11.03.2021

Differences between Bitcoin and Ethereum

Ethereum Bitcoin
Differences between Bitcoin and Ethereum

Bitcoin and Ethereum are currently the largest and most significant cryptocurrencies in the world. Bitcoin and Ethereum differ from each other in many different ways. Knowing these differences is very important if you want to gain a broader understanding of cryptocurrencies. This paper aims to explain the basics of Bitcoin and Ethereum and the main differences between these two giants.

              
What is Bitcoin?

Bitcoin is the world’s first and best-known cryptocurrency based on blockchain technology. Bitcoin is based on a completely open-source code created by an unknown person or group that used the name, Satoshi Nakamoto. The first block of Bitcoin’s blockchain was mined on January 3, 2009. Bitcoin was the first cryptocurrency in history to be able to combine blockchain technology and cryptography. Over the years, several thousand different cryptocurrencies have entered the market and tried to challenge Bitcoin’s dominance without success. Next, let’s go through a little bit of the key features of Bitcoin. These features make bitcoin a unique investment target.

Bitcoin is a very scarce digital commodity. The maximum amount of bitcoin is 21 million bitcoin. Unlike traditional currencies (e.g., dollar and euro), bitcoin is not controlled by a central bank or any single entity. New bitcoins are created in the world every time a new block is mined. In the Bitcoin blockchain, a new block is mined about every 10 minutes, and the mining fee for it is currently 6,25 bitcoin. Bitcoin’s mining fee is halved every 210,000 blocks. The halving of Bitcoin occurs on average every four years. Bitcoin halving is a feature programmed inside the Bitcoin blockchain. The goal of Bitcoin halving is to keep the total amount of bitcoin stable and prevent inflation. Due to its scarcity, Bitcoin has also been called digital gold.

Blockchain technology is the backbone of Bitcoin. Blockchain literally means blocks in a chain. One block always contains a list of the recent transactions performed in the Bitcoin blockchain. Bitcoin utilizes a consensus algorithm called Proof of Work. There are two different operators in the network of Proof of Work-based cryptocurrencies. These actors are called nodes and miners. Nodes verify Bitcoin’s online transactions and do not receive commissions for their work. In turn, the miners collect the verified transactions together and build a new block of the blockchain from them. The miners receive a mining fee and transaction fees for those transactions that have occurred in that block for the work they do.

Bitcoin's blockchain mining today is the responsibility of efficient ASIC machines. These machines consume a lot of electricity, and they also need to be updated at regular intervals. Bitcoin mining is a professional business today. Bitcoin mining is today controlled by large mining-focused companies. In recent years, mining has also become moving in countries where cheap electricity is available.

Today, Bitcoin is the world’s largest distributed computing project. The Bitcoin blockchain is very safe due to the high computing power of the miners. The data in Bitcoin’s blockchain is impossible to edit, and it is distributed around the world. Bitcoin’s blockchain is an open blockchain. This means that anyone can view the information in the blockchain if they wish.

The global financial crisis of 2008 proved that there is an absolute need for a decentralized digital currency system such as Bitcoin. Bitcoin’s blockchain is fully decentralized, meaning that no single entity can control its operation. Also, anyone can choose to join Bitcoin blockchain as an administrator. People’s distrust of centralized systems is one of the biggest reasons for Bitcoin’s success and existence.

What is Ethereum?

Ethereum is currently the world’s second-largest cryptocurrency after Bitcoin. Ethereum was released in 2015, and its leading developer is a programmer named Vitalik Buterin. Ethereum’s operating principle differs very much from Bitcoin. Ethereum is a complete ecosystem and programming platform, while Bitcoin can be seen as a digital currency and store of value.

Ethereum belongs to the platform category of cryptocurrencies. Compared to other similar cryptocurrencies, Ethereum is by far the largest and best-known cryptocurrency. On top of Ethereum, it is possible to program various distributed applications (dApp), decentralized finance applications (DeFi), smart contracts, and even your own cryptocurrencies. Applications built on top of Ethereum often aim to eliminate third parties and various intermediaries. New and innovative applications are continually being published on the Ethereum blockchain. The popularity of the Ethereum blockchain has been multiplying in recent years, and at least with these prospects, no change is expected. Most of the new cryptocurrencies that have entered the market in recent years are explicitly built on the Ethereum blockchain.

If you want to invest in Ethereum, you actually buy Ethereum’s own cryptocurrency ether (ETH). Ether acts as the virtual fuel for the Ethereum platform. For example, ether is used to pay for transactions in the blockchain of Ethereum. The total number of ethers is currently over 130 million and is not limited. New ethers are entering the world as maintenance fees for the Ethereum blockchain. The number and quality of applications in the Ethereum platform and the number of transactions performed in the blockchain of Ethereum affect the Ethereum ecosystem’s value. The above things are also directly reflected in the value of ether. If the use of Ethereum increases, then naturally, ethers will also be used more.

Ethereum is a platform based on blockchain technology. The blockchain of Ethereum is fully decentralized and is not under the control of any single party. Ethereum is moving at a rapid pace away from Bitcoin’s familiar Proof of Work consensus algorithm toward the Proof of Stake model. In this model, you can become a blockchain administrator by locking your own cryptocurrencies to blockchain maintenance work. Compensation for blockchain maintenance and token locking is paid in ethers.

Differences between Bitcoin and Ethereum

Bitcoin and Ethereum are currently by far the largest and most significant cryptocurrencies in the world. However, as cryptocurrencies, they are completely different. Bitcoin is a digital payment system and store of value, also often referred to as digital gold. Ethereum, on the other hand, is a complete ecosystem and programming platform that developers can use to build various applications.

Miners maintain the Bitcoin blockchain. Ethereum, on the other hand, is moving from a Proof of Work model to a newer Proof of Stake model, where you can become a blockchain administrator by locking Ethereum’s own ether currency into the blockchain maintenance work. In the future, therefore, the Ethereum blockchain will not require the heavy mining infrastructure which is familiar from Bitcoin.

Bitcoin and Ethereum have both steadily grown in popularity among investors. The value of Bitcoin and Ethereum’s ether are both determined by supply and demand. However, the difference between these is that where growth in demand automatically increases the value of bitcoin, Ethereum needs to constantly generate new demand so that the pace of birth of new ethers does not negatively affect the value of ether.

People buy bitcoin for several different reasons. It is possible to use Bitcoin both as a means of payment and as a store of value. Bitcoin is purchased, for example, to protect against inflation. Investors in Ethereum believe that the use of the Ethereum blockchain will increase in the future. This presupposes that the use of existing applications built on top of Ethereum will increase and that developers will find the platform in the future. Skilled developers are a prerequisite for new and revolutionary applications to be built on top of Ethereum.

Bitcoin and Ethereum are both cryptocurrencies that utilize blockchain technology in different ways and for different purposes. The biggest differences between Bitcoin and Ethereum are in their uses and technical properties. Despite their different features, Ethereum and Bitcoin are by far the largest and most significant cryptocurrencies in the world. However, Bitcoin and Ethereum are not competitors. The success of both of them is significant for the entire cryptocurrency market.

Mikko Soon Cryptocurrency specialist
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Last updated: 10.03.2022 14:59