In 1999, the Nobel Prize winner in economics, Milton Friedman identified e-cash as one of the missing elements that would be necessary to reduce the role of governments in the world. Perhaps somebody was listening, perhaps not, but regardless, one decade later, the first and probably still the best-known digital currency arrived - Bitcoin.
Bitcoin went on to grow into the biggest blockchain network, but its reign may be coming to an end. Ethereum is a more recent addition to the cryptocurrency landscape and it’s vying for the top position with Bitcoin. Vitalik Buterin, Ethereum’s creator saw a different way forward for blockchain, and in his opinion, cryptocurrency would be a part of it but not all of it.
But we’re getting a little ahead of ourselves, here. Bitcoin vs Ethereum... What exactly are Bitcoin and Ethereum anyway, and what differences separate them? They are both underpinned by the same technology, but if you scratch the surface you’ll see that there are plenty of ways in which they are different from each other.
Bitcoin was created by Satoshi Nakamoto, but that isn’t a person. Some people think it might be a collection of people, but no one knows for sure. Whoever it is, they penned a white paper called “Bitcoin: A Peer-to-Peer Electronic Cash System,” and this set out what Bitcoin would be, along with describing how a cryptocurrency functions. Then, in 2009, the Bitcoin open-source software was launched into an unsuspecting world.
On launch day Bitcoin was valued at 1,309.02 Bitcoins to the US dollar. This figure was arrived at by calculating how much electricity it would take to run all the computers that were creating Bitcoins. The first time that anybody spent any Bitcoin was to buy a pair of Papa John’s pizzas. It cost a Florida resident called Laszlo Hanyecz 10,000 Bitcoin (or $30 back then) in exchange for his fancy cheese on toast. That same amount has now grown to be worth about $10 million.
A blockchain is a public ledger, so it records every transaction that takes place. New blocks are added chronologically, so the whole transaction history is easy to see in order, and its public, so it’s difficult to hide anything there. Every node has a complete blockchain, so it’s hard to falsify a single entry.
Bitcoin became popular pretty quickly because of a few factors built into the technology. The first was privacy. That transparent public ledger means that even though you can see every single transaction for a particular Bitcoin, there’s no way to identify which individual was behind it. In this way, it’s like the digital equivalent of spending ordinary coins because they can’t be traced back to you.
Bitcoin does not suffer from inflation that can afflict traditional fiat currencies—the name for those issued and backed by sovereign states. Inflation happens because the supply of a currency increases (like when more money is printed) and so its value declines. But there won’t ever be more than 21 million Bitcoins because it’s a currency that’s been capped by design.
So, Bitcoin is a decentralised open financial protocol that allows people to enter into transactions freely and privately. There is no governing body which can intervene and artificially manipulate either its value or its supply.
This is only a brief snapshot of Bitcoin, offered here so that you understand why it was created. Ethereum may also be a cryptocurrency, but you’ll see that it has different goals. Let’s look at Bitcoin’s goal first.
Bitcoin was created to be a decentralized secure peer-to-peer payment system, and because each transaction is added to a public ledger, users can be totally confident that it’s legitimate. With this level of certainty, the likelihood of fraud is eliminated.
Security is Bitcoin’s main priority, followed closely by its speed of use. Transactions appear in the system within minutes, and because just one simple coding language is used, C++, security is heightened.
The process of creating Bitcoins is called mining, which is, “The process by which the transaction information distributed within the Bitcoin network is validated and stored on the blockchain. ... [miners] receive fees attached to all of the transactions that they successfully validate and include in a block.”
Bitcoin miners use the processing power of either their home computers or dedicated mining machines to solve complex equations which validate each transaction, and when they do, they are paid in Bitcoins.
The current rate of payment is 12.5 Bitcoins for solving one block, but this rate isn’t fixed. It’s reduced by half every 210,000 blocks, and the next such halving will probably take place in 2020. Mining happens on a “proof-of-work” basis. Receiving blocks and adding them to the blockchain can only be accomplished by solving complex mathematical problems, which proves that the work was done.
Bitcoin is a decentralised digital payment system, and although Ethereum can be described in a similar way, it’s also got more going for it than that. It’s also an infrastructure.
The name of Ethereum’s first offering in 2015 was Ether. That’s what the cryptocurrency behind Ethereum is called, and about 60 million Ether coins were sold initially, and this generated around $18.5 million. Clear support was in evidence for Ether right from the start, but you may ask why? What features made it so attractive to investors? What’s it got that Bitcoin hadn’t?
Two things: smart contracts and even crowdsourcing. The Ethereum protocol was designed to provide increased flexibility and give developers extra functionality, which offers them extra advantages over the other “peer-to-peer” currencies.
Nascent companies often use crowdfunding websites to get their businesses off the ground. But after a site takes their 5% usage fee and their 3–5% payment-processing fee you might be looking at losing 10% of your start-up funds just for the privilege of begging for them!
But with the Ethereum approach, you could (for example) use it to create a contract and then solicit pledges from the community. You could specify a goal and also say how much money you’ll need to get the project off the ground successfully.
The money that comes in is held until the target amount is raised, or until you hit the end date. But let’s imagine that you fall short of your targets and don’t manage to get all the money that you were hoping for by the end of your fundraiser. No problem! The system will automatically release all donations back to their respective contributors on the date laid out in the contract.
This efficient approach uses the blockchain infrastructure to manage the logistics of funding without making you pay for it as you would do if you went to a site like Kickstarter.
Bitcoin wasn’t built to help people get funds for start-up companies, but Ethereum was, so it’s easy to see why it’s become so popular. Bitcoin looks a bit like a one-trick pony in comparison.
It’s easy to see why you’d look to it if you wanted to get funding for a new business idea. As soon as the funds become available, you can start collecting proposals from your project backers. Then everybody who puts a proposal in gets a vote on which one wins, so the future of the idea/company can be decided democratically. That sounds like a great way to start a business, free from the usual top-down approach.
It removes the need to hire managers and the process of decision-making becomes automated, thanks to a set of prearranged rules that ensures the project stays on track. This approach protects it from external influences and decentralizes it so that the whole venture can get on its feet more quickly.
So now you’ve seen what makes Bitcoin and Ethereum work, and a few of the things that make them different. In this section we are going to briefly point out some of the other differences:
A lot of people may compare Ethereum and Bitcoin because they share similar technology, but the truth is that they have different aims. Bitcoin has become a very popular cryptocurrency, but Ethereum is now in second place, and as we’ve seen, it offers some distinct advantages in terms of functionality.
Ethereum doesn’t just let people undertake blockchain-backed transactions, it also adds in the ability to set up and execute contracts too, and even to replace crowdfunding operations. In the end, the popularity of any solution comes down to how well it can satisfy the needs of its users, and Ethereum looks like a strong contender because it has the capacity to satisfy more than one need.
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