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Bitcoin vs Ethereum – What’s the Difference? Comparison of the two largest cryptocurrencies.

Bitcoin and Ethereum are the two largest cryptocurrencies built on the basis of blockchain technology. While many people think that the two projects are competing with each other, they are actually two different networks with completely different assumptions.

Bitcoin can be compared to gold, while Ethereum is a more decentralized computer. Both systems are powered and secured by a decentralized network of people from all over the world (miners) who are paid for their participation in maintaining network security.

Decentralization is a fundamental feature of blockchain technology that makes Bitcoin unique. For example, the US dollar centrally controls the US government. When centralized entities failed the world in 2008, Satoshi Nakamoto created Bitcoin to decentralize control over money. Ethereum was inspired by Satoshi’s project, but created completely new possibilities.

In today’s article, we’ll look at both projects. We will check what their similarities are and what makes them different.

What is Bitcoin?

In January 2009, an enigmatic character named Satoshi Nakamoto released a document called “Bitcoin: A Peer-to-Peer Electronic Cash System. The creator presented the concept of electronic money that could safely operate without a central authority – bypassing banks and state institutions. With Bitcoin, the idea of ​​cryptocurrency was born – money secured by cryptography, with the possibility of transferring between users, without intermediaries.

Bitcoin wasn’t the first time anyone thought about a decentralized, non-physical form of money. However, it was the first time this idea actually caught on. The value of all other cryptocurrencies (including Ethera) generally moves in correlation with Bitcoin, and Bitcoin is still traded more often than any other digital coin.

Bitcoin’s initial goal was to create a viable alternative to traditional fiat currencies managed by central banks. The Bitcoin community is still working on scalability solutions that would allow more transactions to be carried out while maintaining minimal transaction fees. Currently, BTC is often treated as a store of value, but more and more often it functions as a medium of exchange.

What is Ethereum?

ethereum is gaining momentum

Ethereum is a global computing platform powered by native cryptocurrency, Ether (ETH). As the demand for computing power on the Ethereum blockchain grows, so does the demand for ETH.

The programming language of Ethereum is language Solidity. It is used to create smart contracts, i.e. forms of digital contracts that can be saved in the blockchain. Developers choose to build their applications on Ethereum because it is highly decentralized and therefore resistant to censorship and hacking attacks. Peer-to-peer applications on Ethereum are known as decentralized applications (dAppy). The ETH currency is needed to run the dApp on the “global computer” like the Ethereum blockchain.

Ethereum was launched in 2015 as a refinement of Bitcoin’s weaknesses. Its use cases provided more opportunities for developers to create new applications, so it eventually became a separate and competitive entity. Ethereum was created by Vitalik Buterin and his team. Currently, it is one of the fastest-growing blockchain projects.

Similarities and differences between Bitcoin and Ethereum

Both Bitcoin and Ethereum are decentralized products and therefore not controlled by the government or other central authorities. Both are built on top of distributed ledgers known as blockchain.

Blockchains are controlled by a decentralized network of users. They are rewarded for processing the data stored on each blockchain. Anyone who tries to do something wrong will be noticed immediately and any attempt to cheat will be blocked. Blockchains are resistant to changes and attacks as long as at least half of the network complies with the assumptions made in the algorithm.

Bitcoin it was designed in such a way as to ensure that people can transfer value anonymously without the involvement of the central bank or other intermediaries. Ethereum in turn, it is a blockchain with much wider possibilities. In addition to sending funds, it allows you to design various types of applications whose operating principles are determined by smart contracts.

Interestingly, some users are starting to stick their Bitcoins on the Ethereum chain instead of the Bitcoin blockchain. The bitcoins in the Ethereum network are known as “Wrapped Bitcoin”. Ether, on the other hand, cannot be stored on the Bitcoin blockchain.

Consensus mechanism

Both Bitcoin and Ethereum use the Proof-of-Work (PoW) consensus algorithm. PoW is a security and consensus method based on data processing (performing calculations) using specialized equipment located in many locations around the world. This process is called mining or in Polish – mining. However, the Bitcoin consensus mechanism has remained largely unchanged, while significant modifications are taking place in the Ethereum ecosystem.

The Ethereum project plans to change the consensus algorithm to Proof-of-Stake (PoS). In PoS, validators will protect the network instead of miners. Validators will stack (i.e. store in their wallets) a certain amount of tokens to verify and create new blocks. The Ethereum Update 2.0 is the biggest update in the history of Ethereum.

Block confirmation time

In terms of transaction speed and block confirmation times, Ethereum is much faster than Bitcoin. It takes an average of 10 minutes to confirm each block in the Bitcoin blockchain, while in the Ethereum network only 10-20 seconds. Bitcoin can handle 5-7 transactions per second, and Ethereum will process about 10 transactions during this time.

Ethereum can handle more on-chain transactions than Bitcoin. This is important, especially considering the ecosystem of decentralized applications. If we look at the trend so far, the number of transactions on Ethereum has surpassed Bitcoin with a large margin.

Ethereum 2.0 with its Proof-of-Stake consensus algorithm is to support up to 100,000 transactions per second. This is a huge increase compared to the current network bandwidth.

Number of transactions in Ethereum and Bitcoin networks | Source: The Block

Supply of tokens

Bitcoin has a steady supply of 21 million BTC. New bitcoins are issued with each new block mined. In connection with this mechanism, the term “block reward” is used. After every 210,000 blocks, or approx. Every 4 years, the prizes are halved. This event is called a halving. The reward for the first Bitcoin block was 50 BTC. The last, third halving took place in May 2020 and reduced the reward to 6.25 BTC per block.

Unlike BTC, Ethereum does not have a constant supply and a deflationary nature. However, after the EIP-1559 update scheduled for August 2021, Ether will become a deflation token.

EIP-1559 will introduce a new mechanism in which, instead of one gas fee, there will be two fees: the base fee and the inclusion fee. The base charge will be fixed and will be subject to a mechanism known as “incineration”. The inclusion fee will be an optional tip for miners. This mechanism will reduce the supply of ETH over time.

Constant supply of BTC vs decreasing supply of ETH | Source: Justin Drake, Ethereum Foundation

Property management

The Bitcoin protocol uses Unspent Transaction Outputs (UTXO) to manage the BTC property on the network. Each BTC on the network is an “unspent transaction output” that is associated with a private key and public address. When a person moves a certain amount of BTC to another address, the coins not only leave the wallet, but the ownership of the UTXO also changes.

The ownership management model in the Bitcoin network | Source: Binance Research

Ethereum uses a model similar to a bank account. Your account is debited or credited based on inbound and outbound transactions. The UTXO model used in the Bitcoin network is expensive in terms of the computing power required. In turn, the mechanism used by Ethereum is simpler and cheaper.

Ethereum ownership management model | Source: Binance Research

Bitcoin vs Ethereum – fundamentally two different ideas

Comparing Bitcoin and Ethereum leads to a deeper discussion of what blockchain technology can do to improve many aspects of our lives. Bitcoin and Ethereum are becoming more and more important tools in many industries – from finance, through transport, tourism and medicine.

It’s important to understand that Bitcoin and Ethereum are fundamentally different ideas. Bitcoin is a store of value, while Ethereum is a decentralized platform for handling smart contracts. Ether is the currency and the programmable value that drives the network. Both of these cryptocurrencies operate on the basis of blockchain technology that secures the network. We no longer need to share our personal information to make transactions. Blockchain gives us the opportunity to exchange value (not only financial) in a completely new way. We no longer have to trust institutions, because everything is controlled by an algorithm and a decentralized community of users from around the world.

Certainly, both cryptocurrencies – both Bitcoin and Ethereum have had a huge impact on the development of the industry. They inspired many developers and entrepreneurs to create new, decentralized applications managed by the community.

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