While bitcoin is known as 'digital gold' or 'internet money', Ethereum is often referred to as the 'world’s supercomputer'.
Both Bitcoin and Ethereum are open source and the most decentralised cryptocurrencies out of the entire market. But what makes Ethereum so unique?
Ethereum is a General Purpose Blockchain
The first and perhaps most important difference between Bitcoin and Ethereum is the goal of what each blockchain wants to achieve. While Bitcoin is focused on providing a sound form of money, Ethereum is a computing platform geared towards developing decentralised applications using smart contracts.
Ether (ETH), Ethereum’s native cryptocurrency, is used both as a digital currency to transfer value but also to execute smart contracts, run decentralised applications and monetise the work of developers.
The programming language used by Ethereum (Solidity) is Turing Complete which offers more functionality than Bitcoin’s stack-based programming language. Turing completeness simply means that Ethereum can compute almost anything, given enough time and resources.
Ethereum has birthed various use cases for blockchain technology, including decentralised prediction markets (Augur), identity software solutions (uPort), and aims to be one of the core protocols powering Web 3.0 (the term used to describe a ‘decentralised world wide web’).
There is no hard cap on the number of ether (ETH) in circulation, which is currently just under 108 million units. In contrast, bitcoin will only ever have a maximum 21 million units. Ethereum is inflationary since more tokens can be introduced into the supply at any time. There is no pre-programmed issuance schedule in place for Ethereum, meaning there is uncertainty about the future supply of ether.
Another difference compared to bitcoin is that ether has a fixed block reward. The block reward was reduced from 3 ETH to 2 ETH as part of the Constantinople hard fork in February 2019. Until the block reward is changed again, each block will continue to release 2 ETH into the circulating supply.
With bitcoin there is a decreasing rate of issuance and block rewards halve every four years such that less coins are emitted over time. The future supply of bitcoin is known with certainty as there is a pre-programmed supply schedule, which could be changed with a hard fork (but is very unlikely due to lack of support for changing bitcoin’s fixed supply). Therefore, bitcoin is deflationary as the rate of inflation falls exponentially over time.
Faster Block Confirmation Times
Ethereum’s block time (10-12 seconds) is much faster than Bitcoin’s (10 minutes) which allows for a greater user experience since transactions are processed faster. As transactions are processed faster on the Ethereum chain, it can also scale further than Bitcoin's 7 transactions per second to as high as 15 transactions per second.
However, the consequence of Ethereum’s faster block times is that different miners are more likely to find separate valid blocks and submit them at the same time. In Bitcoin, these are known as 'orphan blocks' while in Ethereum they are called 'uncle blocks'. Because of the faster block confirmation time, miners that find an 'uncle block' are rewarded with a portion of the standard block reward to increase security of the chain.
Ethash Mining Algorithm
Ethereum miners do not compete with Bitcoin miners for hash power since the Ethereum core developers created their own mining algorithm, called Ethash. The difference between SHA-256, the algorithm used in Bitcoin mining, and Ethash, is that Ethereum mining algorithm has a property called memory hardness - which was intended to make it more difficult to develop an ASIC miner for the algorithm.
It was not until mid-2018 that ASICs first started to appear on the market for Ethash. While ASICs boost mining efficiency, they do so at the expense of mining decentralisation. Since CPUs and GPUs are widely available, pretty much anyone with a decent laptop could mine ether.
However, other methods of mining are becoming unprofitable as ASICs start to mine on the network and these relatively expensive machines price some people out of the market, preventing them from participating in Ethereum as a miner.
Ethereum’s Planned Shift to Proof of Stake
Ethereum plans to eventually move from Proof of Work to Proof of Stake, which will be a major turning point. Proof of Work refers to the fact that resources and energy are expended by miners to produce a valid block made up of transactions that can be verified easily by anyone. While Proof of Work ensures the security of a cryptocurrency, it is often criticised for its use of large amounts of energy (where Proof of Stake is viewed as a more environmentally friendly alternative).
Ethereum plans to transition to Proof of Stake with the first stage of the Serenity upgrade due in late 2019/early 2020, which means that Ethash will be deprecated and miners will no longer be needed to secure the network.
In place of miners, validators will take over the job of securing and verifying the Ethereum chain where validator must put down some ETH as collateral. It is hoped that the lower barriers to entry for a validator (32 ETH required to stake) as compared to a miner (tens of thousands of dollars in equipment and energy costs) will encourage more people to participate in the Ethereum ecosystem.
The change will also affect the issuance of ETH and hence affect the supply. While Ethereum is currently on a fixed reward schedule, the move to Proof of Stake will change this to a variable model. The amount of ETH staked will determine how much of the cryptocurrency is emitted.