Bitcoin vs Ethereum
What is Bitcoin?
Bitcoin is a fully decentralized digital cash system designed for peer-to-peer transactions without the need for a trusted third party. With a finite supply of 21 million, Bitcoin is inherently scarce, making it resistant to inflation. Its decentralized design also makes it censorship-resistant, allowing any valid transaction to be included in a block. Because of these features, Bitcoin is often viewed as a prime candidate for a global reserve currency.
What is Ethereum?
Ethereum, while often compared to Bitcoin, serves different purposes. It is a platform for executing smart contracts, sometimes described as a “distributed world computer.” Its native token, ether (ETH), is used to pay transaction fees on the Ethereum network, which supports a wide variety of applications beyond simple payments, including finance, social media, and games.
Why was Ethereum created?
Ethereum was developed in 2014 by developers who wanted more flexibility than Bitcoin’s simple transaction structure allowed. Unlike Bitcoin’s scripting language, Ethereum uses Solidity, a Turing-complete programming language that supports more complex contracts and loops. This enables Ethereum to host a diverse range of smart contracts and tokens, but this flexibility comes at the cost of greater complexity and, ultimately, less decentralization.
Comparing Bitcoin and Ethereum
Bitcoin and Ethereum are different projects with distinct goals:
- Bitcoin aims to be sound money, a stable store of value, and a medium of exchange.
- Ethereum aims to be a distributed computing platform supporting various applications. While Ethereum is more flexible, Bitcoin’s design prioritizes security, decentralization, and long-term stability, making it a superior candidate for a global monetary network.
Monetary Policy: Bitcoin vs. Ethereum
Bitcoin’s Monetary Policy is based on absolute scarcity. Since its launch, Bitcoin’s policy has remained unchanged: there will never be more than 21 million Bitcoin, making it “hard money” that cannot be arbitrarily inflated.
Ethereum’s Monetary Policy has changed multiple times since its inception. For example, Ethereum Improvement Proposal (EIP) 1559 introduced a fee-burning mechanism that affects ETH’s supply. However, Ethereum’s monetary policy remains subject to change, which undermines its potential as a sound, absolutely scarce asset.
Auditability
Bitcoin is completely transparent and auditable. Any user can verify the total supply and all transactions using a single command on a Bitcoin node:
bitcoin-cli gettxoutsetinfo
In contrast, Ethereum’s supply is more complex to audit, as different participants in the network calculate the total supply differently. This lack of straightforward auditability, combined with the high resource cost of running a node, leads to greater centralization in the Ethereum network.
Decentralization: Bitcoin vs. Ethereum
Decentralization is essential to Bitcoin’s security and resilience. Bitcoin achieves this through its large network of nodes, which uphold the rules of the protocol independently of miners or developers. Ethereum, on the other hand, has shown signs of centralization. Its higher resource demands mean fewer individuals can run nodes, leading to greater reliance on third parties.
The DAO Hack in 2016 highlighted this centralization. When a smart contract on Ethereum was hacked, the Ethereum Foundation opted to perform a hard fork to “reverse” the hack. This violated the principles of immutability and consensus, causing some Ethereum users to split off into a separate chain called Ethereum Classic.
Scalability Approaches
Bitcoin scales through layers, like the Lightning Network, which allows for fast, low-cost transactions without increasing the blockchain’s size. This layered approach keeps Bitcoin’s base layer simple and allows a wide range of applications without burdening the main blockchain.
Ethereum, however, attempts to scale on-chain, which requires larger and more powerful nodes. This approach results in higher fees and greater competition for block space, especially as new tokens and applications are launched. Ethereum’s scalability issues have led to a proposed transition to Ethereum 2.0, which would replace Proof-of-Work with Proof-of-Stake.
Flexibility and Risks
Ethereum’s flexibility allows for many decentralized finance (DeFi) applications, but this has led to a proliferation of tokens, some of which lack liquidity or have been exploited. The rapid creation and failure of tokens can damage Ethereum’s stability and reputation as a platform.
Bitcoin, on the other hand, prioritizes security and stability over flexibility. This makes it less suited for hosting a wide variety of applications directly on its blockchain but better suited for long-term value storage and sound money principles.
Proof-of-Work vs. Proof-of-Stake
Bitcoin relies on Proof-of-Work (PoW) for security and decentralization, ensuring that no single entity can easily control the network. Ethereum, facing scalability issues, plans to shift to Proof-of-Stake (PoS) with Ethereum 2.0. PoS is seen by some as less secure and more centralized than PoW, as it favors those who already hold a large amount of the cryptocurrency.
Conclusion
While Bitcoin and Ethereum serve distinct purposes:
- Bitcoin is sound, decentralized money with a fixed supply and is well-suited as a store of value and potential global currency.
- Ethereum is a flexible platform for applications, though it faces centralization and scalability challenges that limit its potential as sound money. Ultimately, Bitcoin’s unchangeable monetary policy, decentralization, and security make it a superior store of value, while Ethereum’s evolving nature and versatility make it a popular choice for decentralized applications.
Final Thoughts
- Bitcoin is a decentralized, peer-to-peer money with a finite supply.
- Ethereum is a distributed computing platform for applications, with more flexibility but less stability.
- Monetary Policy: Bitcoin’s monetary policy is fixed, while Ethereum’s policy has evolved and may change again.
- Decentralization: Bitcoin prioritizes decentralization, while Ethereum’s higher resource demands result in more centralization.
- Scalability: Bitcoin scales through off-chain layers, while Ethereum scales on-chain, resulting in higher fees and resource demands.