013 when founder Vitalik Buterin published the Ethereum white paper called” Ethereum : A Next Generation Smart Contract & Decentralized Application Platform” which was followed by an ICO in which a pre-mined quantity of ethereum was distributed to the investors. Vitalik Buterin is actively involved with the Ethereum project and has an important leadership role. Other leaders include Anthony D Iorio, Charles Hoskinson and Mihai Alisie.
- Bitcoin was designed to be a P2P translation & store of value. It is also the native currency on the network that facilitates the transactions. The fee in bitcoin for making transactions is just based on the data size of each transaction.
- Ethereum’s native coin is called Ether(ETH) , it is not designed to be a digital currency but rather fuel a wide range of transactions. Ether is more of a utility and charges a fee for running the code. Ethereum aims to be a supercomputer that is distributed over all nodes in the network which can be used by Dapps to create smart contracts and also enables tokens like ERC20 with different functionalities. A lot of people have also been using Ether as digital currency although that is not its main purpose.
- Inflation rate of Bitcoin is hard-coded in the protocol which means there will never be more than 21 million bitcoins in circulation. Currently around 17 million bitcoin have already been mined and the emission rate is 6.25 bitcoins per hour and it takes 10 minutes to mine 1 block, as a result ~37 bitcoins are mined every hour. Each year this rate is cut in half and in 2024 this rate will be further halved to 3.125. This makes Bitcoin’s monetary policy fixed and non-inflationary.
- Ethereum on the other hand has no fixed cap on the total number of tokens issued i.e they are infinite, but it is occasionally reduced during large network upgrades or forks. There was a recent reduction of 3 to 2 ether per block. Ethereum produces a block every 10 seconds which is roughly 480 ether per hour.
- Bitcoin’s Proof-of-Work algorithm is SHA256 which can be mined by ASIC(Application Specific Integrated Circuit) who excel at 1 type of computational task which is they dominate general purpose chips(CPUs & GPUs). ASICs provide the Bitcoin network with a ton of hash power which makes it extremely secure.
- Ethereum’s Proof-of-Work algorithm is ETHASH which makes it hard for ASICs to mine. They are more accessible to be mined using a GPU which makes it more decentralized but arguably less secure. POW tends to limit the scalability of Ethereum because the Ethereum Virtual Machine requires a heavy load of transactions which is why the plan is always to transition to a Proof-of-Stake consensus mechanism which no longer need large amounts of energy and hardware to maintain the network. The expense is virtually simulated by staking Ether to get the right to solve the blocks and get the reward.
- Bitcoin’s transaction speed is 4 transactions per second but it requires a higher speed in order to compete with mainstream companies like Paypal or credit card companies. This is being taken care of by Bitcoins 2nd layer Lightning Network which is very fast.
- Ethereum can process 15 transactions per second but faces similar issues as Bitcoin. Solutions such as sharding, Proof of Stake and Raiden should make the network faster.
- Bitcoin uses script language which keeps the code robust but less vulnerable to bugs that more complex languages face. However, it can only support simple smart-contracts like multi-signature and escrow. More advanced smart contracts need a second layer or a side chain solution. Decentralization, censorship resistance and security are more important to the Bitcoin community than smart contracts.
- Ethereum is meant to be a smart contract/Dapps platform that needs to support a more complex logic which leads to a wider range of bugs which are harder to find in the audit. Certain bugs have caused loss of millions of Ethereum Tokens, however the expectation is that the benefits will outweigh the risks, also many methods are being developed to minimize this risk.
- Most forks are preferably soft forks that keep backward compatibility meaning the nodes that won’t upgrade will still work and the network stays intact. But there are controversial upgrades that lead to hard forks like in the case of Bitcoin cash where the split was due to block size and Segwit disagreements but such cases are very rare.
- Ethereum often upgrades using hard forks which are not backward compatible which increases the risk of chain splits meaning that nodes that don’t upgrade won’t be a part of the network. Ethereum does have more centralized leadership and dev community coordination which leads to more agreement in terms of upgrade decisions meaning there will not be chain splits due to hard forks in the Ethereum world.
Ethereum and Bitcoin are more different than what you might expect at first glance. This does not mean that one is superior than the other. Most of the differences have to do with the application and its use case scenarios. Differences in design and development also reflect the different goals of both the cryptocurrencies which means that Bitcoin and Ethereum are not competing for the same goals rather looking to service different needs. As an investor and user it is important to familiarize yourself with these differences and their implications and make decisions based on them.