Bitcoin and Ethereum are the two most well-known cryptocurrencies today, with the former the legacy cryptocurrency created by the anonymous Satoshi Nakamoto in 2008 and the latter proposed by Vitalik Buterin in 2013. Although both cryptocurrencies have several similarities, their designs are distinctly different and the application of their networks are tailored towards different use cases.
Understanding the key differences between Bitcoin and Ethereum can provide a better grasp on the broader cryptocurrency and blockchain industry as a whole, as they are both integral components of the market with large open-source communities and influential developments.
Comparing the Differences Between Bitcoin and Ethereum
The main difference between Bitcoin and Ethereum stems from their conceptual design. Bitcoin is predicated on becoming a secure, censorship-resistant value system outside of the traditional financial realm while Ethereum is designed as a ‘decentralized world computer’ where Turing-complete functionality enables users to build and run applications on the network through the Ethereum Virtual Machine (EVM).
There are numerous subtle differences between Bitcoin and Ethereum, but generally analyzing the primary variations requires evaluating the following:
Transaction SchemesMonetary PolicySmart Contract and Scripting FunctionalityMining/Consensus/DevelopmentNarrative & Practical Applications
Both Bitcoin and Ethereum employ public-key cryptography for authenticating transactions that are validly signed by the party who retains control of the private keys to access the native cryptocurrency on each network, BTC and ETH, respectively. However, they differ in the structure of their transaction models.
Bitcoin uses what’s called an ‘unspent transaction output’ scheme known as UTXO. Transactions are all linked together in a chain of inputs and outputs, with unspent outputs representing the ‘funds’ that an individual — with a corresponding private key that unlocks a specific amount of BTC — can use to spend as inputs in a new transaction.
Users do not technically own specific BTC, but instead, hold the right to spend a precise amount of unspent transaction outputs in the network. Bitcoin uses ECDSA as its digital signature algorithm for its public-key encryption, and senders digitally sign the hash of a previous transaction in combination with the recipient’s public key to validly construct a transaction.
Conversely, Ethereum uses an account-based model more similar to traditional checking accounts with a bank. Addresses (public keys) in Ethereum contain the transaction information for each ‘account’ where an update to that specific account is considered a state transition. There are two types of account in Ethereum:
Contract AccountsExternally Owned Accounts
Contract accounts are smart contracts that are run by code and programmed to receive, store, and contact other accounts in the network based on certain inputs.
Externally owned accounts are controlled by users and can send and receive transactions, and sign them with their private keys.
Notably, Ethereum uses ‘gas’ a derivative of the native currency Ether which is appropriated to pay for transactions and computational execution across the network, mainly designed to mitigate spam. Ethereum also uses the ECDSA digital signature algorithm for transactions.
Overall, Bitcoin’s UTXO design is useful for the broader consensus of the network, as all inputs and outputs are linked to each other, and it also provides a more straightforward design of interlocking accounting records that are timestamped in the blockchain. Ethereum selected an account-based model for more considerable space savings, constant light client reference, and other advantages found here. The transactions schemes for both are designed to fit the mold of what each network is attempting to accomplish.
The differences in monetary policy are some of the most profound and often overlooked variances between Bitcoin and Ethereum.
Bitcoin’s monetary policy has been set since its creation and is governed by the total cap on the number of BTC available (21 million), halving of block rewards roughly every four years, and the difficulty adjustment of the mining target to ensure a consistent release of blocks approximately every ten minutes. Bitcoin’s emission rate correlates directly to mining, as miners receive newly minted BTC as a block reward for winning the lottery-like consensus round every ten minutes. The emission is deflationary and equates to a diminishing issuance over time.
Read: What is the Bitcoin Halving?
As a result, Bitcoin is often referred to as ‘digital gold’ because of its high stock-to-flow ratio and scarcity of BTC. Bitcoin’s cemented monetary policy is one of its cardinal advantages.
Ethereum’s monetary policy is more fluid and has not been entirely set in stone yet. While Ethereum still uses mining similar to Bitcoin…