The difference between Bitcoin and Ethereum
Like Bitcoin, Ethereum is a blockchain protocol. That means: a network of computers that together keep one shared ledger, without a central boss. So far they are the same.
But one thing is fundamentally different:
- Bitcoin is a decentralised protocol for payments.
- Ethereum is a decentralised protocol for applications.
Bitcoin has one purpose: transferring value. Ethereum has a broader purpose: it runs programs. That opens the door to tokens, smart contracts, DeFi, NFTs and more.
Ether, tokens and the Ethereum economy
On the Ethereum network there is one main coin: ether (ETH for short). Ether is the currency and unit of payment of the network. Just like bitcoin you can use it to transfer value, but within Ethereum it has a second function too: it pays for running programs on the network (the "gas fee").
Alongside ether there are thousands of other coins on Ethereum. Those are called tokens. Every token belongs to a decentralised application, a dApp. Want to do something within that dApp, play a game, vote, swap? Then you often pay with the matching token.
How can all those dApps run on one network? The answer lies in the next block: smart contracts.
Smart contracts, agreements that execute themselves
A smart contract is not a paper contract and not artificial intelligence. It is a set of rules laid down in advance that automatically carries out an action as soon as the rules are met. No more, no less.
An example:
An insurer enters into a smart contract with a farmer. In case of extreme drought (measured through a weather service) the farmer automatically receives a payout. No claim to file, no loss adjuster. The contract arranges it itself.
That sounds clever, but above all it is consistent. The contract takes no account of human factors that are not in it. Did you not write down an exception? Then that exception does not exist either.
Nodes and validators, who guards the network?
A node is a computer that takes part in the network and keeps a copy of the entire blockchain. On the Bitcoin network, nodes and miners only check transactions: has this money already been spent? Is the signature correct?
On the Ethereum network it goes a step further. Nodes check not only transactions, but also the state of smart contracts. What has changed in the contract? What has to happen now?
Back to the farmer: the contract looks at the weather, sees drought, and changes its state to "pay out". Nodes check whether that change of state happened according to the rules. If so, it becomes final.
An important difference since 2022: Ethereum used to use, just like Bitcoin, proof-of-work (miners solving computational puzzles). In September 2022 the network switched to proof-of-stake. Validators put up their ether as collateral to validate transactions. That uses 99.95% less energy. The original still spoke of miners, and that role no longer exists on Ethereum.
Why is Ethereum not superfast?
Every change of state in a smart contract has to be checked by a large part of the network. Only when all validators agree does the change become final. That makes for security and transparency, but not for speed.
An Ethereum developer once put it like this: "A good rule of thumb: you cannot do more with an Ethereum application than with a smartphone from 1999." That was about the Ethereum of 2018 to 2019. A lot has changed since then: layer-2 networks (such as Arbitrum, Optimism and Base) process transactions largely off the main chain and make Ethereum considerably faster and cheaper. The rule of thumb above remains a good picture of the main chain, but for daily use plenty of apps lean on layer-2.
Applications, what is Ethereum used for?
Category | What it does | Examples |
|---|---|---|
DeFi (decentralised finance) | Borrowing, lending, swapping, without a bank | Aave, Uniswap, MakerDAO |
NFTs | Proof of ownership of digital or physical items | OpenSea, art, gaming items |
Decentralised exchanges | Trading crypto without a central party | Uniswap, Curve, Balancer |
Games | Games in which items are real tokens | Cryptokitties (a classic), Axie Infinity |
Browsing and advertising | Advertisers pay readers directly | Brave Browser + BAT token |
Not everything has proved equally successful. Cryptokitties was the first viral dApp in 2017, but now has barely any users. DeFi and NFTs, by contrast, have grown strongly in recent years and are now the centre of gravity of the Ethereum ecosystem.
Not investment advice. The examples above are for illustration. Always do your own research before you invest in a cryptocurrency, token or application.
Ready to experience Ethereum yourself?
Understanding how Ethereum works is one thing, using it yourself is another. At BTC Direct you buy your first ether from €30. After that you can experiment with wallets, dApps and, if you want, staking.
Further reading
- What is Ethereum?, an explanation of the whole Ethereum ecosystem
- How do I buy Ethereum?, a buying guide in three steps
- Ethereum price, the current price and history
- Ethereum wallet, storage solutions compared
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