Bitcoin Vs Ethereum: The Difference Between Crypto’s Two Big-Hitters
BY Chris Andreou
|April 28, 2021Although there are more than four thousand different cryptocurrencies in existence, the two titans of bitcoin (BTC) and ether (ETH) remain king, accounting for more than 65% of the entire market cap of all cryptocurrency.
Due to their sheer dominance, the two cryptos are often associated with one another. Historically, they even have some price correlation – what’s good for bitcoin tends to be good for ether, although the inverse isn’t always true.
But while both coins are essentially a means of exchange, the similarities effectively end there. Each of these tokens has attributes that set them apart from each other as oil and water.
So let’s take a deeper dive to learn how these two mega cryptos stack up against each other in terms of features and utility.
What is Cryptocurrency?
Before getting into the differences between crypto’s two biggest hitters, it’s worth taking a moment to assess our definition of the term cryptocurrency.
The “currency” in cryptocurrency comes from the fact that these digital tokens can be used to transact – that is, to buy or to sell goods or services.
The major difference between cryptocurrencies and what you would refer to as “normal” currencies (pound, dollar, euro, etc) is that cryptos are decentralised. Digital coins like bitcoin and ether don’t have a central authority or regulator such as banks or governments.
The “crypto” in cryptocurrency comes from the cryptographic functions that ensure that the transactions are kept secure. To even attempt an attack on the bitcoin network would take as much electricity as a small country to do so, along with server farms filled with dedicated hardware, which are often in short supply.
But most importantly, cryptocurrencies use blockchain, which is a set of records that are placed into a container known as a block. These transactions are kept public and in chronological order.
Goal, Concept & Aim
Perhaps the main reason the two cryptocurrencies are so different is that their aim was never aligned in the first place. They have two completely different reasons for being.
While bitcoin is intended to become an authentic currency that currently acts as a store of value, the ethereum blockchain is primarily intended as a development platform on which other tokens and apps can be built. Its cryptocurrency, ether, is merely a secondary function.
Bitcoin focuses on doing one thing well, that is being a decentralised and secure store of value and payment-settlement layer. Bitcoin is now more than 12 years old, and hasn’t changed in any drastic way since its inception. The latest major change occurred in 2017, with the SegWit update that improved scalability and solved certain technical problems.
Ethereum, on the other hand, doesn’t optimise for being a store of value. It aims to be a world network that runs smart contracts for decentralised applications (dApps), with the idea being that its token, ether, may rise in value in tandem with the network’s growth. It’s more like a world computer system with a side order of money.
In this way, ethereum is not even really a direct competitor to bitcoin, although many ethereum aficionados will argue that, if enough pieces fall into place, it very well could be one day.
Mining & Consensus Mechanism
On the bitcoin and ethereum blockchains, miners validate their transactions with a method known as “proof of work” (PoW). In this method, miners around the world add blocks to the blockchain by solving complicated mathematical puzzles, while the rest of the network simply validates the solutions to create what is called “consensus”.
However, in ethereum’s next major upgrade (Ehtereum 2.0), the chain will be moving to what is called a “proof of stake” (PoS) system.
Unlike proof of work, where the algorithm rewards miners who solve a mathematical problem that creates a new block, the creator of a new block is chosen from a pool of users that have staked a certain amount of cryptocurrency (in this case ether).
This means that there is no puzzle to complete, and no reward for doing so. Instead, the miners take a fee for every transaction, and the penalties for trying to interfere with the system are monetary. This new method of consensus drastically reduces the massive energy requirements currently needed to validate ethereum transactions.
Proof of work miners need a lot of energy to try and solve their puzzles. Verifying a single bitcoin transaction with PoW requires the same amount of energy as two American households use in a day. The PoS system lifts the massive energy requirements from the system in favour of a monetary penalty for bad actors. This leads to a greener and cheaper form of consensus.
Fees
The hype and increased popularity of decentralised finance (DeFi) has skyrocketed Ethereum’s growth, and as a result, its transaction fees have risen so much that the network has surpassed bitcoin’s total transaction fees.
Recent data suggests ethereum’s total transaction fees in 2020 stood at $350 million, compared to just $157 million for bitcoin.
Considering the relative market caps of each coin, it’s clear that ethereum’s “gas” fees (transaction fees) are out of control.
The “proof of stake” concept described above also aims to solve the massive issue of sky-high gas fees by reducing the necessary computational power per transaction by 75%.
Time per Transaction
There’s also a big difference in the amount of time it takes for a transaction to complete on ethereum vs bitcoin. The average bitcoin transaction takes around 14 minutes, while each transaction for ethereum only takes 13 seconds.
This means that ethereum is more well-suited to the settlement of smart contracts, where rapid confirmation between parties and dApps is essential. On the other hand, bitcoin, which is almost exclusively a means of tender, can afford to have much longer settlement times as there are much fewer dependencies.
Bitcoin or Ethereum: The Final Word
Bitcoin and ethereum are two completely cryptocurrencies currently dominating the crypto world for entirely different reasons. Ethereum may yet achieve its goal of being a global network for smart contracts, and similarly, bitcoin may one day achieve its goal of becoming the world’s currency. Their aims are not mutually exclusive, and both can in theory occur together.
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