Difference Between Bitcoin and Ethereum: A Beginner’s Guide

Bitcoin and Ethereum are the two leading cryptocurrencies in the world and rightly so. While one began the blockchain revolution that we’re seeing today, the other opened a gateway to endless possibilities for the technology and its purpose. If you’re someone new to the space and are wondering how the two are any different, you’ve arrived at the right place. In this article, I’ll be showcasing how each one is distinct, in simple, layman terms. So, let’s get right to it and learn the difference between Bitcoin and Ethereum.

Purpose

Bitcoin

Bitcoin as a cryptocurrency was launched as an alternative to traditional currencies such as the USD, GBP, Euro, and others. This wouldn’t be controlled by authorities and all its operations such as its usage, transaction validation, and more would be driven by people completely.

Furthermore, all these transactions would be transparent such that anybody can have a look at the records which would be immutable. Finally, the cryptocurrency would be decentralized such that all the transaction records are not stored on a single server like in the traditional system.

The above traits of Bitcoin are known as:

• Autonomy
• Openness/Transparency
• Decentralization

These three also form the base of blockchain technology itself, which is essentially what all cryptocurrencies are developed on.

Ethereum

Ethereum was the first alt cryptocurrency that went beyond solving the purpose of using crypto as a payment option. This was because of its smart contract feature.

Smart contracts are essentially programs on the blockchain that can be used for encoding instructions and criteria and translating them into programs. This means that with smart contracts, people could build applications over the Ethereum network.

These applications could be about anything: cryptocurrency exchanges, lending/borrowing, gaming, and a whole lot more.

Consensus Mechanism

A consensus mechanism is a method used for verifying and validating transactions.

Bitcoin

Bitcoin uses a mechanism known as Proof-of-Work (PoW). In this various participants on the Bitcoin network would try to verify a particular transaction and confirm it. The first one to do it receives a reward.

The verification process involves solving complex cryptographic and mathematical problems such as finding an answer that helps them check out all details of the transaction. Once the first person verifies it, others validate the same, and the transaction is confirmed.

The disadvantages of this are as follows:

• People would start using sophisticated hardware to win this race. As a result, only people who can afford such equipment will receive rewards. This subjects the network centralization and authority.
• Besides this, using such equipment and executing the process eats up a lot of electricity and is harmful to the environment.

Here’s where Ethereum 2.0 comes into play.

Ethereum

Ethereum began with PoW as its consensus protocol. However, besides facing the above-mentioned disadvantages, it realized a couple more problems:

• When the network traffic increases, the transaction validation, and processing speed becomes incredibly slow which causes network congestion. It means there are too many people waiting in line to get their transactions confirmed, which leads to a poor user experience.
• The second thing they realized, as a result, was that this method wouldn’t be scalable. If the number of people using Ethereum increases, they wouldn’t be able to manage the load.

This led to the idea of Ethereum 2.0. In this, the consensus mechanism to be used would be Proof-of-Stake (PoS). Here, instead of people participating in a race, they would be chosen at random by an algorithm to verify a transaction.

The only thing, they’ll need to do is stake a certain amount of Ethereum into the network. This way it wouldn’t become an arms race, and the impact on the environment would significantly decrease.

Conclusion

While these are just two differences laid out before you, they drastically affect the way each of these cryptocurrencies is used. Today, Bitcoin is being adopted as a payment option by companies such as Microsoft, Twitter, and several others.

On the other hand, Ethereum acts as a host for thousands of decentralized applications for various industries. Decentralized Finance (DeFi) started growing because of this. People could perform various fundamental financial operations such as investing, lending/borrowing, buying insurance, and more because of DeFi. However, this is just one amongst the several other use cases of Ethereum.

Overall, these are the essential ways in which Bitcoin and Ethereum differ from each other.

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