Ethereum Vs. Bitcoin: What Are the Differences?

Being such cornerstones of the markets, knowing how these two assets are different is essential. From an investment perspective, both have tremendous potential, but the two assets greatly differ when it comes to actual use.

This article covers the similarities and differences between Ethereum vs. Bitcoin, and how to begin investing in these two assets.

Key Takeaways:

Bitcoin and Ethereum both run on distributed ledgers.
Bitcoin is seen as a store of value, but Ethereum's smart contract capabilities make it a powerful network for running decentralized applications (dapps).
Bitcoin uses Proof of Work; while currently using Proof of Work, Ethereum will soon transition to Proof of Stake.
Both serve their purposes in the cryptocurrency market, with Ethereum more focused on wider applications.

Bitcoin Basics

Bitcoin is the progenitor of the cryptocurrency market, laying the foundation for decentralized networks. In the past decade, thousands of cryptocurrencies have appeared and disappeared, but Bitcoin, despite being the oldest, remains stronger than ever. This is a testament to the network's strength and utility as a store of value.

On a high level, Bitcoin is a network that lets users hold and transfer value with the network's nodes ensuring that the internal accounting is correct. In other words, in a centralized system, an entity like a bank would ensure that the numbers on the financial ledger add up — on Bitcoin, nodes (a group of computers distributed globally) do this.

This property of decentralization is what made Bitcoin so special. It showed the world that it was possible to have a financial system without the need for centralized authorities. The result is a system that is more secure, transparent, and immutable than traditionally available.

But perhaps the biggest contribution to the world is its demonstration of how blockchain technology could be used for several use cases — something Ethereum is all too familiar with.

Ethereum Basics

Ethereum is also a decentralized network in which transfers of value can take place, functioning similarly to Bitcoin in that respect. A decentralized network of nodes ensures that transfers are valid and users can transfer assets similarly.

However, where Ethereum differs is in its ability to allow applications to run on top of the network, thanks to its smart contracts. Using Solidity, developers can create and run a wide variety of decentralized applications. Thus, Etheruem found a way to enable third-party applications to run in a decentralized manner, powered by the ETH coin. Smart contracts are what power the burgeoning fields of decentralized finance (DeFi) and non-fungible tokens (NFTs).

One other point worth noting is that Ethereum once underwent a hard fork, which resulted in the creation of Ethereum Classic (ETC). This was due to the infamous DAO hack, which saw $50 million stolen. Ethereum developers decided to revert the chain prior to the attack, but some Ethereum enthusiasts chided the mutability, which led to the creation of ETC.

Similarities Between Bitcoin and Ethereum

The similarities between Bitcoin and Ethereum are largely limited to the fact that they both use distributed ledgers and act (in part) as a store and transfer of value. They both currently use the Proof of Work (PoW) consensus algorithm, although Ethereum is transitioning towards a Proof of Stake (PoS) model.

As two networks running on distributed ledgers, it takes a network of nodes to validate and approve transactions. As a result, it is very secure and immutable. This is more or less the major similarity between Bitcoin and Ethereum.

Key Differences Between Bitcoin and Ethereum

Where it gets interesting is in the differences between Bitcoin and Ethereum. The following are some of the major differences between the two networks.

Bitcoin Decentralization Vs. Ethereum Decentralization

Top Bitcoin mining pools Source‌‌

Both are decentralized networks, of course, but Ethereum has a more diverse decentralized nature than Bitcoin. A greater variety of miners control Ethereum, while Bitcoin has fewer miners controlling the lion share of the network. This may prove irksome to some, but practically speaking, neither are in threat of attacks.

Top Ethereum mining pools Source

With a shift towards Proof of Stake, Ethereum will only become more decentralized as everyday users will be responsible for the security of the network with staking pools.

Developers - Bitcoin Vs. Ethereum

Both Bitcoin and Ethereum have healthy developer counts and activity, but Ethereum is the clear winner here. Ethereum has far more developers than Bitcoin, because of what smart contracts allow one to do.

A few years ago, most of the Bitcoin protocol development was handled by the Bitcoin Foundation, but now companies like Blockstream and Lightning Labs are leading development. They are working on infrastructure-based solutions.

Ethereum not only has companies like ConsenSys working on its infrastructure, but also an army of developers working on independent projects and solutions.

Scalability - Bitcoin Vs. Ethereum

Bitcoin's transactions have been noted as being slow, while Ethereum has also run into problems with network congestion. The transactions per second (TPS) of the Bitcoin network are about 5 TPS, while Ethereum is slightly better at approximately 10–15 TPS.

Bitcoin averages around 5 transactions per second. Source

For Ethereum, this slow rate doesn’t suit commercial levels of adoption, which is why it is working towards increasing scalability. The Ethereum 2.0 upgrade, which is already underway, will transition the network to PoS, which will significantly increase the throughput of the network. There are also multiple Layer 2 scaling solutions that boost network scalability. The main point here is that Ethereum plans to be more scalable with solutions already underway.

For Bitcoin's scalability, developers are focusing on the Lightning Network. This second layer solution opens bidirectional payment channels between Bitcoin wallet addresses, increasing transaction speeds and reducing costs.

Proof of Work Vs. Proof of Stake

Currently, both Bitcoin and Ethereum use the Proof of Work consensus algorithm. But with Ethereum 2.0, Ethereum will move to Proof of Stake, which brings with it multiple benefits. This will decentralize the network further, provide better throughput and bring network costs down significantly. PoS will have users stake ETH to secure the network, a much easier process than setting up and running a cryptocurrency mining rig, which is how miners validate Bitcoin via its PoW mechanism.

Bitcoin continues to stick with the PoW algorithm, which involves miners performing computationally difficult tasks to validate blocks. This is slower and more energy-intensive, but for the most part, it appears Bitcoin will continue using this consensus method. In the future, this will most certainly be a key difference between Bitcoin and Ethereum.

How To Invest in Both Bitcoin and Ethereum

Investing in either Bitcoin or Ethereum is simple, given that they are the two most popular cryptocurrencies on the market. Both are widely available on centralized and decentralized exchanges. In fact, you can actually get wrapped versions of both coins. This means you can convert native Bitcoin to Ethereum network!

To get started investing in Bitcoin or Ethereum, you only need an account and some funds on an exchange. Once you connect to the exchange, you should easily be able to swap your fiat or existing crypto for Bitcoin or Ether. Most centralized exchanges (and some decentralized exchanges) make it easy to swap from Bitcoin to Ethereum or vice versa.

FAQs

Is Ether a better investment than Bitcoin?

That on what you mean by “better." The market tends to follow Bitcoin, so any positive change tends to reflect with other assets like Ether. A diversified investor would allocate capital towards both.

Is Ethereum more important than Bitcoin?

Comparing Ethereum vs. Bitcoin and determining which network holds more importance isn't very straightforward, as they both have their unique purposes. However, one could argue that Ethereum will have a wider impact on the financial industry with its smart contract functionality.

Will Ethereum Surpass Bitcoin?

Looking at ETH vs. BTC market cap, BTC currently ranks higher. Whether Ethereum will surpass Bitcoin in terms of market cap is a matter of speculation. However, the Ethereum network could have a greater long-term impact on the everyday user because of its dapps.

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