Bitcoin vs Ethereum: Differences and Similarities Between the Two Cryptocurrencies

Bitcoin and Ethereum in Brief

Bitcoin and Ethereum are both public blockchain networks, but they were built with different main goals. Bitcoin is first and foremost a peer-to-peer network that lets users send and receive BTC without a bank or other central party running the network. Ethereum is a programmable blockchain network where you can run smart contracts and applications in addition to ETH transactions.

Both networks work with a public ledger. Many nodes, or computers in the network, store and verify blockchain data. You authorize a transaction with a private key: a secret cryptographic key that proves you’re allowed to control certain crypto. A crypto wallet manages these keys and makes it possible to carry out transactions.

The Bitcoin white paper was published in 2008, and the Bitcoin network went live in January 2009. Ethereum went live on July 30, 2015.

What is Bitcoin (BTC)?

Bitcoin is a network for electronic payments between users, without a required financial middleman. BTC is the currency you can send, receive, and store on this network.

Transactions are recorded on the Bitcoin blockchain. The network uses Proof of Work to reach agreement on the order and validity of transactions. Miners use computing power to try to find a valid block. Other nodes then check whether that block follows the rules of the Bitcoin protocol.

BTC is highly divisible. One BTC consists of 100,000,000 satoshi. That means you can send even a very small part of a bitcoin.

According to the current protocol rules, a maximum of 21 million bitcoin can be issued. Miners receive new BTC as part of the block reward. The amount of new BTC per block is cut in half every 210,000 blocks, which happens on average about once every four years. This is called the Bitcoin halving.

The 21 million limit is a rule of the Bitcoin protocol. That rule can technically be changed, but only if participants choose to use software that supports such a change. Without broad acceptance, the existing Bitcoin rule does not change automatically.

What is Ethereum (ETH)?

Ethereum is a public, decentralized network where you can carry out transactions and run smart contracts. Ether, usually referred to as ETH, is Ethereum’s native currency.

You use ETH, for example, to pay gas fees. Gas is a measure of how much computing work a transaction or action on Ethereum requires. A simple ETH transfer usually uses less gas than a more complex interaction with a smart contract.

Ethereum has two main types of accounts. An externally owned account, often shortened to EOA, is controlled with a private key. A contract account is driven by the code of a smart contract. You can think of such a contract as a program with its own address on Ethereum.

Ethereum switched from Proof of Work to Proof of Stake in September 2022 during The Merge. Since then, validators have used ETH as stake to help propose and verify new blocks.

Key Takeaways

• Bitcoin is a peer-to-peer network for BTC payments without a required financial middleman.
• Ethereum is a network for ETH transactions and programs like smart contracts.
• BTC is the currency of Bitcoin, while ETH is the currency of Ethereum.
• Both networks use public blockchains, nodes, and private keys to verify transactions.
• Bitcoin uses Proof of Work, and Ethereum has used Proof of Stake since 2022.

How do Bitcoin and Ethereum work?

Bitcoin and Ethereum spread signed transactions through a network of computers that independently check the rules. Those computers are called nodes. For example, they check whether a sender is allowed to make a transaction and whether the same funds have not already been spent.

A wallet does not literally store your coins in some kind of digital jar. A crypto wallet mainly helps you manage your private keys and sign transactions. On Bitcoin, this is about spendable transaction outputs. On Ethereum, it is about balances and the state of accounts and smart contracts.

The big technical difference is how both networks organize that data and reach agreement on new blocks. Bitcoin uses separate pieces of spendable balance and mining. Ethereum works with accounts, runs code, and uses validators that lock up ETH.

How does the Bitcoin blockchain work?

The Bitcoin blockchain works with blocks that collect transactions and are secured with Proof of Work. Bitcoin full nodes check every block themselves based on the network rules and store a validated blockchain.

Bitcoin uses a UTXO model. UTXO stands for unspent transaction output: an amount from an earlier transaction that has not yet been spent. Think of it a bit like loose change you can use for your next payment.

Say you have a UTXO of 1 BTC and you send 0.3 BTC. Then the transaction uses that full UTXO and creates new outputs: one for 0.3 BTC for the recipient and usually a second output with the remaining amount for you, minus the transaction fees. A UTXO can only be spent once. That helps the network prevent double spending.

Miners collect valid transactions in a block and try to find a valid Proof of Work. Each new block refers to the hash of the previous block. You can think of a hash as a digital fingerprint of data. If someone wants to change an old transaction, the hash of that block changes too. An attacker would then have to redo the Proof of Work for that block and the blocks after it, and also catch up with the valid chain of the rest of the network.

New Bitcoin blocks are found on average about every ten minutes. That is not a fixed waiting time. Whether and when your transaction gets into a block depends, among other things, on the fee and how busy the network is.

How does the Ethereum blockchain work?

The Ethereum blockchain executes transactions and smart contract code, after which nodes check whether the new state of all accounts is correct. That state includes, for example, how much ETH an address has and what data is stored in a smart contract.

Ethereum uses Proof of Stake. Validators lock up ETH as stake to take part in the consensus mechanism. A selected validator is allowed to propose a block. Other validators check the proposed block and vote through attestations on their view of the valid blockchain.

Ethereum works with twelve-second slots. Under normal conditions, a block can be proposed in each slot, but a slot can also be empty. A block after twelve seconds does not automatically mean that a transaction is already final. Being included in a block and finality are separate steps. Finality simply means that a block can only be reversed if a large part of the staked ETH violates the consensus rules and risks heavy economic penalties in the process.

Every Ethereum transaction uses gas. The sender pays the gas fee in ETH. The more computing work a smart contract requires, the more gas is usually needed. That is why a block does not have a fixed number of transactions. Instead, a gas limit caps how much gas all transactions in a block can use together. Simple transactions and complex contract interactions do not require the same amount of computing work.

What are Bitcoin and Ethereum used for?

Bitcoin is mainly used to store BTC and send it directly to someone else. The network is designed as peer-to-peer electronic money, without a bank needing to process the transactions.

For frequent payments, there is also the Lightning Network. This is an extra layer on top of Bitcoin with payment channels. That allows payments to happen outside the Bitcoin blockchain, without every payment needing to be on-chain separately. This kind of layer does have its own considerations, such as liquidity in channels and the route a payment takes.

Ethereum has broader use within the network. You can send ETH, use it for gas fees, and lock it up as stake when you participate in Proof of Stake as a validator. Ethereum also forms a base for dapps: applications that work with smart contracts.

Examples of these kinds of applications include token issuance, decentralized finance applications, and NFT marketplaces. Tokens are digital units that can be issued and managed through a smart contract.

A smart contract carries out what is written in the code. That is useful for automatic rules, but the contract does not automatically know what happens outside the blockchain. For information such as a result, price, or delivery, extra information from outside the network is needed, for example through an oracle.

What is the difference between Bitcoin and Ethereum?

The main difference is that Bitcoin is mainly designed for transferring value with BTC, while Ethereum also offers a programmable environment for smart contracts. Both are public blockchains where anyone can send transactions and check the rules, but the technical choices are very different.

Bitcoin uses Proof of Work and a UTXO model. Ethereum uses Proof of Stake and an account model. The role of the native currency is different too: BTC is the asset of the Bitcoin network, while ETH is used for transactions, gas, and staking on Ethereum.

Basic principles of both networks

Bitcoin and Ethereum are both open networks. You do not need permission to broadcast a transaction or to run a node that checks the public rules.

Both use cryptographic signatures. These let you prove that you are allowed to authorize a transaction without giving your private key to anyone. Both also use a shared ledger to prevent double spending.

Still, the focus is different. Bitcoin keeps the base protocol relatively limited and mainly focuses on transactions with BTC and UTXOs. Ethereum keeps a shared state of accounts and contracts. That allows transactions on Ethereum to also run code.

Fees matter in both networks. Block space and computing work are not unlimited. If many users want to make transactions at the same time, fees help determine which transactions are included first.

Decentralized does not mean every service around a network is decentralized too. A crypto exchange, wallet service, or dapp can have its own rules and risks, even if it uses Bitcoin or Ethereum.

What is the difference between Proof of Work and Proof of Stake?

With Proof of Work, miners secure Bitcoin by using computing power and electricity, while Ethereum uses Proof of Stake and lets validators lock up ETH as stake. These are two different ways to reach agreement on new blocks and make attacks on the network expensive.

On Bitcoin, miners compete to find a block hash that meets the difficulty target. The valid chain with the most accumulated Proof of Work is the one nodes follow. That makes it very costly to try to change the transaction history afterward.

On Ethereum, validators lock up ETH. They can propose blocks and vote through attestations on the valid blockchain. Certain provable behavior that breaks the consensus rules, such as signing conflicting attestations, can lead to slashing. In that case, a validator loses part of its stake and is removed from the validator network. If many validators are slashed at the same time, the penalty can be much larger and, in extreme cases, can add up to the full stake.

Simply put: with Proof of Work, the cost of an attack is mainly in computing power, hardware, and electricity. With Proof of Stake, an attacker needs a lot of ETH that is at risk within the protocol and can be punished for certain dishonest behavior.

Bitcoin mining requires a significant amount of electricity. The exact amount is still an estimate because a global mining network cannot be fully measured directly. Ethereum’s energy use dropped sharply after the move to Proof of Stake, because validators no longer compete with large amounts of computing power to produce blocks.

You cannot simply say that one of the two models is always safer or more decentralized. That also depends on things like how participants are distributed, the software used, and how mining or staking capacity is divided in practice.

How do smart contracts and programmability differ?

Bitcoin has scripts for conditions around spending BTC, while Ethereum offers a general environment for smart contracts with their own code and stored state. So Bitcoin is programmable, but not in the same way as Ethereum.

On Bitcoin, a script determines under what conditions a UTXO may be spent. That can involve, for example, a valid signature. The design is intentionally more limited and is not meant to be a general environment for complex applications like Ethereum.

An Ethereum smart contract is code at a specific Ethereum address. You can send a transaction to such a contract to execute a function. The contract can store data and also call other smart contracts.

That makes composability possible. This means an application can use functions from other public smart contracts. Different applications can work together like building blocks.

The Ethereum Virtual Machine, often called the EVM, runs this contract code. Gas limits how much computing work one transaction may use. Without such a limit, a transaction could try to run unlimited computing work.

Be careful with smart contracts: a valid interaction is generally not reversible. A mistake in the code, or a transaction you sign by accident, can therefore have financial consequences. And despite the name, a smart contract is not automatically a legally enforceable agreement.

How do transaction speed and scalability differ?

Ethereum can usually propose a new block faster than Bitcoin, but speed alone does not tell the whole story. Bitcoin finds a block on average about every ten minutes, while Ethereum works with twelve-second slots.

On Bitcoin, the time until your first confirmation varies. Extra confirmations make it less likely that a transaction disappears because of a reorganization. On Ethereum, a twelve-second block time is also different from full finality.

On both base layers, capacity is limited. On Ethereum, the gas limit caps how much gas all transactions in a block can use together. If many users want to make transactions at the same time, fees can rise.

Ethereum scales mainly with rollups and other Layer 2 solutions. These process transactions outside Ethereum mainnet or bundle them, after which data or results are published on Ethereum. Bitcoin uses Lightning, among other things, as a second layer for many payments.

So do not compare only raw transactions-per-second numbers. That kind of number depends on the type of transaction, available block space, fees, the layer used, and what exactly you are measuring as final settlement. Bitcoin on the base layer, Lightning, Ethereum on the base layer, and a specific rollup are not directly comparable one to one.

What are the pros and cons of Bitcoin and Ethereum?

Bitcoin and Ethereum have strengths, but also clear limitations. What matters more to you depends on what you want to do with crypto.

Possible advantages of Bitcoin:

• The main goal is relatively simple: store and send BTC within a peer-to-peer money network.
• According to the current protocol rules, the maximum supply is 21 million BTC.
• Full nodes can independently verify blocks and transactions.

Possible disadvantages of Bitcoin:

• Proof of Work mining uses electricity.
• New blocks are found on average about every ten minutes, so confirmations can take time.
• The base layer has limited block space, which can cause fees to rise when the network is busy.

Possible advantages of Ethereum:

• Smart contracts make programmable assets, tokens, and dapps possible.
• You use ETH for gas fees and staking.
• The switch to Proof of Stake has greatly reduced electricity use compared with Ethereum under Proof of Work.

Possible disadvantages of Ethereum:

• Smart contracts and dapps make the system more technically complex and bring extra risks, for example from errors or vulnerabilities in contract code.
• A contract interaction that has already been executed is generally not reversible.
• Gas fees vary and can rise when demand is high.

The same basic risk applies to both networks: if you lose your private keys, you can lose access to your crypto. Phishing, fraud, hacks at service providers, and sharp price swings can also lead to losses. So never share your seed phrase or private key with anyone else.

What role do Bitcoin and Ethereum play in the crypto market?

Bitcoin and Ethereum each have their own role in the crypto market because BTC and ETH do different things within their networks. BTC is the native asset of a peer-to-peer money network. The limited supply under the current protocol rules and the focus on value transfer are central here.

ETH has multiple functions within Ethereum. You pay gas fees with it, validators lock it up for Proof of Stake, and applications on Ethereum use it as currency within their ecosystem.

The way new units and fees work is different too. Bitcoin rewards miners with new BTC from the block subsidy and with transaction fees. Ethereum issues new ETH as a reward to validators. At the same time, since EIP-1559, the base fee of Ethereum transactions has been burned, which removes that ETH from circulation.

The market price of BTC and ETH is not fixed in the protocols. It is formed on markets and can swing sharply. Crypto can therefore be very volatile, and you can lose a lot or even all of the value you put in.

In the EU, MiCA sets rules for, among other things, crypto service providers, transparency, and the protection of customer assets. That does not mean BTC or ETH themselves are protected against price losses or that a regulator has approved them as suitable investments. If you use a provider that is not authorized under MiCA, the related protection rules also do not apply in the same way.

Conclusion

Bitcoin and Ethereum are both important public blockchain networks, but they were designed for different uses. Bitcoin is mainly about BTC as a peer-to-peer money network. Ethereum combines ETH transactions with a programmable environment for smart contracts and dapps.

That also means their technology and tradeoffs are different. Bitcoin uses Proof of Work, UTXOs, and longer average block times. Ethereum uses Proof of Stake, accounts, gas, and smart contracts. Neither one is automatically better. It depends on what you want to do with it and which features and risks matter to you.

If you use BTC or ETH, it helps to understand the basics. Manage your private keys carefully, pay attention to fees, and keep in mind that crypto can move sharply in value.