What is the difference between Bitcoin and Ethereum?

Bitcoin and Ethereum are the two largest blockchain networks, with Bitcoin functioning primarily as a decentralized digital currency and Ethereum serving as a computational platform for decentralized applications. What truly sets them apart is their contrasting technologies and token models.

Bitcoin was invented by the pseudonymous Satoshi Nakamoto in 2008, who proposed a “peer-to-peer electronic cash system.” It was the first modern cryptocurrency, born from global dissatisfaction with the traditional finance system in the aftermath of a widespread financial crisis. Although early adoption was slow, a small community of passionate users (and miners) kept the network active, setting it up for later success.

Ethereum was founded by Vitalik Buterin six years later as a blockchain that powered a decentralized computational network. Buterin collaborated with others who would eventually see success in other large blockchain projects.

Bitcoin and Ethereum use blockchain technology to solve different problems, proving that cryptocurrencies are diverse in their designs and capabilities.

In most ways, the Bitcoin network was designed to support transactions of a single digital asset (BTC) between users. BTC is a cryptocurrency that can be stored in users’ wallets and sent back and forth as peer-to-peer payments. In other words, BTC was designed to replace cash, cutting out third parties like banks and traditional payment rails and putting more power in individuals. Although developers have worked to expand use cases for Bitcoin through layer 2 solutions and other additive technologies, the network mostly remains intact as Satoshi envisioned.

Ethereum’s ETH shares functionality with Bitcoin’s BTC. It can also be used as a store of value and a medium of exchange. However, most would argue these are not ETH’s primary uses. Instead, the Ethereum network—through its native coin—is built to facilitate complex computational processes. Buterin sought to create a Turing-complete system using blockchain, and in doing so he spurred the rich ecosystem of decentralized apps (dApps) we have today.

The Bitcoin network is made up of multiple nodes (computers) that run software to maintain the blockchain. These nodes help process transactions so individual users can send BTC from one wallet to another. Certain nodes, called miners, add transactions to a “block” of transactions, batching them together and adding them to the chain. Miners are tasked with finding complex hashes to gain the right to “mine” a block and collect the reward (BTC), a process called Proof-of-Work (PoW).

Ethereum’s nodes, like Bitcoin’s, secure the network and facilitate transactions. For the first seven years of its existence, it was also a Proof-of-Work network, and the nodes were analogous to Bitcoin nodes. However, in September 2022 the Ethereum mainnet linked with its Beacon Chain in an event called The Merge, officially adopting a Proof-of-Stake (PoS) consensus mechanism. This change was designed to both make Ethereum more scalable and less taxing on energy.

In addition to its different consensus rules, Ethereum has a main function that Bitcoin does not: computation. Its Ethereum Virtual Machine, powered by the underlying blockchain, allows users to conduct complex computational processes across a network of computers. This is the basis for smart contracts used to build dApps for decentralized finance (DeFi), non-fungible tokens (NFTs), and other familiar technologies.

BTC and ETH are both the native assets (coins) on their respective blockchains and serve primary roles in users’ experience on the chains.

With regards to tokenomics, BTC is relatively simple. There is a maximum total supply of 21 million BTC, and no further coins can ever be created. This fixed cap to BTC’s supply ensures that the ever-decreasing inflation (due to halvings reducing the new tokens introduced into circulation by miners) has a 0% terminal rate.

On the other hand, ETH has no fixed maximum supply. This means that token inflation could potentially lead to an increase in the number of coins, without a cap. To counter this, an ETH burning (destroying) mechanism introduced in 2021 flattened, and even decreased, the circulating supply, creating a deflationary effect.

Finally, whereas BTC has only ever been rewarded to the network’s miners from day 1, an initial 60 million ETH were created to be distributed to early participants.

Disclosures:

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