Similarities and Differences – Forbes Advisor

Bitcoin (BTC) and Ethereum (ETH) are the Coke and Pepsi of cryptocurrency. They are the biggest names in crypto and their combined market capitalization equals more than 60% of the $1 trillion crypto market.

The performance of BTC and ETH often serves as a benchmark to gauge the overall health of the crypto market. Despite their dominance, these cryptos work very differently from each other. Let’s take a deeper look at how Bitcoin and Ethereum compare.

How Bitcoin and Ethereum Compare

Bitcoin and Ethereum are fundamentally different beasts. The former is the first cryptocurrency, designed as a store of value and medium of exchange – but today mostly used as a speculative risk asset. The latter was designed as a decentralized computer network, which has given rise to the decentralized finance area (DeFi).

Ethereum also enables payments using its internal ETH cryptocurrency, but its scope is much broader than Bitcoin by design.

Both systems use blockchain technology to validate and record transactions. Still, upcoming changes to Ethereum, often referred to as Ethereum 2.0, should significantly update the crypto’s speed, sustainability, and accessibility.

A major difference between Bitcoin and Ethereum is the consensus mechanisms they use to power their respective blockchains.

What is a consensus mechanism?

A consensus mechanism is a type of algorithm used to run a blockchain. The main goal of any consensus mechanism is to solve what is known as the “double spending” problem.

Once you spend a $20 bill, it no longer belongs to you. You cannot use it again. Before Bitcoin, the problem with the digital currency concept was that they were all just strings of computer code and could be endlessly copied and used twice – or countless times.

Bitcoin’s blockchain consensus mechanism was designed to solve the problem of double spending. It uses validators to ensure that each crypto unit can only be used once, and to record each transaction on a distributed ledger for the whole world to see.

Since everyone can see identical copies of the Bitcoin blockchain, no one can copy and paste their digital money and spend it twice. Processing one transaction is hard enough, but you also have to modify each subsequent transaction since each one references its predecessors.

There are two main consensus mechanisms used by cryptocurrencies. Bitcoin uses the proof-of-work mechanism, while Ethereum is moving towards a proof-of-stake consensus mechanism.

Certificate of employment

Proof of work requires validators to solve complex math problems. They compete for the chance to be chosen to validate a new batch of transactions and add them to the blockchain, earning a certain amount of crypto in the process.

In the early days of Bitcoin, validators were mostly amateur hobbyists. Still, as the mathematical problems of the Bitcoin proof-of-work system have become more challenging, the amount of processing power needed to solve each one has increased exponentially. Bitcoin mining is largely handled by specialized companies that can afford the expensive bitcoin mining rigs and the energy needed to run them.

Proof-of-work systems such as Bitcoin have also been criticized for the amount of energy used by the hardware involved. According to the Cambridge Center for Alternative Finance, Bitcoin’s electricity consumption exceeds Norway’s annual electricity consumption, with an annual rate of 127 terawatt hours (TWh).

Proof of effort

Proof of Stake requires validators to stake their crypto holdings for the chance to validate transactions and add blocks to the blockchain.

The more crypto someone stakes, the greater their chances of being chosen to validate a block of transactions onto a blockchain and earn a certain amount of crypto. The system also discourages bad actors with financial fines.

Proof of Stake stacks the deck in favor of people with more money, but protects against people adding fake records to the blockchain. Without the need for powerful computing hardware, proof of stake is considered a more environmentally friendly consensus mechanism than proof of work.

Decentralized payments vs. decentralized software

Bitcoin was originally developed for decentralized payments. In the beginning, designers of the original cryptocurrency wanted to help people send and receive payments without an intermediary, such as a bank.

Ethereum, on the other hand, was designed to be a distributed computing platform. The designers of Ethereum built the platform to provide a foundation for running decentralized software programs, which have come to be known as smart contracts and distributed apps (dApps).

A smart contract is a digital agreement between two or more parties that will execute itself when certain conditions are met. For example, Account A will release Asset X when it has received Asset Y from Account B. This can make property sales or transfer of ownership faster and less prone to fraud.

A dApp is an application that is not controlled by a central authority. Twitter is an example of a centralized app, with users relying on it as an intermediary to send and receive messages. As such, users play by the rules it enforces and the algorithm it uses to control content.

Distributed apps help users send and receive data directly without an intermediary. Peepeth is a Twitter-like dApp. It claims that as an app it doesn’t optimize for ad revenue, a problem it says users of centralized apps suffer from.

Price volatility

BTC has certainly been more valuable than ETH, peaking at around $68,789 in November 2021. On the other hand, ETH peaked at around $4,891 in the same month.

The native crypto is down more than 50% since the start of the year, only recently rising from its June low of $17,708. That said, Bitcoin and Ethereum are up more than 750% and 630% respectively the last five years.

Ethereum’s price has recently rallied from its June low, in anticipation of the “merger,” when the leading altcoin switches to the “proof of stake” mechanism entirely. The merger is expected to take place around September.