If people have heard of a single crypto asset other than Bitcoin, it is most likely to be Ethereum, which was launched in July 2015 at the initiative of a brilliant young programmer named Vitalik Buterin. Ethereum, in fact, at the time of writing is the 2nd largest crypto by market capitalization. Many people know the name, but fewer know the real differences between Ethereum vs Bitcoin.
Actually, the contrast is more profound than many people realize. Cryptos like Litecoin and Bitcoin Cash have broadly similar aims to Bitcoin – aiming to be an alternative form of money. These coins even share an evolutionary lineage, as Litecoin and Bitcoin Cash both started by taking Bitcoin’s code and modifying it. As a result, many similarities between Bitcoin, Litecoin and Bitcoin Cash remain.
Ethereum, however, has a lot less in common with Bitcoin. Though both use blockchain technology, the use case of Ethereum is to be a censorship-resistant world supercomputer. Let’s look deeper into the differences of Ethereum vs Bitcoin.
1. Ethereum Is Not A Cryptocurrency
One of the great points of confusion within crypto is that people commonly refer to any of the crypto assets as being “cryptocurrency”. But unlike Bitcoin, Ethereum was never designed to act as a “currency” at all.
According to Ethereum’s own website:
“Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”
Compare this to the way Satoshi Nakamoto described Bitcoin in the original white paper:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Notice, both Bitcoin and Ethereum eschew the need for trusted third parties, but their ultimate goals for doing so are very different. Bitcoin was designed to do currency, and to do it very well, with maximum security. Ethereum was designed to do many things, with a high degree of flexibility. This difference is key to understand when comparing Ethereum vs Bitcoin.
2. Ethereum Is For Making Decentralized Apps
Ethereum is best thought of as a protocol layer – similar to TCP/IP suite of communication protocols used to connect networks over the Internet. Or, if that is still a bit too technical, you could also think of Ethereum as “infrastructure”; Ethereum is like a road, which can used to drive all sorts of vehicles on top of.
Just like anyone can, without needing permission, start a blog using the Internet, anyone can, without needing permission, build a decentralized application using Ethereum.
The fact that permission is not needed doesn’t mean that certain rules do not need to be followed. Applications that are built on top of Ethereum need to follow a set of standards, known as “ERC20”. The ERC20 rules are similar to the rules that apps must follow if they are to be compatible with the Apple iPhone.
3. Ethereum Started As An Initial Coin Offering
When Satoshi Nakamoto first fired up his Bitcoin software and mined the genesis block in January 2009, there was no fanfare. Barely anyone even noticed. Nakamoto just used crypto mining to forge the first Bitcoin into existence. As other users slowly joined the network, they got their share too. Bitcoin got started organically.
By contrast, Ethereum launched through a well-publicized 2014 pre-sale. 11.9 million Ethereum was “pre-mined” – something which Bitcoin never did. Anyone who invested in the Ethereum initial coin offering would be very happy with the return they got – it has gone from under US$1 per token, to hundreds of dollars (as of the time of writing).
Ethereum’s start as an initial coin offering, along with its usability as a protocol layer for many other tokens has led it to be the token of choice for new crowdsales. ICOs raise funding through Ethereum most of the time.
4. Ethereum Uses A Different Mining Algorithm
Ethereum uses a proof-of-work algorithm called Ethash, as opposed to Bitcoin’s SHA-256. Ethereum blocks propagate every 10-20 seconds or so, compared to a target block time of 10 minutes for Bitcoin. The mining difference in Ethereum vs Bitcoin will become even more pronounced in the future, as Ethereum has flagged a move to proof-of-stake mining in the upcoming “Serenity” update.
5. Ethereum Currently Has No Cap On Supply
One of the criticisms of Ethereum by Bitcoiners is that there is currently no cap on the supply of Ethereum. Conversely, the supply of Bitcoin is capped at 21 million. Once all of these 21 million are mined, no more Bitcoin can ever be created. This feature of Bitcoin has led people to describe it as deflationary, whereas Ethereum, without any hard cap, may be inflationary.
Summary: Ethereum vs Bitcoin
Like Bitcoin, Ethereum can be traded on digital currency exchanges like Coinbase and CEX.io. Therefore, the two cryptos compete against each other as an investment, but not so much in their wider use cases. Both likely have a role in the future of cryptocurrency.
Both Ethereum and Bitcoin act as gateways into the crypto world for newcomers. Both are excellent candidates as the first crypto for a beginner to purchase – indeed, it may be a good idea for those entering crypto to buy a little of both, to better understand the differences between Ethereum vs Bitcoin that this article has explored.