Comparing Bitcoin vs. Ethereum
What you need to understand is that while Bitcoin and Ethereum are the two most common projects and most commonly talked about subjects in the cryptocurrency space, their purposes and functionality are very different.
Both Bitcoin and Ethereum are blockchain-based decentralized entities, fueled by their native tokens, BTC and ETH, respectively. These tokens are able to be used outside their Bitcoin and Ethereum ecosystems as a medium of exchange and value.
The Bitcoin Timeline
For two decades, attempts at creating and successfully implementing Bitcoin failed. Until 2008, when an anonymous individual/organization by the name of Satoski Nakamoto published a whitepaper entitled: "Bitcoin: A Peer-to-Peer Electronic Cash System".
For a complete insight into Bitcoin’s timeline, please click here.
The Ethereum Timeline
In November 2013, Vitalik Buterin published the Ethereum whitepaper and created The Ethereum Foundation. In January 2014, the development of the Ethereum platform was publicly announced, ending its $18.4 million ICO in August 2014.
For a complete insight into Ethereum’s history, please click here.
Functionality and Purpose
Each platform was created for two very different reasons.
Beginning with Bitcoin, it’s important to look at the time period in which Bitcoin first (successfully) came into being immediately following the 2008 financial crisis. Remember, the crisis led to a complete distrust and lack of faith in traditional financial institutions such as banks and lending corporations.
Since its inception, the Bitcoin Foundation has never departed from its mission in building and operating as a global decentralized financial system (DeFi), while ensuring that its users maintain complete control and ownership over their finances.
From a supply and demand standpoint, Bitcoin has a hard limit or cap at 21 million coins, utilizing market supply and demand to help regulate its price.
However, Ethereum differs in that it’s not a “payment-only” system like Bitcoin, and doesn’t have a market cap limit. According to Buterin, blockchain technology has more utility than simply as a payment-service provider. Specifically, individuals can build onto it, similar to a traditional operating system (OS) like Windows, Mac, and/or Linux.
How to achieve this, according to the Ethereum founder is by creating smart contracts and executing them on top of the Blockchain.
Native Token: Ether
Unlike Bitcoin, where miners “mine” for bitcoin, in the Ethereum, miners work to earn the network’s native currency, Ether. Ether, like bitcoin, can also be purchased, traded, and used to pay for transaction fees and other services on the ethereum network. It is available on Cryptoexchange.com.
Ethereum’s average transaction fees are much lower than that of Bitcoin’s, where some miners charge some transaction fees for each and every transaction. Think PayPal’s annoying fees.
Unlike Bitcoin, which uses transaction fees, Ethereum uses a “gas system”, powered by gas tokens.
Ethereum’s additional token to Ether is a gas token which is used to pay miners fees for including transactions in their block. Every Ethereum smart contract execution requires a certain amount of gas to be sent along with the contract so that miners are encouraged to put that transaction into the Blockchain.
Ethereum’s blocks, in comparison to Bitcoin’s block size, are capped by the amount of gas each block is capable of storing. Ethereum is limited by 6.7 million gas limit on each block. A typical one-on-one transaction eats up 21,000 units of gas.
Bitcoin, on the other hand, is a bit more convoluted, initially hardcoded by Nakamoto at 1MB size limit. This decision has created one of the most important decisions that has split the Bitcoin community as between Bitcoin and regarding whether the 1MB size is sufficient, or whether it should be increased to 2MB.
As of November 26, 2020, Bitcoin is trading at $16,453.50, after crashing $3,000 (4.42%) after reaching an all-time high of approximately $19,000. Up and until November 25, Bitcoin grew by 160% in 2020.
In a CoinDesk report explaining why Bitcoin crashed by this large amount in what seems to be an overnight occurrence, three primary factors are believed to be involved:
- Excess leverage
- Technical pullback, and
- Other factors like rumors surrounding the U.S. Treasury Department’s plans to track owners of self-hosted cryptocurrency wallets weakened the bullish move, allowing for a price pullback.
Many in the industry still believe this occurrence is proof that the bitcoin market is still bullish.
Both Bitcoin and Ethereum use a proof-of-work (PoW) consensus mechanism. However, Ethereum will soon be moving to a proof-of-stake (PoS) consensus mechanism with its Ethereum 2.0 (Eth2) launch and Casper integration.
Proof-of-Work allows miners to use their computational power to solve cryptographically hard puzzles,
creating a “race to the finish” incentives program. The miner who solves the problem, adds a new block
to the blockchain and receives a block reward in return.
Bitcoin uses the SHA-256 encryption algorithm for mining. However, while PoW certainly has its flaws, it does have one major strength, almost preventing miners from taking advantage of the system by mining on parallel chains. Mining on the Bitcoin chain is ridiculously expensive and requires enormous amounts of energy. Therefore, miners don’t really have an incentive to work against the system (or themselves).
Having said that, PoW chains are slow, often centralized, and energy consuming, explaining why many companies like Ethereum are migrating to PoS consensus mechanisms.
What You Can Expect from Ethereum’s Future PoS Migration
Proof-of-Stake (PoS) replaces the two primary components of a PoW algorithm miners and electricity, with validators and stake. Validators are charged with maintaining the agreed-upon state of the network and receive rewards for randomly selecting the next block of data.
In the event a validator fails to stay online and see to their share of computational duties, their block reward will moderately decrease in order to incentivize them to continue running the software. In the event Eth2 is expected to roll out in phases, beginning with Phase 0 in 2020. While it has not launched yet, experts believe it is very close to Phase 0.
Phase 0 will launch the beacon chain of the Ethereum 2.0 network. The beacon chain will implement PoS and will manage the registry of validators, who will begin attesting blocks into existence on Ethereum 2.0.
As of the end of September, Spadina, the latest in a series of Ethereum 2.0 testnets, launched with mixed success, according to CoinTelegraph. Intending to only last for 72 hours, Spadina was short-lived.
Phase 0 won’t immediately impact Ethereum’s wider ecosystem, as the current PoW blockchain will continue operating as is, minus the addition of the Eth2 deposit smart contract.
With three months left in 2020, current results appear to bode well for a scheduled 2020 Phase 0 launch.
Once the Phase 0’s beacon chain launches, the Ethereum community expects an announcement as to Phase 1’s launch date.
As it currently exists, Ethereum and other PoW blockchains can only process one consecutive block at a time, meaning if there is a backup queue of transactions, those transactions must wait until one block is processed before they can be confirmed. In layman’s terms, think about Limewire and having to wait for 1 pirated song to finish downloading before the next one in your neverending lineup can start.
Phase 1 will implement shard chains as Eth2’s scalability solution, resulting in a 64 separate chain partition (shard chains) that will run parallel to one another and interoperate seamlessly. The purpose of this is to allow Ethereum to process multiple transactions simultaneously in this case, 64 blocks at a time.
At some point during Phase 1, Ethereum’s existing PoW blockchain will be replaced with the new PoS blockchain, providing for an ongoing data history (with no break in continuity). This is referred to as Phase 1.5 in the Ethereum community.
To ETH holders’ advantage, they will not have to undergo any token transfer or swap between Ethereum and Eth2. Instead, they will be seamlessly able to use their existing Eth without the fear or “use it or lose it”.
As for Phases 2 through 4 of Eth2, it’s hard to tell what progress would look like, but Buterin outlines in his whitepaper the roadmap he envisions for Ethereum moving forward.