Nick

Nick

Nick started out in bitcoin with a basic mining rig in 2011 and has since become a strong proponent of the cryptocurrency. In his spare time he writes for the bitcoin gambling website bigcoingambling.com and invests in  businesses operating in the bitcoin space.
Nick

Ethereum (Ether) has recently made headlines in the cryptocurrency industry as it hovered around and then pushed through the $1bn market cap milestone.

Sidenote: For those not familiar with the term, market capitalization is just the value sum of all Ether that exists e.g. if there was 1,000 Ether in existence and each Ether cost $1, the market cap would be $1,000.

To put that into perspective, Bitcoin reached the $1bn market cap milestone in the first half of 2013 before soaring to $14bn at the start of 2014 and then swiftly back to $2bn a few months later. At the time of writing, Bitcoin’s market cap rests at $6.3bn.

For Ethereum to have reached $1bn after soft launching in mid-2015, it is fair to say that the currency is performing well. Whether Ethereum is experiencing a bubble or not, such positive feedback from the market would suggest that there is something unique and of interest about this new cryptocurrency.

Of course there are many other altcoins that have gained traction in the past, for example Dogecoin and Litecoin, but none have reached the level of market interest that Ethereum is experiencing right now. Why is that?

What does Ethereum offer that Bitcoin doesn’t?

Before comparing the two “currencies”, it’s important to understand some key high-level differences and similarities between the two.

Property Bitcoin Ethereum
Mining Algorithm Proof of Work Proof of Work
Supply Deflationary Inflationary
Supply Cap 21 million Infinite
Blocksize 1MB No cap
Blocktime 10 minutes ~14 seconds

On the face of it, the key properties are roughly the same. While Ethereum is likely to move into a ‘Proof of Stake’ model (called Casper), the two currencies have a lot in common. However the differences that do exist between Ethereum and Bitcoin are on some pretty key topics:

Blocksize

As it stands, Bitcoin has a hard limit on the maximum size a block can be. This is designed to avoid spammers filling up blocks with ‘dust’ (near-zero value transactions) and clogging up the network. While the blocksize is due to increase to 2MB in 2017 (if not sooner), such a hard limit will cause issues with scaling adoption for Bitcoin, although it’s widely agreed that a longer-term plan needs implementing.

Ethereum on the other hand, does not have a blocksize. Instead each block has a ‘gas limit’ (gas being the Ether cost used to run a script/transaction) and the gas limit can be increased with every block that’s created i.e. every 14 seconds. The limit at which it can be increased is capped and increases only occur if miners ‘vote’ to do so. This aspect removes the block size issue from Ethereum’s future growth potential.

Supply of Bitcoin/Ether

As it stands, Ethereum has no supply cap. The total amount of Ether that will come into circulation is limitless. Bitcoin however, has a fixed limit of roughly 21 million bitcoins, with the last block expected to be mined at around 2140.

Ethereum and Bitcoin Blocktime

Another stark contrast between Ether and Bitcoin is the rate at which blocks are mined. While the Bitcoin algorithm adjusts to ensure that Bitcoins are mined every 10 minutes, the Ethereum blockchain allows blocks to be mined extremely quickly (still through proof of work) with a block time of 14s. However, such a quick blocktime does not mean that transactions rapidly become secure from double-spends – as Ethereum founder and developer Vitalik Buterin explains in this blog post. Many businesses will require 30+ confirmations from the Ethereum network, but this still pales in comparison to a 3 or 4 hour confirmation time on the Bitcoin network.

While these differences are significant, it must be noted that both Ethereum and Bitcoin are in their early stages of development, and none of the code is ‘set’ by any means. Both currencies are flexible if consensus is achieved, and while Bitcoin has suffered from a recent stalemate over its blocksize, there are strong economic incentives for all cryptocurrency communities to work together to improve the network in the long run.

What really matters here is the application of Ethereum and Bitcoin.

Ethereum Vs Bitcoin Applications

It has been coined that “Ethereum is oil and Bitcoin is gold”. While a massive simplification, the statement is not without good logic.

Ethereum

Ethereum is described as an EVM (Ethereum Virtual Machine), it is a decentralized and distributed cloud platform that will exist forever with a 100% uptime. If you want to run code reliably, securely, anonymously and without interference from middle-men, then run your code directly on the Ethereum blockchain. This opens up an enormous range of possibilities for development, a few examples can be found in personal finance, self-executing contracts, gambling or providing a simple peer to peer service (think crowdfunding where funds are automatically released once a target is hit – no human interference).

To run your code on the Ethereum blockchain you’ll just have to pay gas each time the script runs. This creates an economic use for Ether but also deters infinitely looping code that could otherwise be used to attack the system.

Bitcoin

There is no programming on the Bitcoin blockchain. Instead developers create ‘sidechains’ that work off of the main Bitcoin blockchain, leaving it untouched. This means that you could not use Bitcoin in the same way that you could use Ethereum, and therefore the advantages of Ethereum mentioned above cannot be applied to Bitcoin.

The underlying issue comes when you reverse the same question. Can Bitcoin do something that Ethereum cannot?

As it stands, Ethereum can achieve everything that Bitcoin can, in fact you can create your own version of Bitcoin on the Ethereum chain. Going further, you can create entirely new cryptocurrencies using Ethereum, and a company named Augur has already done this with a fair amount of success. However, the key differentiators that fall in Bitcoin’s favor are:

    1. The currency is deflationary

Like gold, Bitcoin has a fixed supply in existence, making it a fantastic store of value that can be easily transacted.

    1. Network effect

Bitcoin has ‘first mover advantage’ and therefore already has the adoption and ecosystem built up around it. Despite potential flaws in the system, the level of adoption that Bitcoin has makes it extremely unlikely that it will ever go bust overnight. As a result, Bitcoin has time to develop and change as and when it becomes necessary. The power of network effect cannot be overstated.

Ethereum And Bitcoin

As many leading developers for both Ethereum and Bitcoin will say, the two currencies provide much needed support to one another. As cryptocurrencies become more commonly used and use-cases begin to appear in the mainstream, more and more people will turn to adoption. And adoption does not mean ‘one or the other’, many will choose (knowingly or unknowingly) to use both, and transfers between Ether and Bitcoin can be made extremely quickly and at next to no cost using exchanges like ShapeShift.

When it comes down to it, there really is no ‘Ethereum Vs Bitcoin’ debate, this is about the market as a whole moving forward and each chain overcoming its own individual issues, and issues will arise at some point for all cryptocurrencies, Ethereum included.