Bitcoin and Ethereum are the two most popular cryptocurrencies. Both are worth more than hundreds of billions of dollars in terms of market capitalization. But what is the difference between Ethereum and Bitcoin and what role does each project play in the industry?
Those new to the crypto space may have a difficult time understanding how cryptocurrencies work in general, let alone the differences between assets like Ethereum and Bitcoin. To help you with your journey, I’ll give you a rocket boost by explaininig how each project works, how they’re used, and which project is better.
What Is Bitcoin (BTC)?
The mysterious programmer Satoshi Nakamoto, who remains anonymous to this day, has launched Bitcoin in 2009 shortly after publishing the project’s white paper. In the white paper, Nakamoto states that Bitcoi psi a peer-to-peer electronic cash system. The main thesis is that a digital currency can exist that does not rely on intermediaries or centralized entities.
The money we use today is mainly controlled, managed, and printed by central banks. And whenever you want to send money to someone (except when using cash), you have to use a bank. Nakamoto created Bitcoin with the idea of enabling people to transfer money between each other directly from a private and digital wallet through a decentralized network.
Bitcoin’s decentralized network is powered by distributed ledger technology, also known as blockchain technology. Blockchains represent networks of nodes and miners who work together to confirm transactions and push them live on the network. These participants create a digital and immutable ledger by reaching consensus among each other.
Bitcoin incentivizes miners to confirm transactions by granting them transaction fees and block rewards. Each miner has a chance to ‘crack the code’ and earn a reward in the form of Bitcoin when mining a block of transactions. On the other hand, the fees sent to miners from from users wanting to send money through the network.
Nakamoto designed Bitcoin as an alternative to the fiat currencies and the banking system. Bitcoin is today recognized globally as an alternative currency and payment method. The asset has widespread adoption both between individual users, as well as vendors, stores, and digital merchants.
Bitcoin has seen massive growth since its initial launch in 2009. The asset went from costing a few dollars to reaching prices of up to $69,000. Bitcoin currently has a market cap worth $320 billion. Many consider Bitcoin to be the future of finance.
What Is Ethereum (ETH)?
Ethereum is an altcoin (alternative currency) that launched six years after Bitcoin. Vitalik Buterin, and other Ethereum Foundation co-founders, built Ethereum with the idea of incorporating smart contract functionality into traditional blockchains.
A smart contract is a digital, autonomous, and self-executable contract on the blockchain that executes certain actions once certain pre-determined conditions are met. For example, Bob and Alice might write a smart contract that will send 10 ETH to whoever guesses the winner of the World Cup correctly.
Smart contracts are a necessity because no mechanism that enforces trust in a blockchain network exists. Let’s say that you and another internet stranger want to send some altcoins to each other. What force guarantees that you, or the stranger, won’t betray each other and run away with the altcoins once you send the first transaction?
Smart contracts introduce trust in an otherwise trustless ecosystem by acting as decentralized intermediaries. You can design smart contracts whichever way you want, and they will do whatever you want. By being decentralized and autonomous, smart contracts allow developers to also automate many processes within the crypto industry.
For example, exchanges used to have employees manually verify and approve withdrawals. The introduction of smart contracts allowed them to automate this process and verify withdrawals almost instantly.
Smart contracts also led to the development of decentralized finance (DeFi). DeFi is an ecosystem in the crypto industry that brings decentralized financial instruments to investors. Such instruments include lending, derivatives trading, yield farming, and trading. Anyone can create a decentralized and non-custodial dApp that offers these instruments.
Ethereum is the biggest dApp ecosystem in crypto. Smart contrats allow the network and its developers to build applications that investors can use. Such applications include exchanges, lending protocols, and much more. In fact, Ethereum was the first project to make decentralized applications possible on the blockchain.
Similarities Between Bitcoin and Ethereum
There are more than enough similarities between Bitcoin and Ethereum. For example, both are decentralized and have a native token that the network uses to reward those verifying transactions. In both cases, the network’s token is also used to pay for transactions.
Both Ethereum and Bitcoin have an immutable and public ledger whose transaction history you can’t delete or edit. Everyone can participate on these networks no matter who they are, how much money they have, or where they come from. Moreover, you can use both Ethereum and Bitcoin for payments.
Bitcoin and Ethereum are also similar in terms of size. No other cryptocurrency (except stablecoins) is anywhere near their market cap. But it’s worth noting that Bitcoin’s market capitalization is double teh size of Ethereum’s market cap. The two networks also have an impressive level of institutional adoption.
Differences Between Bitcoin and Ethereum
Once you look past their shared decentralized design, you’ll figure out that Bitcoin and Ethereum are completely different projects with asymmetrical purposes and use cases. That’s not to say that one project is better than the other, it’s just that they play different roles.
Bitcoin mainly targets payments, but can sometimes serve as a savehaven asset as well. Bitcoin has a Proof of Work consensus mechanism in which miners utilize computer power to solve complex problems in order to mine transaction blocks and validate transactions.
Ethereum targets DeFi and dApps. The project has smart contracts, which Bitcoin doesn’t. Ethereum’s consensus mechanism is based on Proof of Stake. Ethereum forces validators to stake 32 ETH in order to contribute to the network, secure it, and earn staking rewards. Staking consumes much less energy compared to mining, and is more accessible.
Both cryptocurrencies have speculative value, but the way they’re used is different. Bitcoin itself has value through network adoption, mining, and the fact you can use it to transfer money online. Ethereum primarily earns its value from network adoption and growth inside its dApp ecosystem. To use dApps, users must have ETH to pay for gas fees, giving it important utility to anyone interested in DeFi.
The two networks have differing tokenomics. Ethereum is an inflationary token with a premined supply. Bitcoin is a deflationary token with a maximum supply of 21 million coins. No Bitcoins were premised before the network’s launch
Bitcoin is slower than Ethereum. It has a block time of 10 minutes and a transaction throughput of 7 transactions per second. Ethereum has a block time of 15 seconds on average and a transaction throughput of 30 transactions per second.
All in all, Bitcoin is an impressive alternative to fiat currencies and traditional banking. You can use Bitcoin either as a medium of exchange or a store of value. Ethereum is a network that runs applications and smart contracts via the ETH token.
Bitcoin vs. Ethereum: Which One Is Better?
After reading about the similarities and differences between Bitcoin and Ethereum, you might want to know which cryptocurrency is better. But the situation is too complex to provide an objective answer. As a matter of fact, there might not even be an answer.
Bitcoin and Ethereum aren’t meant to compete against each other. They have a complementary design that allows investors to participate on both networks. You can use Bitcoin to send money to a friend from another country and then switch over to Ethereum to earn passive income by providing liquidity to a decentralised exchange.
Bitcoin and Ethereum are fundamentally different. One is designed for payments and storing value while the other is meant to host a diverse hub of decentralized applications powered by smart contracts. One asset might be better than the other in certain areas, but there’s rational reason behind comparing the two.
Still feel confused about how each other works? I recommend reading the following articles