Ethereum Blockchain - Part 2
Ethereum vs Bitcoin
You can look at Ethereum and Bitcoin as both sides of a coin. Though they are similar, they also differ very distinctly. Most of the time, people see Ethereum as another form of cryptocurrency, but as already discussed, this is not the case.
By definition, Bitcoin is a purely a cryptocurrency while Ethereum has a wider array of applications. Ether, its currency, is used for peer-to-peer transactions, and can power smart contracts, dAPPS compute on the blockchain and many other uses.
There is a big difference between the blocktimes of Bitcoin and Ethereum. Unlike Bitcoin which has a 10 minute blocktime, Ethereum offers a faster blocktime of around 12 seconds. Faster blocktimes provide the advantage of faster processing and confirmation of transactions and lower cost per block.
Both Bitcoin and Ethereum use their own algorithms to secure the blockchain. Bitcoin utilizes a Proof of Work system called SHA 256 while Ethereum uses Ethash which is an ASIC resistant proof of work system. However, there are plans to move Ethereum into a “proof of stake” system by 2018 or 2019.
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Read Part 1 of our Ethereum Overview here!
The key difference between the two blockchains is that miners on the Bitcoin platform receive rewards from verifying transactions and securing the blockchain. On the other hand the Ethereum platform rewards miners based on processing power done to run the Ethereum virtual machine and any associated smart contracts it contains as well as rewarding miners for verifying transactions and securing the blockchain.
Capital for Ethereum was raised by pre-selling tokens to participants from around the globe, while all of Bitcoins in circulation were mined by miners.
The majority of Bitcoins have already been mined out of a total supply cap of 21 million Bitcoin. Ethereum on the other hand has no max cap but has an increasing difficulty level where it becomes harder to mine Ethereum as time goes on. Future updates to Ethereum’s mining rewards seek to further lower the amount of Ethereum produced per block.
Ethereum utilizes its own unique algorithm known as Ethash which permits decentralized ASIC resistant mining, giving Ethereum clients more freedom whereas Bitcoin is semi-centralized owing to the need to use special hardware called ASICS to make mining Bitcoin economically viable.
In charging prices for access to the network, Ethereum transactions are calculated depending on the applications as well as the sophistication and complexity of the requirements. Bitcoin on the other hand, is limited by the block size on which blocks compete with one another within the blockchain.
Bitcoin and Ethereum transactions require at least a consensus of 51% among the network of nodes to give it permission to execute and encode information on the blockchain.
Ethereum and Its Advantages
Users of Ethereum can create and release their own cryptocurrencies or tokens to represent assets, virtual shares, or anything that is of value.
Ethereum does not require involvement of central parties such as banks and other financial establishments in creating contracts and sourcing out funding. Clients can also make virtual organizations, where participants can deliberate and talk and vote about issues; sort of creating a community with their own rules and regulations that spans borders and has its own laws.
Like Bitcoin, Ethereum employs the technology of the blockchain. Although they use the same technology, Ethereum allows its users to develop their own operations, unlike Bitcoin which only uses a fixed set of operations. On paper, Ethereum Blockchain is fully Turing compliant. This means that clients or users are given the opportunity to write software and run it on the Ethereum Virtual Machine. The full potential of Ethereum lies with the imagination of the developers on how to use it.
Bitcoin focuses on peer-to-peer cash transactions without third party interference. On the contrary, Ethereum’s applications are far more wide reaching. Automation and execution of complicated transactions are made possible through the Ethereum platform.
Learn more about software wallets to store your tokens in our article!
Ethereum has two different account types: Externally Owned Accounts (EOAs) and Contract Accounts.
Externally Owned Accounts (EOAs) or Normal Accounts
These are normal accounts that every Ethereum user has. Externally Owned Accounts also called EOAs are executed by human users with the use of private keys. This provides the users authority over EOAs. Contract Accounts are free from human intervention, but EOAs are given control if it is programmed with a specific address. Consequently, the user who possesses the private key of an EOA tasked to control Contract Accounts, has the capability to control the Contract Account.
Contact Accounts are secure because these accounts are not able to run random number generation. Contract Accounts can only perform this when ordered by an Externally Owned Account.
A small amount of Ether is required for each step of the program activated within the Ethereum network. This payment of fees for operations or transactions done on the the Ethereum Blockchain disincentivizes any malicious activity or hacking where malicious users can spam transactions or commands that clog up the system. Ether is the mode of payment for these transaction fees.
All transactions fees are collected by nodes within the Ethereum network for further validation. These nodes comprise what is commonly known as “miners”. All transactions are put together to form “blocks” to be placed in line to be featured in the succeeding block. For every block mined, Ethereum miners are rewarded with Ether.
Ethereum and Its Future
Due to its immaturity compared to other non blockchain solutions, would-be-investors are still in doubt if investing in Ether is viable. Some believe Ethereum will not survive in the long run, while others see this as an opportunity due to its low value relative to when Ethereum achieves widespread adoption. To the average person, Ethereum is more than what meets the eye; one cannot simply grasp its full potential just yet. It has countless applications and use cases which is only limited by the users own imagination.
The natural volatility of all cryptocurrencies, not just Bitcoin and Ethereum, still remains a huge issue. The success of Bitcoin is a great example on what patience in investing can bring us. During Bitcoin’s infancy its value was around $200 but since then it as risen to the above $1000 range. The point is, Ethereum is currently trading at around the $400 range, but there is much room for improvement if the value of Bitcoin is seen as the benchmark.
An additional point of value in favor of Ethereum is that it has a core innovation in the form of the Ethereum Virtual Machine (EVM). It is Turing Complete software that runs the Ethereum network. It allows anyone to run any program written in Solidity. The EVM makes the creation of blockchain applications faster and more efficient compared to any other platform. This innovation allows the development of countless varieties of applications.
Ethereum can decentralize any form of centralized service. Intermediary services, such as banks and other financial institutions may soon be a thing of the past, reducing transaction cost for the users of these traditional systems and increasing trust and transparency. Aside from financial transactions, Ethereum can also be utilized in other services such as voting, registries, and regulation to name only a few.
In conclusion, it is foreseen that Ethereum might well be on its way to surpass Bitcoin by 2018. For the past few years, Ethereum was able to build a superb infrastructure that is comparable in safety to Bitcoin but that exceeds Bitcoin when use cases are factored in. These features make Ethereum a cut above the other cryptocurrencies or blockchains most notably Bitcoin.