Ethereum and Bitcoin: What's the Difference?
Bitcoin and Ethereum have been the two most discussed cryptocurrencies in several recent years. Both have played a key role in the development of the crypto industry and have helped the cryptocurrency market to draw the largest trading volume. Nevertheless, their principles of work and purposes differ significantly, and everyone should know how is Ethereum different from Bitcoin exactly.
How Does Bitcoin Work?
Bitcoin is a store of value. Like cash, it is convertible into a variety of products and services. All transactions are recorded on the blockchain ledger, which keeps track of participants and amounts.
Users earn BTC through decentralized mining. Mining nodes compete to process transactions and receive new tokens in exchange for their work. However, only one of the nodes powering the network is awarded the new block. Miners who use more powerful equipment are more likely to receive a reward.
The potential scarcity of Bitcoin, with a hard cap of 21 million coins, also significantly affects its market value. Given the current mining capabilities and payout sizes, BTC mining will likely continue until 2140.
How Does Ethereum Work?
Ethereum is a platform that supports smart contracts and decentralized apps. Developers can build apps and implement programs on smart contracts.
In order to ease the running of decentralized applications on the Ethereum blockchain, Ethereum issues its own token – Ether.
Just like Bitcoin, Ether can be used as a currency. Usually, participants use Ether to create and control decentralized applications. While the token issuance is completely limitless for the duration of its service life, the blockchain's annual growth limit is 18 million. Depending on how operations run and how many tokens are needed for different decentralized apps, Ethereum's price may change.
What Do Bitcoin and Ethereum Have in Common?
So what do both have in common? Here are the 4 main similarities of the pair "Bitcoin vs. Ethereum":
Both cryptocurrencies are subject to several laws and regulations. Many nations allow token exchanges, but some purchases may be subject to limitations. Additionally, crypto investment gains may be taxable in several countries.
These two currencies rely on a blockchain maintained by several nodes, making it decentralized. This eliminates centralized control, such as from the government.
Both Bitcoin and Ethereum use a blockchain to record transactions. Transactions are added according to consensus algorithms and after verification by network members. This ensures that only genuine transactions enter the blockchain and that data remains intact.
Bitcoin and Ethereum use pseudonymous transactions, which means that it is possible to identify and track any transaction. The sender's and recipient's public keys are included in the identification information, but the transaction doesn't reveal the identities of the participants. It is important to keep the keys secure to maintain privacy.
The Difference Between Bitcoin and Ethereum
So what is the difference between Bitcoin and Ethereum? Below are the key aspects that distinguish both cryptocurrencies from one another.
The price history is the most striking difference between Bitcoin and Ethereum.
Historically, Bitcoin has had a higher price and overall capitalization than Ethereum or any other cryptocurrency. This can be attributed to several factors:
- First, Bitcoin appeared much earlier, making it the most popular and most invested-in crypto.
- Second, Bitcoin, with its informal status as the main cryptocurrency, essentially has no competitors. Ethereum, on the other hand, has multiple rivals. Many development teams have even declared competition with Ethereum as one of their main ideas, positioning their projects as "Ethereum killers."
- Third, among crypto investors, Bitcoin is considered to be the most conservative investment, which attracts inexperienced investors. In fact, such investments can be compared to index investing, as Bitcoin's rise or fall is usually reflected in the entire crypto market.
Proof-of-Work (PoW) is the system used by Bitcoin miners to calculate rewards. According to its terms, the miner must solve a mathematical puzzle using the processing power of its equipment. Thus, they'll get the right to add to a block in the chain and get a reward for it in the form of tokens. Ethereum has shifted from a Proof-of-Work mining model to a Proof-of-Stake (PoS) mining strategy. Proof-of-Stake offers more opportunities for token holders. By locking their cryptocurrency for a period of time, the user has the right to validate transactions in the blockchain and receive a corresponding reward for doing so.
During its existence, Bitcoin has hardly changed technologically. At the same time, Ethereum not only receives regular updates but also brings new solutions to the crypto world, which eventually become commonplace.
For example, thanks to Ethereum, smart contracts appeared, which became the foundation for the development of many secondary areas of the industry. In particular, they became the basis for the decentralized finance industry (DeFi) and enabled the creation of wrapped tokens to move assets between blockchains.
Bitcoin has no dedicated development team, and Satoshi Nakamoto, the creator of Bitcoin, hasn't been active for years. That's why Bitcoin is run by an independent community of users. Ethereum, on the other hand, has a permanent team that is constantly busy improving it. However, this also makes Ethereum less independent.
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