Main Differences Between Bitcoin and Ethereum
Having understood the goal behind creation of the protocol and the main offering of the Ethereum protocol, it is time to explore the significant differences between Ethereum and Bitcoin protocols. (Read our previous article: Ultimate Guide to Ethereum Protocol to get the background knowledge in Ethereum).
Keep in mind that by the time Ethereum was being developed, decentralized applications could & can still be created on Bitcoin’s protocol. Examples of applications on the Bitcoin layer include(d): Metacoins — advanced protocols created on top of the bitcoin protocol but with a low development cost since the complexities of mining and networking are taken care of by the Bitcoin blockchain; and, Colored Coins — protocols, leveraging the Bitcoin protocol, that allow creation of digital tokens or alternative cryptocurrencies. To learn more on the Bitcoin developments (Metacoins and Colored Coins) listed above, check out the linked articles by CryptoCompare and CoinDesk respectively.
“[Colored Coins are] a distributed asset management infrastructure that leverages the Bitcoin infrastructure, allowing individuals and companies to issue various asset classes.” — Ron Gross, Israeli Programmer and member of the Bitcoin community.
However, despite Bitcoin’s ability to allow creation of alternative cryptocurrencies and blockchain applications, the Ethereum blockchain was a more suitable protocol for decentralized application development for the following reasons (sourced from Ethereum’s White Paper by V.Buterin):
Bitcoin’s Scripting Language Not Completely Universal
Bitcoin’s scripting language is not completely universal (Turing-complete) and thus not all applications can be built on the protocol. On the other hand, Ethereum’s protocol, incorporates a Turing-complete programming language (e.g. Solidity) and thus any complex or unimaginable applications can be supported by the language and can be deployed in the protocol with no trouble. Example of a feature Bitcoin’s language can’t support is loops. Bitcoin’s scripting can’t allow a piece of code to be run over and over/ repeatedly which is an essential feature in running complex algorithms repeatedly after only one execution. Unfortunately, for Bitcoin, this was a limitation.
Alternative States of UTXO present in Ethereum
Ethereum allows for alternative states for one’s Unspent Transaction Output (UTXO or your digital currency balance). This sounds like a complex concept to understand but it’s way simpler than you think and gets even easier once you are familiar with Ethereum smart contracts which will be discussed in the next chapter. Essentially, Bitcoin allows your digital currency to be in only two states: spent or unspent states but Ethereum allows for an alternate state between the spent and unspent states for your digital currency balance.
Example: let’s imagine we are using Blockchain for e-commerce purposes. If I wanted to buy a book, the buyer would want to confirm that money was paid I’d like to be assured my book will be delivered. In centralized systems like Amazon, the third party bears this responsibility but in a decentralized protocol trust needs to enhanced without the necessity of a third party. Thus, in the Ethereum protocol, one can create an escrow wallet, where money is spent but not yet spent.
Sounds bizarre, right? Let me explain. Back to the e-commerce example: once I place an order, I pay for the book, my digital currency goes straight to the escrow instead of the vendor. The vendor can thus confirm that I paid for the book as the money is on escrow and not in my wallet. However, this digital money only ends up in the vendor’s wallet once he fulfils his end of the agreement i.e. ship the book. In case the book is not shipped and I do not confirm receiving it, the money on escrow can come back to my wallet.
On the other hand, if the book is shipped, the money in escrow goes to the vendor’s wallet. See, this unspent-spent state (as in the escrow wallet) is an option available on Ethereum and helps enhance trust between two parties interacting on its decentralized ledger system. Note that the applications of these alternatives states are far much wide than just simple escrow wallets.
In Conclusion
Therefore, Bitcoin’s use is primarily as digital currency (cryptocurrency) while Ethereum offers an alternative platform for creation of any blockchain applications regardless of complexity. Ethereum’s ability to be universal, thanks to its Turing-complete programming language, and its ability to create alternate states of one’s digital currency balance (UTXO) other than spent and unspent, give it an edge over Bitcoin as a platform for decentralized apps development.
Note that these two features pose as the most significant differences of Ethereum over Bitcoin in my view. However, the Ethereum white paper states Blockchain-Blindness and Value-Blindness as other Ethereum-Bitcoin differences/advantages. Both are expounded on the Ethereum Wiki on Github.
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