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TABLE OF CONTENTS

Bitcoin vs. Ethereum: Digital Gold vs. Decentralized Computer

4.1 | by Joel Agbo

Key Takeaways

  • The idea of blockchain technology as the bedrock of a decentralized payment solution was initiated via Bitcoin by Satoshi Nakamoto.

  • Ethereum was introduced later on (by Vitalik Buterin and the Ethereum founding team) as a complete system built on the blockchain. It powers proper applications, the decentralized internet, and payment solutions.

  • Before Ethereum switched to the Proof-of-Stake consensus algorithm, it shared the reign with Bitcoin as the two biggest Proof-of-Work networks.

  • Bitcoin and Ethereum were built for different purposes but collectively influence the whole crypto space. Their influence is evidenced in the market size, dominance ratios, and the number of spin-off projects.


Bitcoin vs Ethereum

In a recent interview with BusinessInsider, Vitalik Buterin cited Bitcoin’s “limited functionality” as the primary reason he (and his team) went out of their way to build a blockchain with a native programming language and support for various applications.

Whether he envisioned one of the most popular blockchains or just a decentralized game hosting network (where players cannot be ‘hobbled’ out of their favorite Warcraft game characters), Ethereum blockchain has gone ahead to achieve both of these.

The Bitcoin blockchain on the other hand has grown from a payment solution to a political and economic revolution, and it’s also the host network to the biggest cryptocurrency in market size and user community.

Both chains serve different purposes and excel in their separate sectors. Here, we look at the remarkable similarities and differences between them.

Bitcoin vs Ethereum: An Overview

A Bitcoin and Ethereum comparison is basically comparing two blockchains – built for different purposes, but on the same backbone.

The Bitcoin blockchain was designed to handle peer-to-peer transactions and keep records of ‘spend’ and ‘receive’ activities involving bitcoin. The records are kept on a public ledger, and as such are accessible to anyone on the network and outside of it. Bitcoin has been used to process payments at different levels and each time, it has shown great potential for even higher applications.

Merchants and service providers all over the world are integrating Bitcoin’s infrastructure into their payment systems as a more flexible approach to routine transactions. The bitcoin currency has also emerged as a store of value and an issue of political debate. These debates are majorly towards regulation and constructive adoption. Bitcoin already ticks all boxes as a payment solution, and it’s still a work in progress!

On the other hand, the Ethereum blockchain supports peer-to-peer transactions but this feature is integrated into a complete system. Ethereum’s system works in synergy with a series of automatable systems that are structured to create a platform on which decentralized applications can be built.

Gavin Woods’ smart contract technology enables the Ethereum blockchain to work as an automated vending machine. It makes it capable of executing transactions according to instructions decoded from code bits that can be understood by Ethereum’s state machine. This machine is known as the Ethereum Virtual Machine

Ethereum blockchain also supports the creation of additional tokens that run parallel to the native token. They are designed according to different ERC standards to gain certain abilities and serve different purposes. For example, ERC-20 is the standard for smart contract tokens on Ethereum, while ERC-721 is the standard for NFTs

The Ethereum blockchain has been functional for less than a decade but is already home to thousands of smart contract tokens and decentralized applications that leverage the smart contract technology and the EVM to design real-world utilities.

While it's not exactly an apples-to-apples comparison, but let’s take a look how these two crypto giants compare against each other. 

Market Performance

Crypto Prices Marketcap

Bitcoin occupies the top spot in the cryptocurrency rankings according to market capitalization. Since cryptocurrencies began to proliferate, it has held on to this position amidst the competition. But this is not just due to the "first to market" privilege. 

Bitcoin has maintained its status as a pioneering and pace-setting figure for the rest of the space. It also leads the space in terms of adoption and mainstream influence. These translate into higher investor interest and subsequently, higher market size. Bitcoin's value (per coin) hits peaks regularly, going as high as $65,000 during the bull market. Its market capitalization had crossed the one trillion dollar level at that point. 

Before Ethereum emerged, the cryptocurrency sector had already started taking shape. Bitcoin occupied the top position and was trailed by a number of altcoins.

After Ethereum's fundraiser, the smart blockchain steered its way into the top ranks. Moving up against older projects, it claimed the second position in January 2018 and has since held tight to this position, fighting off periodic dethronement. It has stayed in this position for over 3 consecutive years.

Like bitcoin and other cryptocurrencies, Ether's price has also attained regular peaks, peaking at $4,800 in November 2021. Its market capitalization peaked at $600 billion by this time as well.

Bitcoin and Ethereum have a combined dominance of over 50%, with BTC claiming over 35% of the total cryptocurrency market capitalization and ETH holding on to about 18% of the space.

Consensus Mechanism and Mining

Before the third quarter of 2022, Bitcoin and Ethereum Blockchain worked on a similar consensus mechanism and mining system. Both blockchains ran the Proof-of-Work consensus and required participants on the network to run nodes on their devices, validate blocks added to the chain and receive rewards for this service. A major difference between the two at this time was that Bitcoin uses the SHA-256 mining algorithm while Ethereum used the Ethash algorithm.

On migration to Proof-of-Stake in September 2022, Ethereum's consensus mechanism and mining system changed, marking a huge difference between the two blockchains in this aspect.

In contrast to the Bitcoin blockchain, participants of the Ethereum network secure the blockchain by staking their assets on the network and running a validator node. Validators stand more chance of validating a block and receiving rewards if they stake more assets on the network. Validators on the Ethereum blockchain will need to stake at least 32 ETH to be able to run a node, or they can also join staking pools if they wish to commit a smaller amount. For the Bitcoin blockchain, miners with higher computing power are more likely to earn validation rights for a block and receive mining rewards. Ethereum stakers also have the option to engage in liquid staking, where they can unlock their staked tokens' liquidity and engage in activites like selling, lending, and other DeFi activities. 

One advantage Ethereum has gained over Bitcoin since its migration to PoS is compliance with stipulated ecologically healthy energy consumption. The Proof-of-Stake consensus algorithm requires less computing power and electrical energy and is therefore a greener way to run a blockchain network. This was one of the main reasons why Ethereum developers made this switch. However, arguments against this shift see this as making Ethereum less decentralized.

Tokenomics

BTC supply schedule

Source: CoinGecko BTC Tokenomics

Bitcoin’s economic setup has been pitched to custodial institutions as a better way to run national and organizational finance. This is based on bitcoin’s hard-stamped supply and conditional deflationary supply. Bitcoin’s supply is pegged at 21 million, and a good percentage of the circulating supply has already been mined. The remaining supply will be distributed over time to miners on the network. 

No bitcoin was minted before the genesis block was mined. Bitcoin’s creator also designed a reward-halving algorithm to reduce miners’ rewards every four years, and drive more scarcity and stretched supply.

In contrast, Ethereum’s supply isn’t limited. New coins will be issued as long as the chain runs. About 72 million Ethereum coins were already issued on the blockchain before the genesis block was mined. 

ETH Supply Schedule from CoinGecko

Source: CoinGecko ETH Tokenomics

However, as part of the switch to Proof-of-Stake, Ethereum blockchain executed a triple halving exercise that reduced rewards by over 80%, which caused the currency to be deflationary (for now).

Ethereum’s EIP-1559 also introduces a burning mechanism designed to reduce the coins in circulation every time a transaction is executed on the chain. According to this, a fraction of the fee paid for a transaction is removed from circulation through token burning.

ETH Supply Post-Merge

Source: Ultrasound.money

Bitcoin is primarily used as electronic cash, and also for paying fees for transactions on the Bitcoin blockchain. Ethereum is also used for these, but an even greater application is its use as a utility token on the Ethereum blockchain and applications built on the blockchain, as every user on the Ethereum network, including Layer 2s, needs ETH to pay gas fees. 

Network Efficiency

Bitcoin and Ethereum blockchains process transactions at different speeds, and charge varying fees for each transaction. The Bitcoin blockchain can handle just 7 transactions per second. In comparison, the Ethereum blockchain can handle around 12,7 transactions per second. The switch to Proof-of-Stake and other deliverables of Ethereum 2.0 like Sharding is expected to increase this value by a wide margin.

Fees for transactions on these blockchains are charged in the native tokens. When converted to USD, the Bitcoin blockchain charges an average of $1.70 for a transaction while the Ethereum blockchain’s transaction fees vary according to network usage, reaching previous highs of over $50, but currently at around $0.80 based on Etherscan. To reduce the cost and increase the throughput of transactions on Ethereum, users may opt for Layer 2s that utilize technologies such as sidechains and optimistic and ZK rollups to increase scalability and usability. 

Community Size

Bitcoin and Ethereum and the two biggest cryptocurrencies in terms of market value and community. Bitcoin is arguably the most popular cryptocurrency, with Ethereum coming right after it on the list. For an idea of Bitcoin’s popularity, over 105 million people worldwide hold bitcoin. Being the most paired cryptocurrency on exchanges, a majority of cryptocurrency enthusiasts have held bitcoin at least once. This is almost the same for Ethereum.

Market Perception

Bitcoin’s influence on the cryptocurrency sector is so strong that the price development of any other cryptocurrency is mostly dependent on bitcoin’s state at that time. A drop in bitcoin’s price is likely to cause a drop in the value of other cryptocurrencies, including Ethereum. This is reflected in the Bitcoin dominance chart, which is one of the ways in which traders and investors measure the performance of the whole crypto market. 

Bitcoin is perceived as the ‘king’ and cryptocurrency traders take its movements as a serious indicator. This is because Bitcoin is seen as a reserve currency and a standard for every other cryptocurrency. Traders are engaged in constant swapping between bitcoin and other assets and are focused on building up their reserves, so movements of bitcoin can reflect the potential movement of altcoins and their prices.

Ecosystem

Bitcoin and Ethereum have created a huge ecosystem of autonomous parties utilizing their technology to build even more exciting utilities. Bitcoin, as electronic cash, is becoming a household name amongst merchants who hope to use a more flexible online payment system, with some mainstream platforms accepting bitcoin payment directly, or payment through a crypto credit/debit card.

On the other hand, Ethereum’s ecosystem is thriving. Not only is it creating utilities that cut across various aspects of technology, these utilities are appealing to most users. Ethereum’s ecosystem consists of payment solutions and decentralized finance (DeFi) projects, artificial intelligence, gaming (GameFi), data storage networks, asset management projects, and more.

Bitcoin vs. Ethereum Summary

Bitcoin vs Ethereum

Is Bitcoin or Ethereum Better in the Long-Term?

It really depends on your preference. While bitcoin is an established store of value (hence the occassional reference to bitcoin as "digital gold") and enjoys institutional adoption, Ethereum has popularized developments in the crypto space such as NFTs, along with smart contracts on the EVM that drive decentralized applications. That said, Ethereum definitely has more competitors in its corner, fending off up and coming Layer 1s like Solana that offer lower transaction fees and similar utility.

Final Thoughts

Two pioneers of different ideas and propagators of one revolutionary concept. The greatest similarity between Bitcoin and Ethereum is that they have both shown what can be achieved using blockchain technology. This is a personal opinion; but just like Bitcoin, Ethereum is not an altcoin. After all, like Bitcoin, Ethereum plays a trailblazing role for the rest of the crypto space and the world outside it, in terms of blockchain utilization.

Prior to Ethereum’s emergence, a long list of “decentralized Electronic Cash” projects dominated the crypto space, each of them an enhanced copy of the Bitcoin blockchain. Within this time, the use of distributed ledger technology was limited to “electronic cash.” Ethereum shed light on what else could be achieved with this design and since this time, the space has gone beyond P2P payments.

While we've shared an overview of how these two giants differ, this comparison isn't meant to pit each community against the other, but to properly discuss the offerings of both entities. The Bitcoin and Ethereum communities are the biggest cryptocurrency communities, intersecting at several points, and are pushing blockchain adoption through new developments, and the rest of the crypto space benefits from their effort and technological breakthroughs.

As always, do apply caution while investing in digital assets as they are subject to market volatility. This article is for information purposes and should not be taken as financial advice. 

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Joel Agbo
Joel Agbo

Joel is deeply interested in the technologies behind cryptocurrencies and blockchain networks. In his over 7 years of involvement in the space, he helps startups build a stronger internet presence through written content. He is the founder of CryptocurrencyScripts. Follow the author on Twitter @agboifesinachi

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