Bitcoin vs. Ethereum: What’s the Difference?

Bitcoin vs. Ethereum: An Overview 

Ether (ETH), the native cryptocurrency of the Ethereum network, is the second most popular digital token after bitcoin (BTC). As the second-largest cryptocurrency by market capitalization (market cap), comparisons between the two are natural.

Ether and bitcoin are similar in many ways: Each is a digital currency traded via online exchanges and stored in various types of cryptocurrency wallets. However, there are many significant differences. Bitcoin is designed to provide an alternative to physical or fiat currency; Ethereum is intended for complex smart contracts and decentralized applications, which are believed to be part of the emerging (and theoretical) infrastructure of the future of the internet known as Web3.

Bitcoin

Bitcoin was launched in January 2009. It introduced a novel idea set out in a white paper by the mysterious Satoshi Nakamoto. It introduced Bitcoin as an online currency without any central authority, unlike government-issued currencies. There are no physical coins, only transactions recorded on a cryptographically secured public ledger.

Although Bitcoin was not the first attempt at an online currency of this type, it was the most successful. As a result, it has become known as the predecessor to virtually all cryptocurrencies that have emerged since.

Over the years, the virtual, decentralized currency concept has gained acceptance among regulators and government bodies. Although only formally recognized as a medium of payment or store of value in a few countries, Bitcoin has managed to carve out a niche for itself and continues to co-exist with the financial system despite being regularly scrutinized and debated.

Ethereum

Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July 2015, Ethereum is the largest and most well-established open-ended decentralized software platform.

Ethereum enables developers to build and deploy smart contracts and decentralized applications (dApps) without downtime, fraud, control, or interference from a third party. To accomplish this, Ethereum comes complete with its own programming language that runs on a blockchain.

The potential applications of the Ethereum virtual machine are wide-ranging using its native cryptographic token, ether (ETH). In fact, Ethereum is being developed to decentralize the Web. How we interact with the Web will not likely change much, but how it operates in the background is being worked on to remove centralized entities.

Ether generally has four purposes: It is traded as a digital currency on exchanges, held as an investment, used to purchase goods and services, and used on the Ethereum network to pay transaction fees.

Key Differences

While both the Bitcoin and Ethereum networks are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. For example, transactions on the Ethereum network may contain executable code, while data affixed to Bitcoin network transactions is only used to record transaction information. Other differences include block time (an ETH transaction is confirmed in seconds, compared with minutes for BTC), and their consensus mechanisms are different: Bitcoin uses proof-of-work, while Ethereum uses proof-of-stake.

Proof of Work vs. Proof of Stake

Bitcoin uses a consensus protocol called proof of work (PoW), which includes a network-wide competition to solve a cryptographic problem before the network begins confirming and sealing transactions. In September 2022, Ethereum moved to proof of stake (PoS), a set of interconnected upgrades that made Ethereum more secure and sustainable. To address issues regarding scalability, part of the transition to proof of stake is danksharding, which will continue to be addressed through future updates.

A major criticism of proof of work is that it is highly energy-intensive because of the computational power required. Proof of stake substitutes computational power with staking (making it less energy-intensive) and replaces miners with validators, who stake their cryptocurrency holdings to activate the ability to create new blocks.

Purposes

BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system but to facilitate and monetize the operation of the smart contract, dApps, and any other blockchain solution that can be thought of.

Bitcoin was created primarily as a decentralized digital currency, aiming to serve as a peer-to-peer electronic cash system that allows individuals to send and receive value without the need for a central authority. Over time, it has also become viewed as a store of value, akin to "digital gold," acting as a hedge against inflation and a means of preserving wealth.

Ethereum, on the other hand, was developed as a versatile platform supporting not only a digital currency but also smart contracts and dApps. Overall, Bitcoin focuses on being a digital currency and store of value, while Ethereum provides a robust platform for creating and executing transactions that facilitate the movement of value.

Future

The Ethereum ecosystem is growing by leaps and bounds thanks to the surging popularity of its dApps in areas such as finance (decentralized finance, or DeFi apps), arts and collectibles (non-fungible tokens, or NFTs), gaming, and technology. Ethereum will also introduce danksharding sometime in the future to enhance its scalability.

Bitcoin has also experienced change, introducing the Taproot upgrade to enable smart contracts. The Bitcoin Lightning Network is another project being worked on as a second-layer protocol that takes transactions off-chain to speed up the network.

It remains anyone's guess which cryptocurrency and blockchain will stand the test of time—perhaps they both will. But one thing is certain—both have induced much-needed discussions about financial systems worldwide.

The Bottom Line

Bitcoin and Ethereum are two blockchains with their own cryptocurrencies, bitcoin and ether. Each was created with different purposes in mind to address separate issues, but they also have many similarities.