How is Ethereum different than Bitcoin? You Need to Know
Bitcoin and Ethereum are popular cryptocurrencies and have significantly aided the sector’s growth. Bitcoin was the first cryptocurrency to be formed and is seen as digital gold or “gold 2.0,” whereas Ethereum is a global decentralized computer.
Due to its durability and scarcity, which are similar to precious metals, as well as its ease of storage and division, bitcoin is known as “digital gold.” Ethereum is the world’s decentralized computer. No central authority controls the Ethereum network, which also supports decentralized apps (Dapps).
Bitcoin and Ethereum are the top two cryptocurrencies, according to many measures. These indicators include market valuation, unique wallet addresses, and cryptocurrency exchange trading volume. The total dollar worth of a cryptocurrency’s circulating supply is its market capitalization or market cap. Wallet addresses are distinctive collections of characters that stand in for accounts on a cryptocurrency’s network.
Bitcoin and Ethereum have features in common, including the ability to be held in digital wallets, using alphanumeric strings as addresses, and trading on cryptocurrency exchanges. They are digital assets built on a publicly accessible distributed ledger known as a blockchain.
Bitcoin and Ethereum are decentralized cryptocurrencies, meaning they are neither issued nor regulated by central authorities or other financial institutions. As a substitute, they rely on computers running replicas of their networks, called nodes, to guarantee that each network user is aware of the latest developments.
There are significant distinctions between the two cryptocurrencies. These distinctions distinguish them and have sparked different disputes in which some say BTC and ETH are rivals. In reality, because they serve diverse goals, they may complement each other. BTC is a money store. On the other hand, ETH is utilized to engage with Ethereum blockchain-based apps. During market downturns, a safe vault asset’s value is supposed to be retained or increased.
What is Bitcoin?
The first cryptocurrency that could operate without a central authority was Bitcoin. The genesis block, the first data block on the blockchain, was mined by its enigmatic founder Satoshi Nakamoto in January 2009. Since then, Bitcoin’s popularity has steadily increased. Bitcoin was developed as a peer-to-peer (P2P) electronic cash system so parties could perform decentralized transactions.
Bitcoin was the first crypto based on the blockchain, decentralized ledger technology (DLT). The Byzantine Generals Problem, which outlines the difficulties that decentralized systems have in deciding on a single truth, was overcome by blockchain technology. Bitcoin uses a blockchain and proof-of-work (Pow) to solve the Byzantine Generals Problem. A group of miners has resolved this issue, all playing the role of generals. Every node tries to validate transactions that are equivalent to messages made to generals.
The Bitcoin blockchain is accessible to the public and contains the history of every transaction ever made while spreading among numerous nodes to avoid tampering. When a different version of the hash is identified, other network participants reject it, known as tampering.
Cryptographic hashes track tampering, which are long strings of numbers that must be the same for each node. The Bitcoin network processes data sets and converts them into hashes using the SHA-256 hash function, which converts data into those long strings of numbers. When a valid hash is detected, it is broadcast to the network and stored in a new block.
Bitcoin blockchain miners construct and broadcast these blocks via a PoW mechanism in which nodes use huge amounts of computational power to perform hashing operations. Network participants establish an agreement using proof of work.
Bitcoin’s mining and consensus mechanisms ensure that malevolent actors cannot change other users’ balances or spend their funds twice while keeping the network operational with little downtime. The popularity of Bitcoin is increasing over time as it is a tamper-proof cryptocurrency, and bitcoin holders can trade it at any moment without the intervention of intermediaries or central banks.
While Bitcoin began as a medium of exchange, facilitating the purchase of products, investors are holding it as a store of value.
What is Ethereum?
Ethereum takes things further by using the blockchain to build a decentralized computer. In contrast, Bitcoin uses technology to conduct financial transactions and permits nodes and messages to be attached to each transaction.
Powered by its native coinage, Ether (ETH), which is used to conduct transactions and communicate with apps built on top of the Ethereum network, Ethereum is a decentralized, open-source, distributed blockchain network.
Smart contracts are used to develop decentralized applications, or DApps, which are programs that operate without the intervention of a central body.
Solidity, Ethereum’s programming language, is used to create smart contracts that operate on the blockchain. Because of the usage of smart contracts, Ethereum’s potential applications are many. On the Ethereum network, new experiments with decentralized applications are going on that provide financial services and nonfungible tokens (NFTs) as examples of what smart contracts enable developers to create. While Bitcoin is a medium of trade and a store of value, Ether connects with Ethereum network applications. Users must pay fees in Ether for transactions, create smart contracts, and use DApps.
Related: What is the structure of Ethereum? Ultimate Guide for Beginners (blockchainshiksha.com)
Main differences between BTC and ETH
Although Ethereum and Bitcoin use distributed ledger and encryption concepts, their technical implementations differ significantly. For example, while Bitcoin is meant to store value as a digital version of gold, Ether is utilized to fuel the Ethereum network and its applications.
Both the Bitcoin and Ethereum networks create new tokens. Bitcoin uses the Omni layer, a platform for producing and trading currencies on the Bitcoin network. The Omni layer’s adoption has been based on stablecoins. On the other hand, Ethereum tokens are created following many standards, the most well-liked of which is ERC-20.
The ERC-20 standard specifies a set of regulations for network tokens. The ERC-20 standard requires developers to implement various functionalities before issuing their tokens. These services include providing information about the overall quantity of the token, displaying account balances on user addresses, and allowing funds to be transferred between addresses.
Although bitcoin transactions are primarily financial, notes and messages can be attached to them by encoding them into data fields. Ethereum transactions may include executable code to establish smart contracts, interact with existing smart contracts, or run self-executing smart contract apps.
On both networks, public wallet addresses differ. These wallet addresses are one-of-a-kind identifiers that allow users to receive funds, similar to an International Bank Account Number (IBAN), a one-of-a-kind identifier used by financial institutions to determine which bank and country a client’s account. On Bitcoin, addresses might begin with a 1, a 3, or “bc1,” whereas on Ethereum, they begin with “0x.”
While Bitcoin and Ethereum have both relied on proof-of-work consensus, Ethereum is transitioning to a proof-of-stake consensus method. Proof-of-stake works based on a transaction validator’s stake in the network. Users stake their ETH to become validators, organizations that check transactions to ensure the network isn’t being tampered with.
Instead of having miners with specialized processors, proof-of-stake consensus methods reduce the energy required to reach consensus by allocating mining power to the fraction of validators’ tokens. It is more effortless to become a validator in a proof-of-stake network. It has fewer entry barriers for validators and is more resistant to decentralization.
ERC-20 tokens are also used to represent Bitcoin on the Ethereum blockchain.
On the Ethereum network, there are various tokenized versions of Bitcoin. Bitcoin backs these in a 1:1 ratio, meaning that one BTC is held in custody for every ERC-20 token representing Bitcoin. Tokenized Bitcoin versions on Ethereum enable users to preserve their BTC while using decentralized applications. Token holders, for example, can lend their BTC to earn interest.
Scalability difficulties plague both the Bitcoin and Ethereum networks. While Bitcoin can average seven transactions per second, the Ethereum network can handle roughly 30 transactions per second. On the other hand, Visa handles approximately 1,700 transactions per second and claims to be able to scale to 24,000.
As the number of people utilizing both blockchains rises over time, Bitcoin and Ethereum have nearly reached their capacity limits and require solutions to handle more users. Both networks’ transaction costs currently increase when demand for block space exceeds capacity.
BTC and ETH take different techniques to address scalability difficulties. Technical advancements like Segregated Witness (SegWit), which “segregates” some data from the space available in each block broadcast to the network, have been introduced in Bitcoin. SegWit makes better use of the restricted 1 MB of space available in each Bitcoin block.
Furthermore, developers are working on a layer-two scaling solution known as the Lightning Network, which would add a transaction layer to the main blockchain. Transactions on the Lightning Network are rapid and have low fees since they are routed through payment channels that users construct.
The Lightning Network’s user-generated payment channels are pre-funded with BTC and may allow most transactions to migrate from the primary blockchain to this layer-two network.
Proponents anticipate that the Lightning Network will be capable of handling up to 15 million transactions per second. The transactions settled on the core Bitcoin blockchain were those that opened and closed Lightning Network payment channels.
Ethereum is also developing scaling solutions that will work on both the core Ethereum network and layer-two networks. Sharding is Ethereum’s main bet for expanding its primary blockchain, and it will boost transaction speed and minimize network congestion by generating new blockchains known as “shards.”
The Lightning Network’s user-generated payment channels are pre-funded with BTC and may allow most transactions to migrate from the primary blockchain to this layer-two network.
Proponents anticipate that the Lightning Network will be capable of handling up to 15 million transactions per second. Only those transactions settle on the core Bitcoin blockchain that has “opened and closed Lightning Network payment channels. This means transactions are not settled on the Bitcoin network itself.
Ethereum is also developing scaling solutions that will work on both the core Ethereum network and layer-two networks. Sharding is Ethereum’s main bet for expanding its primary blockchain, and it will minimize network congestion while increasing transactions per second by generating new blockchains known as “shards.”
The Random-Access Memory (RAM) and storage requirements of every device running the Ethereum blockchain would be significantly reduced, as shard chains may help spread the processing resources required to run Ethereum across 64 networks.
Servers that aggregate several transactions before sending them directly to the Ethereum blockchain are the basis for layer-two scaling solutions on the Ethereum platform. How these transactions are grouped and broadcast to Ethereum varies significantly between implementations. Sidechains are another term for layer-two solutions for Ethereum. Sidechains are separate networks that exist in addition to the Ethereum network.
They are interoperable thanks to protocols that let users transfer tokens from one network to another, enabling them to use ETH-based applications with lower transaction costs. Bitcoin and Ethereum use various scaling strategies to minimize network congestion and boost the number of transactions per second.
In this article, we discussed about two leading blockchain networks, Ethereum and Bitcoin. Stay tuned for more interesting discussions.
©Blockchain Shiksha
Originally published at https://blockchainshiksha.com on August 10, 2022.
