Peter Nixey
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Peter Nixey

A rough beginners guide to Ethereum v. Bitcoin

(slightly ad-hoc because it was taken from a chat with some friends)

Ethereum is very similar to Bitcoin it’s just that during the process of Ether being transferred from one person to another you can also run a small program.

The beauty is that this program can (for instance) hive the transaction into multiple parts and so can pay a third party when two others interact.

Each particular program becomes a “smart contract” — confusing naming that makes you think it’s a legal contract. It’s not really a contract, what it is is a “distributed script”. i.e. it’s a script that runs on whomever’s computer is validating the Ether transaction.

But because you can split an Ethereum transaction into multiple parts and send it to different places you can do cool things like paying a royalty to an owner of Filecoin when one person buys space on another’s computer. Or instantaneously paying a royalty to the different collaborators on a piece of music when you purchase a song from iTunes.

What’s hard I think with these tokens is to wrap your head around the difference between something being possible (i.e. in 1995 it was possible to stream music to a network connected device)…and what’s possible now. i.e. you stream music in 1995 BUT you really kind of need the buy-in of the music industry / fast internet connections / syncable music devices for the whole thing to become truly mainstream.

That’s where I think we’re at with a load of the coins stuff right now. It’s possible that Know Your Customer (KYC) will be solved by Civic once and forever more… or it may take another 10 years of other identity providers coming online and being willing to put their assertions onto the blockchain before it becomes useful.

Broadly speaking, my feeling is that many of today’s tokens are best treated like tulip bulbs. A great buy and ride up you just want to be sure you’re not the one holding the bulb when the ride down begins.

And in terms of currencies you *could* think of Bitcoin as gold and Ether as the Credit Card (it’s a stretch but bear with me…) I think Bitcoin is extremely likely to be an easy-to-transfer but largely useless store of wealth. Just like gold but without the necklaces. Where Ether has the potential to be what the next generation of internet financial transactions are built on.

Bitcoin has the public interest and brand which is why it’s currently going berserk but Ethereum has a couple of powerful infrastructural advantages over Bitcoin.

  1. Ethereum can run smart contracts (again — better to think of these as programs or you’ll start being confused into thinking that you can put legal contracts on there. You can’t unless the legal contract is a program, which it almost certainly isn’t)
  2. Ethereum is gearing up to move to “proof of stake” rather than “proof of work”. This will make transactions way cheaper, faster and more scalable than the current ones on Bitcoin (or currently Ethereum)

Proof of stake v. proof of work

The way that you know you own a Bitcoin is that the Bitcoin blockchain literally says that you do. When you spend it with someone else, the blockchain is updated to say that they own it.

The blockchain is not stored in one single place though, there are many thousands of copies of it and anyone can get one. So to stop people from just arbitrarily re-writing their copy of the blockchain to say that they own All The Bitcoin, Satoshi made it expensive to update and prove a bitcoin transaction. And the way he did this was by forcing you to use computing power. So each transaction requires a load of expensive (but pointless) computing, to dissuade anyone from cheating the system.

However as more and more transactions happen, the energy and speed requirements of this process become overwhelming.

So Ethereum is developing a new protocol where instead of you risking your electricity bill by lying about a transaction, you instead risk Ether instead. Asserting that a transaction has successfully happened will require you to stake a small amount of Ethereum and if you prove to be a liar, you lose that Ethereum.

This change has the promise to make Ethereum a far more suitable platform for fast and inexpensive payments than Bitcoin.

That said, we are in the earliest headiest days of all of this still and just as Yahoo looked like the big winner from 1999 a Google of Crytpo-protocol may still emerge and eclipse both Bitcoin (less likely) and Ethereum (more likely) altogether.



Founder and CEO of Rails and Angular developer, product guy, former Part Time Partner at Entprepreneur first and YC Alum.

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