Throughout 2017, the price of 1 BTC rose from $ 963 to $ 19,694. Similarly, the price of 1 ETH skyrocketed from $ 8 to $ 747. Since then, the price of Bitcoin and Ethereum has dropped significantly, but at the time, would-be investors and enthusiasts went crazy for cryptocurrencies.
But aren’t cryptocurrencies just virtual money? What is the difference between these two models? And why is there still so much interest even after the massive price drop? This article will answer all of those questions and more.
How Bitcoin works
Contents
- 1How Bitcoin works
- 2How Ethereum works
- 3Bitcoin vs. Ethereum in a nutshell
Bitcoin is a digital currency that claims to be:
- Decentralized, no organization controls the creation or flow of currency.
- Anonymous, the ability to make transactions is not tied to identity.
- Transparent, all transactions can be viewed by anyone at any time.
All of this is possible through the blockchain and peer-to-peer networks.
The Bitcoin blockchain is just a file that keeps a record of all valid Bitcoin transactions that have been made. Every 10 minutes, all new transactions are recorded together in a block and then added to the end of the file. Hence, the blockchain.
This means that some value in the database does not determine the current Bitcoin balance. Instead, your current balance is simply tracking all your past transactions to the present. The coin never changes hands.
Bitcoin does not reside on a single server or group of servers. Rather, it is distributed across thousands upon thousands of computers around the world, called nodes, and anyone can join that network at any time.
Every time a transaction takes place, it is distributed to all nodes on the Bitcoin network, and each node exists to verify that the transaction is valid. This is what Bitcoin mining is: the user dedicates the computational power of their machine to help keep the blockchain validated, and in return, they can earn some Bitcoins.
To send or receive transactions, the user needs a Bitcoin wallet . A wallet is just a public key, the address that others use to send you Bitcoins, and a private key, basically a signature that authenticates transactions made from your wallet. Anyone can create a new wallet at any time, making Bitcoin an anonymous currency.
Since the blockchain is distributed across all nodes, it is fully public and transparent. Anyone can see the entire blockchain and see each and every transaction made.
How Ethereum works
Ethereum is a massive global network that is distributed across thousands of computers around the world in a peer-to-peer fashion. The Ethereum platform incorporates blockchain technology in the same way as Bitcoin, but it is expanded in various ways.
The key component of Ethereum is the smart contract .
The Ethereum platform comes with its own special programming language, called Solidity, which allows people to write Ethereum scripts, and these scripts are called smart contracts. Smart contracts are distributed to the network and, when requested, run on all Ethereum nodes.
Ethereum also implies a digital currency called Ether . Since the execution of smart contracts costs computational resources, node owners are compensated with Ether. The heavier the smart contract, the more expensive it will be to execute. If it costs too much, you will not be allowed to complete it. This encourages the creation of efficient smart contracts.
The Ethereum blockchain is similar to the Bitcoin blockchain, but instead of containing only Ether transactions, it also contains the results of executed smart contracts.
Each node on the Ethereum network maintains a copy of the blockchain as Bitcoin does, and the verification process is similarly called Ethereum mining. Miners spend computational resources to verify that each Ether transaction and each smart contract is valid. In exchange for their efforts, they earn the Ether.
The user can also send and receive Ether directly from wallet to wallet.
Ethereum is proof that the blockchain concept is expandable to areas outside of fintech. This is why Ethereum is often called ” programmable money “. Yes, it is a digital currency, but money that can run code.
Bitcoin vs. Ethereum in a nutshell
In short: while Bitcoin is just a digital currency, Ethereum is much more than that. Bitcoin and Ethereum have fundamental differences in their long-term goals, as well as differences in their underlying technology that influence their value and perceived use in the rest of the world. For example:
- The average time of creating a Bitcoin block is 10 minutes, while the average Ethereum time is 15 seconds. Ether transactions can be confirmed much faster.
- The amount of Bitcoin that can be earned as a mining reward is cut in half every four years. The total number of exploitable Bitcoin has been set at 21 million. When miners reach that number, mining of Bitcoin will cease. The amount of Ether that can be obtained through mining is limited to 18 million per year, so there is always new Ether coming into circulation.
- Bitcoin is best mined using ASICs , dedicated hardware that is far superior to normal hardware. The need for specialized hardware pushes miners into large mining pools that consolidate mining power, while also cementing Bitcoin’s rewards to the “mining cartels” that dominate the market. Ethereum, however, is best mined with GPUs or graphics cards, which are easier to come by and possibly more of the same, even with the increase in GPU prices due to Ethereum mining.
- Bitcoin is often called “digital gold” because it has a holding value and many other cryptocurrencies are “tied” to the price of Bitcoin. Ethereum is more often viewed as a “digital currency” because it has a lower spending value and lower entry point.
However, the main difference between the two cryptocurrencies is the ease of making programmable smart contracts on the Ethereum blockchain. Initially, the Bitcoin network was unable to process smart contracts. As Bitcoin and its blockchain evolved, support for smart contracts was added, although Bitcoin continues to play in the background to Ethereum in this regard.
Proponents of Ethereum point to this ease of use as one of the main reasons why Ethereum is the future of cryptocurrency. Furthermore, Bitcoin has traditionally been slow to implement new changes and, in the eyes of many people, it only continues to exist because it was the first cryptocurrency.
While the cryptocurrency industry is still in its infancy, there is no question that blockchain technology is slowly transforming the world. There are hundreds more cryptocurrencies, too, each trying to decentralize and break the status quo within its given industry, like a completely decentralized internet.
But remember: not all cryptocurrencies are what they seem. Many are outright scams, as has been revealed multiple times. Do you need help deciding? Take a look at our article on how to avoid cryptocurrency scams – it’s a good starting point.
