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What’s the difference between Bitcoin and Ethereum?

by | May 23, 2019

For the vast majority of the past 2 years, the 2 highest ranked cryptocurrencies (by market cap) were Bitcoin and Ethereum. But though they share many similarities, there are also huge fundamental differences between these 2 giants in the crypto world. Especially for beginners, these differences might not be immediately apparent, which is why this article is dedicated to explore those differences. Both are often compared to each other, and while in some cases comparison may be possible, often it is like comparing apples with oranges.

Similarities

First, let’s briefly touch on what are the actual similarities between Bitcoin and Ethereum. Both are blockchains that use a “Proof of Work” consensus algorithm. Proof of Work means that energy and hardware need to be spent (the cost) on hash power in order to secure the blockchain. This means that the blockchain is digitally anchored in the physical world and its limitations are imposed by physics.

Each ledger contains blocks of transactions that are cryptographically linked together. New blocks are created by means of the Proof of Work “guessing game”. Difficulty adjustment takes place depending on total mining hash power dedicated to the network. Each block will reward the miner that found the block with newly created coins.

The native coin of both networks can be used for peer-to-peer transactions and a wide variety of wallets support BTC and ETH.

Both projects are open source and have large developer communities working on the protocol. Also both have big networks of independent nodes that guarantee a global distribution of the blockchain. Both networks are generally deemed sufficiently decentralized according to the fundamental principles of decentralized networks.

From a very high level perspective this is what they both have in common. Now let’s look at the differences that make them distinct from each other.

Differences

Origin

Bitcoin: Bitcoin was launched in 2009 after Satoshi Nakamoto published the Bitcoin whitepaper outlining its principles. No fundraising of any kind was done and the process of early distribution was that miners had to mine on the Bitcoin network to receive the first Bitcoins. Satoshi was one of those first miners and accumulated the largest amount of Bitcoins controlled by 1 person. However, he never spent his Bitcoin and disappeared completely from the internet with nobody knowing his true identity.

Ethereum: In 2013, Ethereum founder Vitalik Buterin published his white-paper describing the Ethereum blockchain network. An ICO followed in 2014, in which a pre-mined quantity of Ethereum was distributed to the ICO contributors. Founder, Vitalik Buterin, is still actively involved with the Ethereum project and has an influential role of leadership.

Use case

Bitcoin: By design, Bitcoin is fundamentally a digital peer-to-peer transfer and storage of value. Its technological design is to be optimized for that, nothing more, nothing less. Bitcoin is also the name of the native “currency” on the network that facilitates that function.

The fee in Bitcoin for making transactions is based on just the data size of each transaction.

Ethereum: The native currency of the Ethereum blockchain network is called Ether and by design it is not primarily intended as a “digital dollar”, rather as “fuel” that can be used for a wide scope of transactions. The function of Ether is more a utility. Ethereum doesn’t primarily aim to be a payment network alone, but rather its function is to be a decentralized super computer that is distributed over all nodes in the network (called the Ethereum Virtual Machine). It is designed to host “smart contracts” (autonomous pieces of code that execute when triggered) which decentralized apps can utilize, and also tokens with different functionalities.

The most notable use cases of decentralized applications that are currently being developed are Decentralized Finance (watch our explainer video) and gaming.

Ether’s function is to pay the fee for all the different types of code executions on the network. Despite digital currency not being its designed purpose, it has been increasingly used as such by a many people in the crypto world.

Scripting language

Bitcoin: Bitcoin’s protocol purposefully uses a simple logic computer language called Script. Script was chosen to keep Bitcoin’s code robust while lowering its vulnerability to bugs that more complex scripting languages face, such as Turing-complete languages. This also means that Bitcoin can only support a few types of smart contracts, such as multi signature and escrow. It is possible to support more advanced smart contract functionality, but this would require a second layer or side chain solution. There are projects working on this, but so far, there are not yet tangible implementations in sight. But because decentralization, censorship resistance, and security are far more important, the lack of having a smart contract platform functionality is generally not perceived as major issue within the majority of the Bitcoin community.

Ethereum: Because Ethereum is specifically a smart contracts/dApps platform, it needs to use more complex logic and therefore is designed to be Turing complete. Because of this, there may be more bugs in its code and it is difficult to find those bugs even if the code is audited. This is the case for the protocol layer and also smart contracts that are deployed on the Ethereum network. Certain bugs have already led to the loss of millions of dollars in Ether or Ethereum tokens. This is an inherent risk factor for the Ethereum project, and the expectation is that the additional benefits outweigh the risks and that methods will be developed to minimize these risks.

Monetary policy

Bitcoin: the inflation rate of Bitcoin’s supply is set in stone in the protocol and its rate is designed so that there will never be more than 21 million Bitcoin in circulation. Currently, over 17 million Bitcoin have already been mined. It’s emission rate is 12.5 Bitcoins per block, and with ~10 minutes per block, this results in an average of 75 Bitcoin produced per hour. Each 4 years that rate is cut in half, so from May 2020, the rate will reduce to 6.25 Bitcoins per block. By design, Bitcoin’s monetary policy is fixed and non-inflationary.

Ethereum: the inflation rate of Ether is much more flexible than Bitcoin’s as it has no maximum cap set in stone at this moment and is occasionally being reduced during large network upgrades (forks). The latest is a reduction of 3 Ether to 2 Ether per block. Ethereum produces a block roughly every 15 seconds, so after the latest hard fork that would result in 480 Ether per hour. Because of this, there is no fixed maximum supply for Ether and could be infinite in theory.

Additionally, the reasoning for block time differences for both networks is quite interesting. Bitcoin’s longer 10 minute block confirmation time was purposefully chosen because each block needs time to propagate over the network so all nodes can be updated with the latest validated version of the ledger. This allows the network to increase security and trust in the confirmation of transactions. Second layer solutions, such as the Lightning Network, should alleviate the long confirmation times for the smaller retail purchases that need faster confirmation (LN provides instant confirmation). Block confirmation time for Ethereum is shorter (15 seconds per block), but this comes with a minor compromise in the security and finality of blocks/transactions.

The longer block confirmation time of Bitcoin is therefore not an inferior characteristic compared to Ethereum. In short, you could say that Bitcoin prioritizes quality over quantity/speed and Ethereum quantity/speed over quality.

Consensus algorithm

Bitcoin: The Proof of Work consensus algorithm that Bitcoin uses is called SHA256 and this algorithm can be mined by optimized dedicated mining hardware called ASIC (Application Specific Integrated Circuit). ASICs are specially designed to excel at 1 type of computational task, and because of this, they can dominate the more general purpose hardware chips (CPUs and GPUs). Because ASICs provide the Bitcoin network with so much hash power, the blockchain is extremely secure. However it also comes with some concerns that ASICs lead to centralization due to concentration of mining power, however this is a controversial and debatable issue.

Ethereum: Ethereum’s Proof of Work algorithm was designed to make it difficult for ASICs to mine its algorithm. This keeps Ethereum accessible for more mainstream computer hardware to mine on the Ethereum network and keep the blockchain more decentralized, but arguably, slightly less secure.

Proof of Work does impose large limitations on the scalability of Ethereum, especially because of the complexity and heavy load of transactions and computations that the Ethereum Virtual Machine requires. Therefore, it has long been the vision for Ethereum to transition to a Proof of Stake consensus algorithm. In Proof of Stake, it is no longer required to spend energy and heavy hardware to maintain the network. Instead, the expense is virtually simulated by a model where nodes can stake Ether to get the right to solve blocks and receive the corresponding block reward. A bad actor that produces false blocks would lose their stake, similar to how a Proof of Work bad faith miner would lose their spent electricity on a rejected block.

A logical consequence of this transition is that the Ethereum blockchain would no longer be anchored to the physical world, and thus only digitally secured by cryptography. There are pros and cons to Proof of Stake vs Proof of Work, but considering the primary use cases of Ethereum vs. Bitcoin, the compromise in security in favor of speed and scalability might be acceptable.

Transaction speed

Bitcoin: currently the on-chain transaction speed is roughly 4 transactions per second.

Ethereum: the transaction speed on Ethereum is roughly 15 transactions per second on-chain.

For both Bitcoin and Ethereum, the on-chain transaction speed is very limited and this is mainly due to the limits and inefficiency of decentralized blockchain networks based on Proof of Work. For mainstream adoption, a higher transaction throughput is very much needed or else both networks will not be able to compete with high capacity centralized payment networks such as Paypal or credit card companies. Both networks are working on scaling solutions for this. For example, Bitcoin’s Lightning Network should enable up to millions of transactions per second and Ethereum’s solutions such as sharding, Proof of Stake, and Raiden (similar to Lightning) should massively increase the workload it can handle.

Network upgrades

Every computer protocol and network needs upgrades, and for blockchains these are called forks. Oftentimes forks don’t lead to a split, but hard forks can lead to a split, each with its own coin/blockchain, if miners do continue directing hash power to both chains.

Bitcoin: most forks are preferably done by soft forks, because soft forks keep the protocol backwards compatible for nodes that don’t upgrade to the newer version. Thus the network stays intact, even if not everybody upgrades. This doesn’t mean there aren’t any controversial upgrades that lead to hard forks (Bitcoin Cash was born due to community split over block size and “Segwit” disagreements), but they are very rare in Bitcoin. Keeping the protocol backwards compatible is one aspect of remaining decentralized.

Ethereum: Ethereum often upgrades by using hard forks that theoretically increase the risk of chain splits, because the newer versions are not backwards compatible. Every node that doesn’t upgrade will no longer be part of the network. Ethereum does have a slightly more centralized leadership and coordination within its developer community leads to more agreement in upgrade decisions. Hard forks usually don’t lead to chain splits in the Ethereum world.

Account model versus UTXO model

Bitcoin: transactions are processed through the Unspent Transactions Output model (UTXO). This means that the Bitcoin blockchain does not keep track of accounts, it only shows (and keeps track of) transactions from address to address. Only within the wallet/node software are the addresses that are controlled by a private key aggregated and the total balance calculated. A Bitcoin wallet usually collects multiple addresses that each contain an amount of “unspent” Bitcoin. When making a transaction, the wallet collects the balance from multiple addresses and will usually spend the entire amount of all the addresses used in that particular transaction. If the amount spent is higher than what the user wanted to transfer, the wallet will send the remaining amount back to a newly generated wallet address (this is done by the wallet software in the background automatically), which is called the “change address”. This is the same as paying $10 in cash to purchase an $8 item and receiving $2 back in change. This more complex way of registering transactions is mostly to increase the pseudonymous nature of Bitcoin transactions. It does not provide full privacy and anonymity, because chain analysis software can be utilized to link identities to transactions.

Ethereum: Ethereum does not use the UTXO model, but instead, the much less complex account model. This means that an Ethereum address works similarly to any account such that the user will typically use one address for all their incoming and outgoing transactions. Wallets will not create new addresses for new transactions (nor for receiving, nor for “change”). This simplified model however provides much less privacy and anonymity, because the entire history of the user’s account is accessible once the address is associated with the identity of the user.

It is important that users of both Ethereum and Bitcoin are aware of this fundamental difference between transaction accounting models, because this is often not understood at all. Both Bitcoin and Ethereum are looking for adding privacy features to their protocols to enhance the privacy of users against bad actors that naturally also have access to the publicly available blockchains.

Final thoughts

As you can see, Ethereum and Bitcoin are both more different than what you might expect at first glance. Some of the differences do not imply any superiority of one over the other. Most of these differences have to do with the different application and use case scenarios. The differences in design and development also reflect the different goals that both networks are trying to achieve. I therefore believe that for the most part, Bitcoin and Ethereum are not even competing, but rather attempting to service different needs.

As investors and users, it is important to familiarize yourself with these differences and their implications, so that you can make better informed decisions in terms of which network to use or invest in based on personal goals and expectations.

This article provides only a brief introduction into the differences and similarities, but it requires more in-depth research to fully understand this topic.

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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