Bitcoin and Ethereum: different protocols, different currencies.

You can find the french version here.

All the friends with whom I regularly talk about crypto have asked me this: “Should I buy Bitcoin or Ethereum? Which one is better?”. As I thought many must be asking themselves the same question, I started writing and ended up with something I think is much more valuable: how deeply different they are.

In the crypto-twitter sphere, countless hours have already been spent debating over which of Bitcoin or Ethereum is “better”. Here, better usually means more decentralized, secure, or even “valuable”. In this post, I want to explain why I think they are simply too different to be evaluated against one another, and shouldn’t be seen as exclusive but rather complementary.

I will start by looking at the differences between the goals of each protocols (Bitcoin and Ethereum), and continue by comparing their respective currency (bitcoin and ether, or BTC and ETH). This should help us understand how Bitcoin and Ethereum complete themselves in a very useful way rather than obfuscate one another.

Two Decentralized Protocols with Different Objectives

The first thing to know is that Bitcoin and Ethereum were not made with the same goal in mind. They are not two different means to the same end, but are inherently different both in how they work and what they do (or intend to do). It is obvious when reading the titles of their whitepapers:

• “Bitcoin: A Peer-to-Peer Electronic Cash System”, Satoshi Nakamoto, October 2008
• “Ethereum: A Next Generation Smart Contract & Decentralized Application Platform”, Vitalik Buterin, July 2015

Bitcoin is intended to be a decentralized payment network. Ethereum is a platform to power smart contracts and decentralized applications.

Their characteristics and actual developments today simply reflect these different objectives. To strive as a payment system, Bitcoin needs stability and finality. It was designed with this in mind from the start. As a consequence, Bitcoin Core, the main protocol, hasn’t suffered any deeply modifying changes since it first came out. A lot of updates have been realized (we’re now at version 0.20.x), but when an important update was discussed in 2017, the Bitcoin Core community chose to go with stability rather than change.

Ethereum, on the other hand, needs more built-in complexity to handle all the functionalities smart contracts and decentralized applications have to offer. Even if a lot has been done before launching the original version, many features and updates are yet to be implemented to fulfill the original vision. Naturally, this makes it a less stable protocol, with a community ready to take on more risk for the sake of innovation. A striving example is the current update taking place right now, from ETH1.0 to ETH2.0. This update has been under development for more than 2 years now, and is expected to take between 1 and 2 more years to be fully working. It includes core changes to the protocol like switching from Proof-of-Work to Proof-of-Stake (different consensus algorithms, which are central pieces of every decentralized protocol).

With such core differences between Bitcoin and Ethereum at the protocol level, it doesn’t come as a surprise that their associated cryptocurrencies, bitcoin (BTC) and ether (ETH), reflect them.

Different Protocols Imply Different Native Currencies

Now that you grasp the differences at the root of the Bitcoin and Ethereum protocols, you should start to understand why both assets must be playing different roles in their network. Let’s have a look at what sets BTC and ETH apart, and how it results in terms of investment opportunity.

As a Decentralized Payment System, the Bitcoin network needs a native currency to denominate the amounts being transferred and incentivize the network in some sense. To make the system resistant and its currency valuable, Satoshi Nakamoto made sure bitcoin had some very specific characteristics: the maintainers of the network verifying transactions are rewarded in bitcoin, the fees users pay to transact have to be paid in the system’s currency, and its issuance decreases over time, up to a maximum limit of 21,000,000 coins. These characteristics create internal incentives for the network’s users to value bitcoin. It is at the same time a unit of account, a medium of exchange, and a scarce (limited) asset required to use the network.

As a Decentralized Application Platform, the Ethereum network needed something entirely different, able to power its platform. In the Ethereum whitepaper, we can read that: “”Ether” is the main internal crypto-fuel of Ethereum, and is used to pay transaction fees.”. As we can see, ether was not intended to be a currency per se, but rather a “fuel” to power the execution of transactions, needed to run and interact with smart contracts and decentralized applications. As a result, different tokens can be created or transacted over the Ethereum network and its decentralized applications, but only ETH can be used to pay transaction fees. As such, it is probably closer to a commodity than a currency.

As it appears, the features of each cryptocurrencies should give it some value. As they are required to pay for transaction fees, demand for BTC and ETH should grow along with the growth and use of the networks themselves. On one hand, ETH is used only to pay for fees*. However, more currencies can be created and used to transact on the Ethereum network, and more complex types of transactions can take place there. On the other hand, BTC is used not only to pay the fees but also to realize the actual transactions.

*After ETH2.0 update is completed, ETH will also be used by nodes to validate transactions, participating in Proof-of-Stake. Validators will get rewarded in ETH. You can learn more about it here.

Bitcoin And Ethereum

I think that Bitcoin and Ethereum are just too different to be evaluated against each other in an exclusive way. Comparing them has nothing to do with comparing Macs & PCs, or iOS and Android. They are different at much deeper levels, both in how their networks work, and how their native cryptocurrencies are used. These differences allow each protocol to learn from one another, while exploring its own set of applications.

Having this kind of diversity will most likely turn out to be beneficial for the two protocols and the industry in general. After Bitcoin paved the way for decentralized currencies, a whole set of decentralized financial applications (DeFi) is now being built on top of Ethereum. I believe we have yet to grasp the size of the innovation wave the Bitcoin and Ethereum protocols launched.

Key Takeaways:

• Betting on Bitcoin is betting on something very promising as a digital store-of-value and potentially medium of exchange, that is working well already and shouldn’t change drastically. Its associated cryptocurrency, bitcoin (BTC), can be considered as the network’s currency.
• Betting on Ethereum is betting on something very promising as well, but much younger and entirely different: a decentralized applications platform. As core parts of the protocol are still under development, it comes with additional uncertainty also allowing for more innovation. Its associated cryptocurrency, ether (ETH), can be considered as the network’s fuel.