Bitcoin and Ethereum: a comparative analysis
Since the emergence of Bitcoin in 2009, cryptocurrencies and blockchain technology have changed the financial landscape. In this context, Ethereum and Bitcoin have become the two most prominent cryptos. While both are built on blockchain technology and share some similarities, they serve different purposes and have distinct features. This short article delves into a comparative analysis of Bitcoin and Ethereum, exploring their origins, functionalities and other characteristics.
Origin and purpose
Bitcoin, the first cryptocurrency in history, was launched in 2009 by an anonymous person or group of people named Satoshi Nakamoto. As stated in its white paper, Bitcoin's primary purpose is to serve as a decentralized digital currency, enabling peer-to-peer transactions without the need for intermediaries like traditional financial institutions. Bitcoin's (BTC) goal is to be a secure and transparent alternative to traditional currencies.
The Ethereum network was conceived by programmer Vitalik Buterin. He along with other cofounders launched the Ethereum network on July 30, 2015, with Ether (ETH) as its native token. The Ethereum network was designed to be more than just a digital currency. It is a decentralized platform that enables developers to build and deploy smart contracts and decentralized applications (dApps).
Blockchain and consensus mechanisms
Bitcoin's blockchain is designed to handle a limited set of transactions, focusing on security and decentralization. It uses the Proof of Work (PoW) consensus mechanism, where miners solve complex mathematical problems in order to validate transactions and secure the network. As a reward, they receive newly mined bitcoins. However, the needed computational power requires vast amounts of energy. For this reason, PoW is criticized for its environmental impact.
Similarly, Ethereum is based on blockchain technology and used Proof of Work during its first years. However, Ethereum transitioned into Ethereum 2.0 which now uses Proof of Stake (PoS) as consensus mechanism. In PoS, validators are chosen to create new blocks and validate transactions based on the number of coins they hold and are willing to stake as collateral. PoS is more energy-efficient compared to PoW.
Smart contracts and decentralized applications
Bitcoin's scripting language is limited in functionality and focuses primarily on processing simple transactions. As stated before, the main goal of Bitcoin is to be a digital currency for online commerce. As a consequence, it prioritizes security and simplicity over programmability. While Bitcoin supports basic smart contracts, its capabilities are nowhere near those of Ethereum.
On the other hand, Ethereum has a Turing-complete programming language named Solidity which allows developers to create complex smart contracts and dApps. This platform enables a wide range of applications beyond simple transactions, such as decentralized finance (DeFi) platforms, non-fungible tokens (NFTs), and more.
Scalability
The Bitcoin network is limited by an average block creation time of 10 minutes and a block size limit of 1 megabyte. The network can process a limited number of transactions per second, around 7, leading to congestion and high transaction fees during periods of high demand. There are some proposed solutions for this scalability problem like the Lightning Network which enables off-chain transactions.
Nowadays, Ethereum can handle between 15 and 30 transactions per second. However, the popularity of DeFi and NFTs on this network has led to periods of severe congestion which can lead to high transaction fees and slower transaction times. The transition to Proof of Stake aimed to improve scalability and energy efficiency. Also, sharding was proposed as another solution for this problem. Sharding involves splitting a chain into smaller pieces called shards. Each shard can process transactions independently of each other. This strategy increases performance by distributing the workload of the network.
Monetary policy
Bitcoin has a fixed supply cap of 21 million coins. The number of new bitcoins rewarded to miners is cut in half every four years or every 210,000 blocks. This is called a halving event.
Ethereum does not have a maximum supply. Nonetheless, Ethereum 2.0 implemented a mechanism to burn a portion of transaction fees, effectively reducing the circulating supply. This makes Ethereum's monetary policy somehow deflationary.