October 5th, 2022
Mention the word “cryptocurrency” and inevitably Bitcoin (BTC) and Ethereum (ETH) come up soon thereafter. This is unsurprising given the dominance of both assets in the crypto market. As of April 2022, BTC and ETH collectively comprised almost 60 percent of the total crypto market capitalization.
Launched in 2009, Bitcoin marked the emergence of the first widely adopted cryptocurrency. Just six years later, in 2015, the Ethereum Virtual Machine (EVM) went live, marking the first widely used decentralized global software platform.
Bitcoin and Ethereum are both built on blockchain technology, a revolutionary innovation based on distributed record-keeping and cryptography. However, they differ fundamentally in numerous ways, such as utility and consensus mechanisms. To explain these differences, we will delve into both networks individually.
Bitcoin is a decentralized, peer-to-peer digital currency that enables instant, global payments to anyone, anywhere. Bitcoin employs cryptography to secure and safeguard transactions and the Blockchain to record them. Network nodes validate transactions, which are then recorded in a public distributed ledger (the blockchain).
Bitcoins are created as a reward for the “mining” process. Miners use computer processors to solve complex mathematical problems and receive a reward for each block they successfully process. In theory, this procedure ensures that virtually anyone can partake in mining since only an internet connection and the appropriate hardware is required to participate.
The computational power expended by miners is what makes the Bitcoin network secure. If someone were to try to alter a transaction that had already been added to the blockchain, they would need to redo the proof-of-work (PoW) for that block, and all subsequent blocks, to achieve consensus. This is known as a 51% attack, and it is challenging to pull off.
The Ethereum Virtual Machine (EVM) is essentially a piece of software that runs smart contracts. It is best understood as a machine state that can execute arbitrary code and can change in accordance with predefined rules. It is powered by Ether (ETH), which is used for transaction fees, gas costs, and protocol governance.
The core value proposition of the EVM is its enablement of decentralized applications (dApps). DApps are programs that run on the Ethereum network and are typically written in Solidity, a programming language designed specifically for smart contracts. These dApps range from blockchains to NFT marketplaces, DAOs to Play2Earn offerings, and many more. They can also be built on top of dApps already existing on the EVM, which creates a platform for further innovation.
As a medium of financial transaction, Bitcoin serves as both a store of value and a payment system for most users. In this sense, Bitcoin is optimized for a singular use case: payments. Ethereum, on the other hand, serves as a decentralized platform for executing smart contracts.
But distinctions between the assets go well beyond utility. Bitcoin implements the PoW consensus mechanism described above. This means that changes to the Bitcoin state can only be accomplished through mining. This activity has drawn sharp criticism due to its harmful effects on the environment. Bitcoin mining is an energy-intensive exercise that can lead to excessive use of fossil fuels. We explored this in greater depth in a previous article comparing PoW and PoS.
Originally released as a PoW-based blockchain, the recent Ethereum merge saw a transition to a Proof-of-Stake consensus (PoS) model, creating a new and important distinction between the crypto behemoths. PoS represents a blockchain consensus model in which “validators” process transactions and vote on governance proposals based on the amount of native tokens or coins they stake on the blockchain. In the case of Ethereum, this means ETH. While PoS is a far more energy-efficient mechanism, it has also drawn criticism over its privileging of wealthier members of the community as the cost of running validator nodes is prohibitively high.
Bitcoin and the EVM offer unique and revolutionary solutions that have fundamentally changed the way we conduct global business. Fast, borderless payment, censor-free applications, and secure, fault-tolerant systems are just a few examples of major contributions that both blockchains have made to technology and business.
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