Bitcoin versus Ethereum

Bitcoin started it all. It’s the equivalent of that one line of code that launched Google into the stratosphere. Another example would have to be the iPhone1. A tool that launched an entire industry, straight into a market leading position that was seemingly untouchable. Then along came Ethereum, making massive leaps and eating into the Market Share that Bitcoin is seemingly dominant in. But, are they complementary or direct competitors. Is this a Myspace vs Facebook, where one needs to die for the other to succeed? Is Ethereum or Bitcoin inherently better or do they both act in different ways for different niches of the marketplace? Below, we’ll sketch out the qualities of the two currencies. As per always, this isn’t advice, you’ll need to do your own research and make up your own mind.

We are of course always attempting to be objective and look at the facts. This will primarily be from a retrospective economical view, with technical aspects of the codebase and team discussed later in the piece.

Finally, we’ll look at if they’re direct competitors or complementary.

Bitcoin and Ethereum, the basics.

Bitcoin is a decentralised platform that stores its code base around the world on nodes. (Digital ledgers) It is at its core a free market economy, untethered from any government apart from how they deal with it in their jurisdiction. This is of course completely different from a centralised currency, such as the USD.

Bitcoin at its core is rooted in the thoughts of Hyak, an Austrian Nobel winning economist who believed in the rise of decentralised currencies and widely discussed what would demarcate success. 

Denationalisation of Money, first published in 1976, Hayek argues that the government monopoly of money has to be abolished to halt recurring bouts of inflation and deflation. He argues that Abolition is also the cure for the deep-seated disease of the recurring waves of depression and unemployment attributed to ‘capitalism’. As we can see it, weighty stuff, that Bitcoin hopes to be the cure for. The craziest part about it though, he thought this up long before the technology that could enable this came into play. Mainly, computers and the rise of Cryptocurrencies.

The basic premise of his argument is that the free market and money must be itself regulated by the free market.

The basics of Bitcoin as to coding are relatively simple for the end user. Everyone can download a node. This node stores the entirety of the digital ledger on your computer and is updated as quickly as your bandwidth will allow. The initial download, of course, is a monster. On the ancient Australian ADSL2+ network, it can take up to three days if not longer, if you’re the sole user of the bandwidth available.

It holds all the blocks on their validating that you own your Bitcoins and makes certain that they are only spent once. The interesting part here is that no one is seriously looking at trying to create duplications. It requires infinitely more processing power than any individual has. According to Vitalik Buterin the founder of Ethereum even “state-level actors” would struggle to achieve this.  

This applies to Ethereum also, though, Ethereum has another interesting layer over top of it. Smart contracts, Ethereum smart contracts allow the Blockchain to run programmes like a PC or Mac does. The difference is that these programs are globally spanning by design. That same node that holds all of your information is capable of holding records, businesses and marketplaces. Some of which haven’t even been conceived yet. What a time to be alive. It has the opportunity to become the first global computer.

There are some key points to take into account here. Unlike your own computer where a program is stored on the hard drive and run from there. Ethereum stores and executes these programs globally. It’s essentially an open source cloud system. Which could execute anything from games to business transactions. It’s rather remarkable. It could also potentially provide processing power, memory, and other computer functions.

The Ethereum community describes it thus, Bitcoin is your old Nokia, solid robust but basic. Ethereum, on the other hand, is akin to the smartphone burning a hole in your pocket or hand as we speak.

As far as the technical aspect is concerned, this may have been true. The thing about digital currencies though is they have the ability to evolve. With the adoption of Segwit and the release of BitCash, we can see how the goal posts are always shifting on a definition of these currencies.

Bitcoins primary purpose and its code base are defined by one thing. Payments. This has made it the currency of choice for swaps with Altcoins. Sure, Ethereum has Dapps (Decentralised Applications) which has proven its use in a wide range of applications including, banking to music, gaming and sports, medicine and even manufacturing. A simple example of this would be for plane maintenance. Each part has to be catalogued and identified during maintenance. Otherwise, the plane is grounded. Tracking these parts is something that Ethereum could do very, very easily.

Bitcoin versus Ethereum: Money talks.

The two aspects which are most critical to compare between Bitcoin and Eth are the difference between the technical aspects on how they allow money to move around. Compared to what their economy is currently like.

Bitcoin has a limit of twenty-one million coins. This means that sooner or later, (around about a century) bitcoin will become a deflationary currency. Though with the creation of Bitcoin Cash, it may be wrapped up in staking. Which would make its infrastructure for a new economic layer on top of it.

Ethereum on the other hand, isn’t exactly limited, but there won’t be many more Ethereum than 100 million. After its capped out, it’s inflation will be minimal in comparison. Perhaps just enough to make up for accounts lost through misplaced or deceased keys.

There is of course a different in the economies of each cryptocurrency. There is also a difference in how they’ll be utilised in the future.  Of course, this is all speculative. At this stage, it’s difficult to say what will happen with both of them.

Economists plot optimal inflation at 2-3% per annum. Hyak probably wouldn’t have an issue with this as the market would price these changes in.

This difference in approach of course means that they will end up being applied differently. Bitcoin, had to adopt SegWit because of burgeoning transaction fees. Which were stifling the network. Bitcoin, one day will run purely on fees. This means that these fees may end up stifling the network as it gets larger unless it continues to adopt change or other applications. Like the Lightning Network.

Ethereum can afford to keep its fees low. It can do this because its resources will be paid for by inflation. It could possibly make it more practical for online and offline commerce.

Ethereum versus Bitcoin: Technical ability

Ethereum is aiming for transfer rates of around a single second. This means that it would be almost instant. We can see this ability being used in real time much like Visa or Mastercard. Currently, it’s around fifteen seconds, which means there is still a way to go before this will be possible.

Bitcoin transfer rates are set to drop. Currently, their full confirmation of transfer time is at the time of writing at ninety six minutes. 

Realistically though, your transfer sits at around ten minutes. Which can be an age when attempting to jump on an on ramp. The simple difference between the two is that Ethereum is considerably faster. This is without taking into another aspect, like the bitcoin backlogs that don’t exist on Ethereum.

Bitcoin has a single use, it can send currency from one wallet to another wallet. The only smart contract functionality that Bitcoin has are multi-party contracts. Allowing for around two or three parties to hold the authorisation codes.

Smart contracts on Ethereum have infinitely higher complexity. Which, is a good thing, computer programs are being created on the Blockchain. It has simple rules that it has to follow. Of course, it must be executed and validated globally.

What you get from this are two things. Bank accounts and Decentralized Autonomous Organizations. This has the very real opportunity to change how the world works. Imagine if wherever you went, your bank account was immediately available to you at any time anywhere. That’s the potential power of Ethereum.

Lastly, Ethereum’s code allows for tokens. These are basically stocks issued by companies. ICO’s which are the initial investment asked for by companies looking to create solutions on the Blockchain. An example of how diverse this technology is is the Brave browser. Which is built to utilise blockchain technology. These tokens are issued directly to the market, often in an open-handed swap.

Bitcoin Versus Ethereum: Are they a digital Fort Knox?

Ethereum recently eclipsed Bitcoin, becoming the most secure Blockchain. With plans to move to Proof of Stake (PoS) in the future, Ethereum has a well thought out and structured plan to grow.  

Proof of Work (PoW). Uses complex mathematical calculations to validate a node. (The digital ledgers) These computations validate transactions and make the network resistant to Sybil attacks. A Sybil attack in computer security is an attack wherein a reputation system is subverted by forging identities in peer-to-peer networks. Its namesake comes from the book Sybil, a case study of a woman diagnosed with dissociative identity disorder. Essentially a Sybil attack just fakes the number of nodes, creating a greater consensus and allowing the Blockchain to be overwritten by a false consensus. Networks use the equivalent of online captchas to verify that the node isn’t just robotic spam.

Proof of work has been criticised as a potential environmental hazard as it uses a lot of resources. Data centres end up stacked, just doing this work, with an energy footprint equivalent to some small countries. It’s why most mines are housed in countries with cheap energy, such as China.

PoS, on the other hand, works because you need to stake your coins. Showing that you have a bank balance and therefore validating your node. Since Ethereum is limited, can’t be duplicated, it makes it very difficult to create fake nodes. The system can validate transactions and programs with this method without requiring industrial scale hardware. This not only makes it faster but keeps that most important of aspects in mind; security.

Bitcoin Versus Ethereum: Decentralised or really decentralised?

Decentralisation is the key to cryptocurrency. It’s what makes it such a powerful tool. Time and again it’s shown how Security of the network creates implications for how both the Ethereum and Bitcoin network for decentralisation. This is particularly important because as the network scales, the size of the data requirements of the nodes will increase.

This, of course, translates directly into dollars and cents. All of these programs require storage, bandwidth and processing power. This means that as the Ethereum network scales, the required chain of transactions required in order to validate will grow. This may make holding the Blockchain on a private computer impossible. With nodes only living in data centres.

This of course will affect the number of people who would take the effort to run a node. Currently, people do it for free, effectively running the network. Bitcoin will maintain this decentralisation by keeping the size of the data on the blockchain limited. Bitcoin will maintain its decentralisation by keeping the size of its blockchain limited. It can currently process around three transactions a second. Which translates to one MB every ten minutes. What this means is that as demand has increased, fees have spiked. The implementation of SegWit, should limit this and reduce those fees.

Ethereum’s solution is to pay the node holders. This will incentives people to run nodes, it’s a simple transaction.  This has the potential to increase decentralisation levels. It will, of course, depend on the levels of compensation for holding these nodes.

This will happen once it is moved to PoS. At this point, if you have some Ethereum you will be able to stake it on a node. Receiving compensation based on the number of Ethereum that you stake. This is similar to inflation that you would gain from any bank account.

This would mean that even an ordinary user may want to run a node. The plan here is to allow Ethereum to run around one hundred thousand nodes a second. This will allow it to maintain not only its security but also its speed.

Bitcoin versus Ethereum: Cultural impact

Bitcoin started it all, it has unbound cultural influence. This is apparent as it still holds around fifty percent of the market cap. This is because it’s still utilised to trade for the majority of the Altcoins.

The community approach on a community level for both of these is somewhat different. Bitcoin does it best to focus on privacy and anonymity. The core initial principles of Cryptocurrency. This means that its primary goal is to serve users that live outside the traditional economic framework.

Ethereum takes a substantially different approach. It focuses on the tech, remaining ostensibly ‘politically neutral’ this is of course because it hopes to become the global computer. Both wanting to be the primary use case for businesses and consumers.

It’s focused on speed, privacy and convenience. It seeks to run a razor edge between traditional cryptocurrency users and mainstream users. The hope to adopt a wider user base means that they will probably be given priority.

More businesses have adopted Ethereum as can be seen by the Ethereum Enterprise Alliance. These brand backings are the primary reason for the spike in interest in Ethereum.

Bitcoin versus Ethereum: Competition or complementary?

These two currencies serve different markets in a lot of ways. The trump card is, of course, the versatility of Ethereum. Though as Bitcoin holds all the keys to the marketplace, it won’t be going anywhere in a hurry.

Ethereum does a lot, it’s founded on versatility. What Bitcoin does well is store funds. Though it is, of course, continuing to develop. Each will develop, grow and change the world around them. That change and what it will be, the future holds in its hands.

If only I knew then what I know now.

Mr M