Bitcoin vs. Ethereum or What are Smart Contracts
Difference between the two of the most popular blockchains.
Study how to write smart contracts, which is the basic unit of programming a blockchain for business purposes. It is the equivalent of being taught HTML and Java during the early Internet days. And master how to create assets or tokenize existing ones on a blockchain.
- William Mougayar, Executive Chairman, Kin Foundation at Kin Ecosystem
Bitcoin and Ethereum are two of the most popular cryptocurrencies that have revolutionized the cryptic space. Bitcoin is the first cryptocurrency that came into existence and garnered people’s interest much after the rising prices. However, Ethereum gained popularity by introducing smart contracts that gave birth to Decentralized Applications (DApps). Let’s delve deeper into the post to understand them better.
Bitcoin & Ethereum: How are they Similar?
Bitcoin was born in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. It flourished in the market in 2009 after the release of open-source software. Bitcoin was created to provide people with a way to transfer money over the internet. Even in 2021, Satoshi has been anonymous to the world, and no one knows their identity.
While talking of Ethereum, it started making its presence in late 2013 when Vitalik Buterin first described it in a white paper. Vitalik argued that the vision of Bitcoin limits only by the transfer of money. It led to the development of Ethereum, intending to build decentralized applications (DApps).
The consensus mechanism that drives both of these cryptocurrencies is none other than Proof-of-Work that depends on the computing power of machines. However, Ethereum 2.0 (or Eth2) is an upgrade to Ethereum that will switch to the Proof-of-Stake algorithm for a more scalable, secure, and sustainable blockchain.
Bitcoin and Ethereum are used as a mode of payment and a store of value. While Bitcoin has shown significant returns in the past, Ethereum has created a new world powered by Decentralized Applications (DApps). Being decentralized (or free from an intermediary), Bitcoin and Ethereum are transparent, censorship-resistant, instant, work 24*7, and facilitate transactions with lower fees.
Ethereum is not just a store of value, but it provides other blockchain applications to utilize its potential. It has its cryptocurrency Ether which acts as the driving force of Ethereum for facilitating transactions on the Ethereum blockchain. It helps to run the smart contracts on Ethereum seamlessly.
What are smart contracts?
A smart contract is a programmable contract with rules and agreements between the buyer and seller that execute after meeting all the conditions. These transactions happen on the Blockchain and remain free of third-party.
Consider a scenario where you wish to purchase a car from your friend or acquaintance. The procedure seems like a nightmare with legalities and ownership transfer involving a line of pesky intermediaries. When we bring smart contracts into the frame, it will automatically transfer the ownership after transferring funds and significantly reduce time as the process is free from mediators.
Characteristics of Smart Contracts
Smart contracts are written pieces of code that execute automatically after meeting all the conditions. They offer numerous advantages apart from removing the middlemen from the frame. Smart contracts can track performance in real-time, consequently bringing tremendous cost savings. They live on the internet and run on software code that helps them execute transactions quickly. They are perfect for the DApps and make the work more straightforward and accessible.
Smart contracts are efficient, leading to more value-generating transactions that process per unit of time. They leave no room for miscommunication and cut eradicates the communication gaps. The details in smart contracts are stored permanently and don’t allow any data change.
They provide a medium of trust as there is no room for manipulation or error. It helps to achieve greater confidence when running a smart contract. In short, smart contracts lower the cost of transactions, guarantee more security, reduce reliance on trusted intermediaries, and help turn legal obligations into automated processes.
How do Smart Contracts work?
The origin of smart contracts dates back to 1994 when Nick Szabo, an American computer scientist, proposed it in his paper. He is also the inventor of a virtual currency called Bit Gold. Szabo defined smart contracts as computerized transaction protocols that execute the terms of a contract.
Developers write the code on a blockchain after defining all the terms and conditions of the event. Just as we have if/else statements that work upon meeting the specific criteria, the same is the case with smart contracts. If the conditions mentioned in the contract are met, the transaction is approved. Else the transaction gets fortified.
Once the transaction is complete, the Blockchain is updated, and the parties involved can view the results. In short, four processes govern the working of smart contracts:
- Pre-defining the contract: It is the stage of writing the rules/conditions in the smart contracts.
- Events: This stage reflects some events that trigger execution of the smart contract.
- Execution and the transfer of value: The smart contract is executed depending on prescribed conditions.
- Settlement process: The last stage involves settling smart contracts after the implementation.
Applications of Smart Contracts
The use of smart contracts made a long road to explore its applicability in every field. We can find cases where decentralized applications could have led to a better environment, even in our daily routine. With the increasing vulnerabilities of the hacks on various platforms, securing the identity was just a mere lie. uPort, a popular DApp, provides decentralized identity management to have control of your data.
The game has evolved as users can lend their computing power or storage to a stranger in return for some extra bucks. Filecoin does the job of renting your computer storage to people, while Golem rents your computing power to help you earn some extra dollars!
Tokens, NFTs, Stablecoins, Decentralized Exchanges, Marketplaces, etc., are some of the domains where smart contracts have made a defining presence in a short time. A popular marketplace, Opensea provides a marketplace to buy NFT in exchange for cryptocurrencies and provides value to the work curated by creators.
Apart from these, several DeFi DApps such as Uniswap, Sushi, 1inch Network, Degens, WinSome, and others have stood firm against the wind to maintain a spot in the market.
Ethereum led the foundation of smart contracts and inspired other blockchains to follow the same route. Polygon and Binance Smart Chain support the same smart contracts as Ethereum Virtual Machine processes them. At the same time, developers will be able to deploy the same smart contracts on Solana by using Solidity compilers like Solang or Neon Labs EVM.
The numbers are astonishing both for Bitcoin and Ethereum. The former registers a market capitalization nearly equal to $900 Million while the latter stands at $500 Million. The market dominance for Bitcoin stands at ~40%, with ~240k transactions happening daily. On the other hand, Ethereum registers ~20% market dominance with ~1.2 million daily transactions on the Blockchain. The statistics clearly show that Bitcoin and Ethereum dominate almost two-thirds of the market.
Conclusion
Bitcoin was the first and foremost cryptocurrency that received support from many individuals and companies. However, the use case of Bitcoin is limited to just being a transfer of value. On the contrary, Ethereum (with the help of smart contracts) powered the economy with decentralized applications and became the second most popular blockchain system.
