Bitcoin vs. Ethereum: What’s the Difference?

Bitcoin vs. Ethereum: An Overview 

Ether (ETH), the native cryptocurrency of the Ethereum network, is the second most popular digital token after bitcoin (BTC). As the second-largest cryptocurrency by market capitalization (market cap), comparisons between Ether and bitcoin 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. These tokens are decentralized, meaning they are not issued or regulated by a central bank or other authority. Both make use of the distributed ledger technology known as a blockchain. However, there are many important differences.

History of Bitcoin

Bitcoin was launched in January 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 attempt at an online currency of this type, it was the most successful in its early efforts. As a result, it has become known as the predecessor to virtually all cryptocurrencies that have emerged over the past decade.

Over the years, the virtual, decentralized currency concept 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 co-exist with the financial system despite being regularly scrutinized and debated.

What Is Ethereum?

Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July 2015, Ethereum is the largest and most well-established, open-ended decentralized software platform.

Ethereum enables building and deploying smart contracts and decentralized applications (dApps) without downtime, fraud, control, or interference from a third party. To accomplish this, Ethereum comes complete with its own programming language that runs on a blockchain.

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 used mainly for four purposes: It is traded as a digital currency on exchanges, held as an investment, used to purchase goods and services, and used on the Ethereum network to pay transaction fees.

Key Differences Between Bitcoin and Ether

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 is only used to record transaction information. Other differences include block time (an ETH transaction is confirmed in seconds, compared with minutes for BTC), and their consensus algorithms are different: Bitcoin uses SHA-256, while Ethereum uses LMDGhost.

Proof of Work vs. Proof of Stake

Bitcoin uses a consensus protocol called proof of work (PoW), which allows the network nodes to agree on the state of all information recorded and prevent certain types of attacks on the network. In September 2022, Ethereum moved to proof of stake (PoS), a set of interconnected upgrades that will make Ethereum more secure and sustainable. To address issues regarding scalability, part of the transition to proof of stake is sharding, which will continue to be addressed through 2023.

A major criticism of proof of work is that it is highly energy-intensive because of the computational power required. Proof of stake substitutes computational power with staking—making it less energy-intensive—and replaces miners with validators, who stake their cryptocurrency holdings to activate the ability to create new blocks.

Purposes

BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system but to facilitate and monetize the operation of the smart contract, dApps, and any other blockchain solution that can be thought of.

Future

The Ethereum ecosystem is growing by leaps and bounds thanks to the surging popularity of its dApps in areas such as finance (decentralized finance, or DeFi apps), arts and collectibles (non-fungible tokens, or NFTs), gaming, and technology. Ethereum will also introduce sharding sometime in 2023 to enhance its scalability.

Bitcoin has also experienced change, introducing the Taproot upgrade to enable smart contracts. The Bitcoin Lightning Network is another project being worked on as a second-layer protocol that intends to take transactions off-chain for the purpose of speeding up the network.

It remains anyone’s guess which cryptocurrency and blockchain will stand the test of time—perhaps they both will. But one thing is certain—both have induced much-needed discussions about financial systems worldwide.