Ethereum vs Bitcoin: What's the Difference?
Bitcoin and Ethereum are the two best-known cryptocurrencies, and from a cryptocurrency trader’s perspective, they are similar. They are traded on cryptocurrency exchanges and stored in cryptocurrency wallets. Their value is determined by market supply and demand. They are both based on blockchain technology. But, despite these similarities and others, there are many differences between Bitcoin and Ethereum.
Ethereum and Bitcoin: The Similarities
Before we delve into the differences between Bitcoin and Ethereum, it is worth considering the similarities. As we’ll discover, Bitcoin and Ethereum are different in many ways, but here are some ways Bitcoin and Ethereum are the same.
- Bitcoin and Ethereum rely fundamentally on cryptographic technology, including cryptographic hashes, public key cryptography, and digital signatures.
- Both use blockchain decentralized ledger technology. Transactions and cryptocurrency ownership are stored in blocks connected by cryptographic hashes.
- Bitcoin and Ethereum are public networks: anyone with compatible software can access and transact on them.
- Bitcoin and Ethereum are peer-to-peer networks lacking a central authority.
- Both networks use elegant consensus and reward systems for adding new blocks and maintaining blockchain security.
- The Ethereum and Bitcoin cryptocurrencies are traded publicly: you can buy and sell both on the Bittrex crypto exchange.
- Ethereum and Bitcoin can be used in the same way as fiat currencies: as a store of value and as a medium of exchange. You can buy digital and physical goods and services with either cryptocurrency.
Before September 2022, we could have mentioned another similarity: both networks use a Proof of Work consensus mechanism to add new blocks to the blockchain and achieve consensus between members of the peer-to-peer network. However, while Bitcoin still uses Proof-of-Work, post-Merge Ethereum uses Proof of Stake—a topic we’ll explore in greater detail in subsequent sections.
Bitcoin: The Basics
Bitcoin wasn’t the first digital money, but it was the first blockchain-based, decentralized cryptocurrency. Bitcoin was created by the pseudonymous Satoshi Nakamoto. The network, based on Nakamoto’s white paper, launched in January 2009. The first open-source Bitcoin client was released soon after.
Bitcoin was envisioned as an alternative to fiat currencies and traditional banking systems. Nakamoto intended bitcoins to be digital cash, an electronic medium of exchange without the limitations of fiat currencies like the U.S. Dollar. Unlike fiat currencies, Bitcoin requires no central authority or trusted intermediary to guarantee transactions.
The Bitcoin Blockchain
A blockchain is a ledger, a database designed to be shared between the nodes of a distributed network, as we explained in What Is a Blockchain and How Does It Work? A blockchain ledger stores data in blocks composed of multiple records. In the case of Bitcoin, the records are transactions.
It’s worth mentioning that bitcoins don’t exist as discrete entities on the blockchain. The blockchain consists of blocks containing transactions with inputs and outputs. The totality of inputs and outputs, amounting to hundreds of gigabytes of data, is sufficient to determine how much Bitcoin each address owns.
Important points to understand about the Bitcoin blockchain are:
- A central authority does not control it. Every node may have a copy and can, in theory, add new blocks. In practice, nodes called miners compete to add blocks.
- The blocks are strictly ordered, and so are the transactions within them. New blocks are always added to the “end.”
- The ledger is publicly accessible so that anyone can view every transaction.
- Once a block is added to the blockchain, and several blocks have been added after it, it cannot be removed or edited. Transactions are permanent and immutable.
- The Bitcoin blockchain has very limited scripting capabilities. It is not a general-purpose computing platform. Why this matters will become clear when we discuss Ethereum in more detail.
Bitcoin’s Consensus Mechanism: Proof of Work
As a decentralized system, there is no central authority deciding which transactions are valid and which blocks should be added to the blockchain. All blockchain-based cryptocurrencies need a mechanism that allows nodes to agree on which blocks to add. These are known as consensus mechanisms or consensus protocols.
The Bitcoin blockchain uses a Proof of Work consensus mechanism. Special nodes called miners gather transactions from the network and bundle them into a block. The miner must then complete a mathematical challenge that consumes energy and computational power. The miner competes with many other nodes, and the first to complete the challenge broadcasts its block to the network. The winner gets a block reward: currently 6.25 BTC. Other nodes validate the winning block and add it to their blockchain. Eventually, the new block is synchronized to the entire network and work can begin to add the next block.
Ethereum: The Basics
Much of what we wrote about Bitcoin and its blockchain applies to every cryptocurrency, including EthereumEther. That shouldn’t be surprising because Bitcoin is in many ways the “original,” the model on which other blockchain-powered cryptocurrencies are constructed.
However, Ethereum is broader in scope than Bitcoin. Whereas Bitcoin was created to support a decentralized digital currency, Ethereum was conceived as a programmable, decentralized computing platform leveraging a blockchain ledger and a native cryptocurrency called Ether.
The Ethereum Blockchain
The Bitcoin blockchain was designed to serve the needs of the Bitcoin cryptocurrency. As such, it stores transaction data to track the ownership of BTC. The Ethereum blockchain, in contrast, is not limited to storing a particular type of data. It can store any type of data provided it follows a key-value format and isn’t too large.
The data stored on the Ethereum blockchain is called its state. Transactions on the Ethereum blockchain modify that state—we’ll explain how when we discuss smart contracts. Each new block contains numerous state changes, which are synchronized across the nodes of the Ethereum network.
The Ethereum Virtual Machine
The Ethereum Virtual Machine (EVM) is a globally distributed computer that uses the Ethereum blockchain to store its state. It’s helpful to think of the EVM as a single computer composed of many nodes distributed worldwide.
Each node runs the Ethereum client software, which communicates with other nodes in the network. The nodes hold a copy of the EVM’s state (the blockchain). They listen for transactions, execute them, and implement the Proof of Stake consensus algorithm to validate transactions and blocks.
Ethereum Smart Contracts and dApps
Earlier, we said that the Ethereum blockchain could store arbitrary data. That includes code. A smart contract is a program stored on the blockchain and executed by the EVM. Transactions can trigger the execution of smart contract functions and thereby alter the state stored on the blockchain. For example, you could create a smart contract that sends Ethereum to an address monthly for a year to pay your rent.
- Smart contracts can be executed automatically without human intervention. Unlike standard contracts, smart contracts don’t depend on the trustworthiness of the parties—they will execute under the correct conditions, come what may.
- Smart contracts cannot be edited once they are on the blockchain. In some circumstances, contracts can be deleted, but only if their code allows deletion.
- Anyone can add a smart contract to the Ethereum blockchain. Transactions, including smart contract transactions, are permissionless.
- Smart contracts are public. Every blockchain user can see a smart contract and what it does.
- Smart contracts are anonymous. They are associated with an address on the blockchain, not with the user’s real-world identity.
- Smart contracts are composable. They can call other smart contracts on the blockchain and add new smart contracts.
Smart contracts have many uses, including the creation of decentralized apps (dApps). A dApp is an app that provides useful functionality by combining a front-end user interface with a back-end that runs as a smart contract on the Ethereum blockchain. The dApp’s user data is stored on the blockchain, and smart contracts provide the core functionality. Developers have created many dApps for domains that include decentralized finance, gaming, and digital asset management.
Beyond dApps, Ethereum’s ability to run code as smart contracts enables it to support a wide variety of services in addition to its native cryptocurrency. For example, smart contracts made non-fungible tokens (NFTs) possible. An NFT is minted by a smart contract that links a unique token to an Ethereum address. Other uses for smart contracts on Ethereum include new cryptocurrencies, decentralized insurance, escrow services, and much more.
Learn more about Bitcoin, Ethereum, and computational logic.
Ethereum’s Consensus Mechanism
Just like Bitcoin and other decentralized blockchains, Ethereum uses a consensus mechanism to secure transactions and ensure Ethereum nodes agree on the state of the blockchain. Until September 2022, Ethereum’s consensus mechanism was similar to Bitcoin’s. They both used a Proof of Work algorithm. Proof of Work consumes massive amounts of energy, so Ethereum decided to switch to an alternative: Proof of Stake.
Where Bitcoin has miners, Ethereum has validators. The validators stake a quantity of Ethereum (32 ETH currently). It acts as collateral to discourage validators from misbehaving—if they act improperly, they stand to lose some or all of their stake. A validator is randomly chosen to create a new block every 12 seconds. They broadcast the block to other validators, who run the transactions and check that the block is valid. If it is, they send a vote of approval to the network. Validators receive ETH rewards when they propose or validate blocks, incentivizing them to make the initial stake.
Ether: Ethereum’s Native Token
Ether is Ethereum’s native cryptocurrency. It’s common for Ether and Ethereum to be conflated: you might hear someone say, “what is the price of Ethereum?” In reality, they are asking about the price of Ether. Ether is the coin; Ethereum is the blockchain and surrounding infrastructure. For someone interested in buying and selling cryptocurrencies, Ether is comparable to Bitcoin. It can be used as a medium of exchange and as a store of value. However, Ether plays many additional roles in Ethereum.
Ether is the only way to pay transaction fees. When you make a transaction such as sending Ether to a business’s Ethereum address, you pay an Ether fee, just as you would pay a Bitcoin fee to make a Bitcoin transaction. But Ethereum transaction fees—known as gas fees—play a wider role in Ethereum.
Because Ethereum is a distributed computing platform with finite computational resources, there must be a way to allocate and limit their use. Gas is a measure of computational effort, and gas fees pay for the computation a transaction requires. Smart contracts—and therefore dApps—consume gas when they run and are charged an amount consonant with the resources they use.
Finally, as discussed above, Ether plays a role in Ethereum’s Proof of Stake consensus mechanism. A node must offer 32 ETH as collateral to become a validator.
ETH vs BTC: Conclusion
As cryptocurrencies, Bitcoin and Ethereum are in many ways similar. You can buy and sell them. They are both useful as a medium of exchange and a store of value to varying degrees. But there are big conceptual and implementation differences.
- Bitcoin is a distributed ledger, whereas Ethereum is a distributed computing platform.
- Bitcoin has limited programmability. Ethereum is a Turing-complete computational environment.
- Bitcoin supports a single cryptocurrency. Ethereum can support many different applications.
- Bitcoin uses a Proof of Work consensus mechanism. Ethereum uses Proof of Stake.