Understanding the Differences between Bitcoin and Ethereum
Bitcoin and Ethereum are the two most-valued cryptocurrencies being offered today. The first cryptocurrency and the first ICO, respectively, have changed the ways we see money, business, and data and will likely redefine our lives in years to come.
Despite this, most people cannot tell apart the Big Two. This article will explain the difference between bitcoin and Ethereum.
Possibly the most obvious difference between the two cryptocurrencies involve how they were created. Bitcoin, for example, was a proof-of-concept for a digital money idea, while Ethereum was meant to be a replacement for bitcoin.
The idea for bitcoin was introduced in 2009, when anonymous developer Satoshi Nakamoto wrote the protocol specifications in the paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” Publishing the paper on the Cyberpunks mailing list, the paper expanded on Wei Dai’s 1998 concept of “cryptocurrency” or money that utilizes cryptography to control and limit its creation, distribution, and transactions.
Bitcoin in the early years was treated as a research project, with early contributors gathering significant caches of the new tokens in the name of experimentation with the prototype system. Due to this, early adopters have an unbalanced share of the coin’s volume and control. As most of these adopters were exclusive members of developers’ communities and mailing lists like Cyberpunks, there is a sense that was, in fact, centralized around this core group. This is, however, challenged by the fact that the bitcoin protocol was distributed freely and that the rash of early bitcoin clones indicated wide adoption of the bitcoin concept.
Ethereum, on the other hand, came from a direct criticism of bitcoin. In 2013, Vitalik Buterin, a bitcoin researcher and programmer, proposed an initial coin offering – the first of its kind – to fund the development of a new coin. While Ethereum would not be the first post-bitcoin cryptocurrency, it was the first to address critical flaws in the coin’s protocol, such as its lack of scripting capability, its limited coin supply, and its long transaction time. This came to be because Buterin found it impossible to get agreement from the bitcoin community about embracing these changes.
As there was no early “adoption” period, early distribution of Ether was based on the result of the crowdsale. This resulted in what many see as a more equitable distribution of the seed Ethers. As more than half of all theoretical Ethers have yet to be mined, compared to approximately 20 percent of bitcoin, it is seen that Ethereum has more potential for late adopters to develop a stake.
Ethereum is also considered fairer because it utilized the Ethash algorithm for its proof-of-work consensus protocol. Ethash is different from the SHA-256 algorithm used by bitcoin in one very specific way: it is resistant to ASIC (application-specific integrated circuits). This mean that specialized mining rigs cannot be built to mine Ethereum as they are used for bitcoin. This allows home miners a fair chance at mining Ethereum (although, admittedly, large server farms have made Ethereum mining unaffordable for the casual user).
Bitcoin (and bitcoin-like coins, like litecoin) are unique in the sense that the supply of the coins is finite. The constraints established on bitcoin were arbitrary to Nakamoto and likely make sense from the point of view that bitcoin was meant to be an experiment, one of many forays into digital money that made a splash and then petered out. It is not clear if Nakamoto would have made changes if he/she thought the coin would hit the success it knows today; Nakamoto left the bitcoin project in 2010.
Using a supply curve that approximate the way gold is mined – hence the term “miner” for coin discoverers – Nakamoto decided that the total number of bitcoin available for mining should reach just less than 21 million, with bitcoin being produced in a set procession every ten minutes with the creation of a new block. Every 210,000 blocks, the number of bitcoins produced per block is cut in half. Additionally, the difficulty for creating a block is increased every 2016 blocks.
The ramification of a fixed supply currency can be seen in the bitcoin price spike of 2017. In an open-supply currency, if the value of the currency moves outside of acceptable limits, the currency’s regulator can order the issue of new money. When the value returns to normal, that new money can be removed from the system (typically, by simply not reprinting the bills once they return to the regulator to be “retired”). As bitcoin does not have a central regulator and as the currency is finite, the additional value is bore out in the price of the coin. Worse, as block space is also finite, as the number of transactions on the network increases, so will the demand on block space. This can lead to a spiking of transaction fees.
In theory, the last bitcoin will be mined around 2140. This is assuming that the cost to mine bitcoin will adjust accordingly with the cost of electricity, offering an incentive to continue to mine it. With bitcoin hitting the “break-even” mark by some estimates in March 2018, it is unsure if there will be enough miner interest for the last bitcoin to ever be mined.
Ethereum, on the other hand, has no set coin supply limit. It will be the determination of the Ethereum community when the supply of Ethers will come to an end. Miners receive five Ethers per block mined, plus any gas or application operation fees produced from the mined block. Ethereum also implements the GHOST protocol, which deals with nodes finding the same block simultaneously.
In bitcoin, orphaned blocks or blocks that were discovered too late for official inclusion, are rejected. In Ethereum, however, these blocks – called uncles – are included in the chain, as they improve the transaction speed of the network. Uncles receive 87.5 percent of the block reward, while nephews – blocks that are children of uncles – receive 12.5 percent.
Speaking of blocks, another key difference between bitcoin and Ethereum is in how the two organize their blocks.
Bitcoin was meant only to be digital money. As such, its block design reflects a simplistic blueprint. Bitcoin creates a new block every ten minutes, meaning that transactions have a ten minutes confirmation time. Bitcoin has an original block size of one megabyte – it was discovered by accident in 2013 and was not enforced until that time. Contentions that the block limit causes bottlenecks in the bitcoin network led to hard forks and the branching out of bitcoin alternatives like Bitcoin Cash, Bitcoin XT, Bitcoin Gold, and Bitcoin Classic.
Bitcoin also utilizes the unspent transaction output model, in which unspent outputs or coins that have not been spent are actively recorded to the blockchain. This is to ensure that only unspent outputs can be used in transactions, preventing double spending. With a completed transaction, the input is deleted, leaving only the output that can be used for a new transaction as an unspent transaction output.
Ethereum, on the other hand, denotes the current balance of all accounts n a Merkle tree separate from the main blockchain. While the public key for a coin is permanently stored on the bitcoin blockchain, both the private and public keys are stored in an Ethereum wallet. Wallets are capable of directly writing to the blockchain and Ether transfers require the transmission of the public key.
Ethereum blocks can also include “uncles” or blocks that were mined by another miner but discovered later than the “official” block. This system is credited for Ethereum’s average block time of 15 seconds. Ethereum also charges both a transaction fee (like bitcoin) and a “gas” fee, which is the cost to run an instruction set on the Ethereum Virtual Machine. Ethereum blocks can either store Ether transactions or decentralized application (dapp) code.
Unlike bitcoin, Ethereum’s role as virtual money is secondary. Its primary purpose is to serve as a platform for blockchain-based applications.
These applications permit the existence of “smart contracts,” or autonomous protocols capable of digitally facilitating, verifying, and enforcing a contract without the need of an outside arbitrator or executor. The term was coined by computer scientist Nick Szabo in 1994.
“A smart contract is a computerized transaction protocol that executes the terms of a contract,” Szabo wrote. “The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.”
“[W]e can extend the concept of smart contracts to property. Smart property might be created by embedding smart contracts in physical objects. These embedded protocols would automatically give control of the keys for operating the property to the agent who rightfully owns that property, based on the terms of the contract. For example, a car might be rendered inoperable unless the proper challenge-response protocol is completed with its rightful owner, preventing theft. If a loan was taken out to buy that car, and the owner failed to make payments, the smart contract could automatically invoke a lien, which returns control of the car keys to the bank. This smart lien might be much cheaper and more effective than a repo man. Also needed is a protocol to provably remove the lien when the loan has been paid off, as well as hardship and operational exceptions. For example, it would be rude to revoke operation of the car while it’s doing 75 down the freeway.”
Smart contracts are implemented by dapps, which run on the Ethereum Virtual Machine – a virtual space created by the Ethereum software protocol to run scripts saved to the blockchain. This means that a smart contract can work autonomously, allowing for any number of functions – from contract signing to retail sales – to happen without third-party intervention.
Bitcoin does have scripting capability, but it is limited – it is reserved to sixteen functions. Scripts cannot be saved or ran from the blockchain, trivializing the decentralized nature of the capability.
Possibly the biggest and least-discussed difference between the two coins is consensus methodology. Both coins are proof-of-work now, that is that they are mined. Proof-of-work depends on the difficulty in faking a hash and having to defend that fake against a network that would verify the fake against a previously-received confirmation to make it not worth the effort to attempt the forgery.
“The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs,” the Satoshi whitepaper reads. “Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes.”
The problem with proof-of-work is what happens when the supply of coins run out. When the bitcoin supply dries out because the supply limit has been reached or – more likely – bitcoin becomes unprofitable to mine – proof-of-work will cease to work. Mining has dual purposes: besides creating new tokens, it is the confirmation process for the network. Nodes compete to come up with the nonce to solve the next block. The block is not given necessarily to the node that comes up with the nonce first, but the node that both has a valid nonce and completed the most confirmations for the last cycle. The tokens are not just a reward for solving the block, but for also doing the most work to keep the network running.
Without mines, there are no verifiers. Either miners would continue to mine at a loss and rely on bitcoin fees to compensate, which – admittedly – will grow as block space becomes rarer, or miners will leave the network, extending confirmation times.
Ethereum’s creators foresaw this. When Ethereum’s coin supply finally comes to an end, the network will switch to proof-of-stake, where verifying nodes would need to post a stake of Ethers on an online wallet on the node to confirm its commitment to the system. This stake is effectively collateral against possible fraud by the node. This switch to proof-of-stake is needed as the supply of Ethers are not known; going proof-of-stake from the beginning requires pre-mining all possible tokens.