During the last couple of years, the popularity of digital currencies has skyrocketed, with hundreds of millions of dollars-worth of investments made so far by companies operating on the market, private investors, banks and even governments.
While there are tons of digital currencies available, it is worth pointing out the fact that only Bitcoin and Ethereum have had an important influence on the market. While Bitcoin has been around since 2009, Ethereum is still fairly new, yet during its short time, has already managed to gain a lot of value, and attract the attention of investors from all around the world.
As you may already know, both digital assets are based on the blockchain, a distributed ledger that provides transparency, proof-of-work and many other benefits as well. However, as Ethereum is still fairly new on the market, there has been a lot of confusion about the similarities and differences between the two digital assets and their underlying system, the blockchain network. In this article, we will attempt to outline most of these differences, and grant readers a better understanding of the two digital assets that are shaping our world as we speak.
Bitcoin: a brief presentation
Bitcoin represents a digital currency created in the year of 2009, which offers numerous benefits, such as low transaction fees, a decentralized system, transparency, and anonymity for its users. It works based on a peer-to-peer technology, and is backed by the bitcoin blockchain, which is the underlying system that makes bitcoin what it truly is. During its years of service, its value has managed to grow considerably, as bitcoin is currently fluctuating around the $2,500 mark. The digital currency facilitates transactions between two people, while eliminating the need of using an intermediary, which would normally be a bank. All transactions that are carried out are then verified by network nodes, and are then recorded onto the public ledger known as the blockchain. Therefore, the system works without needing to use a central repository, and doesn’t need a single administrator, thus making it the world’s first digital currency.
While both people and governments were sceptical of Bitcoin at first, its recent history showcases that the digital currency can be trusted, as nowadays, hundreds of thousands of merchants throughout the world accept it as a means of payment for products and services. Not only this, but millions of dollars have been invested in backing bitcoin and blockchain-related projects, with more and more companies specializing in the digital currency appear on a monthly basis.
Ethereum: a brief presentation
On the other side of the spectrum, we have Ethereum, which is an open-source, blockchain-based project that strives to offer smart contract functionality, which basically works to facilitate numerous forms of internet-based contractual agreements between users and other entities. While bitcoin was built to serve the sole purpose of being a digital currency that would one day replace our traditional financial system, Ethereum serves a different purpose. Smart contracts can be paid for via Ether, which is basically the digital currency, or fuel behind the system. Therefore, ether can be regarded as the fuel needed to operate decentralized and distributed applications on the platform, made by clients, to the machines that are executing the operations in question.
Understanding the key differences between the two digital platforms
Upon its creation, Bitcoin has been designed to function as a secure, P2P, decentralized payment system, with all transactions available for the world to see on the public ledger. It is worth mentioning the fact that bitcoin is put into circulation by mining, which is basically the process of adding all transaction records to the blockchain- in return, for each block of transaction that is mined, users are rewarded a number of coins, based on their effort and processing power that goes in verifying the authenticity of each transaction in question. Additionally, bitcoin operates based on a proof-of-work protocol, which means that in order to add a block to the blockchain, a computer must solve a couple of complex mathematical problems. In return, this system increases both validity, but also security.
Ethereum instead, wasn’t really designed to be a payment system, but rather much more. To be exact, it represents a decentralized platform, which is capable of running smart contracts. These are applications that operate exactly as they have been coded, while minimizing risks such as fraud, downtime, third party interference or censorship. Not only this, but Ethereum’s protocol is also meant to allow and encourage flexibility. While at this moment in time, Ethereum also works on the proof-of-work protocol, it is in the process of changing and adopting the proof-of-stake protocol instead, which will bring about many other benefits, while minimizing the downfalls associated with the initial system.
To put things better into perspective, a proof-of-stake model will eliminate miners, and create validators. Therefore, there will be no more difficult mathematical problems that miners have to solve in order to get their reward. Rather, validators will need to put their very own ether on the line to help certify that a certain block is valid, after carrying out its verification. Adopting the new protocol also means that the method of reward will change. Instead of having to reward miners for cracking a block, validators will earn transaction fees for each transaction and smart contract that they manage to validate and upload onto the Ethereum blockchain.
Another key difference between Bitcoin and Ethereum, is the fact that the latter allows users to create their very own digital tokens. These can be used by individuals to represent assets, virtual shares and even proof of membership. These particular tokens are compatible with most wallets that support the standard coin API, which is absolutely great news. With this factor in mind, users can simply copy the code from the Ethereum website, and then use the tokens in question for numerous purposes, as the development of decentralized apps based on smart contracts continues. To put things better into perspective, a great feature associated with Ethereum is the fact that it grants app developers the possibility to raise virtual funds, which can then be used to further fuel their applications and hence, the development.
Not only this, but Ethereum can also be used to get rid of the management structures that everyone is accustomed with, by replacing it with DAOs, which are basically democratic autonomous organizations operating on the Ethereum blockchain. The possibilities here are basically endless.
Some of the finer differences between the two platforms, is the fact that the average block time for bitcoin is of around 10 minutes, whereas Ethereum confirms in around 12 seconds, due to its GHOST protocol. While confirmations are quicker, this also increases the chances of orphaned blocks, which are basically left for dead, outside the blockchain network.
Monetary supply represents another key difference worth taking into consideration. With this in mind, at this time, more than two-thirds of all bitcoin that will ever be available (hint: 21 million) has already been mined. Ethereum on the other hand managed to raise the capital that it needed for its launch in its ICO, and so far, around half of the coins have been mined.
The transaction costs between the two platforms also tends to differ. In Bitcoin, to make sure that a transaction is confirmed quickly enough by the network, a certain sum of money has to be paid off to the miners. With Ethereum, this tax is referred to as Gas, and the amount of Gas that needs to be paid depends on several factors such as the bandwidth usage, or complexity of a transaction.
Future and potential
So far, the market has attempted to decide which platform will manage to survive in the end, and how popular both will become in the future. With this in mind, numerous statements have been made by prominent members in the industry. For example, not long ago, Mike McGovern, the head of investor services of a private bank stated that the Ethereum blockchain is superior when compared to Bitcoin’s. The reasons behind this statement were reportedly that Ethereum is less expensive when compared to bitcoin, as mining ether tokens is bound to cost less electricity. Another reason would be the sole purpose of the currencies in question.
At the time of writing, Ethereum is currently facing, what many would refer to, as a hiccup. With this in mind, the cryptocurrency is trading at its lowest level in the last month, as it is now down around 9.9%, and situated at $215 in terms of its value. Since reaching its record value back in June, or almost $400, the value fell with around 45%. Yet, this volatility will likely not make or break the cryptocurrency. Values tend to change due to hundreds of reasons, and a lower value doesn’t necessarily mean that the currency in question is close to its demise. After all, one bitcoin values around $2,500. Does this mean that the dollar is about to disappear? Definitely not!
What should you invest in?
This is a difficult question, and it mostly depends on what your vision of the financial market is. Would you like access to a digital currency that has been established for much longer, and with a much higher value, which can be used to buy, sell and transfer funds with ease? Or would you rather have access to a platform that provides users with tons of decentralized applications and smart contracts, which can be put to work by using Ether?
Holding both Bitcoin and Ether would be the smartest investment idea in this case, as Bitcoin will provide you with added value, and the ability to buy/sell whatever you want in the future, whereas Ethereum will provide you with a crypto-fuel which can power up decentralized applications. An investment in Ether is basically an investment into its blockchain network, backed by the belief that in the future, the technology will manage to get access to a significant part of the market.
Based on everything that has been outlined so far, while both platforms can theoretically be used to facilitate payments between two parties, and then exchanged into dollars if the user desires, it is essential to understand that Bitcoin and Ethereum were built to serve different purposes from the start. While the future of both currencies is not yet clear, as predictions are made on a daily basis, with Ethereum, you can expect a great investment opportunity which will grow side by side with the technology behind it and apps being developed, whereas with Bitcoin, you can expect a digital asset that is likely to grow in the years to come, and possibly reach mind-blowing values.
Regardless, it is believed that digital currencies as a whole will have an important influence on the future of the financial system, as the traditional system powered by banks continues to fail us, and cryptocurrencies are paving the way for the future.