Cryptocurrencies and decentralized applications (DApps) tend to be seen as the same things, yet there are fundamental differences that separate the two. Although investors can buy, sell, and speculate on tokens that power DApps (such as Ethereum), the design of the Ethereum network was not intended to be used as a currency. So how do tokens such as Ethereum differ from Bitcoin? Let’s start by explaining what Bitcoin and Ethereum are before we dissect the differences.

Bitcoin

Bitcoin was the original virtual currency that was introduced more than 7 years ago. It was introduced via a white paper by a person called Satoshi Nakamoto. In this document, it explained that Bitcoin could help to lower the transaction fees associated with traditional online payments and could be run by a decentralized authority. The coin’s decentralization is in a sharp contrast to the fiat currencies issued by banks and governments.

Bitcoin has slowly become adopted as a virtual currency among both the general public and government regulators. Bitcoin is not an officially recognized form of exchange or store of value, but it has made a large impact on the financial system, where it has recently came under the ire of scrutiny and regulations.

Ethereum

Ethereum was launched in 2017, and has become one of the most well-established and open-ended software platforms that allows applications to be built without fraud, downtime, controls, or outside interference from third parties.

One distinguishing factor of Ethereum is that it is not just a platform; it is also a programming language called Turing Complete. Using this language, developers can build and publish distributed applications.

There are far ranging applications for the use of Ethereum and and it’s Ether token. Due to the optimism for how it can help shift the way that payments are handled, it received an overwhelming amount of support during its pre-sale campaign in 2014.

The Ether tokens are used by developers to be used akin to a vehicle on the Ethereum blockchain, and is purchased by founders to start their own applications. The tokens can be bought and sold just like any other digital currency, or can be used to power other platforms and incentivize work.

According to the founders of Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” One notable project using the Ethereum platform is Microsoft’s joint venture with ConsenSys. This will let developers build out its Blockchain as a service using Microsoft Azure, allowing for coders to create a cloud-based developer environment.

Difference Between Ethereum and Bitcoin

The key difference between a platform such as Ethereum and Bitcoin is that its founders had very different intentions for starting up. Bitcoin’s mission statement was to decentralize payments and provide a layer of anonymity for its users. Ethereum built upon this idea, and expanded its functionality to make more accessible for the market.

The decentralized applications that are now possible with Ethereum lets developers, and even non-technical entrepreneurs launch their own platforms, which are sometimes called Initial Coin Offerings (ICOs) if it involves the issuance of tokens or virtual currencies. Starting only two years ago, these decentralized applications have been set to disrupt every industry from book publishing to the energy market.

The Ethereum network has built upon the original blockchain technology that Satoshi Nakamoto introduced, and has improved it in several ways with quicker block time processing and lower transaction fees.

This is just the start of some of the differences between the two virtual, tokens, and their most important differences have been described below.

1. Ethereum is more than a currency

Unlike Bitcoin that was designed to be used as a store of value and means of exchange, Ethereum is a blockchain-based platform that has very different uses and features.

Ethereum supports what are called smart contracts that developers can use to power their own platforms. Smart contracts decentralize the payments made on the Ethereum network, thereby reducing risk of fraud and censorship. As each payment is decentralized, this can improve the security for the developer’s applications, as well as reduce costs to implement them.

Each application on the Ethereum blockchain is powered by Ether. Similar to Bitcoin, Ether is held in a wallet address that allows smart contracts to be used.

Bitcoin lacks the ability for smart contracts to be used on its network, although that could change sometime in the near future. [1]

2. The Creation of New Cryptocurrencies with Ethereum

Another factor that distinguishes Bitcoin from Ethereum is that entrepreneurs can create their own brand of cryptocurrencies on the Ethereum network. These tokens can be used as digital shares, proof of membership, or in rounds of voting for the company’s direction. The ease of creating these new virtual currencies is one reason for the ICO craze of 2017. Anyone can now copy and paste the code and have a new token ready to buy within hours. Founders can then specify the amount of tokens in circulation and a hard cap to limit supply.

The influx of ICOs to the market has led some countries such as China and South Korea to a complete ban of these ventures within their borders. Although most of these firms have good intentions for their investors, a large number of ICOs were setup to purposefully defraud their investors in a Ponzi scheme, or as a crude snatch n grab with other people’s money.

The emergence of ICOs has forced many governments to reconsider their definitions of financial securities, as well as what constitutes an investment if one is being rewarded in virtual tokens. Are the financial instruments the same as shares, or are they something else?

3. Ethereum Can Replace Kickstarter or traditional Startup Funding

One key feature of Ethereum is that it allows founders to raise capital for the ventures. This capital can be issued in the form of tokens, that can be purchased via Ether or fiat currencies. The amount raised can be stored away until its funding goal is reached or other milestone. If the project is unsuccessful in raising the required funds, the money can be sent back to the initial backers of the project.

In this case, removing the middleman for startups means that there are less rules and less fees for intrepid entrepreneurs. These fees can make up for as much as 10% of the project’s funding on platforms such as Kickstarter.

Again, Bitcoin lacks the ability for startups to raise capital in the same decentralized manner, which is another reason for why founders are choosing to launch their DApps on Ethereum rather than Bitcoin.

4. Democratic Autonomous Organizations

Another difference between Bitcoin and Ethereum is that the later allows for what are called democratic autonomous organizations (DAOs). This feature allows companies to gather ideas from people who put their money into the project. The ideas can then be put to a consensus on the direction of the company in future. DAOs reduce the red tape and bureaucracy associated with traditional business models. They eliminate the need for an expensive team and frivolous paperwork. The Ethereum network also protects the companies founded through its decentralized nature from outside forces and eliminates downtime.

5. Other Facts: Blocktime, Mining, Confirmations & Monetary Supply

There are other differences between the two platforms that are worth mentioning. The average blocktime of Bitcoin is 10 minutes, whilst Ethereum’s goal is 12 seconds. Ethereum’s strength here is with its use of what’s called the GHOST protocol. A quicker block time lets transactions confirm faster.

Another important difference are the token’s monetary supply. In the case of Bitcoin, over two thirds of its currency has already been mined, with the bulk of those coins going to its earliest miners and investors. Only about half of Ethereum’s coins will be have mined when it reaches its fifth year of operations.

How the networks choose to reward their miners is also different. Bitcoin halves its rewards approximately every 4 years, while Ethereum uses a different proof of worth algorithm. Ethereum leverages its Ethash system and pays out 5 Ether for each block that is mined. Ethash is known as a “memory hard hashing algorithm” that encourages mining to raise total supply. Instead of the huge mining farms that Bitcoin needs to keep its supply rising, Ethereum instead rewards a more decentralized mining configuration that is more profitable for individual miners.

The platforms price their transactions in different ways. Ethereum’s system is called Gas, and each transaction is costed depending on the applications storage requirements and bandwidth. Bitcoin’s transactions are determined by the blocksize and each competes equally to be processed.

Ethereum has its Turing complete internal code, allowing it to churn through any transaction given enough CPU cycles and time, while Bitcoin lacks a feature like this.

Summary

While the subtleties between Ethereum and Bitcoin might be lost on others, the reality is that they are entirely different platforms and have differing intentions. To put it simply: Bitcoin is a digital currency that aims to reduce the reliance on banks for payments. Ethereum’s goals, among others, are to host DApps that can be used by entrepreneurs for a host of far-ranging applications.

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