Last month, the overall market capitalization of cryptocurrencies touched the $120 billion mark. Bitcoin, created by the mysterious Satoshi Nakamoto, continues to be the leader in this market – with ~48% share. Interestingly though, the market share of bitcoin has actually fallen rather significantly since the start of 2017 (it was >85% in February). Ethereum, founded by the young Vitalik Buterin (this time, a real person!), has emerged as the ‘fastest-growing’ player in the cryptocurrency market – with an astounding 5000% growth this year (Bitcoin, in comparison, has grown by around 300%). Starting out with a sub-10% market share in January, the platform has constantly made inroads, and currently occupies almost 22% of the market (Ripple, whose share has considerably gone down in recent times, is the third-most popular cryptocurrency). Over here, we will do a point-by-point Ethereum vs Bitcoin analysis, and try to find out which of the two has the better features and capabilities:
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Ethereum is more than a cryptocurrency
While bitcoin is a digital currency, ethereum is much more than that. The latter is, in essence, a blockchain-powered platform, which includes the built-in cryptocurrency called ‘ether’. In addition, the ethereum platform also has embedded ‘smart contracts’ (the pre-specified set of regulations that are coded to execute if certain conditions are met), and the Ethereum Virtual Machine (or, EVM). Put in another way, while bitcoin is a cryptocurrency transacted and recorded on blockchains, ethereum allows users to build decentralized applications (the code is available on Ethereum’s website). The built-in ‘Ethereum Wallet’ stores the ether cryptocurrency. The overall scope of Ethereum is much bigger than that of bitcoin.
Note: If we were to compare only the digital currencies, a ‘bitcoin vs ether’ analysis would have been more apt.
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Price of currency
Apart from having the biggest share in the cryptocurrency market, bitcoin also has the highest value with respect to USD. From an exchange rate of 1 BTC = $800 – $1000 at the start of this year, the price of the currency has surged to more than $4600 by the end of August. Bitcoin is a highly volatile cryptocurrency though, and in July, the prices fell to a 49-week record low (<$2000). Ethereum, on the other hand, is currently priced at ~$303 (interestingly, the ETH price had climbed to over $400 in June, before an almighty crash brought it down to sub-$200 levels). An analysis of the price movements of the two currencies reveals that ethereum (standard deviation (60 days): 7.07%) is even more volatile than bitcoin (standard deviation (60 days): 5.38%). In terms of market capitalization, bitcoin is more than double of ethereum ($72 million vs $28 million, as on Sept 4).
Note: The price of Bitcoin Cash (a software client fork of bitcoin) is $555, while that of Ethereum Classic (a split from Ethereum) is $16.
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Programming languages
C++ is the underlying programming script for the bitcoin currency. While robust enough, it lacks the sheer flexibility of Ethereum – which has been coded in a Turing-complete combination of 7 different languages. This means that, given adequate time and processing/computing power is available, Ethereum can be used for practically any type of calculations. Varying types of smart contracts and applications can be coded on Etherium – with the decentralized platform functioning as a high-power virtual computer that is created with a large number of functioning blockchain nodes. Bitcoin is by far the oldest player on the block and easily the most well-known crypto payment system – but Ethereum’s functionality is more.
Note: Aragon, Gnosis and Filecoin are some interesting applications that make use of Ethereum’s Turing-complete internal code.
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Currency supply
The first bitcoin was made available way back in January 2009. There is a finite limit or cap set on the supply of this currency, at 21 million (actually, 3 bitcents less than that). At present, more than 16.5 million bitcoins are circulation – and by January 2018, that figure is likely to reach 18 billion (~80% of the total bitcoin supply). There is considerable speculation on what would happen in the aftermath of the currency reaching its 21 million cap (given that there are no expansions made by the bitcoin protocol). The supply of Etherium (first released in July 2015) has no such maximum limits, although a finite number of units is released annually. Currently, well over 94.4 million units of ETH are in circulation – and the number is swelling rapidly. The supply cap on bitcoins makes it deflationary in nature, while ethereum is likely to be rather inflationary due to its unlimited availability.
Note: Polychain Capital CEO Olaf Carlson-Wee has predicted that the ‘ether’ will overtake bitcoin in terms of value (read:market capitalization) in the latter half of 2018.
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Block times
Ethereum has the clear edge in this regard. The built-in ghost protocol of this platform makes the average block time of Ethereum much shorter than that of bitcoin (12-14 seconds vs 10 minutes). This, in turn, makes the creation of more blockchain applications easier on the former. The confirmations and validations on Ethereum are more prompt as well (although there are chances of more ‘orphaned blocks’ being created). Stale blocks (chain forks) are rewarded in the Ethereum platform too. The lower network speed of bitcoin increases the overall transaction costs – and this factor lies at the heart of the growing popularity of Ethereum for transactions. Many traders prefer do the exchanges/transactions in ethereum, and then convert their value in bitcoin (i.e., bitcoin is perceived as more useful for speculative purposes). The decentralized blockchain structure of the two cryptocurrencies are similar – but Ethereum’s design features open up more possibilities.
Note: By virtue of being the ‘first blockchain currency’, bitcoin has a much stronger community support than Ethereum. Support and documentations for the ‘newer’ currency is growing fast though.
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Reward for miners
Blockchain is a distributed open ledger system, on which the records of the transactions have to be entered/added to the chain. This task is performed by the miners. For bitcoin mining, the rewards for mining (in exchange of the processing power provided) is in the form of certain units of the cryptocurrency. The reward was set at 50 bitcoins per block created at the start, with the stipulation of the figure being halved after every 210000 blocks. At present, this bitcoin ‘block reward’ stands at 12.5 bitcoins (the second and the latest halving happened in July 2016; the final halving would take place in 2140). The per-block reward in the ethereum system is 5 ethers, with a lot of speculation going on about lowering this reward to 1.5 ether. In a vote in March this year, it was found that an overwhelming majority of the ethereum community worldwide was in favour of lowering the reward.
Note: Ethereum offers the so-called ‘uncle/aunt rewards’ to miners who come up with solutions but do not have their blocks included. This reward is generally 2-3 ethers.
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Proof-of-Work vs Proof-of-Stake
Both bitcoin and ethereum currently work on the proof-of-work (PoW) basis. Complex mathematical loops have to be solved by bitcoin miners to create and add new blocks/transactions. The setup ensures that risks of fraudulent activities will be minimal (since adding new blocks will require plenty of time and resources). Ether miners, on the other hand, have to create/execute smart contracts and the transactions within, to get the rewards. However, researchers feel that bitcoin’s PoW model can cause considerable wastage of energy. This is one of the main reasons for the proposed shift of Ethereum to a proof-of-stake (PoS) model. The PoS system will bring in the concept of rewarding miners in the form of ‘transaction fees’ for every smart contract validations and transactions (which also cuts down on the energy wastage that can happen in the bitcoin mining ecosystem). An additional advantage of Ethereum’s system will be the greater focus on collaboration – with the chances of higher payoffs for completing/validating transactions quickly being an important motivating factor. In the proof-of-stake model, the ‘validators’ will have to put their own ethers on the line (put them on stake), for block validation. This will rule out chances of a malicious agent going rogue and disrupting the entire network.
Note: Ethereum’s shift from proof-of-work to proof-of-stake is expected to happen before the end of 2017. The present Ethereum algorithm is called Ethash (a memory hard-dashing algo), while the new consensus algorithm of Ethereum is named Casper.
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Transaction costs
The Ethereum digital cryptocurrency platform makes use of Gas – a special unit – to measure the transaction costs. Putting things simply, Gas tracks the total amount of ‘work’ involved in any transaction – with every Ethereum block/transaction costing a certain number of Gas units. Several factors influence the cost of transactions, including the bandwidth consumption, the storage requirements and the degree of complexity. In the bitcoin framework, there is equal competition between the transaction blocks – and limitations are put by the size of the blocks. The average bitcoin transaction fee went beyond the $1 mark in March – and over the last couple of years, these fees have shot up by well over 1100%. Ethereum transaction costs are also rising fast, and are calculated on a base figure of 21000 Gas.
Note: The median cost of transfer for Ethereum is $0.1513.
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Currency forks
Bitcoin XT and Bitcoin Classic are both important software client forks of bitcoin – but the fork that has made the most news recently is Bitcoin Cash (BCH). It is a ‘hard fork’ (a complete protocol change and a shift to a separate blockchain) – which released in August 2017. At present, the price of BCH is $596, and more than 16 million units of the ‘forked currency’ is in circulation. The fork happened after the underlying technology of bitcoin was upgraded to Segwit2x. On the Bitcoin network, Segwit (Segregated Witness) became active a couple of weeks back. As far as Ethereum is concerned, the ‘Metropolis’ hard fork is set to happen later this month – with the new protocol offering greater anonymity to users (with zero-knowledge proofs) security masking and exponentially increasing mining difficulties. There is a lot of buzz over the upcoming ‘Ethereum Ice Age’, and the Metropolis fork is viewed as an important step towards that. In June 2016, the much-publicized DAO attack resulted in $55-$60 ether being stolen – and as a response to the attack, the ‘Ethereum Classic’ (ETC) hard fork happened. The exchange rate/trading price of ETC is presently ~$18.
Note: Litecoin, a creation of Charlie Lee, is one of the earliest forks of the bitcoin cryptocurrency. According to a Forbes report, the price of Litecoin has jumped by over 2000% since the start of 2017.
10. Hashing algorithms
We have already mentioned Ethash as the algorithm that powers the proof-of-work Ethereum model. The bitcoin platform, on the other hand, works on the SHA-256 algorithm – that has the capability of generating digits in hexadecimal format. The presence of the Turing-complete internal code (EtherScript) adds greater functionality to the Ethereum platform (bitcoin, for instance, is not designed to handle smart contracts) – but also makes the overall architecture more complicated, with chances of errors creeping in. In bitcoin, the programming is stateless, and there will always be some programs that cannot be written (since it does not have Turing-completeness). Loops generally cannot be expressed in bitcoin either.
Note: Expanse and Krypton (apart from Ethereum Classic) also use the Ethash algorithm. The SHA-256 algorithm is used by a much larger set of cryptocurrencies, including Bytecoin, Bitcoin Dark and MasterCoin.
11. More decentralized mining with Ethereum
Mining either of the cryptocurrencies require fairly large upfront investments. However, there is a clear point of difference between the ways in which bitcoin and ethereum go about it. The former has built-in ASIC (application-specific integrated circuit) chips, which keeps the mining power relatively concentrated. In contrast, the hard hashing algo of Ethereum encourages greater decentralization of miners. Compared to bitcoin, it is easier for individual users with GPUs to join the Ethereum network – thereby building the community over time. The use of graphic cards in the Ethereum setup also lowers the possibilities of ‘51 percent’ (collusion) attacks. The proposed proof-of-stake (PoS) model will give a further boost to decentralized validation by users.
Note: The electricity consumed per Ethereum transaction can be as high as 45 kWh for miners. The disk space required by Ethereum is also more than that of bitcoin.
12. Currency legitimacy
In April, Japan became the latest country to accept bitcoin as a legal currency. The volume of Bitcoin trading is the highest in the United States (here, BTC is considered as ‘property’), while the cryptocurrency is also widely traded in countries like Sweden, Denmark, Australia and the United Kingdom. However, there are a fair number of nations – like China, Nigeria and Ecuador, where bitcoin trading is illegal (the ban on the cryptocurrency varies though). Being the proverbial ‘new kid on the block’, ethereum does not quite have the stability and worldwide recognition level of bitcoin yet – but it received a big shot in the arm when Microsoft Azure started to provide it. The rapidly growing adoption and usage of Ethereum in the finance and IoT industries also point to the immense growth potential of the platform. Bitcoin is the more ‘known’ currency, but Ethereum can close the gap soon.
Note: The launch of the Coinbase debit card, along with the legitimization of Bitstamp (for trading in EU countries under the ‘Passport’ program) eased the usage of bitcoins across the world. Companies like TenX and Uquid (in 2016) have also launched Ethereum debit cards. The increasing usability of the currencies is pulling up their values.
From JP Morgan and Cisco, to Intel, IBM and Wells Fargo – many leading tech/finance companies have started using Bitcoin. In 2016, the open-source Hyperledger project was created by these companies (along with the London Stock Exchange Group) The Enterprise Ethereum Alliance is also expanding rapidly – with 86 new firms joining the fold in May. While the share of bitcoin in the overall cryptocurrency market cap is steadily falling – the currency is set to grow, albeit at a lower rate than before (the volatility will also be lower). Ethereum, in contrast, is a more ‘risky’ platform – but can potentially deliver greater functionality and value, leading up to higher gains.
Given the inherent differences in the nature of Bitcoin and Ethereum (one is a digital currency per se, while the other is a broad digital blockchain application platform) – it is perfectly possible for the two to coexist and thrive in the foreseeable future. Bitcoin has the early-mover advantage, while Ethereum is moving up fast in terms of usability and popularity. The cryptocurrency market will be something worth tracking in the coming years, that’s for sure.
Hussain Fakhruddin
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