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Similarities and Differences – Forbes Advisor

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Similarities and Differences – Forbes Advisor

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Bitcoin (BTC) and Ethereum (ETH) are the Coke and Pepsi of cryptocurrency. They are the biggest names in crypto and their combined market capitalization is over 60% of the trillion dollars. crypto market.

The performance of BTC and ETH are often used as benchmarks to gauge the overall health of the crypto market. Despite their dominance, these cryptos work very differently from each other. Let’s take a closer look at how Bitcoin and Ethereum compare.

How Bitcoin and Ethereum Compare

Bitcoin and Ethereum are fundamentally different beasts. The first is the first cryptocurrency, designed as a store of value and a medium of exchange, but today mainly used as a speculative risk asset. The latter was designed as a decentralized computing network, which gave rise to the space of decentralized finance (DeFi).

Ethereum also enables payments, using its internal cryptocurrency ETH, but its reach is much wider than Bitcoin by design.

Both systems use block chain technology to validate and record transactions. Yet, the upcoming Ethereum changes, commonly referred to as Ethereum 2.0is expected to significantly upgrade the speed, durability, and accessibility of crypto.

A major difference between Bitcoin and Ethereum is the consensus mechanisms they use to run their respective blockchains.

What is a consensus mechanism?

A consensus mechanism is a type of algorithm used to run a blockchain. The main objective of any consensus mechanism is to solve the so-called “double-spending” problem.

Once you’ve spent a $20 bill, it’s no longer yours. You cannot spend it a second time. Before Bitcoin, the problem with the concept of digital currency is that they were just strings of computer code and could be copied endlessly and spent twice, even countless times.

Bitcoin’s consensus mechanism blockchain was designed to solve the problem of double spending. It uses validators to ensure that each crypto unit can only be spent once and to log each transaction on a distributed ledger for everyone to see.

Since everyone can see identical copies of the Bitcoin blockchain, no one can copy and paste their digital money and spend it twice. Processing one transaction is hard enough, but you will also need to modify each subsequent transaction since each refers to its predecessors.

There are two main consensus mechanisms used by cryptocurrencies. Bitcoin uses the proof-of-work mechanism, while Ethereum is moving towards a proof-of-stake consensus mechanism.

proof of work

Proof of work requires validators to solve complex mathematical problems. They compete for the chance to be chosen to validate a new batch of transactions and add them to the blockchain, thus earning a set amount of crypto.

In Bitcoin’s early days, validators were largely hobbyists. Yet, as the mathematical problems of the Bitcoin proof-of-work system have become more difficult, the amount of processing power needed to solve each has increased exponentially. Bitcoin mining is largely handled by specialized companies that can afford the expensive bitcoin mining rigs and energy to run them.

Proof-of-work systems like Bitcoin have also drawn criticism for the amount of power expended by the computing hardware involved. According to the Cambridge Center for Alternative Finance, Bitcoin’s electricity consumption exceeds Norway’s annual electricity consumption, at an annualized rate of 127 terawatt hours (TWh).

Proof of Stake

Proof of Stake requires validators to stake their crypto assets to earn the chance to validate transactions and add blocks to the blockchain.

The more crypto someone stakes, the more likely they are to be chosen to commit a block of transactions to a blockchain and earn a set amount of crypto. The system also discourages bad actors with financial penalties.

Proof of stake stacks the game in favor of people with more money, but protects against people who add fraudulent records to the blockchain. Without the need for powerful hardware, Proof of Stake is considered a more environmentally friendly consensus mechanism than Proof of Work.

Decentralized Payments vs Decentralized Software

Bitcoin was originally developed for decentralized payments. Initially, the designers of the original cryptocurrency wanted to help people send and receive payments without an intermediary, like a bank.

Ethereum, on the other hand, was designed to be a distributed computing platform. The designers of Ethereum built the platform to provide a foundation for running decentralized software programs, known as smart contracts and distributed applications (dApps).

A smart contract is a digital agreement between two or more parties that will execute once certain conditions are met. For example, account A will release asset X once it receives asset Y from account B. This could make property sales or transfer of ownership faster and less susceptible to fraud.

A dApp is an application that is not controlled by a central authority. Twitter is an example of a centralized application, with users using it as an intermediary to send and receive messages. Thus, users respect the rules it applies and the algorithm it uses to control the content.

Distributed applications help users send and receive data directly without an intermediary. Peepeth is a Twitter-like dApp. He claims that as an app, it does not optimize ad revenue, a problem suffered by users of centralized apps.

Price volatility

BTC has certainly been more valuable than ETH, peaking at around $68,789 in November 2021. On the other hand, ETH peaked at around $4,891 in the same month.

The original crypto is down more than 50% since the start of the year and has only recently rebounded from its June low of $17,708. That said, Bitcoin and Ethereum have grown by over 750% and 630%, respectively, over the past five years.

Ethereum’s price recently rallied from its June low, ahead of the “meltdown” when the leading altcoin switches entirely to the “proof-of-stake” mechanism. The merger is expected to take place around September.

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