While cryptocurrencies Bitcoin and Ethereum are both built on the blockchain, their uses, applications, and followers differ in a number of ways. We’re diving into how these two cryptocurrencies overlap — and how they’re entirely different.
Protocols, cryptocurrencies, and the blockchain
While the idea of a cryptographically secured chain of information-containing blocks was around in the early 1990s, the first blockchain wasn’t conceptualized until a paper published in 2008 — by none other than the elusive (and unknown) founder of Bitcoin. At its most basic, a blockchain is a secure, anonymous, and immutable transaction record — one that can be applied to currency exchange, but also to any system that requires a decentralized transaction log.
Both Bitcoin and Ethereum are protocols for value exchange that use proprietary currencies; bitcoin (lower case refers to the currency, as opposed to Bitcoin, the protocol) and ether. Being currencies, the value of both fluctuates; at the time of this writing, one bitcoin was equivalent to nearly $1,200 USD, while one ether token was worth closer to $50. Both cryptocurrencies can be “mined,” though the details of doing so vary between the two.
As bitcoin has grown in popularity, a number of online and brick and mortar retailers have started accepting payments in bitcoin for products from pizza to diamonds. Ethereum will likely never reach this kind of popularity, because it wasn’t really meant to.
Value transfer vs. supporting decentralized applications
Bitcoin’s primary reason for being is to act as a currency — to replace the bills, coins, and numbers traditionally associated with sovereign bank accounts with an internet-based alternative. In a world with a significant amount of distrust for third parties (and particularly for banks), the blockchain offers an opportunity to deregulate and democratize the movement of money.
Beyond being fully transparent and traceable, having no third-party intermediary means that the cost of transferring value decreases greatly. Existing financial infrastructure dictates certain costs of peer-to-peer and consumer-to-merchant payments — which can be circumvented entirely with technology such as Bitcoin. So while some recent fintech applications (think Venmo and Transferwise) have managed to lower consumer costs through smart models, these haven't actually altered the underlying fee structure that accompanies the movement of money. Bitcoin entirely rethinks this infrastructure.
Ethereum has other grand goals. While Ether (its currency) could theoretically be used in a similar way to bitcoin, its purpose is rather to incentivize developers using Ethereum’s platform to do so effectively — in the Ethereum ecosystem, bad code is more costly. The Ethereum protocol is designed to act as foundational layer on which developers can build decentralized applications — that is, applications that run on a network of computers (in this case, any computers running the Ethereum platform), rather than on a centralized server. The protocol leverages smart contracts, which, unlike paper contracts, are automatically executing.These contracts enforce the terms of any agreement made on the blockchain, meaning that a huge variety of applications can be built on top of the Ethereum infrastructure.
Given Ethereum’s flexibility, many different types of apps can be built using the protocol. Within financial technology, developers have used Ethereum to build everything from decentralized crowdfunding to asset tokenization platforms. The technology is also relevant outside of finance. One company uses Ethereum to create supply chain transparency, leveraging its auditable and immutable nature to guarantee the data being reported. Another uses the technology to create a prediction market platform with lower fees and more trustworthy outcomes than more traditional alternatives.
“Immutability” is a relative term
Bitcoin and Ethereum developers tend to interpret the term in two different ways, which has led to a significant division between the two communities.
First, some backstory on Decentralized Autonomous Organizations (DAOs). A DAO essentially uses technology to create an organization that has no need for people or documents to govern it. Instead, computer programs codify and execute the rules that dictate how the DAO should operate. Typically, a DAO is formed by a group of people who write the smart contracts that dictate how it will run, and then the DAO holds an initial fundraising period, after which it can begin operating. Those who contributed to the crowdfunding then have the option to vote on proposals put forward, just as do normal shareholders of a company.
One particular DAO built on Ethereum called The DAO launched in early 2016, and quickly raised $150 million. Shortly thereafter, however, a hacker exposed a vulnerability in the code and drained $60 million worth of investor funds. After much deliberation, an informal community vote dictated that the hack be reversed by a ‘hard fork,’ or change in the code, which put the missing funds back into a different account and made them available to investors.
This is where Bitcoin proponents (strongly) disagree. According to this camp, code changes defeat the underlying purpose of the blockchain: to be an immutable ledger. If social forces are able to change an “immutable” transaction record, they say, this is hardly immutable, which likewise raises bigger concerns around whether it even constitutes a ledger at all. The worry here isn’t so much around The Dao or even Ethereum, but the fact that hard forks based on consensus inspired by individuals set a potentially damaging precedent for other blockchains.
Because that's the reality: Though bitcoin and ethereum are quite different, cryptocurrency protocols and blockchains in general are still in their early days — and how each develops can influence perceptions about the category as a whole.