What is the Difference Between Bitcoin and Ethereum?

Bitcoin and Ethereum are the two most widely used digital assets. While Bitcoin is a cryptocurrency and is designed to serve as an incorruptible medium of exchange, Ethereum is a smart contract platform built on top of a blockchain. Ether (ETH) is the native token of this blockchain. 

Overview for Fast Readers

• While Bitcoin and Ethereum are both blockchains that have much in common, there are a number of differences in their design that lead to very different outcomes
• Bitcoin’s hard-coded inflexibility gives it much of its strength, while Ethereum is a flexible protocol that can be updated and adapted as needed
• Bitcoin and Ethereum have very different usecases and each takes a different approach to the question of supply

Let’s take a look at a couple of the major differences between Bitcoin and Ethereum.

Function

Bitcoin

While Satoshi Nakamoto envisioned Bitcoin as a peer-to-peer electronic cash system, it has evolved over its eleven years’ of existence to be used more as a store of value than an everyday transaction medium.

There are a number of reasons why Bitcoin functions so well as a store of value: namely its decentralization, resistance to counterfeiting, and disinflationary supply schedule (which we’ll get into later).

When examining fiat currency, it’s clear that it shares none of these attributes with Bitcoin. 

Money in a bank account can be seized or frozen at any point. While this is perhaps not of immediate concern to residents of countries with stable legal systems, Bitcoin’s decentralization is a great relief to people who for whatever reason cannot trust centralized institutions with their life savings.

Think political dissidents in Hong Kong, or anyone in Argentina with U.S. dollar denominated savings which were devalued overnight during the 2001 corralito.

Additionally, Bitcoin holdings are always available to their owner. The network is active 24/7; weekends and bank holidays will never stop you from accessing your money.

The U.S. Secret Service – which was founded in 1865 to counter rampant counterfeiting – estimates that there is as much as a quarter of a billion dollars of fake cash in circulation. If you happen to accept a counterfeit bill you’re out of luck, you won’t be able to get it replaced with a legitimate one.

This is not an issue with Bitcoin: as long as the network is functioning properly (as it has without interruption since its inception) it is impossible to spend a counterfeit Bitcoin. 

This is due to the powerful encryption that secures the network and the Proof of Work consensus mechanism that turns electrical energy into a digital representation of value.

All these attributes combine to make Bitcoin a perfect store of value for anyone who is uncomfortable with the risks of centralized, counterfeitable, infinitely-inflatable currencies.

Ethereum

Ethereum is a smart contract platform rather than a store of value or electronic cash.

Smart contracts are deterministic digital agreements. Once signed by all parties, they will self-execute according to the terms agreed upon. This makes smart contracts ideal for escrow services, financial agreements such as bond payouts, and records of ownership.

Ethereum has a native scripting language called Solidity in which all smart contracts are written. 

In comparison to Bitcoin which functions only as money, Ethereum aims to be an application platform. Developers can build decentralized apps (dapps) on the Ethereum blockchain.

While early dapps took the form of games like CryptoKitties, there are now hugely important and innovative applications like decentralized finance (DeFi) that run on Ethereum.

There is currently more than US$13 billion of value invested in DeFi. Users can borrow, lend, and earn interest on their cryptocurrency holdings, all while taking advantage of the security and trustlessness of smart contracts.

Ethereum aims to function as the world’s computer and to be as revolutionary a force as the PC was thirty years ago.

Supply

The supply of each cryptocurrency is one of the major differences between Bitcoin and Ethereum. While both assets have decreasing rates of inflation, the way the two go about this is quite different.

Bitcoin

Bitcoin’s halving schedule is one of its major features. Every 210,000 blocks – which at a block time of roughly 10 minutes works out to about four years – the reward given to miners for mining a block is cut in half.

The block reward started at 50 BTC and is now 6.25 BTC after the most recent halving in May 2020. This block reward will continue to decrease until about 2140, when the last of the 21 million Bitcoins to ever exist will have been issued.

Monetary inflation is the rate at which the supply of a currency increases. As Bitcoin’s supply is capped and its monetary inflation is predictable and immutable, it has a huge advantage over fiat currencies that can be inflated at the click of a button for those who are looking to preserve or increase their purchasing power.

Ethereum

Ethereum’s monetary inflation is similar to Bitcoin’s in that its supply is defined by certain limits that are hard-coded into the protocol. 

There were 60 million ETH sold at the Initial Coin Offering (ICO) and 12 million set aside for a development fund. Annual issuance was capped at 18 million per year.

Unlike Bitcoin, which is capped at 21 million, there is no limit on the total supply of Ether. Currently, there are more than 113 million Ether tokens in circulation. 

In 2020, Ether’s inflation rate was around 4.5%, just over 2.5 times that of Bitcoin. As the total supply increases, the relative magnitude of an annual issuance of 18 million ETH will decrease. This is the factor that leads to the gradual decrease of Ethereum’s inflation rate.

One unknown is how Ethereum’s transition from a Proof of Work to Proof of Stake consensus mechanism will affect the supply of Ether. Ethereum founder Vitalik Buterin commented that inflation was a major consideration in the transition:

“One of the reasons why we’re doing Proof of Stake is because we want to greatly reduce the issuance. So in the specs for ETH 2.0 I think we have put out a calculation that the theoretical maximum issuance would be something like 2 million a year if literally everyone participates.”

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