Since Vitalik Buterin announced Ethereum at the 2014 North American Bitcoin conference, it has gained considerable popularity and is commonly compared with bitcoin. However, though there are similarities, Ethereum is not directly in competition with bitcoin. A short description of each of them will give you a better understanding.
Bitcoin was the first virtual currency. The purpose of bitcoin is to provide an alternative medium of exchange competing with fiat currencies. It is based on the distributed ledger system with no central authority such as a central bank or government. Bitcoin promises lower transaction fees than ordinary online payment mechanisms. There are no physical bitcoins but just balances associated with particular public and private keys (wallets).
Bitcoin and Blockchain: The Relationship
Blockchain is the technology that powers bitcoin. It is impossible to discuss bitcoin without mentioning blockchain. Actually, ‘Bitcoin’ (capitalized) is sometimes used to refer to the bitcoin blockchain while ‘bitcoin’ (lower case) refers to the digital currency itself.
Blockchain is a public ledger of all transactions executed in a particular system. Transactions are packaged into blocks and constantly added to the existing chain of blocks making it larger with every transaction. These blocks are added to the blockchain chronologically through cryptography making them almost impossible to manipulate.
Ethereum is a network of virtual machines that you can use to run distributed applications (DApps). The computer programs are designed to automatically execute contracts when certain conditions are met. Ethereum has a decentralized public blockchain used to cryptographically store, execute and protect contracts. This is made possible by a distributed network of computers each of which downloads a small virtual machine to sync with the Ethereum blockchain and execute contracts when necessary. This distributed network of computers provides the reliability, security and the computing power required to carry out designed arrangements. The Ethereum blockchain supports many applications often referred to as blockchain 2.0.
Ethereum and Digital Currency
Unlike bitcoin, Ethereum is not just a digital currency. The digital currency running on the ethereum blockchain is referred to as ether. Ether is used in ethereum run applications to monetize work. However, it has gained popularity as a digital currency and is traded in digital currency exchanges like any other cryptocurrency.
Although both bitcoin and Ethereum are based on the principles of distributed ledger and cryptography, they have differences. These differences are both technical and purpose based. Technically, while the bitcoin blockchain uses stack based programming languages, Ethereum uses turning complete. Their basic builds are also different, with ethereum using ethash and bitcoin using SHA-256, a secure hash algorithm. In terms of block time, a bitcoin transaction is confirmed in minutes while that of ethereum is confirmed in seconds.