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What's the difference between Bitcoin and Ethereum?



Even though Bitcoin and Ethereum are often compared with each other, they both fulfill different - albeit often complementary - tasks within the blockchain ecosystem.



SUMMARY


As the two most well-known blockchains and cryptocurrencies, Ethereum and Bitcoin are often directly compared. In reality, Bitcoin and Ethereum pursue different goals and can be seen as complementary forces in many ways. Bitcoin is a peer-to-peer digital money network that enables transactions without a central authority. This novel network architecture has consequently paved the way for the complex blockchain ecosystem we have today. Ethereum, often referred to as the "world computer", builds on Bitcoin's technology and introduces smart contracts that enable the creation of decentralized applications (dApps) that span a wide range of crowdfunding platforms, financial instruments, digital games and collectibles, and decentralized marketplaces.



CONTENT

  • Differences between Bitcoin and Ethereum

  • Use cases for cryptocurrencies

  • Consensus mechanisms

  • Where Bitcoin and Ethereum meet


DIFFERENCES BETWEEN BITCOIN AND ETHEREUM


Bitcoin and Ethereum are the two most well-known blockchain protocols, and their respective cryptocurrencies, BTC and ETH, have become indispensable in the rapidly growing world of digital assets. Even though they compete with each other in their respective communities, Bitcoin and Ethereum fulfill different roles in the blockchain ecosystem. Bitcoin was introduced in 2009 and is the original blockchain protocol. It was developed as a peer-to-peer digital cash system to initiate, process, and verify transactions without intermediaries. However, Bitcoin is not well suited to hosting applications.


Ethereum was launched in 2014 to connect people around the world with a system of smart, self-executing contracts. Smart contracts facilitate the creation of decentralized applications (dApps) that have different functions and all operate on the Ethereum network using common standards for interoperability. While both Bitcoin and Ethereum currently use a proof-of-work (PoW) consensus algorithm, Ethereum introduces the concept of smart contracts, which are automatically self-executing agreements used in the creation of dApps.



USE CASES FOR CRYPTOCURRENCIES


Bitcoin and Ethereum have their own cryptocurrencies that serve different purposes. Bitcoin (BTC) is an alternative to fiat money and serves as a medium of exchange for payments and a store of value for saving or speculating. On the other hand, the Ethereum network supports the transfer of value in ETH from one party to another. ETH itself is also used to power smart contracts - computer programs that perform certain actions when certain conditions are met - and the dApps that enable them. These dApps often generate their own tokens, which can be used for their operation, management, and value determination or creation.



CONSENSUS MECHANISMS


Currently, both Bitcoin and Ethereum use a proof-of-work consensus algorithm, in which a decentralized global network of computer hardware uses cryptography to validate network data and mint new currency. However, Ethereum developers are currently working to upgrade the network to a proof-of-stake (PoS) consensus algorithm, where users use tokens as collateral to verify and create blocks. This long-awaited upgrade is called Ethereum 2.0 and also includes the implementation of shard chains, which divide the blockchain into smaller parts to streamline operations on the chain.


The consensus mechanisms of Bitcoin and Ethereum are expected to become increasingly different. While the Bitcoin protocol has remained largely unchanged since its inception, Ethereum has proven to be more dynamic and is currently being further developed to significantly increase the efficiency of the network in the future.


Speed: While Bitcoin blocks are verified and created approximately every 10 minutes, the same process takes 10 to 20 seconds on the Ethereum network. This higher throughput allows Ethereum to process on-chain transactions faster than Bitcoin - which is crucial given the ecosystem of dApps that use the Ethereum network to support an enormous range of different functions.


Token supply: Bitcoin has a hard cap of 21 million coins that can ever be created. New BTC are minted with each successfully mined block. After every 210,000 blocks, the total number of BTC that prospectors receive for successfully mining a block (called the block reward) is halved, which is called bisection. Over time, this has proven to be an effective deflationary monetary policy. For example, when the Bitcoin network was first launched in 2009, one Block Reward was equivalent to 50 BTC. With the May 2020 halving, Bitcoin's Block Rewards were reduced to 6.25 BTC. In contrast, Ethereum currently has no fixed cap on the total supply of ETH, which could be a problem for some speculators who value crypto investments that are subject to a deflationary monetary system. However, a number of proposed updates, such as EIP-1559, provide built-in deflation mechanisms that could solve this problem in the future.


Account management: When a transaction occurs on the Bitcoin network, the protocol uses a method that relies on unspent transaction outputs (UTXOs). UTXOs are the amount of cryptocurrency left over after a transaction has been executed - similar to the change you get back after giving cash to a merchant. Ethereum uses an account model where accounts are debited and credited depending on exactly how much ETH was exchanged. Ethereum's account model thus saves computational effort by eliminating several steps of the UTXO model and is arguably more intuitive and user-friendly.



WHERE BITCOIN AND ETHEREUM MEET


Despite the differences mentioned above, Bitcoin and Ethereum were born out of a shared desire to decentralize economies, industries, and value systems around the world. Both platforms were developed to address these concerns in different but equally important ways. Bitcoin's core offering is simple: a decentralized peer-to-peer payment network that has evolved into a universal store of value, underpinned by its mathematically demonstrable scarcity and not mandated by any national government or other central authority. And Ethereum's goal of becoming a decentralized, censorship-resistant world computer represents a desire to reorder global systems away from digital hegemonies, third-party regulators, and centralized ISPs.


With the emergence and growing popularity of decentralized finance (DeFi), blockchain developers have found ways to integrate Bitcoin's resilience and value into the evolving Ethereum ecosystem through Bitcoin-backed ERC-20 tokens such as wBTC and tBTC. While every major blockchain project has its share of maximalists who view blockchain development as a zero-sum game, many of the most successful projects have shown that they not only provide undeniable value to end users but also find ways to work together in ways that are mutually beneficial and sustainable in the long run. Given their overwhelming importance and established but distinct functions, Bitcoin and Ethereum are well positioned to create lasting value for a healthy, mature and diverse crypto ecosystem.

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