Learn the differences between the two major cryptocurrencies, and find out which one is right for you.
What’s the difference?
Bitcoin and Ethereum have similarities; both are Cryptocurrencies, both are built on blockchain technology, both use the proof of work (POW) method for mining, both can be used to purchase goods and services (although they are mostly used to transact between other cryptocurrencies).
They differ in more ways than they are alike, most notably in the way they are recorded on the blockchain. Bitcoin uses a UTXO (Unused Transaction Output) model, Ethereum uses an Account/Balance model (similar to a bank account). Bitcoin is considered digital money for buying and selling, while Ethereum is considered a smart contract for payments. Bitcoin transactions can take minutes, Ethereum transactions take seconds. Bitcoin has a limited supply 21 million coins which is estimated to be reached in 2140, Ethereum has no limit in production.
What is Bitcoin and How Do I Use It?
Bitcoin (BTC) was created by an anonymous person using the pseudonym “Satoshi Nakamoto” and the first Bitcoin was mined on January 3, 2009. Bitcoin mining is similiar to mining for gold, involving investments in land, equipment, people, processing, and other overhead to bring the gold to market. This all contributes to the price of gold. If the cost of mining is greater than the price, the gold will stay in the ground until the price increases or the mining process becomes less costly.
Bitcoins are mined by solving a math problem. Really? Yes. Solving the problem requires resources which contribute to the price of Bitcoin. The costs involve computer equipment to solve the algorithms, the facility to house the equipment, electricity to run the computers, air-conditioning, and other electrical equipment at the facility, payroll, and other overhead. Today, Bitcoin mining creates about 144 blocks per day. There are 12.5 Bitcoins per block (1,800 Bitcoins per day). One Bitcoin is currently valued between $9,000 to $10,000. There are about 18 million Bitcoins in circulation with an estimated market cap of $1.7 billion.
In most cases Bitcoins are being used for cross-border payments. Some buy them for investment hoping that the price will increase. Others use them for online gaming. Retailers have yet to embrace cryptocurrency, although some online stores have begun accepting it. Nike, Starbucks, Microsoft, and Target are already accepting payments online using cryptocurrency.
As mentioned previously, Bitcoin uses the UTXO model for transacting, often explained as digital cash. When you have cash and you want to buy something that costs two dollars, you have to give the seller two one-dollar bills. If instead you have one one-dollar bill and four quarters, that works equally as well. Bitcoins are similar in that they represent a coin or part of a coin. When making a payment, you can use part of one coin or combine several coins or parts of coins to meet the price. When using part of a coin, the part left over is the “Unused Transaction Output” or UTXO. Understanding the basic accounting system reveals one of its shortcomings; it is more difficult and slower to complete transactions.
What is Ethereum and How Do I Use It?
Ethereum (ETH) was first introduced on July 30, 2015 by Vitalik Buterin. Six years after the inception of Bitcoin, advances in blockchain technology allowed Ethereum to offer more capabilities, earning it the Smart Contract title. Of the many differences is how Ethereum is mined. The math puzzle is based on the block’s header and its data which includes a hash and finding a hash that matches. Once a match is made the block is considered mined and it is broadcast to the network for the other nodes to validate and add to the blockchain. The resources needed to mine a coin is considerable just as it is for Bitcoin mining which leads to the cost.
Ethereum’s architecture uses blockchain technology not only for maintaining a decentralized payment network but also for storing computer code which is used to provide tamper-proof decentralized financial contracts and applications. Ethereum applications and contracts are powered by Ether, the Ethereum network’s currency.
One of the most significant differences is that Ethereum provides for smart contracts to be deployed by way of Decentralized Applications (Dapps). Dapp based contracts can be built and run without downtime, fraud, control or interference from a third party. Ethereum supports a complete programming language which runs on a blockchain, enabling developers to build and run Dapps.
Because of the contract and ledger-based aspects of Ethereum, a consortium of Fortune 500 companies along with other innovators, developers, and businesses have formed a member-based standards organization known as the Enterprise Ethereum Alliance, “EEA”. This organization’s charter is to develop open, blockchain specifications that drive harmonization and interoperability for businesses and consumers worldwide.
Because of its unique programable blockchain capabilities, Ethereum is best applied to business transaction systems. This allows programmers to expand the functional use of Ether to beyond just payments and provides systems for borrowing, lending, or investing your digital assets. Of course Ether is well adapted to Cryptocurrency wallets and can essentially facilitate cheap, instant payments as part of the wallet’s suite of services and because of the extensibility of Dapps, payments via mobile phones is easy to provide making it globally available.
Both Bitcoin and Ether have their place in the cryptocurrency world. The established and well received Bitcoin is here to stay and will continue to be a market leader in transactions, market cap, cross boarder payments, and globally acceptable cryptocurrency. Ether will also continue to grow as the extensible and versatile cryptocurrency for payments, wallets, and other business-like transactions where its programable capabilities will create new methods for transacting.
There are thousands of cryptocurrencies. These two are the market leaders but many of the others provide unique benefits which separate them into specialized payment markets. Cryptocurrencies are here to stay and it’s only a matter of time for traditional fiat payment methods to become a thing of the past.