What is Ethereum?
Ethereum is a cryptocurrency that was launched in 2015. Created by Vitalik Buterin, Ethereum is an open source, distributed computing platform in the Blockchain. Utilizing Smart Contracts, Ethereum enables companies to decentralize numerous applications in the Blockchain, eliminating the need for an intermediate.
The Differences Between Bitcoin and Ethereum
Bitcoin has a finite number of coins that will be created, capped at 21 million. Ethereum has not a maximum number of Ether set, but there are plans to stop issuance in the near future.
How it Works
Ethereum was built with the purpose to serve as a platform that facilitates applications in the Blockchain, fueled by Ether tokens. Ethereum operates as a Turing-complete Virtual Machine (EVM) which means that any logical problem can be solved if there are adequate computational resources and time. It can automate contracts where funds are released when pre-defined conditions are met. Bitcoin, on the other hand, is not convenient for new applications to be built on its Blockchain. It was created as a means of the digital dollar, in order to disrupt the traditional payment systems.
Ethereum provides the ability for applications to create a side-chain on the Ethereum Blockchain and issue their native token. These will be used to trigger functions in the applications, such as to buy a service or to participate in a voting system. Moreover, tokens can represent company shares, which investors can hold as means of ownership.
Difficulty and Rewards
In Bitcoin, a built-in difficulty to keep an average block time at 10 minutes was preset by Satoshi Nakamoto. Ethereum runs its own Ghost protocol and its block time is notably fast, ranging from 12 to 15 seconds. While Bitcoin has a system to decrease Bitcoin rewards, set to halve every four years (currently at 12.5 Bitcoins per block,) Ethereum uses a different method by releasing a specific amount of Ether (5 ETH per 15 seconds).
Both cryptocurrencies use the Proof-of-Work method to achieve consensus, but Ethereum plans to migrate to the Proof-of-Stake method; the implementation of the Casper protocol will smooth up the transition. With Proof of Stake, blocks will be generated after the validator will be randomly selected, from a pool of “forgers,” that will be dependent on the size of their staked Ether tokens. After the transition, “forgers” will only be compensated in transaction fees, as token production will be halted. The purpose for shifting to the Proof-of-Stake is to make Ethereum an environment-friendly cryptocurrency, that will not consume vast amounts of energy.
Fees in the Bitcoin network are calculated based on the size of a transaction, whereas in Ethereum are dependent on computational complexity, bandwidth, and storage needs. Bitcoin has a limited ability to process 4 transactions per second, while Ethereum can handle 15 at the same time.
Bitcoin uses the SHA-256 algorithm and mining has become significantly costly for solo miners, as large, energy-consuming grids (ASICS) have dominated the market. In contrary, Ethereum runs on the memory-hard KECCAK-256 algorithm that promotes mining decentralization, encouraging individuals to dedicate their computational resources, by supporting GPU mining.