Ethereum Vs Bitcoin: What’s all the Fuss about?
Let me explain it to you in layman's terms
Is Ethereum a Bitcoin Rival? No.
The reason why certain tribes see it as an even better innovation than Bitcoin is because of its programmable blockchain.
These blockchain technologies, as a whole, are about making trade-offs between security and flexibility.
More flexibility comes at a cost to security.
Bitcoin is still by far the most secure and decentralized open blockchain on the internet, and that gives us a very robust monetary system. Its 21 million fixed cap, ensures the supply cannot be inflated artificially, so in that very sense, its closer to gold than it is to our fiat based monetary systems.
That however is not the purpose of Ethereum’s design.
It doesn’t compete with Bitcoin in that sense.
The purpose of Ethereum is to be more flexible, in order to do carry out a much broader range of programmable smart contracts. (Did you know that Bitcoin has smart contracts as well?)
These programmable smart contracts are not going to be as secure as Bitcoin because of this flexibility.
That’s how the trade-off works.
Explain Ethereum to me like I’m 5?
Credit to Reddit user eMixologies who gave this very simple scenario.
Ethereum shares the first aspect similarly with Bitcoin.
Let’s say there is a book. A book on the internet and everyone has a copy of it. You can store everyone’s transactions and balances right there, everyone and anyone can access and see them.
Its all transparent, so you cannot cheat by deleting it or adding extra stuff for your own self. (this is known as the distributed ledger technology, also known as the Blockchain)
Now, if I have $12 in my account or balance, everyone would be able to refer to their own “book” and verify that I do indeed. (The whole idea is to remove the human governance factor out of the equation from the entire monetary system that is so prone to tampering.)
Now, here’s where Ethereum excels more flexibly.
Ethereum is asking more from this book by making it execute certain instructions agreed upon by the participants.
Say I made a bet with a bookie over a football match. If I lose, I would lose $100. But if I win, they would have to pay me $500.
The problem is, many times the other party doesn’t honor the bet and get away with it if I don’t ever confront him. That’s part of the nature of human beings. And so with this special book, I can write a formula with the terms that says; If win = get $500; if lose = (-$100) and get myself and the bookie to sign on it. The contract would then be enforced automatically when the time comes.
So, the sore loser can never change their minds.
This how a programmable blockchain works (a.k.a Smart Contract)
Now, When you think about the applications for this, the sky is the limit. It’s like the internet 3.0.
Not to mention functional possibilities from voting/consensus, joint party agreements, storing information, registration, membership, etc..
However, a majority of the Ethereum based projects have not seen any real-life applications. It’s all talk at the moment, so be a skeptic when someone inserts the word “decentralized” or even “blockchain” in front of their XXXX project. (many of these projects do not need to be on the blockchain, it’s essentially a very slow database)
What is Ether?
Ether (ETH) is a digital currency/token/coin that powers the Ethereum blockchain to incentivize participants interacting within the network.
Without the economic aspect of the network, there will be no incentive to secure, verify and execute transactions because all this work comes at a cost. (Computational power & electricity)
And because of supply and demand, each ETH has value. On and off-ramps that exchange ETH for fiat money allows them to cash out at any time.
With coin exchanges, comes the smart money and speculators who see the bright long term growth in Ethereum and then choose to invest in them bringing in more monetary value into the network. Volatility attracts traders to the ecosystem as well giving it more liquidity.
That is essentially what gives ETH value.
Who is the founder of Ethereum?
Vitalik Buterin a Russian-Canadian born programmer started writing the Ethereum whitepaper in 2013. He came across Bitcoin way before that and wrote on blogs such as Bitcoin Magazine.
He proposes that Bitcoin needs a scripting language to further its application development potential, but unfortunately he couldn’t reach consensus within the development community. So he went ahead and develop his own decentralized mining network and software development platform.
In his words:
In 2011, searching for a new purpose in life, I discovered Bitcoin. At first, I was skeptical, and did not understand how it could possibly have value without physical backing. But slowly I became more and more interested. I started writing for a blog called Bitcoin Weekly initially at a meek wage of $1.5 per hour, and soon with Mihai Alisie cofounded Bitcoin Magazine.
In 2012, I entered the University of Waterloo; in 2013 I realized that crypto projects were taking up 30h/week of my time, so I dropped out. I went around the world, explored many crypto projects, and finally realized that they were all too concerned about specific applications and not being sufficiently general – hence the birth of Ethereum, which has been taking up my life ever since.
What is mining for Ethereum?
In the real world, miners extract valuable minerals or metals from the earth. This is called mining.
Mining is also an integral aspect for all cryptocurrencies and not just for Ethereum – The process involves forming new blocks that are added to the blockchain just like the short clip below. Read about Mining Profits here.
Of course they do more than just create these blocks. Aside from getting rewarded with ETH for accomplishing mathematical or computational guesses to a unique “puzzle”, the whole process secures, verifies and propagates blocks of verified transactions to the open blockchain.
Mining for Cryptocurrencies is an extremely energy intensive process just like any gold/mineral mining operation. You can check out this report on how much energy it takes to mine just for Gold alone.
I find people shouting about the use of energy in mining cryptocurrencies referring to News outlets like “Bitcoin mining consumes more electricity a year than Ireland” as boring and uninformed as a child.
Mining doesn’t work to create Bitcoin.
That is not the purpose of mining. Mining is not used to create Bitcoin.
That is the side effect.
Why did Satoshi Nakamoto intended it to be a side effect? Because one day there will be no more Bitcoin left to mine. 21 million is all there is.
Guess what? Mining will still continue to operate even after the last BTC is mined. Its purpose is now not to create more BTC, but to provide security.
Mining validates all of these transactions and blocks to make sure they’re valid. They are rewarded in BTC for doing this right.
Once you understand the role mining plays within this elegant system, you’ll begin to realize that we’re essentially paying for our own security, the security of our monetary value; our wealth.
In physics, the definition of energy is that in which it allows work to be done. Remember your high school physics which says that “Energy can neither be created or destroyed, merely transformed.“
Well, even a $100 bill presents significant economic energy not just from the paper being used, but from the price (economic energy) it represents as a function of supply and demand.
A physicist’s own account on how Bitcoin obeys The Laws of Thermodynamics by the conservation of energy; suggests that miners are merely converting electrical energy into economic energy.
There is an inevitable trend in human expansion and civilization for entropy (disorder) to increase. The mere fact that we’re here living and breathing, populating and breeding, creates an almost out of control energy consumption.
Why so much effort for a chain of blocks?
Tamper Evident. The blockchain ensures that you can’t change something without anyone noticing. You can tamper with it, but there is evidence of your tampering.
Man in suits do this all the time, especially in countries where corruption is prevalent. Our economic policy is subjected to the political whims of a few powerful men. Read Decentralized Systems.
Tamper-proof. The blockchain doesn’t give you this added security, it is the proof-of-work consensus algorithm that gives Bitcoin this tamper-proof capability. Hence, Bitcoin has the characteristics of immutability.
Having a blockchain project, doesn’t necessary mean its immutable.
Bitcoin is immutable because of the Proof-of-work consensus algorithm and Not because of the blockchain.
Ethereum also uses Proof-of-work (PoW) but are in the midst of making a switch to Proof-of-stake (PoS).
PoW is also PoS, but PoS is not also PoW. Let me explain that to you in a minute down below.
What is Proof of Work (PoW)?
PoW solves a very long standing problem in computer science called the “Byzantine General’s problem.” Much earlier networks and systems fail to achieve immutable peer-to-peer decentralization simply because there were no solutions to this problem.
Essentially what this means is how a large network (like the open blockchain/internet) can be trusted when say you send someone $12, how could you be sure that someone else isn’t eavesdropping and tampering with it by changing the amount to $50.
Imagine that in a network of over a billion people. It would be chaos and uncoordinated leading to a failed system.
In our current system, we have to place our trust in a centralized third party like a bank or the government whether we like it or not and trust them with our money. If you’re thinking this whole system is working pretty well, think again.
And that is why immutable, peer-to-peer decentralized systems were the holy-grail of the internet. The next evolution for the internet is simply being trustless.
Meaning, A can send to B without B having to trust A. We don’t need C to step in.
Using the PoW protocol, Satoshi Nakamoto was then able to solve this problem and create a peer-to-peer decentralized network that was immutable.
Credit to Andreas Antonopolous for his wonderful eye-opening speech on PoW:
Imagine PoW as evidence of work being done to say that I matter or I exist. Major civilizations in the past use PoW as their testament to future generations.
The Great Pyramids of Giza in Egypt is a very ancient example of PoW. It says to us that this is their masterpiece, their work of art, the measure of their magnificent civilization.
Perhaps, aside from that single declaration, the pyramids served other alternative purposes as well. But that is another subject for debate.
Even today, we build skyscrapers, each one taller than the last one. Each more expensive & impressive than the last. You can’t build these monumental things that stands the test of time cheaply.
Its expensive, energy intensive and you need tons of resources for it to even stand majestically over time.
Anyone without a single clue about how expensive and energy exhaustive will still drop their jaws in awe the moment they see these magnificent wonders of our civilization.
There is simply no cheap way of doing something like that.
Now if Bitcoin continues to work like that for the next decade, a century or even a millennium, that’s truly a monument to our own digital civilization. Something built for the people, by the people.
What is Proof-of-Stake (PoS)?
PoS is virtualizing the entire mining process.
Remember I said, PoW is also PoS, but PoS is not also PoW?
In PoW, miners have to commit thousands of dollars worth of electricity behind the security work they’re doing for the network. If they don’t do it right, they break the rules, they’d lose their electricity stake in the form of BTC.
Hence, PoW is PoS. Electricity costs BTC. The system is enclosed with the native asset.
In PoS, the stake is not intrinsic to the system. You’re NOT using the native asset, you take something from outside and put a value on it (say fiat currency) determined by several other human factors, the system is now essentially open.
Open to external factors like the value of a currency. A currency in which we wholeheartedly decided to remove the human factor from making authoritative decisions in the first place.
It may be worth much less or worse, nothing tomorrow. The value of your stake is now subject to these variables, time + people.
Electricity on the other hand is fixed in a sense that its value is always equal to how much energy you use.
Today, tomorrow or in the future, that electricity is the same. On the flip side, the value of a currency may not be the same.
So, PoS is not PoW.
PoW presents an incredible artifact for an immutable digital system. Each block has proof of the amount of work/energy it takes to produce that kind of number. So you know its real and not forged.
Its all within the equation. There’s no outside variables.
The energy within the PoW system is always expending. You cannot cheat or tamper with it. So that’s why the longer Bitcoin survives, the more secure it gets. Now its close to impossible for a 51-percent attack.
It’s managing on a Global scale the monetary system of the world (potentially reaching out to 7 billion people), which is thermodynamic-ally safeguarded and immutable.
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