October 05, 2022
Crypto and blockchain technologies have the potential to transform the world as we know it. These technologies can be seen as the Internet of Money. Just like the internet itself, which has transformed society as we know it, crypto might follow the same path in the years to come. At the forefront of this Blockchain boom are the two largest crypto competitors: Ethereum vs Bitcoin.
Bitcoin is one of the oldest blockchain ledger technologies to exist. Although there are older blockchain technologies, like Zcash, Bitcoin is the first of its kind. Developed by anonymous creator Satoshi Nakamoto, Bitcoin at its core is a simple ledger technology. It is a way to verify all transactions in a completely decentralized, anonymous way. All transactions are recorded in the blockchain, which is public to everyone. In addition, the code for Bitcoin itself is open-source, so anyone can technically make their own Bitcoin-copy if they would like.
So, why is Bitcoin so important, if anyone can choose to copy it and make their own?
This is due to something called the Network effect. Basically, It was collectively decided that Bitcoin will be the one used as storage of value. The main reason is that Bitcoin is one of the first cryptos to exist, ever. It has a unique story, and people see value in it. The network is already so large on Bitcoin, that by now one would need billions, or even trillions of dollars to be able to replicate something at the same scale like Bitcoin. Same holds true for Ethereum, as its code is also open-source: anyone can make their own coin which follows the exact same code as Ethereum, however due to the Network effect it is very unlikely that the coin will catch on. Some people rely on older coins that have been around for a while.
Due to the Proof of Work algorithm, nobody can change or falsify a transaction on the Bitcoin blockchain. Bitcoin cannot be changed by anyone. Once the blockchain program started (producing the genesis block on Jan. 3rd, 2009), no external authority can change the contents of the ledger. Anyone can check any transaction at any time. The Proof of Work algorithm allows people who secure the network and approve transactions to get rewarded with Bitcoin. This is known as Bitcoin mining and provides an incentive for anyone to use their machine for mining Bitcoin.
Ethereum vs Bitcoin: How Bitcoin creates value.
Bitcoin creates value for three main reasons: its scarcity, decentralization, and ease of transfer/fractionalization. Nobody controls Bitcoin; it runs on its own. The crypto is highly scarce: there will only be 21 million Bitcoins in the world, ever. We currently have 18,873,350 Bitcoins in circulation, according to Coingecko, the last Bitcoin to be mined, will be around the year 2100. It can also be easily fractionalized. Dollars, and most fiat currencies, tend to stop at 1/100th. You can send $0.01, but not $0.001. With Bitcoin, that’s not the case with Bitcoin. You can send as little as a satoshi with Bitcoin, which is equivalent to 0.00000001 $BTC. At today’s prices, one satoshi is worth roughly $0.0006581. In other words, $BTC can be easily sent and stored by anyone, (with some exceptions) in any part of the world. Everyone can own and use Bitcoin. In many ways, Bitcoin is considered digital gold.
One of the most traditional assets which have been considered storage of value is gold. Gold ($GLD) keeps its price steady, is scarce, and is a rare earth metal. Mining gold is a tough and tedious process, requiring a lot of labor and resources. Gold can be easily fractionalized into different quantities. Overall, it can hold a lot of wealth in relatively small weight and size. As of today, one kilo of gold is valued at almost $60,0000. One kilo of gold can fit in someone’s hand, and therefore is a relatively simple way to transfer large quantities of wealth from one person or entity to another.
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However, gold also has its flaws. It is not a perfect transfer of wealth. First of all, most of the gold traded is paper gold. Paper gold is essentially an IOU or a promise that the seller will give to the buyer a certain amount of gold, as written in the paper transaction. This makes it easier to move money around and make quick transactions between two parties. However, the issue comes when someone decides to convert this paper gold into physical gold. We already know that all of the paper gold in the world is not backed by real gold, therefore if everybody were to withdraw their paper gold at the same time, there would be none left. Finally, the big issue with gold comes to the trust in it. Many people make gold knockoffs, or fake gold. Checking if gold is real might be a slow and tedious process. Gold is never 100% pure, it can be 99.99% pure at most.
Also, there are many entities that need to be trusted: we must trust the manufacturer, the supplier, and even the storage facilities. Bitcoin removes many of these problems so you can choose to trust the math behind it.
First of all, Bitcoin is not a physical asset; it is an extremely scarce digital asset. Bitcoin makes it fairly easy to transfer large amounts of wealth between two parties, depending on the network cost, sending Bitcoin to someone else can cost just as much as a wire transfer. A wire transfer is centralized, and can be delayed for many reasons. Bitcoin can be transferred extremely quickly, although sometimes with the network overload transactions can take a few hours before being confirmed. Yet, no matter what the size of Bitcoin sent, the network fee remains the same. You can transfer $10 of Bitcoin to someone, the network fee will be roughly $22 today. You can also transfer $100million of Bitcoin to someone, the network fee will remain at $22.
Ethereum vs Bitcoin: PoS vs PoW
We have now established how Bitcoin stores value. So, why is Ethereum important? $ETH has utility beyond the coin itself. Vitalik Buterin founded Ethereum, so it is not an anonymous project. It is a bit newer than Bitcoin, conceived in 2013, 4 years after the famous Bitcoin whitepaper. Ethereum is not an anonymous project, which gives some sort of reliability for both users and creators on the network. It has a market cap of over $500Bln today. Ethereum aims to be the world’s decentralized network, where developers can build applications on top of Ethereum to generate any type of token or economy they would like.
The simplest way to explain the major difference between Bitcoin and Ethereum is this:
Bitcoin is a storage of value, whereas Ethereum is essentially programmable money.
Put it simply, Ethereum, just like Bitcoin, uses a Proof of Work (PoW) algorithm to approve transactions. It’s currently steadily upgrading to a Proof of Stake (PoS) algorithm when Ethereum 2.0 is released. Still, at its core, the utility of Ethereum should remain the same: you can program your own tokens/applications on top of the Ethereum network. Just like Bitcoin, where you can check every transaction from any wallet at any given time, Ethereum has Etherscan. With Etherscan.io, a user can check any transaction from any two tokens developed on Ethereum at any time. A user can also check which wallets were used, and what the token’s code looks like.
When someone creates a coin, let’s say a copy of Bitcoin, they need a solid network of mining power to approve transactions and generate value. If nobody knows about the coin, there is little room for investment or funding, since the risk is extremely high. Therefore, Ethereum offers any person to borrow its network and program his money on top of the Ethereum network. This means that virtually anybody can create their own token with their tokenomics. If we look at the top 100 coins by volume on Coingecko, we will see that there are many tokens there that have been developed on top of the Ethereum network. For example,Tether ($USDT), USD Coin ($USDC), Shiba Inu, ($UNI), ($SUSHI), ($COMP), ($DAI), Maker ($MKR), just to name a few.