Bitcoin vs. Ethereum

Bitcoin and Ethereum are the two largest cryptocurrencies by market capitalization as of January 18th 2024. Often, when investors start to explore digital assets, they approach us with questions about the differences between Bitcoin and Ethereum, unique features of Bitcoin and Ethereum, and why people would choose one over the other. While Bitcoin and Ethereum are complex networks with many different technical features to consider, below we offer an overview of their key differences.

Bitcoin: Defining Characteristics

The original Bitcoin whitepaper lists several papers on cryptography, payment networks, and encryption as sources of inspiration. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, references Wei Dai’s b-money proposal (1998), which was described as a way for “untraceable digital pseudonyms to pay each other with money.” Additionally, he credits the proof-of-work algorithm used to build the network to Adam Back’s Hashcash (2002), and the data structure used to hold transaction information, called Merkle trees, to Ralph Merkle’s research at Stanford University (1980). 

Concerns stemming from the 2008 financial crisis led to the formation of Nakomoto’s vision for Bitcoin – a “purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.3” One BTC can be subdivided into 100,000,000 Satoshis (or “Sats”).

Making Payments with Bitcoin

At inception, the purpose of Bitcoin was to eliminate many of the problems created by transacting through financial intermediaries, including costly fees, long processing times, and the inevitability of fraudulent transactions. Built on the foundational principles of consensus, transparency, and immutability, Bitcoin appeals to many as a method of payment. 

However, over time it became apparent that there were opportunities to improve the network’s utility as a payment system. People accustomed to the speed of modern credit card networks were less inclined to wait 10 minutes to complete a transaction, which was how long it took to process early Bitcoin payment transactions.

The Lightning Network is one of the most popular solutions. Launched in 2017, it allows high-frequency, low-volume Bitcoin transactions to occur nearly instantaneously between counterparties. These transactions are compiled off-chain, then broadcast back onto the main blockchain in a final, immutable settlement record. Its integration into the Bitcoin network may drastically reduce traffic from payments on the main blockchain once it reaches a point of critical mass.

How Bitcoin Mining Works

Mining Bitcoin requires custom hardware equipment called ASICs (Application-Specific Integrated Circuits). ASICs are far superior in terms of performance and efficiency to the processors found inside personal computers (PCs). Their cost serves as a barrier to entry. Miners who successfully confirm a set of transactions and upload it to the blockchain receive bitcoin for the work involved. Hence, this system is called “Proof of Work.”

How Bitcoin Security Works

Bitcoin uses SHA-256 (Secure Hash Algorithm 256), a derivative of the aforementioned Hashcash. The proof-of-work (PoW) consensus algorithm serves as the foundation to how miners, or nodes, in the network validate transactions. This authentication process hinders attacks and abuses of the network by requiring computational power on behalf of the miner, which is resource-intensive and expensive. The PoW consensus algorithm also serves as the foundation to how new coins are minted and added to the network’s overall supply. 

How Bitcoin Supply Works

Bitcoin has a maximum supply cap set at 21 million BTC and is equipped with a disinflationary supply mechanism in the form of diminishing block rewards. An established and transparent monetary supply and issuance schedule is critical for evaluating a digital currency’s investability. With over 19 million BTC already in circulation today, we estimate that the total Bitcoin supply will be mined around the year 2140.

Ethereum: Defining Characteristics

Ethereum was first outlined as a proof-of-concept ‘world computer’ in the original 2013 whitepaper by Vitalik Buterin, an early Bitcoin contributor and co-founder of Bitcoin Magazine. As an early adopter of Bitcoin, Buterin developed the view that a digital currency and its associated blockchain could facilitate much more than simple Peer-to-Peer (P2P) electronic value transfer. By integrating programming capabilities directly into the Ethereum protocol, he reasoned, applications built on Ethereum could automate the transmission of information and value under dynamic conditions, enabling tailored business models for a new Internet economy, or Web 3.0. 

At network inception on July 30, 2015, 72 million ETH were created and allocated based on the approximate $18 million USD that was raised in an initial crowdsale, conducted between July and August 2014. From this point on, the nonprofit Ethereum Foundation would be the sole organization dedicated to accelerating adoption and usage.

After an eight year-long effort to increase the speed, reliability, energy efficiency, and overall scalability of Ethereum, the Ethereum Network was updated with a new “Proof of Stake” system for validating transactions in a market-moving event known as “The Merge”. While Ethereum’s prior Proof-of-Work mechanism was secured by requiring participants to demonstrate they had computer processing power at their disposal, now Ethereum’s Proof-of-Stake mechanism is secured by requiring participants to demonstrate they have ETH tokens at their disposal. This was comparable to upgrading an internal combustion engine to a modern electric motor.

Ethereum Smart Contracts and Decentralized Applications (DApps)

The Ethereum network was designed to expand upon the use cases afforded by Bitcoin and serve as a decentralized world computer. While Bitcoin employs a limited scripting language that only permits P2P value transfer, Ethereum was designed to be computationally universal, or Turing-complete, facilitating more advanced types of programmable digital interactions. The Ethereum Virtual Machine (EVM) essentially acts as a decentralized runtime environment for any activity that one can perform on a regular computer. This was a significant innovation in blockchain technology because it permitted sophisticated, conditional logic and provides the basis for more complex dApps.10

Smart contracts are lines of code that facilitate the exchange of anything representative of value, such as money, information, property, or voting rights. They are uploaded onto the blockchain and transactions executed cannot be modified. Using smart contracts, users can send or receive ETH, create markets, store registries of debts or promises, represent ownership of property (like NFTs), or transfer funds given a set of logical instructions. It’s even possible to create entirely new digital assets running on the rails of the Ethereum network, such as Basic Attention Token (BAT), Decentraland (MANA), and Livepeer Token (LPT).

Ether (ETH) and Paying with Ethereum

You might hear someone say that they invested in or paid with “Ethereum.” This is fine in casual speech, but technically incorrect. “Ethereum” is the name of the network, while the network’s native cryptocurrency is Ether or ETH for short. One ETH can be subdivided into 1,000,000,000,000,000,000 (1018) Wei, but for practical reasons Gwei (or Giga-Wei, equal to 1 billion Wei, or one one-billionth of an ETH) are more commonly used. 

ETH serves three main purposes: (i) to store value, (ii) to settle transactions by allowing users to send or receive payments and (iii) to facilitate network operations (i.e., power Smart Contracts and DApps) via staking rewards. 

Ethereum Staking and Supply

Proof of Stake represents a different system for selecting who has the right to confirm the next block on the blockchain. Instead of miners, there are “validators” who lock increments of 32 ETH into a smart contract to become eligible to validate transactions. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves. As new blocks are validated, validators are rewarded with ETH proportional to the amount staked.

Ethereum Security

Like Bitcoin, Ethereum incorporates public-private key cryptography to ensure the security and continuity of the network. As of the most recent update, new signatures are generated with a Boneh-Lyn-Shacham (BLS) signature scheme.12 This system allows for signatures from many different validators to be aggregated together, increasing efficiency without compromising security.

The threat of a 51% attack still exists under Proof-of-Stake, but with even greater potential punishments for an attacker. A malicious validator who tries to introduce a fake block risks forfeiting their staked ETH. Compared to Proof-of-Work, this system also allows the Ethereum network to consume far less energy per transaction, but some consider it less “battle tested” in terms of security, governance, and decentralization. 

1. Coinmarketcap.com as of December 9, 2023
2. ETH does not have max supply. 72 million ETH was created at inception and supply increases in a disinflationary fashion, with new issuance capped at 16 million ETH per year. The inflation rate will ultimately approach zero. 
3. Satoshi Nakamoto. “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin Project. October 31, 2008. https://bitcoin.org/bitcoin.pdf
4. A blockchain is a type of distributed ledger in which blocks of transactions are validated by nodes in a decentralized network using cryptography, then appended sequentially to the end of the chain. Each block consists of transaction data, a timestamp, and a reference to the previous block. The longest record of confirmed transactions is considered the correct blockchain.
5. Saravanan Vijayakumaran. “The Security of the Bitcoin Protocol.” Indian Institute of Technology Bombay. May 19, 2018. https://static.zebpay.com/web/pdf/Bitcoin-Security-White-Paper.pdf.
6. “SHA-256”. Bitcoin Wiki. https://en.bitcoinwiki.org/wiki/SHA-256 . 
7. Vitalin Buterik. “The Meaning of Decentralization.” February 6, 2017. Medium. https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274
8. Aaron Van Wirdum. “Is Bitcoin Anonymous? A Complete Beginner’s Guide.” Bitcoin Magazine. November 18, 2015. https://bitcoinmagazine.com/articles/is-bitcoin-anonymous-a-complete-beginner-s-guide-1447875283.
9. “A Short History of Ethereum.” Consensys. May 13, 2019. https://consensys.net/blog/blockchain-explained/a-short-history-ofethereum/
10. “What is a virtual machine?” Microsoft Azure Blog. https://azure.microsoft.com/en-us/overview/what-is-a-virtual-machine/

11. CoinMetrics as of September 14, 2022
12. Ben Edgington “Upgrading Ethereum” https://eth2book.info/bellatrix/part2/building_blocks/signatures/
13. Maria Shen. “Electric Capital Developer Report 2020” Dec 10, 2020. https://medium.com/electric-capital/electric-capital-devel-oper-report-2020-9417165c6444