Bitcoin vs. Ethereum: What’s the Difference?

It is undeniable that Bitcoin and Ethereum are among the most widely recognized digital currencies. They have significantly contributed to the industry’s growth and adoption over the past decades. While they are both based on the Blockchain, there are several key differences setting them apart. In this blog, we will understand how Bitcoin and Ethereum contrast and which one is ideal for you. If that sounds exciting, let’s get going.

• Understanding Bitcoin

Emerged in 2009, Bitcoin is the first-ever decentralized cryptocurrency developed by a mysterious person or group popularly known as Satoshi Nakamoto. Its purpose was to eliminate all the intermediaries from a transaction, making it fully transparent, trustless, and peer-to-peer. Unlike fiat money, Bitcoins only exist in the form of virtual transactions on the Blockchain.

Read more: What is a Bitcoin, and how does it work?

• Understanding Ethereum

Ethereum was initially proposed by Vitalik Buterin in late 2013. After a couple of years of development, the platform was finally launched on the 30th July 2015. Despite being a popular cryptocurrency, Ethereum is a platform built to empower decentralized applications (DApps). Using Ethereum, anyone can build and run decentralized applications for various industries ranging from finance to social media and gaming.

• Purpose

Bitcoin and Ethereum were built for different purposes. Bitcoin was developed to overcome the flaws of fiat money. Traditional currency is vulnerable to dictatorship and can be easily inflated if financial institutions decide to print more money.

Bitcoin, on the other hand, is a completely decentralized currency that functions independently without any intermediaries. This makes it a censorship-free alternative to fiat money. No one can control its flow or circulate more coins. They can only be mined via high-performing computers through a process called Bitcoin mining.

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

— Satoshi Nakamoto (The anonymous founder of Bitcoin)

Ethereum, however, is more than just a cryptocurrency. It is a community-driven, open-source platform built to enable smart contracts and decentralized applications that make financial services and digital commerce accessible to everyone. Ethereum’s blockchain is more sophisticated than Bitcoin’s. It can store computer code and run applications that are decentralized. Ethereum was conceived to host DApps and smart contracts that can function without a middleman.

• Consensus mechanism

Every cryptocurrency has a “consensus mechanism,” a program implemented in a blockchain to achieve agreement about the ledger. That’s how trust and security are achieved across a decentralized network.

Bitcoin uses proof-of-work — a consensus mechanism that harnesses computing power to verify cryptocurrency transactions. In 2009, Bitcoin became the first-ever cryptocurrency to adopt proof of work for verifying transactions. The algorithm asks network members to spend computing power to crack an encrypted hexadecimal number. And the user who cracks the code gets to validate and add new transactions to the blockchain. This entire process is called Bitcoin mining. Through mining, new Bitcoins are introduced into the network. All the miners receive a certain amount of Bitcoins when they add new blocks to the Blockchain.

While Ethereum was initially introduced with a proof-of-work consensus mechanism, in September 2022, it moved to proof-of-stake. It was Ethereum’s biggest upgrade and reduced the energy consumption required to secure the network by a staggering 99.95%. Proof-of-stake requires validators to stake their capital (in the form of ETH) — which can be destroyed if they act dishonestly. This means if anyone tries to defraud the network by adding multiple blocks or proposing false transactions, some or all of their staked ETH can be destroyed.

Proof-of-stake consumes fewer resources than proof-of-work and requires less computational power to validate transactions.

• Scalability

By nature, Bitcoin’s proof-of-work consensus mechanism is not highly scalable. This means the network can handle only a certain number of transactions per second. As of now, it can process up to 7 transactions/sec. To overcome this limitation, Joseph Poon and Thaddeus Dryja introduced the Lightning Network in 2018. It is Bitcoin’s second layer that conducts transactions off the blockchain without delegation of trust and ownership. The Lightning Network can process billions of transactions per second.

On the contrary, Ethereum can tackle up to 30 transactions per second right out of the box, thanks to its highly scalable proof-of-stake consensus mechanism. Despite the higher number of transactions per second, Ethereum still has scalability issues. The community is actively addressing these issues through regular updates.

• Energy consumption

According to an estimate, Bitcoin consumes electricity at a rate of 124.46 terawatt-hours (TWh) per annum. That’s more than the entire annual electricity consumption of Norway. That’s not all. For every transaction, Bitcoin burns approximately 707 kilowatt-hours (kWh), which is 11 times that of Ethereum.

After Ethereum went through its biggest upgrade in September 2022, it now consumes 0.0026 TWh/yr globally for securing the network.

• Supply

There will only ever be a maximum of 21 million Bitcoin coins in circulation. This limit is to prevent inflation and ensure Bitcoin retains its price in the long run. As of today, 19,494,612.5 Bitcoins are in circulation, and by 2140, all the Bitcoins will be mined. After that, miners will no longer earn rewards by mining Bitcoins. Instead, they will get Bitcoins for verifying transactions.

On the flip side, Ethereum has no maximum supply limit. This means an unlimited number of Ether tokens can be created. This makes it vulnerable to inflation.

• Use cases

Bitcoin is primarily used as a decentralized virtual currency. Many believe it’s more than just an investment, a hedge against traditional financial market volatility. Bitcoin is widely used as an alternative to fiat money across various industries ranging from eCommerce to online gaming and charity.

Ethereum, however, goes beyond being a medium of exchanging value. Its built-in smart contract functionality allows it to be the backbone of Decentralized Finance (DeFi). Developers can build complex and decentralized applications powered by blockchain and Ethereum for various industries ranging from technology to social media and everything in between.

• Pros and cons of Bitcoin

Being a leading cryptocurrency, Bitcoin has its own pros and cons. Let’s look at a few.

Pros

• Emerged in 2009, Bitcoin is the oldest and most popular cryptocurrency on the internet.
• With a market cap of $512 billion, Bitcoin represents a dominance of 47.15%.
• With over 15,000 businesses accepting Bitcoins, it is a widely accepted cryptocurrency globally.
• Bitcoin’s value cannot be influenced by any government authorities or political interference.
• The cap on its supply makes it scarce and uninflatable.
• Bitcoin’s layer 2 (the Lightning Network) makes Bitcoin transactions faster and improves the scalability of the network.

Cons

• Bitcoin’s price is highly volatile.
• Bitcoin mining is energy-intensive.

• Pros and cons of Ethereum

Being a giant ecosystem built to power DApps, Ethereum has a few advantages and disadvantages. Here are a few.

Pros

• Ethereum’s utility is not just limited to being a digital currency. The technology can power DApps for various industries ranging from social media to technology.
• Ethereum’s consensus mechanism does not need intensive computing resources, thanks to its proof-of-stake mechanism.
• While Ethereum is not primarily built for conducting transactions, it can process payments faster than Bitcoin blockchain.
• Ethereum has one of the largest and most vibrant developer communities in the world.

Cons

• The transaction fees are higher than Bitcoins.
• Its unlimited supply can make it vulnerable to inflation.

FAQs