Bitcoin, which launched in January 2010, is the longest running public blockchain and also the largest (as measured by market cap). It wasn’t until 5 years later that Ethereum would emerge, inspired heavily by Bitcoin but also operating very differently.
These two blockchains share one common facet: they are both distributed, permissionless networks that store a publicly verifiable record of all transactions on their blockchain. But this is where the similarities draw to an end. Both Ethereum and Bitcoin differ enormously, not just from a technical point of view, but a financial and ethical one too.
This article will take a deep dive into these key areas of difference, concluding with some thoughts about how they are also complimentary to one another. Whether as an investor or a user, this guide should help shed some much needed light onto the world’s two most valuable cryptoassets.
Ethereum and Bitcoin differ most dramatically when evaluated from a financial perspective. As an investor, the two key areas of interest are the respective risk profiles and monetary policies for each blockchain.
The security and trust of any given blockchain is paramount to their success. Both Bitcoin and Ethereum secure billions of dollars in value and both have stood the test of time, with neither having their protocol meaningfully compromised by an attacker.
Bitcoin, however, was launched in January 2009 and it was not until 2015 that Ethereum would follow. This time discrepancy is significant – in a nascent market, Bitcoin has survived the longest and can provide the greatest security guarantees. While Ethereum can still be credited with being highly secure, it simply cannot provide those same guarantees.
Leaving longevity aside, Ethereum’s smart contract layer has brought with it numerous other risks that don’t apply to Bitcoin’s (much simpler) blockchain. While the base layer of Ethereum is as secure as Bitcoin’s, poorly written smart contracts can introduce bugs that can cause financial losses.
The most infamous of these vulnerabilities came with Ethereum’s “DAO attack“, a smart contract bug that led to the theft of tens of millions of dollars and a contentious split of the network.
Ethereum also has a much greater affinity to change. As a generalized smart contract platform, Ethereum’s ambitions are limitless. With these ambitions comes the need for network upgrades that allow for more efficient execution of smart contracts.
On the other hand, Bitcoin’s ambitions have been somewhat muted. Originally conceptualized as “peer to peer electronic cash” by Satoshi Nakamoto in 2009, Bitcoin has struggled reaching the scale necessary to achieve this vision. Instead, the Bitcoin blockchain settled into a role as “digital gold” – an unchanging platform that offered slow but highly secure and permissionless value transfer.
Ethereum’s willingness to change is a blessing and a curse. On one side there is the added value that Ethereum unlocks with every successful upgrade. On the other is the risk of introducing catastrophic bugs that have the potential to cause financial loss and irrecoverable damage to the blockchain’s reputation.
Ethereum, then, carries with it more uncertainty but equally higher upside should its ambitions be met.
When we look a the supply of Bitcoin vs Ethereum, it’s interesting to note that Bitcoin’s supply is capped at 21 million Bitcoin while Ether’s supply is technically limitless.
Ethereum’s monetary policy has always been a sticking point for investors. Without defined scarcity built in, investors have been quicker to pick up on Bitcoin’s simple “digital gold” narrative. However, planned network upgrades on Ethereum are expected to drop issuance greatly and protocol updates like EIP 1559 are likely to ensure that the total supply of ETH will never surpass 110-120 million. It is also possible that ETH’s issuance rate falls to negative, reducing the blockchain’s supply over time.
With Bitcoin, block rewards halve every 210,000 blocks, or roughly once every four years. The term “halving” can be viewed as the issuance rate of Bitcoin being reduced by 50%. The issuance rate was originally set at 50 BTC and will experience its third halving in the summer of 2020, bringing the new block reward to 6.25 BTC.
With Ether, block rewards are changed dynamically, meaning that the community at large dictates how the issuance rate will be reduced over time. With the upcoming shift to Proof of Stake, Ether will experience its lowest issuance rate to date, further promoting the notion of scarcity despite there being a technically uncapped supply.
The differing utilities of Bitcoin and Ethereum could not be more apparent. Functioning as “peer to peer electronic cash”, users are able to send and receive Bitcoin from anywhere in the world, without permission and with minimal fees. This utility on its own is of enormous benefit, breaking down borders and providing its users with a deflationary currency whose monetary policy cannot be changed.
Unfortunately, this utility has been diminished by the price volatility of Bitcoin and a sluggish network, with payments taking several hours to process during times of congestion.
The Lightning Network protocol has attempted to reintroduce Bitcoin as a payment method by creating “off-chain” channels for instant payments.
While the Lightning Network has been touted as a revival of Bitcoin’s peer to peer payments, its success has been somewhat limited. Users tend to prefer holding their BTC over spending it, as the potential upside of Bitcoin could be phenomenal. For this reason, Bitcoin has now become a type of digital gold; a scarce and deflationary asset that is slow to move but highly secure.
Ethereum on the other hand, has enormous utility both known and unknown. At its inception, very few were able to predict many of the new technologies that now exist on Ethereum today.
Decentralized identities (DID), decentralized finance (DeFi), supply chain tracking and blockchain derivatives are just a few of the concepts under development with DeFi so far gaining the most traction.
It is hard to summarize Ethereum’s utility as succinctly as Bitcoin’s “digital gold”. Many in the community refer to Ethereum as “money lego”, but even such a generalized term fails to communicate the even greater generality of the Ethereum blockchain.
The utility of Ethereum is theoretically limitless. What remains to be seen is whether its technology can scale to accommodate its global ambitions.
One of the biggest differences between Bitcoin and Ethereum is the notion of Unspent Transaction Outputs (UTXOs) and Accounts. Both models are used to track the state of a database, while each implementation plays a specific role in the design of each protocol.
On Bitcoin, transactions are marked as spent or unspent. With UTXO’s, Bitcoin is transferred from one owner to another by signing the hash of a previous transaction and the public key (address). This allows for a continual progression of inputs and outputs where the token owners are effectively passing along the rights to their Bitcoin. All UTXO’s have the following characteristics:
- Quantity – Every transaction must prove that the sum of its inputs are greater than the sum of its outputs.
- Validity – Every referenced input must be valid and not yet spent (aka unspent).
- Authorization – The transaction must have a signature matching the owner of the input for every input.
If any of these parameters are not met, the transaction is marked unsuccessful, resulting in an “error”. What’s important to note here is that UTXOs provide a good foundation for decentralization and continual value transfers from one address to another. Unfortunately, they do not bode well to complexity or referencing accounts as balances are never truly “owned” by one account.
On turing-complete blockchains like Ethereum, account balances are used similar to traditional bank accounts. In practice, accounts experiences direct value and information transfers through state transitions, meaning that the ownership of ETH is transferred upon the completion of a successful transaction.
Seeing as every account in Ethereum has its own balance, storage and code-space for calling other accounts or addresses, it becomes easier to program complex logic using a robust foundation. Simply put, a transaction that uses an account based model is valid if the sender has a large enough balance to pay for it (i.e. to send 2 ETH an account must have balance of 2 or more ETH).
With contract accounts, code is received and run, ultimately changing anything from internal storage to creating additional messages that may affect debits and credits to other accounts. Advantages of Account Balances include:
- Simplicity: Balances are easier to read and build off of than UTXOs
- Standardization: It’s easy for code to quickly read an account balance, as opposed to trying to verify a string of transactions with UTXOs
- Opportunity: Account balances allow for more flexibility and composability among different accounts.
Transactions only require one reference and signature which produces one output, contrary to the UTXO design which produces many *potential* outputs. Similarly, account balances are what allow for many different ERC tokens to be stored under one address.
In conclusion, knowledge of UTXOs and Account Balances aren’t necessary to use the technology, but they do serve as a good basis for understanding how these systems work under the hood.
While these two blockchains are powered by computers and mathematics, there is a human element that plays a significant role in how these two networks are developed.
As Eric Weinstein put it in his podcast with Ethereum founder, Vitalik Buterin, “we always think in a sci-fi movie that something that you think is human would rip off its mask and reveal itself to be a computer. And this is the reverse. The computer’s face is ripped off, revealing the human behind it.”
Bitcoin is borne out of libertarianism and adesire to untether from government policy, putting value back into the hands of self-sovereign individuals. These libertarian ideals have been guarded by Bitcoin’s core developers and community with steely determination; rejecting all but essential code changes to maintain the blockchain’s original function.
Ethereum on the other hand, was formed around similar principles but with a less idealistic approach. The Ethereum blockchain, which has been upgraded on countless occasions, has a community of users and developers that want to see the blockchain adapt to changes over time.
Politics and ethics have played an enormous role in the governance of Bitcoin and Ethereum. With Bitcoin, this level of governance is played down. Many in Bitcoin defend its core principles by citing the Satoshi whitepaper as if it were a sacred text. Ethereum however, recoginizes this inevitable human involvement and attempts to accommodate it as best as possible through tools like the “decentralized autonomous organization” (DAOs).
The downplaying of human involvement by Bitcoin developers and community leaders has been dubbed Szabo’s law, after Bitcoin core developer, Nick Szabo. This idea of pretending as though humans are not an integral part of blockchains systems is considered hugely limiting by many within Ethereum.
Arguably and quite paradoxically, it is Bitcoin’s ethical stance and human governance (and not technical limitations) that is resigning the platform to “digital gold”.
By recognizing the value of humans in the leadership and governance of public blockchains, it is possible to efficiently involve the members of society whose lives these technologies most impact.
Ethereum and Bitcoin?
While the cryptocurrency community fights over the differences that exist between Bitcoin and Ethereum, investors should see an obvious opportunity for hedging within this space.
Although the price of Ethereum and the price of Bitcoin move with significant correlation, this correlation will inevitably dwindle over time as their paths – Ethereum’s “money lego” and Bitcoin’s “digital gold” – further diverge.
As it stands, there are only two unique types of public blockchain – smart contract blockchains and UTXO based, “Bitcoin-style” blockchains. Of these two distinct types, Bitcoin and Ethereum are their respective leaders with little by way of competition. Without the prospect of an entirely new type of blockchain appearing, any upside found within this market will likely be led by either Bitcoin or Ethereum.
As such, understanding that it is not Ethereum vs Bitcoin but Ethereum and Bitcoin is key.
While technical and political ideologies may differ dramatically across these two chains, a rational investor would be able to see through this emotive language to the opportunity that lies ahead for both platforms.
The great differences that separate the functionality and direction of these two blockchains should be considered as, not one or the other, but both, together.
Bitcoin and Ethereum FAQs
One of the fundamental differences between Bitcoin and Ethereum is in their coin supply.
Bitcoin has become famous for its 21 million coin supply limit. This supply limit, which is written into the blockchain’s logic, is a key factor in the cryptocurrency’s success as “digital gold”.
Ethereum, on the other hand, has no limit to its coin supply. Instead, Ethereum has – through governance – dropped its issuance rate over time with yearly issuance of new coins trending towards 0-1%.
Bitcoin’s predictable coin supply has arguably been a major factor in its success.
Bitcoin made headlines when the price of a single coin reached an all time high of $20,000 in December 2017. While the price of any asset is always the result of demand and supply factors, Bitcoin’s price is higher than Ethereum’s for a couple of key factors.
First, Bitcoin has fewer coins than Ethereum. There will only ever be 21 million Bitcoin while Ethereum will stabilize at somewhere between 110-120 million. The higher supply of ETH makes for a cheaper price.
Second, Bitcoin has attracted a greater level of demand than Ethereum. Perhaps due to its “first mover advantage” or its popular narrative as “digital gold”, Bitcoin has – for the time being – outstripped Ethereum in terms of demand.
Many people focus on the differences between Bitcoin and Ethereum but there are some significant similarities too.
- Ethereum and Bitcoin both share the same mechanism for reaching consensus called “Proof of Work”.
- Ethereum was heavily inspired by Sataoshi Nakamoto’s 2009 white paper.
- Both Ethereum and Bitcoin have miners, nodes and wallets that make up the fundamental topology of the network