Cryptocurrencies or Blockchains: Comparing Ethereum and Bitcoin

Introduction

In this continuing series on cryptocurrencies we compare Bitcoin with Ethereum, a blockchain platform with a minable crypto token called ether. At the outset, it should be clarified that Ethereum is not designed to work solely as another alt-chain or altcoin. It is also not designed to work only as a payments network, the purpose of Bitcoin. Simply put, Ethereum is a platform and not an application. So what is it for?

Ethereum is the first smart contracts blockchain that has been developed separately from Bitcoin. Ethereum is a blockchain platform for any type of digital smart contracts including digital payments. The Ethereum platform called Frontier is designed to enable building and execution of decentralized applications on the Ethereum blockchain. 

One way to understand this is from a Ripple point of view. Ripple's distributed ledger is a blockchain application and the cross currency exchange and account balances in Ripple transactions can be called a smart contract.

How Ethereum Works – A High Level Overview

For those familiar with Bitcoin and its history, the context of Ethereum and its design is easier to follow and even appreciate. This blog has a complete section on Bitcoin, for Bitcoin newbies. Ethereum has been in public consciousness since Vitalik Buterin’s whitepaper in 2013 and the 2014 crowdsale to fund development. Since the launch of the Ethereum blockchain in July 2015, new developments are reported on a daily basis. 

For purposes of this article, there is a short overview section before moving on to the comparison between Bitcoin and Ethereum. The Ethereum Frontier platform, distributed apps ecosystem and roadmap, will be covered in a separate series of posts. The Ethereum website and Github wiki are go to sources for complete information on Ethereum.

"Say Uncle": The Six Building Blocks of Ethereum. Ethereum's differentiator is the smart contracts language Solidity and EVM that enables decentralized applications to run on the blockchain. 

Smart Contracts Language: Solidity and Ethereum Virtual Machine

The first release of the Ethereum source code, called Frontier, created the genesis block went live in July 2015. Ethereum has a new blockchain with two major enhancements over Bitcoin. The first is a Turing complete programming language for smart contracts called Solidity that supports loops and conditions for contract transactions. Ethereum also includes a runtime Ethereum Virtual Machine or EVM, that executes Solidity bytecode on the blockchain. 

Dapps

Applications which implement the smart contracts in Ethereum are called decentralized applications or dapps. Decentralized applications are different from conventional distributed application architectures. An Ethereum smart contract will execute on all nodes that run the blockchain.

Ether

The digital tokens or coins in Ethereum are called ether.  Ether are used are crypto fuel or costs of transaction. Developers have to use ether to submit smart contract rules/code to the blockchain and users have to spend or burn ether to invoke transactions for an application. Transactions will roll back if they run out of gas (the amount of ether specified).  Ether can be traded against bitcoins and other fiat currencies via cryptocurrency exchanges.

Blockchain 

The Ethereum blockchain in other respects is analogous to the Bitcoin protocol. The blockchain is public and decentralized. New blocks are generated through a mining process. The current version requires full nodes to be downloaded for better security. Ethereum blocks are generated every 12 seconds with uncle blocks allowed to link to the main chain.

Ethereum transactions contain information about accounts and transaction state. Ethereum accounts consist of two types of account (external) user accounts and contract accounts. Contract accounts execute smart contract rules in the EVM. 

Six Differences Between Ethereum and Bitcoin

One: Application

Bitcoins are a cryptocurrency and bitcoins have a complete ecosystem of merchant, wallets, exchanges and payment processors that runs on top of the blockchain. Bitcoins can be used to make payments in the real world. Bitcoin is a decentralized peer to peer network. Two individuals anywhere in the world can exchange bitcoins directly from their wallets without using an exchange. 

Ethereum can be called the next generation of the Bitcoin protocol. The Ethereum blockchain distributed consensus provides for peer to peer contracts without a trusted third party. This has applications for every use case where there is an exchange of value between two parties under a binding agreement or a contract.  Two individuals or parties anywhere in the world can code a smart contract and execute it using ether without the need of a trusted third party. 

The Ethereum website highlights multiple use cases from building your own cryptocurrency to a decentralized autonomous company using Ethereum.  Several industry applications are live on the Ethereum blockchain. We have highlighted some examples such as the solar energy micro-grid in the article on use cases for blockchain applications. 

Two: Ownership

No one owns the Bitcoin platform not even its pseudonymous creator Satoshi Nakamoto or the developer community that continues to maintain it. The network is distributed across nodes all over the world. Bitcoin’s roadmap is driven by the developer and mining community. As the blocksize increase issue has demonstrated, the absence of public owner(ship) and decision making authority is a risk for Bitcoin.

The Ethereum platform is owned and the roadmap defined by the Ethereum foundation. The Ethereum source code is open source. There is also a growing developer and technology ecosystem that is actively involved in 

a) Creating developer tools and infrastructure for dapps e.g. Consensys. Microsoft Azure BAAS.

b) Building new releases Frontier, Homestead, Casper, Serenity through the Ethereum foundation.

c) Building smart contract applications for Ethereum.

d) Building tools such as blockchain explorers and interfaces for the Ethereum blockchain.

e) To a lesser extent, alt-coins forks from Ethereum. 

Three: Blockchain

The Bitcoin blockchain runs on the permissionless network of participating nodes that run in full or light modes. The higher the nodes and longer the block height, the more difficult to attack or take over the network. Anyone can download and run a Bitcoin node. Bitcoin uses SHA256 proof of work algorithm to add valid blocks to the network using consensus method. 

The Ethereum blockchain can be said to be based on the Bitcoin protocol. Ethereum improves upon the problems that Bitcoin blockchain has run into. Miners in the current version download and run the full node and solve proof of work algorithm. Consensus method is used to reward the longest chain. 

Ethereum’s 12 second block rate significantly increases the rate of orphan blocks and forks as well as reducing incentive for miners on a slow network which is handled by including uncle blocks. Ethereum uses an innovative concept of compensation by accepting stale blocks called uncle blocks on the blockchain.

Uncle blocks solve the proof of work but lag behind the winning block. A maximum of two uncle blocks are accepted on the main chain and compensated at a fraction of the main block reward. Uncle blocks should not have parents older than six blocks.

Four: Coins

Bitcoin is a cryptocurrency and payments network. Bitcoins are designed to be in finite supply and deflationary. 21 million bitcoins will be generated through a halving mining block reward. As on April 2016,  15.3 million bitcoins have been mined and the block reward is 25 bitcoins. All bitcoins have been generated through mining.

Ether is the digital token used in Ethereum. Around 72 million ether were pre-mined and distributed through a crowdfunding sale in exchange for bitcoins to launch Ethereum platform development in 2014.  After the Frontier platform went live, Ether are generated as mining block rewards. As on April 2016, there are 78.7 million ether in supply.

Five ether are generated in the form mining reward for new blocks, with five ether per block and uncle blocks are compensated at 7/8th of the block reward or 4.375 ether with a maximum 2 uncles per block which implies a new block confirmation can produce a maximum of 13.75 ether.

Although, the supply of ether is not capped, a final issuance model appears to be under development. The current supply of ether is generated through block rewards.

Five: Mining

Bitcoins are generated by the miners when new blocks are added. Bitcoin uses SHA 256 proof of work method. Bitcoin’s increasing centralization due to high costs of ASIC mining, increased difficulty in proof of work, debates on energy consumed are some of the issues that have emerged as the currency has gone mainstream into public and institutional consciousness. 

Ethereum mining has tried to address the issues that have surfaced with Bitcoin mining. Because ether are not intended as cryptocurrency, there is no limitation on ether mining or changing the block reward. The current Frontier release uses Ethash proof of work algorithm which is ASIC resistant and memory hard. The proof of work is planned to be replaced with proof of stake in the next release.

Six: Market Value

As first mover, Bitcoin rules markets with a $4oo average value and a $6.5 billion market capitalization in 2016. Starting with a near zero market cap, Bitcoin has followed the path of natural evolution and set the stage for other crypto-platforms to follow. Bitcoin’s value is driven by its design properties as digital money (fungible, portable, scarce, divisible etc.). 

Ether has registered the highest growth in market cap starting at $1 USD in August 2015 on launch, and increasing tenfold in value trading at 1 billion or $11 USD in 2016. As the Ethereum protocol takes off, this value will increase based on the intrinsic value of blockchain companies and a potential “dapps economy” running on Ethereum. 

Summary

When comparing Bitcoin and Ethereum, it should be clear that they are not competing systems. Bitcoin can be considered the first successful implementation of a smart contracts platform that makes use of the decentralized nature of the Internet and digital cryptography to enforce contracts between human actors that previously required a trusted third party or intermediary.

As Ethereum matures, it is likely benefit Bitcoin which can go back to its original vision of a peer to peer digital cash payment network. Ethereum may become the defacto standard or protocol for decentralized public or private applications with the same advantages as the Internet and the rise of cheap computing. The Ethereum blockchain has the potential to disrupt many industries that are based on intermediary or arbitrator models. 

While Bitcoin is a public system, Ethereum needs a critical mass of smart contract applications to be feasible. Network security, scalability and using a decentralized datastore is a major paradigm shift to the closed world of technology where the Internet acts as a transport connecting closed application systems.

The evolution and developments of these platforms will be very exciting to watch in the coming months.