Bitcoin vs Ethereum- how can they be compared?
Before we begin, we have to address that Bitcoin and Ethereum are like the Pepsi and Coca-Cola of the cryptocurrency environment. They are often compared against one another, as the number one and two biggest names in the market. Bitcoin vs Ethereum; from basis to prices, these two concepts are very much different. However, even in these differences similarities can be found.
Bitcoin and Ethereum are systems, while bitcoin (BTC) and Ether (ETH) are the cryptocurrencies that are used by those systems. We have to be clear when comparing two ecosystems, whether we are comparing the assets, technology, or even both.
Both of these ecosystems are fundamentally different because Bitcoin was created to enable decentralized finance, while Ethereum was designed to enable apps and contracts.
Both Bitcoin and Ethereum use blockchain technology to verify and record transactions, but the future changes that will affect how Ethereum works will mean how they do it is different, with outcomes for sustainability, speed, and accessibility.
So when saying which one is better, or putting them up like Bitcoin vs Ethereum, we have to know that the main difference lies in what we know as a consensus mechanism.
Bitcoin is a decentralized, peer-to-peer payment network powered by its members with no central authority.
It’s the most popular cryptocurrency of all time, and it allows people to do a secure transactions and keeps their identity a secret while sending or receiving Bitcoin.
Payments are made using cryptography, so all the transactions are secured on the blockchain. Many people believe that Bitcoin will be a better alternative to conventional electronic transactions.
Ethereum is a decentralized platform upon which different applications can be built, enables, and supported by the value and effort of people using it.
This blockchain technology has some similarities with Bitcoin, but the functionality of Ethereum is more than just enabling digital currency.
This platform has its own programming language that runs on the blockchain and lets developers create and run distributed apps.
What is a consensus mechanism?
This mechanism is a computer algorithm that makes a blockchain workable. It manages to do this by solving what’s known as the double-spend problem.
For example, a 10$ note once spent doesn’t belong to you anymore, so you can’t spend it again. Because BTC is a string of computer code, it can be copied infinitely. This means, in theory, that you could simply make copies of your BTC and spend it over and over again.
However, when you send someone BTC, the copy you owned is destroyed and a new version is created in the account where you sent it.
All of this is recorded on a distributed ledger for the whole world to see. Since everyone can see on their copies of the ledger that you’ve spent on BTC, you can’t try to spend a copied version of it. So, in simple words, you can’t cheat the system.
Bitcoin and Ethereum actually use absolutely different consensus mechanisms.
Bitcoin uses a mechanism called proof of work, while Ethereum is moving towards a proof of stake mechanism. Here we can see the differences between these two consensus mechanisms.
Proof of work
This kind of consensus mechanism asks participants to perform complex computations for the chance to become the user who gets a chance to validate a bunch of transactions and add them to the blockchain while earning a set amount of crypto.
This work involves guessing, as precisely as possible, an alphanumeric, unique string of 64 characters.
There are trillions of possible combinations to these strings, so those who own the most powerful computer hardware can make the most guesses per second within the 10-minute period of time, and have the best chance of becoming the validator.
In order to get a copy of the ledger validated and added to the block, you’d need to control at least 51% of the computing power of the network. This is how the consensus method prevents treachery.
This work used to be done by people who looked for a hobby at home, but the processing power needed to increase over time, so the mining process is now moved to companies and specialist organizations, or rather to those who can afford the power and hardware needed to run it.
Proof of work systems, like Bitcoin, have taken in a lot of criticism for the amount of energy expended by the hardware involved.
They use 19 terawatt per hour (TWh) of electricity per year, which is just under the amount used by the entire nation of Norway.
Proof of stake
This consensus mechanism asks users to stake their own money for the chance to validate transactions, and then add a block to a blockchain, rather than resolve complex computations.
The more crypto person stakes, their chances of being chosen as a validator increase. When validating a block of transactions they also earn a set amount of crypto. The system also prevents bad actions with financial penalties.
Proof of stake stacks the deck in favor of people with more money but protects against people adding fake records to the blockchain because they’d need to stake at least 51% of the money in the network to control a consensus.
Because there is no need for powerful computer hardware, proof of stake is considered a more environmentally friendly consensus mechanism.
Decentralized payments vs decentralized software
Bitcoin was created simply to facilitate decentralized payments, meaning to allow people to send and receive payments without an intermediary like a bank, for example.
On the other hand, Ethereum was designed to do more than just send and receive crypto.
Using blockchain, which provides a fixed record of transactions, Ethereum was designed to facilitate decentralized software such as smart contracts and dApps.
A smart contract is a digital agreement between two or more parties that will execute once certain conditions are fulfilled.
A dApp is an application that isn’t controlled by a middleman, or rather a central authority. We can take Twitter as an example of a centralized app, where users rely on it as an intermediary to send and receive messages.
Speaking of dApp, it’s distributed on a blockchain, with users who are able to send and receive data directly without a middleman.
So while you could say that Bitcoin is larger, Ethereum is faster and these two aren’t strictly in competition with each other because they are created to do different things. On the other hand, BTC and ETH are directly comparable.
The transaction fees in Bitcoin are totally optional. You can pay the miner more money to have him pay special attention to your transactions, for example. Still, the transactions will go through even if you don’t pay a fee.
However, for Ethereum, you must provide some amount of ether in order for your transaction to be successful.
As for the average amount of time it takes to add a new block to the blockchain, in Bitcoin it takes up to 10 minutes, while in Ethereum it takes only about 12 to 15 seconds.
Hashing algorithms are part of what makes blockchain technology so difficult to hack, and we are thankful for them. Cryptographic hash functions keep their privacy and ensure the security of the systems.
Both use a hashing algorithm, Bitcoin uses SHA-256, while Ethereum uses the Ethash hashing algorithm.
Bitcoin vs Ethereum – Which one is better?
The answer to the question of which one is better is entirely up to your requirements. While Bitcoin works better as a peer-to-peer transaction system, Ethereum works well when you need to create and build distributed apps and smart contracts.
Researching this question lead to a deeper discussion of what blockchain technology can do to improve aspects of our lives. Both Bitcoin and Ethereum will likely be a part of future finance.
It’s crucial to understand that Bitcoin and Ethereum are fundamentally different ideas, even though the backbone of Ethereum and Bitcoin is the same. Both of them run on blockchain technology to secure their networks. Blockchain gives the power to create a trustless, immutable way to do business.
So to summarize, Bitcoin vs Ethereum – there is no clear winner. When choosing between these two it’s important to know what you desire to accomplish.