What is the difference between Bitcoin and Ethereum?

If you open the Coinbase app – arguably the most popular way people buy and manage cryptocurrencies – you’ll see Bitcoin nested comfortably at the top of the list as the highest valued digital currency. Two spots down sits Ethereum.

Most people probably encounter Bitcoin or Ethereum in this way. Viewed through a financial lens, Bitcoin and Ethereum seem to serve the same purpose. Both can be bought, held, and sold for real money.

The truth is more complicated. Yes, Bitcoin and Ethereum are both digital currencies. Yes, both are powered by blockchain technology. And yet, Bitcoin and Ethereum were developed for entirely different purposes.

So what is the difference between Bitcoin and Ethereum? Let’s dive in.

bitcoin and ethereum

What is Bitcoin?

Bitcoin is a specific application of blockchain, designed to be a digital currency that serves as a global, peer-to-peer payment system. The market positions Bitcoin as a medium for the exchange of value. In this way, Bitcoin’s primary function and how you might use it on an app like Coinbase are one in the same: it’s a digital currency to buy and sell.

What is Ethereum?

In contrast, Ethereum was developed to be a decentralized, global supercomputer.

Ethereum may be a digital currency, but the primary function of its token is to power the decentralized applications built on the Ethereum network. These applications can be anything, from the trading of digital assets to the managing of online identity. Ultimately, Ethereum acts as a platform for developers to build peer-to-peer smart contracts.

So What’s a Smart Contract?

Smart contracts are programs that execute a set of instructions. These can mirror simple operations like a vending machine retrieving you a snack, or complex business logic that computes digital advertising metrics based on agreed-upon standards.

Ether serves as the underlying, programmable tokens that enable developers to program and run decentralized applications (i.e. Đapps).

Because of this flexibility, Ethereum’s general purpose programming language has garnered a extensive developer community. Ethereum can support very complex smart contracts which serve as the building blocks of decentralized applications. Bitcoin, however, has a prescriptive language that restricts its ability to create extensive contracts.

That’s why Ethereum has emerged as the preferred blockchain for writing smart contracts.

The Cost of Doing Business

There are also differences in how Bitcoin and Ethereum measure the cost of transactions.

Ethereum assigns a gas cost to transactions that are determined by computational power, storage amount, and complexity of the smart contracts its running. Therefore, Ethereum has a gas limit rather than a block size because Ethereum is ultimately about running programs, and not just storing data.

Compare this with Bitcoin transactions which compete equally with each other. The cost of transaction here is driven by block size.

Achieving Consensus

So how does Bitcoin and Ethereum achieve distributed consensus without a middleman? After all, this is the fundamental responsibility of any distributed system.

Both blockchains rely on proof-of-work as the consensus algorithm that confirms transactions and adds new blocks to the chain. It’s an incentive mechanism to reward network participants (or miners) who race to complete transactions by expensing physical energy. This process called mining involves solving mathematical puzzles with hashing power, which increasingly requires a large sum of computational power and energy.

Environmental and scalability concerns with the proof-of-work algorithm has prompted Ethereum to pivot towards the proof-of-stake model, which is less reliant on hardware power and miners. Rather, it requires users to virtually put up Ether as collateral to help validate transactions, and in exchange, receive rewards proportional to their collateral amount.

Bitcoin has not set plans to change its consensus algorithm.

TLDR: The Essential Difference Between Bitcoin and Ethereum

Bitcoin and Ethereum are both public blockchains. Bitcoin is used to transfer digital assets – called cryptocurrency – between peers. Ethereum is used as a foundation to build decentralized applications for almost any purpose using smart contracts.

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