Bitcoin (BTC) and Ethereum (ETH) are arguably the two most popular cryptocurrencies out there and have greatly contributed to the sector’s growth. Bitcoin was the first cryptocurrency ever to be created and is seen as digital gold or “gold 2.0,” while Ethereum can be seen as a decentralized computer for the world.
Bitcoin is seen as digital gold because it is scarce and durable like the precious metal, but it can be easily stored and divided. Ethereum is seen as a decentralized computer for the world because the network is used to run decentralized applications (DApps), meaning applications that aren’t under the control of a central authority.
When measured in various metrics, Bitcoin and Ethereum are the top two cryptocurrencies. These metrics include market capitalization, unique wallet addresses and trading volume on cryptocurrency exchanges. Market capitalization, or market cap, refers to the total dollar value of a cryptocurrency’s circulating supply. Wallet addresses refer to unique strings of characters that represent the equivalent of accounts on a cryptocurrency’s network.
Both Bitcoin and Ethereum share similarities: They are assets based on a publicly displayed distributed ledger called a blockchain and could be stored in digital wallets, use alphanumeric strings as addresses and are traded on cryptocurrency exchanges.
Both BTC and ETH are decentralized cryptocurrencies, meaning they are not issued or regulated by central banks or other financial authorities. Instead, they rely on computers running copies of their networks, known as nodes, to ensure every network participant is on the same page.
There are notably crucial differences between both cryptocurrencies. These differences set them apart and have led to various debates in which some argue BTC and ETH are competitors. In reality, they may complement each other because they serve different purposes. BTC may be used as a store of value, while ETH is used to interact with applications built on the Ethereum blockchain. In a portfolio, BTC may be used to preserve value and as a safe haven, while ETH could be used to access decentralized financial (DeFi) services. A safe haven is an asset whose value is expected to be preserved or to rise during market downturns.
What is Bitcoin (BTC)?
Bitcoin was the first cryptocurrency to be launched that functions independently of any central authority. The first block of data on its blockchain, known as the genesis block, was mined in January 2009 by its pseudonymous creator Satoshi Nakamoto. Since then, Bitcoin’s adoption has been steadily growing over time. Bitcoin was created as a peer-to-peer (P2P) electronic cash system, which means that transactions can be conducted without any central authority.
The concept that led to the creation of the Bitcoin blockchain was created in 2008 through a white paper written by Nakamoto. Bitcoin allows users to manage a currency outside the control of any government, bank, or financial institution. Instead, it relies on a decentralized network of users running the Bitcoin blockchain software with a set of rules every network participant agrees to. The rules determined by the software determine how transactions work, the time transactions take to settle, a 21 million BTC supply limit and more.
Bitcoin was the first cryptocurrency based on decentralized ledger technology (DLT) called the blockchain. Blockchain technology solved a number of problems, including the Byzantine Generals Problem, which describes the difficulty decentralized systems have on agreeing on a single truth. To overcome the Byzantine Generals Problem, Bitcoin employs a proof-of-work (Pow) method and a blockchain. The multiple miners, who all have the role as generals, solve the difficulty. Each node makes an effort to validate transactions that are identical to communications sent to generals.
The Bitcoin blockchain is publicly available and is associated with the history of every transaction ever conducted on it while being distributed among several nodes to prevent tampering. If a different version of the blockchain is detected, it is rejected by other network participants, known as tampering.
Tampering is detected through long strings of numbers known as hashes, which must be exactly the same for every node. The Bitcoin network processes sets of data and turns them into hashes through the SHA-256 hash function, the algorithm that processes data to turn it into those long strings of numbers. Once a valid hash is found, it is broadcasted to the network and added to a new block.
Miners on the Bitcoin blockchain generate and broadcast these blocks through a PoW process in which machines use vast amounts of computing power to engage in hashing functions. Through proof-of-work, network participants reach a consensus.
Bitcoin’s mining and consensus processes ensure that malicious actors cannot alter other users’ balances or spend their funds twice while keeping the network up and running with almost no downtime. Being a tamper-proof cryptocurrency that can be transacted at any time without any intermediaries or central banks controlling it has helped Bitcoin’s popularity surge over time.
While BTC started as a medium of exchange, meaning it can facilitate the purchase of goods and services, it was also adopted as a store of value. A store of value is an asset whose value is maintained over time.
What is Ethereum (ETH)?
While Bitcoin uses blockchain technology for monetary transactions and allows nodes and messages to be attached to each transaction, Ethereum takes it a step further by using the blockchain to create a decentralized computer.
Ethereum is a decentralized open-source and distributed blockchain network powered by its native cryptocurrency, Ether (ETH), used to make transactions and interact with applications built on top of the Ethereum network. Ethereum’s white paper was published in 2013 by its co-founder Vitalik Buterin, detailing the use of smart contracts, which are self-executing agreements written in code.
The smart contracts allow for the creation of decentralized applications, or DApps, which are applications that work without a central entity behind them. In 2014, Buterin and Ethereum’s other co-founders sold Ether to raise funds for Ethereum’s development.
Ethereum’s co-founders include Buterin, Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Iorio and Amir Chetrit. The co-founders also set up the Ethereum Foundation in Switzerland, a non-profit organization dedicated to supporting the Ethereum network.
In July 2015, the Ethereum network was launched as one of the most ambitious projects in the crypto space with the goal of decentralizing everything on the internet. Similar to Bitcoin, Ethereum is a decentralized platform without a governing central authority that uses PoW to ensure malicious actors aren’t able to tamper with the blockchain data.
Ethereum has its own programming language called Solidity, which is used to program smart contracts to run on the blockchain. The potential applications of Ethereum are wide-ranging thanks to the use of smart contracts. Its main use cases may not have yet been invented, similar to the way Facebook and Google weren’t created years after the internet was launched. Innovation on the Ethereum network is surging, with decentralized applications offering financial services, nonfungible tokens (NFTs) being examples of what smart contracts allow developers to create. While Bitcoin is used as a medium of exchange and store of value, Ether is used to interact with applications on the Ethereum network. Paying for transactions, creating smart contracts and using DApps all require users to pay fees in Ether. As the value of Ether went up, it also started being used as a store of value.
Decentralized applications built on Ethereum allow Ether and other crypto assets to be used in a plethora of different ways including as collateral for loans or be lent out to borrowers to earn interest. Collateral refers to assets pledged as security for repayment of a loan. For example, a user can deposit $1,000 worth of ETH in a decentralized application to take out a $750 loan through it, while earning interest on the deposited funds.
Key differences between BTC and ETH
While both the Bitcoin and Ethereum networks are based on the concept of distributed ledgers and encryption, they are vastly different in terms of technical specifications. For instance, while Bitcoin serves as a digital equivalent of gold used to store value, Ether is used to power the Ethereum network and its applications.
It is possible to issue new tokens on both the Bitcoin and Ethereum networks. Bitcoin uses the Omni layer, a platform meant for creating and trading currencies on the Bitcoin blockchain. The Omni layer’s adoption has centered around stablecoins. Ethereum tokens, on the other hand, are issued following different standards, with the most popular one being ERC-20.
The ERC-20 standard defines a list of rules for the tokens on the network. The ERC-20 standard includes several functions developers have to implement before launching their tokens. These functions include providing information about the token’s total supply, providing account balances on users’ addresses and allowing funds to be moved between addresses.
Bitcoin transactions are monetary in nature but transactions can have notes and messages affixed to them by encoding these notes or messages into data fields in the transactions. Ethereum transactions can contain executable code to create smart contracts or interact with self-executing contracts and applications built using them.
Other differences between these networks include the time for new blocks of data to be added, which determines the time it takes to confirm transactions. Blocks on the Bitcoin network are added on an average every 10 minutes, while on Ethereum, they take about 15 seconds.
Public wallet addresses are also different on both networks. These wallet addresses are unique identifiers that allow users to receive funds, comparable to an International Bank Account Number (IBAN), which is a unique identifier financial institutions use to identify which bank and country a client’s account belongs to. On Bitcoin, addresses can start with a 1, a 3, or with “bc1,” while on Ethereum these start with “0x.”
While both Bitcoin and Ethereum have relied on proof-of-work consensus, Ethereum is moving away from it and into a proof-of-stake consensus algorithm. Proof-of-stake operates depending on a transaction validator’s stake in the network. To become validators on Ethereum, which are entities that verify transactions to ensure the network isn’t being tampered with, users have to stake their ETH.
Proof-of-stake consensus algorithms limit the energy necessary to reach consensus by attributing mining power to the proportion of validators’ tokens instead of having miners with specialized computers. A proof-of-stake network is more energy efficient with lower entry barriers for validators and stronger immunity to decentralization because it is easier to become a validator.
Bitcoin is also represented on the Ethereum blockchain in the form of ERC-20 tokens. To take advantage of DApps, a tokenized version of Bitcoin was created and launched on Ethereum.
There are numerous tokenized versions of Bitcoin on the Ethereum network. These are backed by Bitcoin at a 1:1 ratio, meaning that for every ERC-20 token representing Bitcoin in circulation, there is one BTC in custody backing it. Tokenized versions of Bitcoin on Ethereum allow users to keep on holding BTC while using decentralized applications. For example, token holders can lend their BTC to earn interest.
Bitcoin vs. Ethereum: scaling solutions
The base Bitcoin and Ethereum networks both suffer from scalability issues. While Bitcoin handles on average seven transactions per second, the Ethereum network is able to handle around 30 transactions per second. In comparison, Visa handles around 1,700 transactions per second while claiming to be able to scale to 24,000.
With the number of people using both blockchains grows over time, both Bitcoin and Ethereum have almost reached their capacity limitations and are in need of solutions that will help them accommodate more users. As it stands, both networks’ transaction fees rise when demand for block space goes over what they can handle.
BTC and ETH have different approaches to solving their scalability issues. Bitcoin has implemented technical improvements such as Segregated Witness (SegWit), an upgrade that “segregates” some data outside of the space available in each block propagated to the network. SegWit allows for a more efficient use of the limited 1 MB of space each Bitcoin block has.
Moreover, developers have been working on a layer-two scaling solution, referring to a solution that would build a transaction layer on top of the base blockchain called the Lightning Network. On the Lightning Network, transactions are fast and fees minuscule, as they are sent through payment channels users create.
The Lightning Network’s user-generated payment channels are pre-funded with BTC, and could allow most of the transactions to move from the base blockchain and into this layer-two network.
Proponents expect the Lightning Network to be able to handle up to 15 million transactions per second. These would not be settled on the Bitcoin network itself, as the only transactions that would be settled on the base Bitcoin blockchain would be those opening and closing Lightning Network payment channels.
Ethereum is also implementing scaling solutions that will both work on the base Ethereum network and through layer-two networks. Ethereum’s main bet to expand its base blockchain is called Sharding, and would reduce network congestion and increase transactions per second by creating new blockchains called “shards.”
Every device running the Ethereum blockchain would see the Random-Access Memory (RAM) and storage requirements drop significantly, as shard chains could help spread the computing resources needed to run Ethereum across a total of 64 networks.
Layer-two scaling solutions on Ethereum rely on servers that group large amounts of transactions before submitting them directly to the Ethereum blockchain. The way these transactions are grouped and then broadcast to Ethereum varies significantly between implementations. Other layer-two solutions for Ethereum are called sidechains. Sidechains are independent networks that run parallel to the Ethereum network and are compatible with the network via protocols that allow users to swap tokens from one network to the other, effectively allowing them to use applications built on ETH while paying less in fees. Bitcoin and Ethereum take advantage of multiple scaling solutions to help reduce network congestion and increase the number of transactions they can handle per second.
Read full article here