• Tue. Apr 16th, 2024

Bitcoin (BTC) vs. Ethereum (ETH): Key Differences

May 1, 2023

Undoubtedly, Ethereum and Bitcoin are two famous cryptocurrencies that have gained great traction over the past few years. Consider these two cryptocurrencies and Pepsi and coca cola of the crypto world. Although many believe these two assets are competitors, the truth must be clarified.

In 2009 Bitcoin laid its step in the cryptosystem and has been referred to as “digital gold”, whereas Ethereum is often regarded as a “digital universe”. Both these cryptocurrencies are blockchain-based and employ distributed ledger technology to construct a valuable layer on the computer. But Bitcoin’s architecture is confined to transactions and exclusivity.

While on the other hand, Ethereum extends blockchain by including a computer at the value layer, substituting conventional financial services like loans and trade with code.

Both Ethereum and Bitcoin systems are powered and protected by a decentralized framework of individuals globally called miners. Miners are rewarded for maintaining the system and keeping it safe. Decentralization is the fundamental feature of blockchain technology that distinguishes Bitcoin from the fiat currency, which is centralized and controlled by a central authority.

In 2008 when centralized authorities abandoned the world, Satoshi Nakamoto came to the rescue with the creation of Bitcoin to give the world decentralized monetary authority. Ethereum, on the contrary, was inspired by Bitcoin. But in contrast to Bitcoin, it provides versatility by introducing Smart contracts and the DAO concept in the cryptosystem. Not only this, it provides unlimited potential to its users as well.

Understanding the differences between Bitcoin and Ethereum constitutes the initial step toward a deeper trip into technological advancement and where it may be going in the coming years. In this article, we’ll thoroughly review these two cryptocurrencies before learning what makes them unique.

Understanding Bitcoin

Bitcoin is a decentralized digital currency that enables peer-to-peer transactions in the absence of middlemen such as financial institutions or other monetary organizations. It was founded in 2009 by an unknown person or group under the alias Satoshi Nakamoto.

Since then, it has gained the attention of several investors and is now the most widely used cryptocurrency in the world. Though it has had its ups and downs, especially in its early days, its progress has been consistent in recent years.

Bitcoin transactions are cryptographically validated by nodes in the network and stored in a ledger known as a blockchain. The blockchain serves as a constant and transparent ledger of all transactions and ensures the network’s confidentiality and safety.

As a result, everyone has a history of each transaction that has previously occurred, and all relevant information is accessible to anybody who desires to obtain data. One of Bitcoin’s distinguishing characteristics is its market cap, with just 21 million Bitcoins expected to ever exist. As a result, it is deflationary money, in contrast to typical fiat currencies, which are inflationary.

BTC miners employ the Proof-of-Work (PoW) technique to produce and broadcast these transactions. To perform hashing processes, computers must use massive amounts of processing power. In return for their efforts, miners are rewarded with newly-created Bitcoin.

For those who don’t know, Proof-of-work is the way that network members utilize to reach an agreement. Moreover, users may employ digital wallets to hold and move Bitcoins, which are encoded and secured by private keys. Transfers are handled swiftly and at minimal costs, which makes them an appealing option for international payments and transfers.

Due to Bitcoin’s transaction and agreement processes, which guarantee that the organization runs smoothly, fraudsters and organizations cannot alter the holdings of other members or use their assets for malicious purposes. This also protects users’ assets from double-spending.

Bitcoin’s popularity stems primarily from its status as a virtual currency that cannot be manipulated and can be traded at any moment, regardless of the participation of middlemen or financial institutions.

Bitcoin was initially intended to be a form of exchange, allowing users to purchase a range of goods and services. Yet, recently, it has also evolved into a type of store of value and a highly successful investment field.

So, in short, Bitcoin provides a decentralized and transparent way to transfer value without intermediaries such as banks or other financial institutions. Its decentralized nature also makes it resistant to censorship and manipulation by governments or other centralized authorities.

Understanding Ethereum

Ethereum is a blockchain-based platform which means it is also decentralized. Ethereum is an open-source, shared blockchain network that allows developers to create and execute decentralized applications (DApps) and smart contracts.

Vitalik Buterin invented Ethereum in 2014, and it is now the second-largest cryptocurrency by market valuation after Bitcoin. Vitalik issued a white paper in which he extensively defined the concept of smart contracts and how they are utilized.

The Ethereum platform is distinct in the fact that it not only maintains transaction data like Bitcoin, but it also records and implements smart contracts. Smart contracts are arrangements that may autonomously execute an agreement’s provisions without the assistance of mediators or middlemen. The implementation of smart contracts enables the creation of decentralized apps referred to as Dapps.

Ethereum, like Bitcoin, is a decentralized platform that uses the Proof of Work protocol to reach a consensus. But recently, Ethereum updated to Ethereum 2.0, which uses Proof of Stake (PoS) instead of Proof of Work. The upgrade aimed to solve network congestion issues to increase the transaction rate.

To protect the network and confirm transactions, Ethereum employs the Proof of Stake (PoS) consensus process. Validators also referred to as “stakers” in a PoS system, are selected according to the amount of Ethereum they hold.

They are then responsible for uploading new blocks to the blockchain and confirming transactions. Validators are encouraged to be truthful since they can receive transaction fees and newly minted Ethereum for their efforts.

Ether (ETH) is Ethereum’s coin which is utilized to pay transaction fees as well as to incentivize validators. Ether, like Bitcoin, may be employed as a different type of digital money. Ethereum’s most important characteristic is its capability to design and operate decentralized apps. Developers may use Ethereum to create decentralized financial (DeFi) apps, game platforms, markets, etc.

Since they operate on the Ethereum blockchain, these applications are decentralized, which implies they are not regulated by one body and can’t be halted by government authorities or other centralized bodies.

Another distinguishing element of Ethereum is its adaptability. Using the ERC-20 standard, developers may build customized tokens on the Ethereum network. Tokens may symbolize everything from loyalty points to physical commodities such as gold or equities.

As a result, a robust community of decentralized apps and currencies has emerged on the Ethereum blockchain. At the same time, Bitcoin could only be utilized as a means of exchange in the form of wealth and are just like currencies we use daily.

As the value of Ether soared, a growing number of people started to save their money in ether wallets. Decentralized apps built on Ethereum enable Ether and other cryptocurrencies to be utilized across a broad range of settings. It can be a win-win situation if you understand its Ethereum concept and it’s working for you.

Bitcoin vs. Ethereum: Differences

We know that Bitcoin and Ethereum are two of the most well-known cryptocurrencies. While they are both decentralized digital currencies, they differ significantly in various ways. Let us look more into their differences.

Historical Backgrounds

The first distinction between Ethereum and Bitcoin is their unique historical origins. Bitcoin was the first cryptocurrency ever created; as already stated, Satoshi Nakamoto released it to the world in 2009. Since all information was anonymous, whether this moniker relates to an individual or a group is uncertain. Nobody even knows if the person who launched this amazing innovation is alive.

As for Ethereum, Vitalik Buterin, a researcher and developer, was the one who originally released Ethereum in 2015. He improved the platform by incorporating distributed ledger and the pre-existing original cryptocurrency, Bitcoin. Consequently, the system now has significantly increased potential. Buterin is the one who created Ethereum decentralized software and smart contract framework.

Consensus Mechanism

The consensus methods of Bitcoin and Ethereum vary. Bitcoin employs the Proof of Work consensus approach to verify transactions on a blockchain. Proof of Work uses computational power to solve complex mathematical problems and verify transactions.

Whereas Ethereum employs a proof-of-stake technology, which consumes less energy to ensure transactions as it involves validators or stakers selected by the platform itself. It should be noted that Ethereum was initially based on the PoW consensus mechanism but was upgraded in 2020 due to several issues the platform was encountering.

Transaction Cost

Bitcoin owners are not obligated to submit any transaction cost. You can give the miner additional money to have his eyes set, especially on your transaction; however, the transaction will continue to be performed even if you do not pay for it.

In contrast, Ethereum necessitates some amount of fees to be paid for your operation to be completed. Your Ether gift will be converted into a gas equivalent, a unit necessary to fuel the tasks necessary to add your transaction to the blockchain ledger.

Environmental Impact

One of the significant distinctions worth mentioning is these two cryptocurrencies’ impact on the environment. Bitcoin works on PoW protocol as stated prior as well. PoW requires miners to carry out the whole complex process of verifying a transaction and earning rewards in the form of Bitcoin.

But it should also be noted that PoW consumes a significant amount of electricity, which is why bitcoin has garnered much controversy. The miners, in order to be a part of the mining process, need to have all the requirements to validate a transaction.

Ethereum, in contrast, appears to be attempting to modify its technology to a framework akin to “proof-of-stake” to reduce its power construction. PoS requires validators to stake their holding first. The network then selects the validator based on their stakes.

The greater an individual’s holding, the more the chances of him becoming a validator. When the system works properly, those who engage are rewarded with rewards.

The important point to note here is that PoW requires electricity to function, which is not the case with PoS. Hence we can say that PoS is more environmentally friendly. Due to this, Ethereum may someday become more ecologically benign than Bitcoin if implemented under the correct conditions.

It is crucial to note, however, this complex change has yet to be completed. On the other perspective, numerous Bitcoin supporters argue that the operation may not always be harmful to the environment if miners employ renewable energy.

Use Cases

Bitcoin focuses entirely on being the greater currency, lacking the extra capabilities of Ethereum’s smart contracts and tokens. Although both Ethereum and bitcoin networks enable developers to develop applications alongside, using the blockchains for storage of data.

Application developers in Ethereum may establish their own tokens to control their apps. They encompass “standards”, such as ERC-20 and ERC-721, that correlate to tokens such as NFTs and DAI.

Ethereum also supports smart contract programs. Developers may create these apps by using Ethereum as a global computer, scripting contracts that automatically operate without the intervention of a centralized entity.

Many use cases that formerly necessitated centralized intermediates, such as DeFi and two-sided markets, are now possible. Bitcoin proponents will claim that these additional features are unnecessary and devalue the real concept of improved money. They claim that all these features jeopardize the blockchain’s authenticity. Ethereum advocates feel that these extra features are required.

Availability

One of the most notable differences between Bitcoin and Ethereum is the supply limit of each of these cryptocurrencies. The notion that the total quantity of Bitcoin is limited to 21 million represents one of the aspects that assist in identifying it. This restricted amount of tokens in the market creates exclusivity, which, like gold, may contribute to keeping its value steady.

That is why Bitcoin is known as a deflationary cryptocurrency. Miners will start focusing their emphasis on other possible revenue streams, like transaction expenses, once the maximum output cap has been achieved and block rewards have been awarded.

Alternatively, Ethereum doesn’t set any supply constraints but restricts the quantity generated each year. The network limits output via “burning” Ether to deter miners from exploiting the process and to preserve the cryptocurrency’s deflationary value throughout the duration.

Hash Rate

Since the hashing algorithm employed by the two cryptocurrencies, i.e., Ethereum and Bitcoin, differs, their hash rates cannot be directly compared. But, the hash rate of Ethereum is far greater than Bitcoin’s, implying that Ethereum is far safer against 51% assaults.

Volatility

The values of both Bitcoin and Ethereum are quite volatile. With Bitcoin, this is due to the fact that it is still a newish asset, with a lot of conjecture and ambiguity around it. Ethereum, on the contrary, is a bit more developed but nevertheless experiences comparable volatility because it is frequently utilized as a medium for introducing Initial Coin Offerings (IOCS). These ICOs are extremely volatile, and their outcome can have a substantial influence on Ethereum’s price.

Market Capitalization

Market capitalization is a statistic used in the cryptocurrency industry to determine how prominent or lucrative a cryptocurrency is. Bitcoin’s market cap was over $880 billion USD in September 2021, whereas Ethereum’s market cap was approximately $375 billion USD. Yet, it’s vital to remember that market capitalization is a volatile indicator that fluctuates depending on market circumstances and other variables.

Future of Bitcoin and Ethereum

Prices have increased by multiples in recent years, particularly in 2020. From an investment standpoint, the potential of both cryptocurrencies is bright. Investors looking for long-term holdings in Ethereum may discover that now is the moment to get involved, as its values will skyrocket as additional updates are released.

Bitcoin is in the midst of a price surge, yet there’s a great deal of doubt and a shortage of strong foundations for further price increases.

The capacity of Bitcoin and Ethereum to overcome their individual difficulties, such as scalability and energy efficiency, will determine their future success. As cryptocurrency acceptance and usage develop, it is probable that both Bitcoin and Ethereum will continue to be prominent participants in the cryptocurrency market, providing various goals and tackling various scenarios for usage.

Finally, each cryptocurrency’s success will be determined by the needs and tastes of its own networks and users.

Conclusion

Ethereum and Bitcoin are two of the most prevalent and extensively utilized cryptocurrencies. Bitcoin is primarily utilized as a payment method and a store of value. Ethereum, on the contrary, is a distributed system which supports smart contracts and decentralized applications (dAPPS) through the use of blockchain technology. Both cryptocurrencies have different uses and market values, but both play a significant part in the crypto world.

Bitcoin benefits from being a well-established cryptocurrency with a strong network impact, whereas Ethereum benefits from being a framework for creating decentralized apps. The future of both cryptocurrencies depends on the way they encounter their issues.

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