You’ve heard of Bitcoin.
You’ve heard of Ethereum.
You know they are both “cryptocurrencies”, but you may not really know what that means.
Are Bitcoin and Ethereum just different versions of the same thing? Are they competing coins?
The short answer is: yes they care competing (in a way), but they aren’t really the same and they aren’t trying to do the same things.
But short answers are boring and not very helpful, so in this post, I am going to try to explain the differences between Bitcoin and Ethereum in a simple way that still makes you more informed.
So let’s go through the differences step-by-step now!
Bitcoin, the first-ever cryptocurrency, was introduced in 2009 by the pseudonymous developer (or group of developers) known as Satoshi Nakamoto.
Created as a decentralized digital alternative to traditional currency, it aimed to eliminate the need for intermediaries like banks, providing financial freedom and censorship-resistant money.
Ethereum, on the other hand, was launched in 2015 by a team led by Vitalik Buterin.
While it shares some similarities with Bitcoin, Ethereum was designed as a platform for ‘decentralized applications’ (dApps).
For the most part, these projects are rarely (if ever) actually decentralized, with ETH just providing an easy way for founders to raise money for their projects through a coin offering with no obligations to buyers.
Bitcoin primarily serves as a store of value and medium of exchange.
It is often referred to as “digital gold” due to its finite supply.
Many investors and users view Bitcoin as an alternative to traditional currencies like gold and cash.
Ethereum, while also a ‘cryptocurrency’, goes beyond the role of a currency.
Its primary purpose is to facilitate the creation and operation of dApps through ‘smart contracts’.
In the world of blockchains, we use the term “consensus” to mean agreement on the state of the blockchain.
Remember that because no one person controls or maintains these ledgers, it is up to network participants to maintain their own copy of the ledger and keep it updated.
When everyone’s copy of the ledger is “on the same page”, so to speak, then you can say the network has reached consensus.
Bitcoin and Ethereum used to reach consensus the same way - through a process called “proof-of-work”.
Ethereum abandoned proof-of-work mining in favor another consensus algorithm called “proof-of-stake” on September 15, 2022.
let’s go over the differences between these two consensus algorithms now.
Running what is known as a “full node” on a blockchain allows users to verify their own transactions.
What that means is that you can know, with mathematical certainty, that you have received the coins you think you have received.
If you aren’t running your own node, you must broadcast and receive transactions through someone else’s node and you are therefore trusting them to be honest.
For this reason, many believe that running a full node is the only way to really use blockchains to their fullest, and opting to rely on someone else defeats the purpose of using the blockchain in the first place.
Running a full Bitcoin node is quite cheap and easy to set up on your own. Usually for less than $150.
With a standard internet connection, you can usually have one running in under 12 hours easily.
Running a full Ethereum node is much more difficult and expensive.
It can take anywhere from 10 to 50 days to fully sync (because the ETH blockchain is so large).
In addition to the time, because the chain is growing so quickly, most people opt to host their full node on cloud servers like Amazon Web Services.
Users are typically paying about $100 a month just for server space.
Even more scary is that over 60% of ETH full nodes are hosted on Amazon alone, and over 87% are run on some sort of centralized cloud service.
In PoW, miners compete against each other to solve complex mathematical puzzles.
The first one to solve the puzzle gets the right to add a new block of transactions to the blockchain and is rewarded with some Bitcoin as an incentive.
While PoW has proven to be secure and effective in maintaining consensus and keeping the network decentralized, critics dislike its tremendous real-world energy usage.
They fear such a large energy consumption might have negative environmental impacts.
I have covered these criticisms in great detail elsewhere on this website, if you are interested in learning more.
➤ MORE: Is Bitcoin Mining Bad for the Environment?
In short, you can think of Proof-of-Work as a giant lottery, where using more energy to guess the winning number increases your odds of winning the lottery.
While Bitcoin does consume lots of energy, it is this real world resource use that makes it very hard to attack the network.
Instead of miners competing to solve puzzles, PoS relies on ‘validators’.
Validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” or lock up as collateral.
If you lock up more ETH, you are more likely to be chosen to create the block and get the reward.
PoS is more energy efficient, but critics say this may not actually be a good thing if you are worried about centralization.
PoS essentially means that the biggest holders get to control the network and get more of the rewards, increasing their power over the network over time.
Another issue specific to Ethereum’s Proof-of-Stake is there is a minimum amount of ETH you need to hold to become a validator: 32 ETH (worth about $58,000 as of May 2023).
Very few people own this much ETH, which is why staking services have sprung up to pool user’s ETH into larger pots so they can participate in the rewards.
The problem is that the majority of validators (over 70%) are now centralized on a small group of platforms, meaning that the government could take them over or the platforms themselves could steal the ETH and take the rewards themselves.
Bitcoin is perhaps most famous for its capped supply.
The total number of Bitcoins that will ever exist is hardcoded into the Bitcoin protocol itself at 21 million.
This limited supply mimics natural resources like gold, introducing scarcity into the digital world.
As of now, every ten minutes, a new block is added to the Bitcoin blockchain, and the miner who adds it is rewarded with newly 6.25 Bitcoins.
However, this reward halves approximately every four years in an event known as “halving,” slowing the rate at which new Bitcoins are created as it approaches the 21 million cap.
The supply cap and halving rules can be found in the Bitcoin source code in src/validation.ccp, lines 1550 to 1561.
Ethereum, on the other hand, operates differently.
Unlike Bitcoin, Ethereum doesn’t have a maximum supply cap for its native cryptocurrency, Ether (ETH).
The Ethereum protocol allows for the creation of new Ether coins with each block added to the Ethereum blockchain, which occurs approximately every 12 seconds.
ETH get rewarded according to the following rules:
Block proposers receive 8 / 64 * base_reward for each valid attestation included in the block, so the actual value of the reward scales with the number of attesting validators. Block proposers can also increase their reward by including evidence of misbehavior by other validators in their proposed block.” - Ethereum.Org
Given Ethereum’s uncapped supply, accurately determining the total number of Ether in existence is more complex than for Bitcoin.
And, unlike Bitcoin, no one really knows how many ETH there are in existence today. All we have are rough ideas on the total.
Bitcoin is widely accepted as a means of payment across various merchants throughout the globe.
Bitcoin has been especially helpful to those in third world countries facing extreme remittance costs and unreliable local currencies, such as in the CFA Franc countries and countries like Venezuela, who experience hyperinflation.
Bitcoin was also the first chain to host NFTs. And, ever since the introduction of Ordinals and STAMPS, Bitcoin is now a more popular chain to develop NFT projects on than ETH is.
Ethereum’s primary use cases revolve around its smart contract capabilities.
So called ‘Decentralized finance (DeFi) applications’ and ‘decentralized autonomous organizations’ (DAOs) are some popular use-cases for ETH.
The Terra/Luna stablecoin project is a good example of a very well-known DeFi App built on a competing chain to Ethereum, and the outcome of that project is very common in the DeFi space.
While Bitcoin and Ethereum share some similarities, their primary goals could not be more different.
Bitcoin is attempting to create a universal currency of the internet that competes with national currencies and allows users to take back some of the monetary powers their countries wield against them.
Ethereum is primarily aimed at allowing wealthy early adopters to raise lots of money quickly on projects that may or may not go anywhere while also protecting the investor from obligations to the buyers of the coins.