What's the Difference Between Bitcoin and Ethereum?
Bitcoin and Ether (the currency used on the Ethereum platform) are two of the most popular cryptocurrencies available today, accounting for approximately 60% of the market value of all cryptocurrencies as of early May 2021. While both are decentralized and based on blockchain technology, there are quite a few notable differences between them. Here is a look at the history and structure of each.
Bitcoin is the first cryptocurrency to receive widespread adoption. After all, blockchain was first introduced to the world with bitcoin. The idea for the revolutionary technology was published in October 2008 by an anonymous person, or group of people, calling themselves Satoshi Nakamoto. Satoshi imagined a digital store of value (i.e. 'money') that could circulate freely without the need for banks or governments, or any kind of central oversight. To emphasize the importance of this point, this network was created without any central entity controlling the network. In January 2009, Bitcoin was launched and the first bitcoins were mined.
The bitcoin protocol is an open-sourced technology, which means that anyone (yes, anyone) in the world can copy the technology, adjust things they believe should be done in a different way, and then publish a new protocol to the world. As Bitcoin grew more and more valuable, other cryptocurrencies emerged. They’re commonly referred to as altcoins—a contraction of “alternative coins”— and of the nearly 10,000 altcoins currently in existence, one in particular found widespread success and acceptance. Ether is now the second-largest cryptocurrency by market cap in the world. It’s so successful that lumping it in with other altcoins feels inappropriate.
Ether is the currency component of a decentralized, open-source, blockchain-based software platform called Ethereum that was launched in 2015. Unlike Bitcoin, which is solely intended to be transactional or a store of value, Ethereum is a network that different applications can be built upon—and ether is the currency required to build and run those apps.
At nearly $750 billion, Bitcoin’s market cap is just more than double Ether’s $321 billion (as of May 20, 2021).
Both Ethereum and Bitcoin are based on encrypted, unalterable public ledgers known as blockchains. While the Bitcoin blockchain allows you to do little more than transfer value from one place to another, Ethereum is a protocol that can carry out sets of instructions called smart contracts. Smart contracts are created to be enforceable agreements between two parties, without the need for human intervention. The requirements to fulfill the contract are encoded onto the blockchain, allowing individuals to structure complex financial transactions without requiring a human to verify that the requirements are met. This provides for financial use-cases such as trading, borrowing/lending, earning interest, betting/wagering, and even some forms of insurance.
Miners are the nodes, or computers, that record transactional information to a network’s blockchain in exchange for a reward. Not only do these miners add transactional information to the network, but they validate the records on the blockchain with each new block, providing a form of continuous verification. Bitcoin’s reward is currently 6.25 bitcoins per block, plus fees. (That number will decrease to 3.125 around May 2024 in a process called halving, in which the Bitcoin reward is cut in half with every 210,000 blocks mined, or roughly every four years.) Ethereum’s block reward is currently 2 Ether, plus fees. While Bitcoin production will stop when 21 million bitcoins have been mined (which will occur in the year 2140), there is no hard cap on Ether.
Adding a new block to the blockchain is much faster on Ethereum: 14 seconds versus an average of 10 minutes with Bitcoin. What that means, other than a shorter wait time, is that Ethereum can handle more transactions as Bitcoin each day.
Fees on either network fluctuate depending on network activity, but lately Ethereum’s average fees have been twice the amount of Bitcoin’s, as a wide variety of applications compete for block space within the Ethereum network.
Strengths and Weaknesses
Bitcoin’s biggest strength just might be its brand awareness. It is, by far, the best known cryptocurrency. It’s synonymous with crypto, which, for many people, makes it the most trustworthy option. As a result, Bitcoin is the default investment choice for people who are new to the space. Secondly, the security of the Bitcoin network is incredibly important. It is extremely difficult to alter or falsify a record on the bitcoin protocol and there are few vulnerabilities for potential hackers to exploit. That inflexibility, however, can also be seen as a weakness. Developers are introducing improvements to Ethereum at a faster rate than Bitcoin.
Ethereum is planning to roll out a system-wide upgrade to make the platform more secure and scalable. Ethereum 2.0, also known as ETH2, may also include a new transaction verification process called Proof of Stake. In such a system, miners put up their own coin as collateral to be allowed to verify transactions and mint new coins. If they are caught falsifying the record, they lose their stake.
A successful transition to a Proof of Stake system would arguably make Ethereum far more sustainable than Bitcoin, whose Proof of Work mining mechanism demands large amounts of energy. And it might even allow for faster processing of crypto transactions, thus hastening the use of cryptocurrencies for everyday purchases.
The imminent arrival of ETH2 has revived talk of the Flippening, the hypothetical moment when Ethereum’s market capitalization surpasses Bitcoin’s. The Flippening has been predicted a number of times before, but each time it’s failed to materialize. Bitcoin’s market cap is currently almost double that of every other cryptocurrency combined. That margin, however, is near historical lows.
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