There are about ten cryptocurrency power assets that lead the whole market, both in regards to popularity, market cap, and trading volume. Above all, there is Bitcoin (BTC), the first and most popular digital asset that really changed the world of financial transactions since its launch in 2009. It was also the first blockchain developed and the technology was truly revolutionary at the time.
BTC remains unsurpassed today since many of the most popular cryptocurrencies, including altcoins such as Litecoin (LTC), Bitcoin Cash (BCH), and Ethereum (ETH) also use modified versions of the BTC blockchain to operate their network.
That being said, Ethereum is the other cryptocurrency power player that is also immensely popular and widely used. However, Ether operates in a different manner than Bitcoin and it’s actually a complementary cryptocurrency rather than a competitor because it has different functionalities than BTC.
The Design of Different Cryptocurrencies
These two cryptos make up the bulk of crypto trading, exchanging, and mining today. However, they weren’t created with the same aim in mind, as you’ll see later in this article.
Of course, the popularity of ETH and BTC doesn’t mean that other cryptos are irrelevant since numerous digital assets offer various advantages and are intentionally developed with a specific use in mind. For instance, Monero is perfect for highly private transfers, while Stellar Lumens are ideal for high-volume international transfers.
If you are dealing with cryptocurrencies, whether you are an average trader, a big-time broker, a startup developer, or a beginner crypto enthusiast, you simply have to know the basics about BTC and ETH and all the key differences between these two assets.
Blockchain Technology and Cryptocurrencies
In order to understand how BTC and ETH work, we first need a quick overview of how most cryptocurrencies generally operate, i.e. using blockchain technology. While there are cryptos that don’t use blockchain technology but rather run on closed networks with centralized authorities, this isn’t the case with ETH and BTC.
So – blockchains. Since cryptocurrencies don’t physically exist beyond the web, there has to be a trustworthy and secure method of transferring cryptos online and storing them. This is where blockchain technology comes in. It is a decentralized open-source technology created to facilitate transfers of certain cryptos through the web and to make sure that there is no fraudulent behavior or scams such as double spending (when someone tries to use the same assets twice, trying to take advantage of the delay between sending assets to someone and the time it takes to verify a transfer). BTC and ETH both have their own blockchains.
Blockchain technology basically consists of literal digital information blocks that form a chronological chain. These blocks carry all sorts of information in them regarding business, personal info, project details, programming scripts, and among other things, they carry transfer data. Each and every crypto transaction has to be processed through the blockchain before it gets to its destination (receiver’s address). These assets don’t actually exist beyond the blockchain, which also acts as a distributed public ledger of transfers that stores data concerning the movement of all units of a certain crypto through the network.
Private and Public Keys
Your private key is your proof of ownership over a certain amount of cryptos and in order for each transaction to get processed through the blockchain, miners need to verify the validity of a transfer and process it. Private keys are basically passwords that let you do as you wish with your cryptos.
Because all cryptocurrency is located on blockchains, there has to be a method of proving your ownership over a certain amount of assets, and this is what private keys are for. Public keys, on the other hand, act as the address where somebody can send you new digital funds.
Now, let’s see how BTC and ETH work.
BTC Basic Information
Back in 2009 when the mysterious Satoshi Nakamoto published the Bitcoin whitepaper and launched this crypto, no one could have predicted that BTC would become the largest cryptocurrency in the world. It has truly created global financial turmoil, brought unforeseen popularity to cryptocurrencies, and given them a serious role in the financial portfolios of companies, startups, and individuals worldwide.
When it was launched, Bitcoin was declared as the first type of digital cash or virtual currency secured by state-of-the-art blockchain technology which enabled transactions without any central authority like government agencies, central banks, or other financial institutions that are an integral part of transactions of fiat currencies.
Bitcoin offered far more mobility and privacy than traditional fiat money, both when conducting everyday payment transfers and for large-scale business investments. Bitcoin introduced the concept of digital currency being stored on distributed public ledgers, i.e. blockchains, which was an innovative method for storing value without worrying about its physical location.
Also, the question of what would happen to your funds in case the bank you are storing your savings in goes bankrupt was eliminated, because there is no central authority of the BTC blockchain, which makes it crisis-proof. This has been a burning question since the period after the 2008 global economic crisis. This technology made it possible for your funds to still be available through your private key no matter the economic or political situation in your country, or even in the whole world.
Crypto enthusiasts quickly adopted BTC as the future of financial transactions and soon enough, numerous new cryptos, called altcoins, started appearing on the market. Also, Bitcoin mining started becoming increasingly popular among the community which resulted in BTC becoming a digital asset with a multi-million dollar daily market cap.
ETH Basic Information
The Ethereum platform was launched in 2015 and has since become the largest decentralized software platform on the web. Ethereum’s native currency Ether (ETH) isn’t as popular as BTC and its market capitalization has always been far behind that of Bitcoin, but this doesn’t mean that the currency is less attractive in both financial and practical means.
The thing with Ethereum is that it is much more than just digital cash. It can basically be explained as a platform that enables individuals, startups, developer teams, and companies to create decentralized applications (DApps) based on Ethereum programming languages. In fact, the programming languages can be used for creating websites, online services, business platforms, developing entertainment-centered platforms and games, and much more.
In other words, DApps are the true potential of Ethereum because developers can literally use Ethereum’s blockchain to program and create trustworthy and secure software without any central authority, independently of state institutions. The democratic potential of Ethereum is one of the most important characteristics that make ETH the platform of choice for many crypto enthusiasts and programmers.
Apart from DApps, another big perk of Ethereum is its ability to facilitate smart contracts, an integral part of creating DApps. Smart contracts are contracts between two interested parties without the participation of a third party that would have to verify their agreement. All the details of a smart contract are left to the two sides that participate in the agreement. This makes ETH a great network to facilitate quick and easy business agreements.
Smart contracts and DApps are both powered by the ETH currency which makes Ethereum a digital asset that can be used both as a store of value, payment method, or collateral and as a means to develop and run applications and smart contracts. This is why Ethereum is regarded as much more than just a digital currency.
Bitcoin vs. Ethereum
Now let’s take a look at some of the key differences between BTC and ETH.
Each cryptocurrency transaction through the blockchain has to be verified before the funds can be processed to their destination. Both ETH and BTC use a proof-of-work (PoW) consensus algorithm in order to confirm transactions. This means that a decentralized network of nodes, that are actually miners, confirm transactions and mine new BTC and ETH coins in the process of transfer verification. This is how new blocks on the blockchain are created – by verifying transactions.
The main difference here is that while the BTC confirmation mechanism is Proof-of-Work, the developer team behind Ethereum is looking to advance the ETH blockchain to a whole new level and create a Proof-of-Stake (PoS) consensus algorithm. This new algorithm which is under development for the Ethereum platform will be relying on users taking tokens as collateral to confirm transactions and discover new blocks of the blockchain. This means that fraudulent transactions and scams will be even harder to pull off since users will be staking their tokens. This upgrade of the Ethereum network will be called Ethereum 2.0.
Transaction Account Management
Another difference between BTC and ETH is in the transaction account management process. When you want to transfer some BTC, the blockchain protocol uses unspent transaction outputs (UTXOs). This means that BTC transfers utilize small amounts of BTC that are left after each transfer (similar to the change you get in a shop after you pay for a product with cash), except that this change is left in the BTC network to be used by further transactions and in order to process this, additional computing power is required.
Ethereum, on the other hand, has a transaction account management procedure based on debiting and crediting specific amounts of ETH that are required for a transfer. This saves both computer power and time because several UTXO steps are left out of the process. Essentially, this means your transaction can get processed faster with ETH.
ETH and BTC Token Supply
The two most popular crypto assets are also different when it comes to token supply. When Bitcoin was launched in 2009, it already had a hard cap of 21 million coins – the specified final amount of BTC mined. The Bitcoin software protocol awards miners with new BTC after every new block is successfully mined and after every 210,000 blocks, the amount of BTC that is awarded is halved in order to make BTC more scarce and mining more difficult. On the other hand, Ethereum doesn’t have a hard cap on the total amount of ETH that can be mined and circulating.
Transfer speed is a big issue in the world of cryptocurrencies. When you are transferring funds, you want to have the assets moved as fast as possible. Of course, compared to bank transfers most cryptocurrencies are lightning-fast, plus they don’t require all the paperwork and bureaucracy associated with banks. However, there are drastic differences in transfer speed between cryptocurrencies.
Blocks of the Bitcoin network are created approximately every 10 minutes, while the block time is about 10 to 20 seconds on the Ethereum blockchain. This is a very important feature for the Ethereum ecosystem because it means that it can handle large amounts of smart contracts and operations related to DApps fast, which can help the ongoing development of independent software platforms and applications to thrive.
A Few Words Before You Go…
These are some of the core characteristics of BTC and ETH that will enable you to better understand the advantages and uses of each cryptocurrency. Keep in mind that you can’t say that BTC is better than ETH or the other way around. Both are extremely useful and versatile. They are simply different and generally used for different purposes.