Bitcoin and Ethereum are the Coca-Cola and Pepsi of the cryptocurrency space. As the number one and two biggest names in the market, they are often compared to each other and, at first glance, they share many similarities.
However, from their premise to price differences, the two concepts are very different. Here’s how they compare.
Before we start…
Bitcoin and Ethereum are systems, while bitcoin (lowercase b) and Ether are the cryptocurrencies used by these systems. When we compare the two ecosystems, we need to be clear whether we are comparing the technology, the assets that the technology produces, or both.
In this article, we will refer to systems by name and currencies by their ticker symbols. For bitcoin, it’s BTC. For Ether, it is ETH.
How Bitcoin and Ethereum Compare
Bitcoin and Ethereum are fundamentally different as the former was designed to enable decentralized finance while the latter was also designed to enable applications and contracts.
Although Ethereum allows payments using its internal cryptocurrency ETH, its reach is much wider than that of Bitcoin – by design.
Both systems use blockchain technology to validate and record transactions, but an upcoming change in how Ethereum works will mean that the way they do this is different, with consequences for speed, durability and accessibility.
The difference is in what is called a “consensus mechanism”.
What is a consensus mechanism?
A consensus mechanism is a computer algorithm that makes a blockchain viable. It does this by solving what is known as the “double spend” problem.
A $10 note, once spent, no longer belongs to you, so you can no longer spend it. A BTC is a string of computer code and can be copied endlessly. In theory, this means you can get as rich as you want by simply making copies of your BTC and spending it over and over again.
However, when you send BTC to someone, your copy is destroyed and a new version of it is created in the recipient’s account.
All of this is recorded on a distributed ledger for the world to see. Since everyone can see on their copies of the ledger that you’ve spent your BTC, you can’t try to spend a copied version of it – the consensus of ledger holders would be that you try to get one fast.
Processing one transaction is hard enough, but you will also need to modify each subsequent transaction since each refers to its predecessors.
This would require incredible computing power and effort, and you would need to control 51% of the distributed ledgers on the network to get the consensus necessary to burn your fake transaction history on the blockchain and take your freshly mined crypto as a reward.
Bitcoin and Ethereum use different consensus mechanisms.
Bitcoin is referred to as proof-of-work while Ethereum is moving towards a proof-of-stake consensus mechanism.
proof of work
This consensus mechanism asks participants to perform complex calculations for the chance to become the user who can validate a bunch of transactions and add them to the blockchain – earning a fixed amount of crypto In the process.
The “work” is to guess, as accurately as possible, a unique 64-character alphanumeric string.
There are billions of possible combinations for these strings, so whoever has the most powerful hardware can make the most guesses per second within the 10-minute window of opportunity and have the best chance of being the validator. selected.
In order to get a doctored copy of the ledger validated and added to the block, you would need to control at least 51% (a consensus) of a network’s computing power, which would be astronomical. This is how the consensus method prevents fraud.
This work was once done by hobbyists at home, but the processing power needed increases over time, so the process of “mining” is now reserved for specialized companies and organizations – i.e. those who can afford the hardware and power to run it. .
Proof-of-work systems such as Bitcoin have drawn a lot of criticism regarding the amount of power expended by the computing hardware involved. Bitcoin currently uses 19 terawatt hours (TWh) of electricity per year. This is just below the amount used by the entire Norwegian nation.
Proof of Stake
This consensus mechanism requires participants to stake their own money for the chance to validate transactions and add a block to a blockchain, rather than performing complex calculations.
The more crypto someone stakes, the more likely they are to be chosen to complete a block of transactions on a blockchain and earn a set amount of crypto. The system also discourages bad actors with financial penalties.
Proof of stake stacks the game in favor of people with more money, but protects against people adding fraudulent records to the blockchain, as they would need to stake at least 51% of the money on the network to control a consensus.
Without the need for powerful hardware, Proof of Stake is considered a more environmentally friendly consensus mechanism than Proof of Work.
Decentralized Payments vs Decentralized Software
Bitcoin was developed solely to facilitate decentralized payments, that is, to allow people to send and receive payments without an intermediary such as a bank. Ethereum, on the other hand, was designed to do more than just send and receive ETH.
By using the blockchain, which provides an immutable record of transactions, Ethereum was designed to facilitate decentralized software such as smart contracts and distributed applications (dApps).
A smart contract is a digital agreement between two or more parties that will execute once certain conditions are met.
For example, account A will release asset X once it receives asset Y from account B. This could be used to make property sales and transfer or ownership faster and less susceptible to fraud.
A dApp is an application that is not controlled by a central authority. Twitter is an example of a centralized application, with users using it as an intermediary to send and receive messages. Thus, users respect the rules it applies and the algorithm it uses to control the content.
A dApp is distributed on a blockchain, with users able to send and receive data directly without the need for an intermediary. Peepeth is a Twitter-like dApp. He claims that as an app, it does not optimize ad revenue, a problem suffered by users of centralized apps.
So while you could say Bitcoin is bigger but Ethereum is faster, the two are not strictly in competition with each other as they are designed to do different things. BTC and ETH, on the other hand, are directly comparable.
BTC has definitely been more valuable than ETH, peaking at around US$68,000 in November 2021 (before dropping below $20,000 in May 2022). ETH, on the other hand, peaked at around $4,800 in November 2021.
Despite the large difference between their values, the values of the two cryptocurrencies have historically shown a strong positive correlation between them, trending between 0.7 and 0.8 for much of this time (1.0 representing the strongest correlation). strong possible), according to data from coinmetrics.io.
Either way, and as is the case with all cryptocurrencies, both BTC and ETH are volatile. Prices are unpredictable and prone to crashes, as we saw in May this year when the market capitalization of crypto assets fell around $900 billion, up from $3 trillion.
The cryptocurrency market is unregulated in Australia, although consumer organizations such as CHOICE are pushing for better protection for those who fall victim to scams and huge losses. For now, the Australian Securities and Investments Commission (ASIC), through its Moneysmart website, advises crypto investors be extremely careful when dealing with this volatile asset.
This article is not an endorsement of any particular cryptocurrency, broker, or exchange, nor does it constitute a recommendation of cryptocurrency as an investment class.
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