bitcoin (btc) and ethereum (eth) are the coca cola and pepsi of cryptocurrencies. they are the biggest names in crypto, with their combined market capitalization equaling more than 60% of the $1 trillion crypto market.
The performance of btc and eth often serves as a benchmark to gauge the overall health of the cryptocurrency market. Despite their dominance, these cryptocurrencies work very differently from one another. let’s take a deeper look at how bitcoin and ethereum compare.
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how bitcoin and ethereum compare
bitcoin and ethereum are fundamentally different beasts. The first is the first cryptocurrency, designed as a store of value and medium of exchange, but today it is mainly used as a speculative risk asset. the latter was designed as a decentralized computing network, which has given rise to the decentralized finance (defi) space.
ethereum also allows payments, using its internal eth cryptocurrency, but its scope is much broader than bitcoin by design.
Both systems use blockchain technology to validate and record transactions. Still, the upcoming changes to Ethereum, commonly known as Ethereum 2.0, should significantly upgrade the speed, sustainability, and accessibility of cryptocurrencies.
a big difference between bitcoin and ethereum is the consensus mechanisms they employ to run their respective blockchains.
what is a consensus mechanism?
A consensus mechanism is a type of algorithm used to run a blockchain. the main goal of any consensus mechanism is to solve what is known as the “double spending” problem.
Once you spend a $20 bill, it no longer belongs to you. you cannot spend it a second time. Before bitcoin, the problem with the concept of digital currency was that they were just strings of computer code and could be infinitely copied and spent twice or countless times.
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Bitcoin’s blockchain consensus mechanism was designed to solve the problem of double spending. uses validators to ensure that each crypto unit can only be spent once and to record each transaction in a distributed ledger for all to see.
since everyone can see identical copies of the bitcoin block chain, no one can copy and paste your digital money and spend it twice. Manipulating a transaction is quite difficult, but you would also have to change each subsequent transaction, since each references its predecessors.
There are two main consensus mechanisms employed by cryptocurrencies. bitcoin uses the proof-of-work mechanism, while ethereum is moving towards a proof-of-stake consensus mechanism.
proof of work
proof of work requires validators to solve complex mathematical problems. they compete for the chance to be chosen to validate a new batch of transactions and add them to the blockchain, earning a set amount of crypto in the process.
In the early days of bitcoin, validators were largely hobbyists. Still, as the math problems in the bitcoin proof-of-work system have become more challenging, the amount of processing power needed to solve each one has increased exponentially. bitcoin mining is largely done by specialized companies that can afford expensive bitcoin mining rigs and the energy required to run them.
Proof-of-work systems like bitcoin have also received criticism for the amount of energy expended by the computer hardware involved. According to the Cambridge Center for Alternative Finance, bitcoin’s electricity consumption exceeds Norway’s annual electricity consumption, at an annualized rate of 127 terawatt-hours (twh).
proof of stake
Proof of stake requires validators to stake their cryptocurrencies for a chance to validate transactions and add blocks to the blockchain.
The more cryptocurrencies someone stakes, the higher their chances of being chosen to validate a block of transactions on a blockchain and win a given amount of cryptocurrencies. the system also discourages bad actors with financial penalties.
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Proof of stake favors people with more money, but protects against people adding fraudulent records to the blockchain. without the need for powerful computing hardware, proof-of-stake is considered a more environmentally friendly consensus mechanism than proof-of-work.
decentralized payments vs. decentralized software
Bitcoin was originally developed for decentralized payments. In the beginning, the designers of the original cryptocurrency wanted to help people send and receive payments without an intermediary, such as a bank.
ethereum, on the other hand, was designed to be a distributed computing platform. Ethereum’s designers built the platform to provide a foundation for running decentralized software programs, known as smart contracts, and distributed applications (dapps).
A smart contract is a digital agreement between two or more parties that will be executed once certain conditions are met. for example, account a will release asset x once it has received asset y from account b. this could make property sales or transfer of ownership faster and less susceptible to fraud.
a dapp is an application that is not controlled by a central authority. Twitter is an example of a centralized application, where users rely on it as an intermediary to send and receive messages. As such, users follow the rules, enforce them, and the algorithm it uses to control content.
Distributed applications help users send and receive data directly without intermediaries. peepeth is a dapp similar to twitter. claims that, as an app, it doesn’t optimize ad revenue, a problem it claims users of centralized apps suffer from.
price volatility
btc has certainly been more valuable than eth, peaking at around $68,789 in November 2021. on the other hand, eth peaked at around $4,891 in the same month.
The original crypto is down over 50% since the start of the year and only recently recovered from its June low of $17,708. That said, bitcoin and ethereum are up over 750% and 630%, respectively , in the last five years.
Ethereum price recently rebounded from its June low in anticipation of the “merge”, when the leading altcoin switches to “proof of stake” mechanism entirely. the merger is expected to take place around September.
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