Introduction
As the two most widely known blockchains and cryptocurrencies, many people often directly compare Ethereum and Bitcoin against each other. In reality, Bitcoin and Ethereum are designed to achieve different goals, and in many ways can be regarded as complementary forces. Bitcoin is a peer-to-peer digital cash network, which facilitates transactions without the need for a central authority. This novel network architecture has consequently paved the way for the complex blockchain ecosystem that we have today. Ethereum, often referred to as the ‘world computer,’ iterates on Bitcoin’s technology while introducing smart contracts, which enable the creation of decentralized applications (dApps) spanning a broad range of crowdfunding platforms, financial instruments, digital games and collectibles, and decentralized marketplaces.
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.
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.
Bitcoin vs. Ethereum: Differences
Bitcoin and Ethereum are the two most well-known blockchain protocols, and their respective cryptocurrencies, BTC and ETH, are integral to the fast-expanding world of digital assets. While competition remains among their respective communities, Bitcoin and Ethereum fulfill different roles within the blockchain ecosystem. Launched in 2009, Bitcoin is the original blockchain protocol, and was designed to serve as a peer-to-peer digital cash system that allows transactions to be initiated, processed, and verified without the need for third-party middlemen. Bitcoin, however, is not well-suited to hosting applications.
Launched in 2014, Ethereum was created in order to connect people globally to a system of smart, self-executing contracts. Smart contracts facilitate the creation of decentralized applications (dApps), which range in function and all operate atop the Ethereum network using shared standards for interoperability. While both Bitcoin and Ethereum currently utilize a Proof-of-Work (PoW) consensus algorithm, Ethereum introduces the concept of smart contracts, which are automatically self-executing agreements used in creating dApps.
Cryptocurrency Use Cases
Bitcoin and Ethereum have native cryptocurrencies that serve different purposes. Bitcoin (BTC) is an alternative to fiat money, acting as a medium of exchange for payments and a store of value for saving or speculation. On the other hand, while the Ethereum network supports the transfer of value in ETH from one party to another, ETH itself is also used to power the operation of smart contracts — computer programs that perform certain actions when specific conditions are met — and the dApps they make possible. These dApps often give rise to their own native tokens that can be used in their functioning, governance, and value assessment or creation.
Consensus Mechanisms
Currently, both Bitcoin and Ethereum utilize a Proof-of-Work consensus algorithm, in which a decentralized global network of computer hardware utilizes cryptography to confirm network data and mint new currency. However, Ethereum’s developers are currently working to switch the network to a Proof-of-Stake (PoS) consensus algorithm, which relies on users to stake tokens as collateral to verify and create blocks. This widely anticipated upgrade is called Ethereum 2.0, and will also involve the implementation of shard chains, which partition the blockchain into smaller pieces in order to streamline on-chain operations.
The consensus mechanisms of Bitcoin and Ethereum are expected to increasingly diverge. While the Bitcoin protocol has remained largely unchanged since its inception, Ethereum has proven more dynamic, and is undergoing developments that aim to significantly increase the efficiency of the network going forward.
Speed: While Bitcoin’s blocks are verified and created roughly every 10 minutes, this same process takes 10 to 20 seconds on the Ethereum network. This increased throughput enables Ethereum to handle on-chain transactions more rapidly than Bitcoin — which is essential considering the ecosystem of dApps that use the Ethereum network to support a tremendous range of diverse functionality.
Token Supply: Bitcoin has a hard cap of 21 million coins that will ever be created. New BTC is minted with every successfully mined block. After every 210,000 blocks, the total number of BTC that miners are rewarded for successfully mining a block (called a block reward) is cut in half in what’s known as a halving. Over time, this has proven an effective deflationary monetary policy. For example, when the Bitcoin network was first launched in 2009, one block reward was equal to 50 BTC . As of the May 2020 halving, Bitcoin’s block rewards have been reduced to 6.25 BTC. By contrast, Ethereum currently does not have a hard cap on the total supply of ETH, which may be a concern for some speculators who value crypto investments that are governed by a deflationary monetary system. However, a number of proposed updates, such as EIP-1559, offer built-in deflationary mechanisms that may address this issue in the future.
Account Management: When a transaction takes place on the Bitcoin network, the protocol utilizes a method that relies on unspent transaction outputs (UTXOs). UXTOs are the amount of cryptocurrency that remains after a transaction is executed — similar to the change you receive back after giving cash to a merchant. Ethereum uses an account model that debits and credits accounts depending on exactly how much ETH is transacted. As a result, Ethereum’s account model saves computational effort since it eliminates several steps involved in the UTXO model, and is arguably more intuitive and user friendly.
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.
Where Bitcoin and Ethereum Meet
Despite the above differences, Bitcoin and Ethereum were both born out of a shared endeavor to decentralize economies, industries, and value systems around the world. Both platforms were designed to address these concerns in different but equally important ways. Bitcoin’s core value proposition is simple — a decentralized, peer-to-peer payments network that has now evolved into a universal store of value that is underpinned by its mathematically provable scarcity, rather than prescribed by a national government or other centralized authority. And Ethereum’s goal of becoming a decentralized, censorship-resistant world computer represents a desire to rewire global systems away from digital hegemonies, third-party regulatory bodies, and centralized internet service providers.
With the emergence and growing popularity of decentralized finance (DeFi), blockchain developers have found ways to integrate Bitcoin’s resiliency and value into Ethereum’s evolving ecosystem through Bitcoin-backed ERC-20 tokens such as wBTC and tBTC. Therefore, while every major blockchain project has its fair share of maximalists who view blockchain development as a zero sum game, many of the most successful projects have shown to not only offer undeniable value to end users, but find ways to interoperate in a way which is mutually beneficial and sustainable in the long run. Given their outsized prominence and established, yet distinct, functionality Bitcoin and Ethereum are well positioned to provide lasting value in facilitating a healthy, mature, and diverse crypto ecosystem.
