Bitcoin and ethereum are both experiencing a boom the likes of which this space has never seen before, but are they complementary or in competition with each other? Can it objectively be said one is just better, or do they have their own advantages and disadvantages, serving different niches?
There are many different opinions out there saying one way or the other. Here we’ll just try and present the qualities of the two currencies and you can make up your own mind.
The below analysis will try and be objective, starting with a quick introduction of bitcoin and ethereum, to then compare them on their monetary aspect from an economical point of view, followed by a technical, or coding, point of view.
The analysis them moves on to providing a comparison of the two on security, decentralization, and a catch-all cultural level encompassing general attitudes, to conclude with asking whether they are in competition with each other or whether they complement one another.
Bitcoin and Ethereum, a Quick Introduction
Before we undertake an analysis of the two currencies and platforms, bitcoin can be quickly introduced as a decentralized global currency issued by code stored across the globe. Some may call it free market money or private money as opposed to state issued currency.
Its foundation, on the conceptual level, is the insight of Hayek, a Nobel Prize winning economist who spent all his life studying money and reached an insight which boils to: the regulator of the free market, money, must itself be regulated by the free market.
The quick introduction for bitcoin in regards to the coding aspect is that everyone can download a computer program which stores all transactions in a chain of blocks called blockchain through which it can validate you are the owner of the bitcoins while ensuring that you can only spend it once, just like any other money such as dollars or pounds.
All of the above applies for ethereum too, but on top eth also has smart contracts, making the currency aspect just one application. Because ethereum can run programs like any ordinary computer, but does so at a global scale.
Like bitcoin, it has a software you download. This software does all the usual verification in regards to eth, the currency, but on top it also verifies, where applicable, code programs not much different than many software programs you download, although of course much simpler at this stage.
Unlike your own computer where the program is stored and executed locally on your own laptop, ethereum’s programs are stored and executed globally, making it a world computer while allowing anyone access to its functionality similar to an open source cloud system which can also provide processing power, memory, and other computer functions.
Since ethereum is a superset, that is it does everything bitcoin does, but also does a lot more things on top, the ethereum community compares them in one sentence by stating bitcoin is like old cell phones while ethereum is like smart phones.
As far as the tech aspect is concerned, that is probably true. Cell phones used to be just about calling people, while now smart phones have apps, games, all sorts of things.
Bitcoin is mainly used just for payments, while eth does that but also has Dapps for all sorts of things and has found wide application in industrial use ranging from music to banking, energy to cars, gaming and sport to manufacturing.
Bitcoin v Ethereum on the Economical Monetary Aspects
There are two aspects when comparing bitcoin and eth on their currency or monetary qualities. The technical, coding aspect – as in what are the parameters they use to allow money to move – and the economic aspects.
On the latter, bitcoin is limited to 21 million. After around a century no more bitcoins will be issued by the code. That makes it deflationary in the long term, like gold, but since new gold mines keep being found, it makes it even more deflationary.
Ethereum isn’t as exactly limited, but there won’t be many more eth than around 100 million with its inflation rate thereafter becoming somewhat insignificant.
The difference in these two qualities has economic implications as far as their use as money is concerned, but which one is better is a somewhat subjective matter. Most economists tend to think a rate of around 2% yearly inflation is optimal. Those who like Austrian economics would probably not object to it as long as that remains known and constant because the market would price it in.
The difference in these two approaches, however, has implications on a coding level regarding the security of the network. For bitcoin, since eventually it will have to operate only on fees, its transaction fees may need to reach high levels with current levels at a fairly expensive $2-$3 per transaction.
Ethereum can afford lower fees because resources would be paid by a very small level of inflation potentially making it a lot more economical to use for everyday commerce on-line and off-line.
Bitcoin v Ethereum on the Technical Currency and Money Aspect
Judging the currency on the technical aspect is easier. Ethereum can transfer value in around 15 seconds, with plans to lower it to 2-3 and, perhaps, even 1 second, meaning it is as good as instant.
Bitcoin can transfer value in around 10 minutes with no plans to change this for the foreseeable future at the base layer, but second layer protocols on top may change it. So ethereum is a lot faster, without taking into consideration any other aspect, such as current bitcoin backlogs which do not exist in ethereum.
Bitcoin can’t really do much else, but transfer value from A to B. It has an incredibly limited smart contracts functionality which basically revolves around making the value transfer more secure by asking two or three people to hold the authorization code.
Ethereum’s smart contracts are a lot more powerful to the point where money can itself become a computer program with rules it must obey based on if:then while:else code stored, executed and validated globally.
That means ethereum allows machines to have bank accounts while also making things like Decentralized Autonomous Organizations possible which might change the way we work.
Moreover, ethereum’s code allows for the creation of new currency built on top of it called tokens. Currently, they act similar to company stocks, but issued directly to the market by many innovative eth based projects.
Bitcoin v Ethereum, a Comparison on Security
Ethereum has recently become the most secure public blockchain, overtaking bitcoin, but a lot more interesting is ethereum’s plan to move to what is called Proof of Stake (PoS) sometime later this year or most probably next year.
You probably have heard of Proof of Work (PoW). For the globally distributed softwares called nodes, which validate transactions, to be resistant from Sybil attacks, that is from just faking the number of nodes, the system uses complex mathematical calculations to prove that work has been done and therefore to prove that the node is real, not fake. It’s a bit like online captchas that ask you to verify you are not a robot.
This Proof of Work uses a lot of energy and a lot of resources. There are rows and rows of hardware piled up and up in massive industrial facilities that in combination consume as much energy as some small countries.
Ethereum plans to get rid of that completely and instead use Proof of Stake (PoS). The way this does the metaphorical captcha verification is by your node showing that it has a certain amount of eth. Since eth is limited and can’t be duplicated, this makes it resistant from faking all nodes, so the system can validate transactions and programs as if it was using proof of work, but without all the energy and industrial scale hardware.
Bitcoin v Ethereum, a Comparison on Decentralization
The difference in how bitcoin and ethereum will secure their network has significant implications for the level of decentralizations each may hope to maintain in the long term.
All these transactions and programs require storage, bandwidth and processing power. Since a chain of transactions is used to verify ownership, eventually the required resources may stop being negligible and may require investment of perhaps $100 or maybe $1,000 a year to run a node.
That might affect the amount of people who would run a node, and thus decentralization, as in bitcoin and in ethereum for now they do it for free. So bitcoin’s way of keeping some decentralization is by ensuring the required capacity of the network is very limited.
It can currently process only around 3 transactions per second, which translates to 1MB of data for every 10 minutes. That means if demand increases fees will go even higher while transactions may be delayed for hours, days, or even weeks.
Ethereum’s solution is to simply pay the nodes, thus incentivizing people to run one because they’re being paid for it, so keeping or perhaps even increasing decentralization levels.
It will do so once it moves to Proof of Stake. Then, if you have some eth, you can lock it in a similar way to a savings bank account and get interest on that amount.
This way, even ordinary users might want to run a node, ensuring its decentralization and security while allowing it to scale a lot more with plans for ethereum to handle more than 100,000 transactions a second in the near future.
Bitcoin v Ethereum Compared on a Cultural Level
Bitcoin and ethereum are both just code and that code doesn’t really have any inherent political attitude or culture, but on a community level the two are somewhat different in their general approach.
A nice comparison here would be Tor and Firefox. The general attitudes of the bitcoin community are a bit like Tor with a strong focus on privacy to an anonymity level, more concerned with serving controversial businesses which are not served by banks rather than with serving ordinary users.
They do, of course, serve ordinary users too, but if there is a tradeoff between the two the former would probably be given priority at the expense of the latter.
Ethereum is different in two primary ways on a cultural level. It maintains a philosophy of “political neutrality” and it tends to focus on the technological aspects of the invention a lot more than other aspects.
It’s a bit like Firefox, focused on privacy and other nice things, but also on speed, on convenience, on being a tech that everyone wants to use and if there is a tradeoff between ideology and pragmatism or fringe uses vs mainstream uses, the latter would most probably be given priority.
The above can be shown by the fact that ethereum has gone mainstream as far as businesses are concerned with giant global household brands endorsing it through the Ethereum Enterprise Alliance.
None of them uses the bitcoin blockchain.
Ethereum v Bitcoin, Competitors or Complementary?
The two currencies do in some way serve different markets, but ethereum serves a lot more markets than bitcoin ever can because its blockchain has found wide uses in many industries, ranging from music and gaming, to supply chains and banking, oil and energy, social networks and cars, with most industries finding a use for ethereum.
Whether it likes it or not, just like other technologies like cars or the internet, ethereum too can also serve niche markets that have so far used bitcoin because on a currency level they are hardly any different.
Bitcoin might, however, find a niche in storing value due to its limited number, but which one can really perform that function better may be a matter of network effects.
Eventually, the two might settle on an 80%-20% market share, and if they do, it would be a matter of view on whether that makes them competitors or complementary.