How Bitcoin Works?
Bitcoin is a digital currency designed to:
1. Decentralized (no organization controls the creation or flow of money)
2. Anonymity (the ability to conduct transactions is not personal)
3. Transparent (anyone can view all transactions at any time)
All this is possible thanks to blockchain и peer-to-peer networks.
The Bitcoin blockchain is simply a file that keeps track of all ongoing Bitcoin transactions. Every 10 minutes, all new transactions are written together in блок and appended to the end of the file. Hence the blockchain.
This means that some database values do not determine your current Bitcoin balance. Instead, your current balance is just a track of all past transactions to date. Currencies are never really traded.
Bitcoin is not on a single server or cluster of servers. Instead, it is distributed across thousands of computers (called nodes) around the world, and anyone can join the network at any time.
Whenever a transaction is executed, it is distributed across all nodes in the Bitcoin network, and each node exists to verify that the transaction is correct. That’s it Bitcoin mining: you use your machine’s computing power to help validate the blockchain, and you get some bitcoins in return.
To send or receive transactions, you need a bitcoin wallet… A wallet is simply a public key (the address that other people use to send you bitcoin) and a private key (basically, a signature that verifies transactions made from your wallet) . Anyone can create a new wallet at any time, making Bitcoin an anonymous currency.
Since the blockchain is distributed across all nodes, it is completely open and transparent. Anyone can view the entire blockchain and see every transaction made.
How Ethereum Works?
Ethereum is a huge global network, distributed in a peer-to-peer network among thousands of computers around the world. The Ethereum platform uses blockchain technology in much the same way as Bitcoin, but extends it in a number of ways.
A key component of Ethereum is smart contracts.
The Ethereum platform comes with a special programming language Solidity that allows people to write Ethereum scripts, which are called smart contracts. Smart contracts are distributed across the network and executed on all Ethereum nodes upon request.
Ethereum also uses a digital currency called Ether. Since the execution of the smart contract requires computing resources, the owner of the node is compensated in Ether. The more complex the smart contract, the higher the execution cost. If the cost is too high, it cannot be done. This spurred the creation of efficient smart contracts.
The Ethereum blockchain is similar to the Bitcoin blockchain, but it contains not only ether transactions but also the results of executing smart contracts.
Every node on the Ethereum network maintains a copy of the blockchain like Bitcoin does, and the verification process is similarly called Ethereum mining. Miners spend computing resources to verify the correctness of each ether transaction and the outcome of the smart contract. In return for their efforts, they received ether.
You can also send and receive ether directly from wallet to wallet.
Ethereum proves that the blockchain concept extends beyond financial technology. Therefore, Ethereum is often referred to as “programmable money”. Yes, it is a digital currency, but a currency that can execute code.
Bitcoin vs Ethereum in Brief
While Bitcoin is just a digital currency, Ethereum is much more than that.
Bitcoin and Ethereum differ fundamentally in their long-term goals, as well as in the underlying technologies that affect their value and intended use in the wider world. E.g:
Bitcoin’s average block time is 10 minutes, while Ethereum’s average block time is 15 seconds. Ethereum transactions can be confirmed faster.
The amount of Bitcoin that can be earned as a mining reward is halved every four years. The total number of bitcoins available for bitcoin is 210,000. When miners reach this number, the mining of new bitcoins will stop. The amount of ether that can be mined during mining is limited to 180,000 per year, so new ether is always in circulation.
Bitcoin is best mined with ASICs, specialized hardware that is far superior to traditional hardware. The need for specialized hardware is driving miners into large mining pools that consolidate mining power while consolidating bitcoin mining rewards in the “mining cartels” that dominate the market. However, Ethereum is best developed with more affordable and arguably more egalitarian GPUs, even if GPU prices rise due to Ethereum mining.
Bitcoin is often referred to as “digital gold” because of its holding value and many other cryptocurrencies are “pegged” to Bitcoin’s price. Ethereum is more commonly seen as a “digital currency” because of its cost and lower entry point.
However, the main difference between the two cryptocurrencies is the ease of entering programmable smart contracts on the Ethereum blockchain. Initially, the Bitcoin network was unable to process smart contracts. With the development of Bitcoin and its blockchain, support for smart contracts has been added, although Bitcoin continues to play a minor role in this regard after Ethereum.
However, the main difference between the two cryptocurrencies is the ease of entering programmable smart contracts on the Ethereum blockchain. Initially, the Bitcoin network was unable to process smart contracts. With the development of Bitcoin and its blockchain, support for smart contracts has been added, although Bitcoin continues to play a minor role in Ethereum in this regard.
Ethereum proponents point to this ease of use as one of the main reasons why Ethereum is the future of cryptocurrency. Also, Bitcoin has traditionally been slow to implement new changes, and according to many, it still exists because it was the first cryptocurrency.