July 17, 2018

What Is the Difference between Bitcoin and Ethereum?

Gold bitcoin and ethereum coins on top of a tablet with charts displayed.

They’re the two biggest cryptocurrencies on the block. Together, they have a combined market cap of over $160 Billion at time of writing. They’re Bitcoin and Ethereum, the two blockchain projects you’ve almost certainly heard of even if you just got started in cryptocurrency investment.

So what’s the difference?

In a nutshell, Ethereum and Bitcoin each use blockchain to do something very different. To understand that, we’ll start by looking at how the projects are similar. Then we’ll step back and see the wide world of difference between them.

The Similarities 

Both of these projects run off of blockchain and its underlying public ledger technology. Each creates a basic token, a Bitcoin in the case of the Bitcoin project and Ether in the case of Ethereum. Traders can buy and sell these tokens on the open market.

For a pure cryptocurrency trader, this is about where the story ends. If your interest is in an investment vehicle then what you need to know is this: Bitcoin and Ethereum both create tokens for sale on cryptocurrency exchanges, and the price of Ether is generally more stable than that of bitcoins. 

However, if you’re interested in the product and utility behind cryptocurrencies, we’ll have to dig a little deeper. 

The Differences

Without getting too technical, Bitcoin and Ethereum differ mainly in their use.

Bitcoin is a pure currency alternative. The token exists to supplement the dollars in your wallet as a medium for storage of value. The project exists chiefly to create, secure and track the exchange of those individual tokens on the open market. 

In other words, Bitcoins exist to be spent. 

Ethereum, on the other hand, is a smart contract platform. It allows users to enter an agreement that the technology monitors and executes. When one person lives up to their side of the bargain, or when certain conditions are met, the Ethereum platform automatically fulfills the contract; generally through payments made in Ether. The project exists to create an infrastructure in which users can program and enter into those contracts.

The individual Ether tokens exist as a medium of exchange for these contracts. (They also raise funds for the Ethereum project, but an Ether token’s value to users comes from its role as the medium of payment in smart contracts.)

In Practice 

So, for example, here is a Bitcoin use scenario:

Sarah buys a pizza from John worth one Bitcoin. (It was a really good pizza.)

The Bitcoin ledger records the following: Sarah transfers to John one Bitcoin. 

By contrast, here is an Ethereum use scenario:

Sarah contracts to buy a pizza from John. She agrees that it is worth the equivalent of one Ether.

The Ethereum ledger records the following: If Sarah receives one pizza; then transfer to John one Ether.

Bitcoin isn’t designed to be anything more than a spendable currency. It has no interest in the underlying transaction. Ethereum, on the other hand, exists to create its smart contracts. It is only interested in the underlying transaction, making sure that once Sarah gets her pizza, John gets his token.

Now, this isn’t the only difference by a long shot. While both are based on blockchain technology, Bitcoin and Ethereum have differences in their underlying architecture, which entirely change the way they process transactions. (Ethereum’s is generally considered more efficient, taking a fraction of the time that Bitcoin does to transfer tokens.) Ethereum creates a platform and programming language with which users build their smart contracts and distributed apps, while Bitcoin is a pure transactional project.

Ethereum can even be used to create tokens in addition to Ether, while Bitcoin’s only token is the Bitcoin.

The technical differences between these projects are significant and inform much of the development that blockchain technology has experienced in the past ten years.

Big picture, though? These projects are about doing two different things. Bitcoin wants to reinvent the way you think of money. Ethereum wants to reinvent the way you think about contracts.

That’s the difference.

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