Even if you haven't been following blockchain closely, you’ve probably noticed that over the last few months, the conversation has shifted. Now, instead of hearing only about Bitcoin, you’re probably hearing about Ethereum, too.
That’s not surprising. Ethereum and Bitcoin are currently the world’s two largest blockchain platforms. Bitcoin, launched in 2009, was the world’s first decentralized cryptocurrency. Six years later, Ethereum’s live blockchain was launched.
Despite the shared blockchain technology, there are several important differences between Bitcoin and Ethereum. Each has its place in the blockchain ecosystem.
Bitcoin vs. Ethereum: Understanding the difference
Both Bitcoin and Ethereum are powered by the principle of distributed ledgers and cryptography, but they differ in many ways. The accompanying infographic illustrates several of the technical differences. Meanwhile, we’ll focus on the more business-oriented ones.
The most obvious difference: Bitcoin is a cryptocurrency, and Ethereum is a platform — although it does have a digital currency called Ether. Bitcoin was created as an alternative to regular money, while Ether is not primarily a payment alternative — at least for now. Rather, it facilitates and monetizes the working of Ethereum. Ether tokens may function as a cybercurrency, but they can also represent voting rights and shares; they’re often used for fundraising in initial coin offerings (see below).
The speed of transaction time (or block time) also differs between the two — which has both technical and business implications. Whenever a transaction takes place on a blockchain, a block needs to be generated and the proof of work for the transaction needs to be confirmed by the rest of the network. Ethereum greatly improved the transaction and block generation process with an average transaction time of 14 seconds, compared to Bitcoin’s average of 10 minutes.
Ethereum took the blockchain concept and ran with it, dramatically expanding the potential applications. And Ethereum makes it possible for developers to build and publish decentralized applications, or dApps. (More on this below.)
“The momentum has shifted to Ethereum — there is no doubt about that,” William Mougayar, the founder of Virtual Capital Ventures, told The New York Times in June. “There is almost nothing you can do with Bitcoin that you can’t do with Ethereum.”
Why Ethereum matters: Smart contracts
Ethereum supports smart contracts. Think of smart contracts as computer programs that act only after specific conditions are met. Like a traditional contract, a smart contract defines the provisions — the obligations and penalties — around an agreement. Unlike a traditional contract, the terms of a smart contract are recorded on the blockchain, and they can’t be altered. Also unlike traditional contracts, smart contracts can automatically execute those obligations, often through an escrow-like account.
Here are three examples — two hypothetical, one real.
- Free pizza: In a piece for CIO, Thor Olavsrud suggests that smart contracts could bring back the “days of getting a pizza in 30 minutes or less.” A smart contract would ensure payment, if it arrived on time, and no payment if it arrived late. He even suggests it could be set up to provide a sliding scale, depending on just how late delivery was.
- Drought insurance: A farmer could buy drought insurance, and according to the contract, if the temperature tops 100 degrees for more than 100 days, the farmer gets an insurance payout of $10,000. With a smart contract, at the end of summer, the farmer would automatically get the money. (This example is courtesy of Brian Behlendorf, executive director of the Hyperledger Project.)
- Flight-delay insurance: A passenger could buy flight-delay insurance, which would be recorded on the Ethereum blockchain. As soon as a delay of more than, say, one hour, is reported, the passenger is paid automatically. French insurer AXA already is testing this model.
If you’d like to learn more, check out our blog post, “Blockchain 101: How to Explain Smart Contracts to Your Mom,” where you’ll find Behlendorf’s example, plus other clear and simple explanations of smart contracts.
Why Ethereum matters: dApps
A dApp (decentralized app) is an application that runs on a decentralized blockchain network. For now, that network (or platform) is Ethereum. Most dApps are built on Ethereum’s blockchain. It makes sense, given that Ethereum was built specifically for that purpose.
Developers can use Ethereum to build dApps that take advantage of its smart contract technology. The current and potential applications are almost endless: insurance, retail, microfinance, virtual worlds, currency exchange, identity-theft protection, financial derivatives, voting systems, title registries, and thousands of others. This is possible because, as explained above, Ethereum provides an open-source, public blockchain platform for smart contracts. BlockGeeks offers a useful analogy. “Think of Ethereum like the internet and all the dApps as websites that run in it.”
Why is this so important? Ethereum makes it possible to decentralize any service.
In March 2017, Disruptor Daily identified the 10 most disruptive dApps. In July, the CoinTelegraph identified the best experimental Ethereum-based dApps. Here are some of the ones they picked:
- Gnosis is a predictions platform. DApps under development include an art pre-auction valuation predictor and a financial markets predictor.
- SlackCoin rewards good communication. It pays teams for communicating better and more efficiently on Slack, a corporate messaging platform.
- Lunyr is a decentralized crowdsourced encyclopedia. It rewards users with app tokens for peer-reviewing and contributing information. All submissions are peer reviewed, and users who submit contributions must peer-review other submissions.
- TenX plans to allow users to use Ether almost anywhere Visa and Mastercard are accepted.
To get a sense not only of what’s not but actually in development, visit State of the dApps, a curated — and constantly updated — collection of decentralized apps for Ethereum.
Why Ethereum matters: ICOs
Ethereum gives developers a means to raise funds for various applications through initial coin offerings (ICOs).
As we’ve discussed before, it can be useful to think of an ICO as a hybrid of venture capital, crowdfunding and an IPO. Instead of giving up equity in exchange for venture capital funding, these firms issue tokens. Investors receive the tokens, somewhat comparable to shares in the firm, in exchange for the money they invest. In some respects, it’s like buying stocks. It’s also like crowdfunding because ICOs provide a way to get funds from users by enabling them to have a share of the business, and transactions happen on the blockchain.
Generally, the tokens can be traded on secondary exchanges. The company sets the token’s initial value, but via dynamic pricing, its value is ultimately determined by real-time market supply and demand.
(For more, see our overview of ICOs here.)
Why Ethereum won’t vanish into the ether: powerful fans
Developers and Fortune 500 execs alike are moving toward Ethereum. The Enterprise Ethereum Alliance, launched in February, includes more than 30 Fortune 500 companies, along with startups, academics, technology vendors, and Ethereum subject-matter experts. Members include BP, Cisco, Accenture, Intel and Toyota.
Just as influential, Ethereum has built a community around developers focused on making smart contracts mainstream.
“By encouraging knowledge exchange, Ethereum makes [dApps] enjoyable and exciting,” BlockGeeks CEO Ameer Rosic says. Because of this, he says Ethereum has a “huge lead” in blockchain development and innovation — a lead he expects to continue.
He’s not alone.
Ethereum: The next big thing?
“Ethereum and smart contracts are the next gen applications on the blockchain,” Sudhir Khatwani wrote in a Coinsutra post. “Just like the invention of the internet has transformed human life, the Ethereum blockchain and smart contracts have the power to change human life in incredible ways.”
That's not hyperbole — but keep in mind that all this change isn't happening today.
“Smart contracts will eventually automate the mass personalization of value exchange,” writes Nigel Montgomery, research director at Gartner. “What that means is the ability to engage many times the number of customers and partners globally, but in an intimate and personalized manner, dictated by today’s consumerized ‘instant response’ world. That is the aim.”
He adds, however, that we aren’t there yet, calling the technology “immature and mercurial,” and warning that, because of the immutable nature of the blockchain, outcomes are irrevocable. In other words, the promise and potential is real, but it still will have some growing pains. Ethereum has a roadmap of where it wants to be in the coming years, and it has a history of following its roadmap closely. That, too, bodes well for longevity.
Ethereum vs. Bitcoin: Complementary, not competitive. (Really.)
“This us vs. them approach is antithetical to one of the most dominant trends in crypto: collaborative proliferation. The constant launching of new projects and token start-ups that are designed, either directly or indirectly, to help other projects see greater functionality and efficiency,” William Peaster wrote in a piece for BTCMANAGER.com.
It’s not just blockchain insiders who dismiss the notion of competition: so does one of the leading investment websites.
Because of their vastly different missions, Ethereum and Bitcoin aren’t really direct competitors, argues Motley Fool. As a November 2017 piece put it, “While competitive to a degree, Bitcoin and Ethereum aren’t direct threats to one another.”
Ethereum, it explains, appears intent on pushing its blockchain to enterprises, while Bitcoin has focused on being a payment facilitator.
Beyond Bitcoin and Ethereum
If you’re a relative newcomer to blockchain technology and you’ve read this far, congratulations. We have good news and bad news. The good news is that you now have a basic grasp of Ethereum’s potential and how it relates to Bitcoin. There’s much more to learn — especially on the technical side — but this is a start.
The bad news? There’s much more to blockchain than Ethereum and Bitcoin. The are many platforms and frameworks, and no single blockchain will solve every problem. Different types of blockchains are better suited to different needs and circumstances.
If you want to understand the pros and cons of top blockchain platforms and frameworks, including Ethereum and the various Hyperledger projects — and discover which type of blockchain is right for your project — read our latest whitepaper. The Innovator's Guide to Picking the Right Blockchain is free and will give you a good primer on the different blockchain technologies available.