Bitcoin vs. Ethereum: What's the Difference?
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By NATHAN REIFF
Reviewed By SOMER ANDERSON
Updated Jun 16, 2020
Bitcoin vs. Ethereum: An Overview
Ether (ETH), the cryptocurrency of the Ethereum network, is arguably the second most popular digital token after bitcoin (BTC). Indeed, as the second-largest cryptocurrency by market cap, comparisons between Ether and BTC are only natural.
Ether and bitcoin are similar in many ways: each is a digital currency traded via online exchanges and stored in various types of cryptocurrency wallets. Both of these tokens are decentralized, meaning that they are not issued or regulated by a central bank or other authority. Both make use of the distributed ledger technology known as blockchain. However, there are also many crucial distinctions between the two most popular cryptocurrencies by market cap. Below, we'll take a closer look at the similarities and differences between bitcoin and ether.
KEY TAKEAWAYS
Bitcoin signaled the emergence of a radically new form of digital money that operates outside the control of any government or corporation.
With time, people began to realize that one of the underlying innovations of bitcoin, the blockchain, could be utilized for other purposes.
Ethereum proposed to utilize blockchain technology not only for maintaining a decentralized payment network but also for storing computer code which can be used to power tamper-proof decentralized financial contracts and applications.
Ethereum applications and contracts are powered by ether, the Ethereum network’s currency.
Ether was intended to complement rather than compete with bitcoin, but it has nonetheless emerged as a competitor on cryptocurrency exchanges.
Bitcoin Basics
Bitcoin was launched in January of 2009. It introduced a novel idea set out in a white paper by the mysterious Satoshi Nakamoto—bitcoin offers the promise of an online currency that is secured without any central authority, unlike government-issued currencies. There are no physical bitcoins, only balances associated with a cryptographically secured public ledger. Although bitcoin was not the first attempts at an online currency of this type, it was the most successful in its early efforts, and it has come to be known as a predecessor in some way to virtually all cryptocurrencies which have been developed over the past decade.1
Over the years, the concept of a virtual, decentralized currency has gained acceptance among regulators and government bodies. Although it isn’t a formally recognized medium of payment or store of value, cryptocurrency has managed to carve out a niche for itself and continues to coexist with the financial system despite being regularly scrutinized and debated.
At the start of the cryptocurrency boom in 2017, Bitcoin’s market value accounted for close to 87% of the total cryptocurrency market.
Ethereum Basics
Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July of 2015, Ethereum is the largest and most well-established, open-ended decentralized software platform.
Ethereum enables the deployment of smart contracts and decentralized applications (dapps) to be built and run without any downtime, fraud, control or interference from a third party. Ethereum comes complete with its own programming language which runs on a blockchain, enabling developers to build and run distributed applications.
The potential applications of Ethereum are wide-ranging and are powered by its native cryptographic token, ether (commonly abbreviated as ETH). In 2014, Ethereum launched a presale for ether, which received an overwhelming response. Ether is like the fuel for running commands on the Ethereum platform and is used by developers to build and run applications on the platform.
Ether is used mainly for two purposes—it is traded as a digital currency on exchanges in the same fashion as other cryptocurrencies, and it is used on the Ethereum network to run applications. According to Ethereum, “people all over the world use ETH to make payments, as a store of value, or as collateral.”2
Key Differences
While both the Bitcoin and Ethereum networks are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. For example, transactions on the Ethereum network may contain executable code, while data affixed to Bitcoin network transactions are generally only for keeping notes. Other differences include block time (an ether transaction is confirmed in seconds compared to minutes for bitcoin) and the algorithms that they run on (Ethereum uses ethash while Bitcoin uses SHA-256).
More importantly, though, the Bitcoin and Ethereum networks are different with respect to their overall aims. While bitcoin was created as an alternative to national currencies and thus aspires to be a medium of exchange and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts, and applications via its own currency.
BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system, but rather to facilitate and monetize the operation of the Ethereum smart contract and decentralized application (dapp) platform.
Ethereum is another use-case for a blockchain that supports the Bitcoin network, and theoretically should not really compete with Bitcoin. However, the popularity of ether has pushed it into competition with all cryptocurrencies, especially from the perspective of traders. For most of its history since the mid-2015 launch, ether has been close behind bitcoin on rankings of the top cryptocurrencies by market cap. That being said, it's important to keep in mind that the ether ecosystem is much smaller than bitcoin's: as of January 2020, ether's market cap was just under $16 billion, while bitcoin's is nearly 10 times that at more than $147 billion.
In a simplified version of Haber and Stornetta's proposal, documents are constantly being created and broadcast. The creator of each document asserts a time of creation and signs the document, its timestamp, and the previously broadcast document. This previous document has signed its own predecessor, so the documents form a long chain with pointers backwards in time. An outside user cannot alter a timestamped message since it is signed by the creator, and the creator cannot alter the message without also altering the entire chain of messages that follows. Thus, if you are given a single item in the chain by a trusted source (for example, another user or a specialized timestamping service), the entire chain up to that point is locked in, immutable, and temporally ordered. Further, if you assume the system rejects documents with incorrect creation times, you can be reasonably assured that documents are at least as old as they claim to be. At any rate, bit-coin borrows only the data structure from Haber and Stornetta's work and reengineers its security properties with the addition of the proof-of-work scheme described later in this article.
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