In 1999, economics Nobel Prize winner Milton Friedman said, “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash.”
Ten years later, the digital currency Bitcoin was born.
And for some time, this cryptocurrency dominated the market as Bitcoin rose to become the largest blockchain network. But recently, a new player entered the scene: Ethereum. The founder of this blockchain technology, Vitalik Buterin, envisioned a different path — one that would include cryptocurrency but wouldn’t be limited to it.
But first, let’s back up. What are Bitcoin and Ethereum and, more importantly, what are the differences between the two? At first glance, they might look pretty similar, but if you dig a little deeper, there are some major differences between the two technologies.
Bitcoin was created by Satoshi Nakamoto, which is thought to be a group of people rather than a single person. The group first published a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”, which described exactly what Bitcoin is and how it works. Then, during 2009, the cryptocurrency Bitcoin was launched as an open-source software.
At its launch, the exchange rate for Bitcoin was $1 for every 1,309.02 Bitcoins. The rate was created by figuring out the cost of electricity for running the computers that were generating Bitcoins. The first Bitcoin transaction that is known in the crypto community was for two Papa John’s pizzas. A man in Florida named Laszlo Hanyecz completed the transaction for 10,000 bitcoin (about $30 at the time) in exchange for those savory slices. 10,000 bitcoin is now worth about $10 million, to put that into perspective. Now that we have some info about how it all started, let’s learn about what bitcoin is and how it’s used.
A blockchain is a public ledger that details all transactions that have occurred. Each block is added in chronological order, so it’s simple to view the entire history of transactions. Because the ledger is public, it’s transparent; nothing is hidden from sight. Each node has a full blockchain — making it difficult for a single entry to be falsified. Bitcoin quickly rose to popularity for a variety of reasons, including:
Privacy. The entire history of a Bitcoin transaction is displayed for all to see. Anyone can search the transaction history of a specific Bitcoin. But it’s important to note that the Bitcoin protocol does not require people to show their identities in order to transact, so while you can view the transaction history of a Bitcoin, you can’t associate that history with a specific person, so individual privacy is protected and transactions are autonomous.
The virtual currency is not subject to inflation. Total Bitcoins are capped at 21 million, which is different from other currency systems. Inflation occurs when the value of a dollar decreases over time due to an increasing supply, such as the printing of more money. This is not possible with Bitcoin, and it remains scarce due to the cap on the number of Bitcoins.
Bitcoin breaks free of traditional institutions. From banks to centralized governing agencies, Bitcoin is an open financial protocol that allows people to transact freely, without any central governing authority, which provides a sense of autonomy.
Now that you understand a little about the history of Bitcoin and why people like it, it’s important to understand the goal of this cryptocurrency. Part of what makes Bitcoin and Ethereum so different is that although they both use blockchain technology, their goals are very different.
The goal of Bitcoin is to act as a secure peer-to-peer decentralized payment system. Since every transaction is recorded on a ledger, users can have total confidence that transactions are legit, without the worry of fraud.
Bitcoin places security as a top goal, followed by speed. Transactions in the system appear within the minutes, and are said to be highly secure because the system uses only one language for coding, C++, which has fewer than 70 different commands.
Bitcoin puts currency into circulation through the process of mining, which is described as “The process by which the transaction information distributed within the Bitcoin network is validated and stored on the blockchain. ... [miners] receive fees attached to all of the transactions that they successfully validate and include in a block.”
Essentially, miners give up their processing power to complete these transactions and, as a reward, they are awarded Bitcoins.
The current reward is 12.5 Bitcoins per block, and this reward halves every 210,000 blocks. The next halving is forecasted to take place during 2020. Also, unlike Ethereum, there is a specific number of Bitcoins that can be generated, and that number is 21 million. The mining process operates based on the “proof-of-work basis.” In order to receive blocks and add them to the blockchain, you must solve complicated math problems. Now that we understand the basics of Bitcoin, let’s better understand Ethereum, so we can understand the major differences between the two technologies.
Bitcoin is a payment system that is digitalized and free from central or government regulation. And while it’s true that Ethereum does share these qualities, it’s much more than a payment system — it’s an infrastructure.
Ethereum launched in 2015 and had an initial offering of Ether, which is the cryptocurrency behind Ethereum. The initial sale was about 60 million Ether, which resulted in the raising of about $18.5 million. From the start, the support for this blockchain technology was strong. But what made it different from everything else out there?
A centralized platform provided a cryptocurrency, but it also provided something new — smart contracts and even crowdsourcing. The Ethereum protocol is built to allow greater flexibility and provide developers with increased functionality, which expands the traditional boundaries of the “peer-to-peer” currencies, such as Bitcoin.
Startups commonly use applications such as Kickstarter to generate funding for their businesses. However, there are some cons of using sites like these, including a 5 percent site fee and a 3–5 percent payment-processing fee. Together, this can eat away up to 10 percent of the funds that you generate for your startup.
In contrast, Ethereum allows people to raise funds using the existing technology and infrastructure. For example, when starting a new project, you may create a contract and seek pledges from the community. A goal is set, along with the amount of funds required to successfully launch the project.
The money raised is held until the specified goal is reached, or until the agreed-upon date. But let’s say that you fail to raise the amount required by that specific date. When that occurs, the system is programmed to directly release funds back to the contributor on the date specified in the contract.
This streamlined approach allows users to leverage the blockchain infrastructure to efficiently organize funding, while saving fees that are typically associated with Kickstarter types of programs.Start mining today
Bitcoin doesn’t have the functionality to generate funds for startups. What’s also interesting about Ethereum’s blockchain technology is that it generates a new type of organizational structure — helping to get an idea off the ground faster.
For example, let’s say that you generate funding for a new idea. Once the funds are available, you may collect proposals from people who backed the project. Once proposals are collected, everyone who contributed would be awarded one vote on them, to generate the best direction forward. No single person is making the decision about the future of the company but, instead, it’s a collaborative project which breaks free of the “top-down” management structure norm.
The hiring of managers to make decisions and complete endless amounts of paperwork are bypassed, and the process is totally automated, with a set of preprogrammed rules to keep the project moving forward. This type of approach protects the project from outside influences and allows for the efficient decentralization of the network, minimizing downtime and getting a project up and running faster.
Now that you understand how Bitcoin and Ethereum work, it helps to call out some major differences between the two blockchain technologies. We’ve already highlighted a few of the differences, but here is an “at-a-glance” breakdown.
Average block time differs. Bitcoin’s average block time is about 10 minutes whereas Ethereum aims for about 12 seconds. Ethereum continues to focus on staying fast, but also on maintaining quality through a GHOST protocol, which is defined as the following:
The Ghost protocol in Ethereum was introduced in 2013 as a way of combating the way that fast block time blockchains suffer from a high number of stale blocks - i.e., blocks that were propagated to the network and verified by some nodes as being correct but eventually being cast off as a longer chain achieved dominance, or Forking.
However, even though Ethereum is capable of generating blocks faster, it also experiences more orphaned blocks. “An orphan, or stale block, is created when two nodes find a block at the same time.”
Ethereum’s block time remains much faster than Bitcoin’s, but it’s important to consider the above details when looking at speed.
The supply of money. Approximately two-thirds of all available Bitcoins have been mined to date, with the majority being awarded to early miners. However, Ethereum raised their capital at launch with a presale and only half of its coins are expected to be mined by its fifth year of existence. For Bitcoin, the reward for mining coins halves every four years, but Ethereum rewards miners based on its proof-of-work algorithm called “Ethash,” where five Ether are provided for each block — and it doesn’t have a cap like Bitcoin.
The cost to transact is different. With Ethereum, the cost to transact is called “gas” and the amount of gas required varies based on storage needs, complexity and the use of bandwidth. The Ethereum blockchain size has been up for debate because miners do not want to be limited like Bitcoin.
Coding differences. Ethereum features Turing-complete code, which allows anything to be calculated with enough computing power and time. This provides a distinct advantage; however, it also brings complications, and may have contributed to the DAO attack in June 2017, when a thief executed a major attack, targeting an organization that uses the system. The person made off with $50 million, and this event drove the price per unit from record highs of $21.50 to $15 in a matter of hours. Ethereum developers have since created a fix they say will neutralize the attacker and prevent stolen funds from being spent, but this event shows what can happen when a vulnerability is detected within the system.
Many compare Bitcoin to Ethereum, and although the technology is similar, the goal of each is very different. Bitcoin has proved itself a popular cryptocurrency, but Ethereum is close on its heels (the number two cryptocurrency in the world) and has a much different functionality.
Ethereum provides the ability not only to transact through blockchain technology, but also to create and execute contracts and even generate funding for new projects or startups. But in the end, it’s all about meeting a user’s needs, and those needs will continue to evolve and change in the future, and the technology that changes with those needs will rise to the top.
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