Bitcoin vs Ethereum. Guide to Understanding Ethereum.
I’m writing this predominantly for crypto-newbies. Newbies need to know the difference between Bitcoin and Ethereum. Sometimes we forget how confusing this space can be to new individuals.
What is Ethereum?
Ethereum is one of the largest cryptocurrencies to date. Created by Vitalik Buterin
, it has a lot of distinct features that differentiate it from Bitcoin. Bitcoin was created to be a peer-to-peer digital currency and Ethereum was created to serve as a decentralized computer featuring smart contracts. Both are similar in that they utilize blockchain technology to facilitate transactions within the network. Ethereum though, allows for much more utility through the use of smart contracts.
What is a smart contract?
A smart contract is a digital contract which conditions are carried out automatically through self-enforcing logic. A basic example of a smart contract could be one that automatically pays your best friend X
amount of money on his/her birthday. The functionality of if/then logic on a blockchain allows for decentralized applications (dapps) to be created and executed on the Ethereum network. This is why Ethereum is referred to as a decentralized computer. You can create your own dapp by learning the Ethereum program language Solidity
, or you could use one of the thousands of already created dapps
What is a decentralized application?
A decentralized application is a application (program) that that is not controlled by a single entity, but rather, by the peers within the network. This means no central authority has control over the program itself.
Imagine if YouTube was not owned and controlled by Google, but rather, by everyone who is participating within the network. This means YouTube wouldn’t be able to arbitrarily decide which videos and users are suitable for the platform. This power would instead fall into the hands of the people. Side Note:
There’s already decentralized version of YouTube called DTube
which is built on the STEEM blockchain.
Technical Differences Between Bitcoin & Ethereum
|Bitcoin vs Ethereum ||Bitcoin ||Ethereum |
|Total Supply: ||21 Million ||None |
|Block Size: ||1-2 MB ||Depends |
|Block Time: ||~10 Min ||~15s |
|Consensus Algorithm: ||Proof of Work ||Proof of Stake (Soon) |
The total supply of bitcoin is predetermined; there can never be more than 21 million bitcoins created. Ethereum on the other hand does not have a max supply.
You can read Vitalik’s thoughts on this here
Block Size vs Gas Limit
Ethereum doesn’t have a block size but rather a gas limit
. Gas is a measure of the amount of computational work needed to execute a command on the network. The amount of gas needed will depend on the program you are trying to run -- similar to how much gas needed for your vehicle will depend on how far you wish to travel.
Gas limit is how much you’re willing to pay for a transaction to be carried out. Gas price is the price at which you’re willing to pay per gas. Together those determine your transaction fee. TX Fee = Gas Limit * Gas Price
Websites like EthGasStation
take an average of previous transactions to show what the average gas price is. Use it for your own benefit
Ethereum’s block time is much faster than bitcoin’s. ~15s vs ~10min. This means transactions on the ethereum blockchain on average will be much faster than on bitcoin’s. This is also why it’s typically recommended to use ethereum instead of bitcoin when making cryptocurrency deposits into exchanges like Binance
Bitcoin uses a consensus algorithm known as proof of work (PoW). Ethereum currently uses PoW, but near the end of 2018 ethereum will move to a proof of stake (PoS) algorithm known as Casper. This will initially be rolled out as a PoW and PoS hybrid where every 100th block is validated by PoS.
Understanding ERC-20 Tokens
ERC-20 is a set standard for tokens that are created on the Ethereum network. It was created to allow for interoperability between ethereum based tokens. There are tens of thousands of different ERC-20 tokens due to the free nature of anyone being able to create their own.
You may have heard of some of the more popular ones including:
- VeChain (VEN)
These are all essentially tokenized smart contracts.
Understanding Initial Coin Offerings (ICOs)
One of the most common uses cases for an ERC-20 token is to be used as a means to raise capital. These events are called ICOs or Initial Coin Offerings. ICOs are analogous to IPOs (Initial Public Offerings) in that, when an entrepreneur needs to raise capital to fund the business -- he/she asks venture capitalists for money. The venture capitalists in return ask for a stake in the company which is expected to increase in value over time.
The difference is an ICO does this through crowdfunding by utilizing blockchain technology. Instead of purchasing stock in the company, you’re purchasing a cryptocurrency (which is often just a ERC-20 token). Then, if the project gains real world utility, the price of the token should increases in value.
As you could imagine, because of the nature of how easy it is for anyone to create their own ERC-20 token, bad actors within the space have abused this power to launch fraudulent businesses which is funded through the sale of their token.
The most notable example of this is probably BitConnect which promised 1% daily compounding interest with your investment. This of course was a scam
, and BitConnect no longer exists.
This is not to say there’s no such thing as a legitimate ICO (Ethereum was funded through an ICO after all), however, know that an overwhelming majority of ICOs are fraudulent with 80% being scams
. As a newcomer to the cryptocurrency space, understand that there is a lot of fraudulent cryptocurrencies out there. The importance of DYOR (do your own research) can never be understated.
This post is starting to get pretty lengthy so I’m going to cut it here. By now you should have a good understanding of what ethereum is, why it’s important, and how it works. I’ve listed the most important takeaways below:
- Ethereum was created by Vitalik Buterin
- Ethereum is a decentralized computer featuring smart contracts
- The Ethereum platform allows you to build decentralized applications (dapps)
- Ethereum will transition to a proof of stake (pos) consensus algorithm
Thanks for reading!
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