Bitcoin vs Ethereum: How Is Ethereum Different From Bitcoin?

Bitcoin and Ethereum are the Xbox and Playstation of the cryptocurrency world. They are two of the most popular cryptocurrencies whose contribution to the sector's growth has been enormous. From price to the premise, their concepts are unique but with a few things in common.

What is Bitcoin?

Users under the pseudonym Satoshi Nakamoto first created the concept of Bitcoin in 2008. Bitcoin allows users to manage a currency not controlled by any financial institution or government. 

A set of decentralised networks runs the Bitcoin blockchain software with its own rules to which every participant must agree. These rules determine how every transaction works. It was the first cryptocurrency based on DLT (Decentralized Ledger Technology) blockchain. 

The Bitcoin network processes multiple data sets and converts them into hashes through an algorithm called the SHA-256 hash function. It processes data and converts them into long strings of numbers. 

Bitcoin's mining and consensus mechanism ensures that users cannot spend their funds twice, enabling it to stand out as a tamper-proof currency. Moreover, Bitcoin also features a store of value, which users can stock as an asset and use over time. Bitcoin's hassle-free mode of transactions has increased its popularity over time. 

What is Ethereum?

The Ethereum network was launched in July 2015, and its co-founder, Vitalik Buterin, published its white paper in 2013. Ethereum uses its blockchain to create a decentralised computer, like interacting with applications and making transactions based on the Ethereum network. 

The main goal of Ethereum was to decentralise everything on the internet. This cryptocurrency operates on its programming language and solidity and is surging daily on the ladders of innovation. For instance, Non-Fungible Tokens (NFTs) and decentralised financial service applications are examples of what developers can create using Ethereum-based smart contracts.  

Users must pay a fee for creating smart contracts, paying for transactions, and using decentralised apps in Ether. Today, as this ambitious cryptocurrency's value is increasing, it is also being used to store value. 

Bitcoin and Ethereum: Overview

Quite often, these two biggies of the crypto world are compared against each other. However, you should know that Bitcoin and Ethereum are merely systems, whilst the cryptocurrencies these two systems use are called bitcoin (small letter b) and Ether. Their respective stock symbols are:

• bitcoin: BTC
• Ether: ETH

Main takeaways: Bitcoin v/s Ethereum 

**Please note that the abovementioned data is current as of 27^th May 2022 and is subject to change over time. 

Speaking of how similar these two systems are, both use blockchain technology to record and validate all their transactions. However, Ethereum's upcoming change plans differ concerning accessibility, sustainability, and speed. 

Before discussing their major difference in the consensus mechanism, let's understand what a consensus mechanism is.

Consensus Mechanism

A consensus mechanism refers to a computer algorithm which mainly aims at solving the problem of 'double spending' by making any blockchain viable.  BTC is a string of codes that can be infinitely copied. In other words, you can become as wealthy as you want to be by simply making multiple copies of your BTC. 

However, the reality is very different. Every time you spend a bitcoin, its copy gets destroyed, and the recipient on the other side of the transaction receives a new version. A record of all details of transactions is maintained on a distributed ledger, where the world can see that you have spent your BTC. 

The ledger holders' consensus would clearly indicate the fake one if you attempt to spend a copied version. Counterfeiting even one such transaction would be difficult, and then you have to modify each transaction since all of them are correlated. 

To work around this, you either have to control at least 51% of that network's mining hash rate or have massive computing power. Therefore, an attack as such on Bitcoin or Ethereum is probable but still hypothetical. From the very beginning, Bitcoin and Ethereum used distinct consensus mechanisms. Bitcoin uses 'proof of work' while Ethereum aims at using a 'proof of stake' consensus mechanism. 

Bitcoin: Proof of Work

Proof of work (PoW) is the decentralised consensus mechanism, where network members put feasible amounts of effort to deter anyone from gaming the system. It is mainly used in cryptocurrency mining for mining new tokens and validating transactions. 

• Proof of Work: Understanding

'Work' involves estimating a unique 64 characters string that is alphanumeric as accurately as possible. Within a 10-minute window, anyone making the maximum number of guesses per second has the highest chance of being chosen as a validator.

• Proof of Work: Criticism 

Earlier, hobbyists sitting at home used to do this 'work'. However, the processing power required to get it done has increased exponentially. As a result, only those able to afford the necessary power and hardware can get this work done today, like companies and specialist mining organisations. 

The energy required for computer hardware is enormous and is the sole reason behind Bitcoin's criticism. Currently, it uses 19 terawatt hours (TWh) every year, nearly the amount used by an entire country like Norway. 

Ethereum: Proof of Stake

This consensus mechanism initiates processing transactions and helps create new blocks in the blockchain based on the total number of validator stakes coins. The PoS structure has less potential for a network attack thanks to its well-designed structure. 

Under Proof of Stake, the next block writer is selected randomly, with nodes having larger stake positions being assigned with higher odds. 

• Proof of Stake: Understanding

Under proof of stake (PoS), owners themself offer coins as collateral and are given a chance to validate blocks. As a result, coin owners with 'stake coins' are eligible to become 'validators'; however, they should own a specific amount of stake coins. Next, a random validator is selected who gets to do the 'mining' unlike the competition-based mechanism as in the proof of work. 

Proof of Work v/s Proof of Stake: Main Takeaways