Crypto Compass

Bitcoin and Ethereum Explained

Bitcoin

What is it?

In the first post we dove into what exactly cryptocurrency is, but not any of the specific forms. Even if you have literally no idea what cryptocurrency is, you’ve most likely at least heard of Bitcoin. That’s because it’s the most popular form of cryptocurrency in terms of market capitalization, user base, and popularity.

How is it created?

New Bitcoin is released through the process of mining. In the first Crypto Compass post, I explained how mining works, authentication of transactions and being rewarded with respective cryptocurrency. I won’t dive back into that again here at the risk of being boring or redundant, but this reward for the miners is how new bitcoin is released into circulation. In fact, mining is the ONLY way to release new Bitcoin into circulation. There is a fixed reward given to the miners, and after every 210,000 blocks mined (or in plain English around every four years), the reward given to the miners is cut in half. This slows the rate at which new bitcoins are released into circulation, and its purpose is to control inflation. The final bitcoin won’t be circulated until the year of 2140.

What’s the point?

Bitcoin is used as a currency and as an investment. While Bitcoin is not as commonly accepted as something like the U.S. dollar, there are places that accept Bitcoin as payments. Some apps allow you to pay with it as well, even if the vendor doesn’t accept it. Using it as an investment is more popular, but just as a reminder, this is not investment advice, I am merely providing more information on the topics.

Ethereum

What is it?

Ether is the second-biggest cryptocurrency by market cap (its total dollar value) after Bitcoin. Ethereum is a network and Ether is its native cryptocurrency. While Bitcoin was developed to be a decentralized form of money, Ethereum’s purpose was to be a decentralized computing platform. It takes the security and openness concepts of the blockchain technology and applies them to computer programs, rather than financial transactions. So, in this way, Ethereum goes a step beyond Bitcoin in that, on top of having its own digital currency, it offers a digital platform on which developers can build and run applications.

What is it good for?

As much as I want to answer this question with “absolutely nothin,’” the potential application of Ethereum is actually super-interesting, and the opportunities are vast. If you’ve been bored reading about crypto up until this point, this might be what does it for you.

Before we get into how Ethereum works and its implications for the future, I want you to think about the internet and technology as we know it. When you go on the internet, almost everything you do involves giving your personal information to a company online. I promise I’m not about to dive into a conspiracy theory, it’s just a fact. Whatever kind of account you set up online, the information is stored on the company’s server. Most of these computer systems and websites are operated by big technology companies who run the servers on behalf of the companies you’re doing business with. It’s proven to be pretty convenient, but it has significant down sides. For one, your personal information in these systems is more vulnerable to hacking. And if you’re trying to start a new app, website, or any kind of computer program, paying these big companies to run these servers for you can also be expensive.

Ethereum is revolutionary because it’s the first platform that allows online computer systems to run without using any third party. The computer systems are cheaper to run, and your personal information can become more private because there’s no company storing that information forever. With blockchain technology, company computers and cloud servers (a centralized system) are replaced with a network of many small computers run by volunteers on the network (a decentralized system). There’s the word again – decentralized. To sum it up, Bitcoin is decentralized in that it takes the banks out of transactions, whereas Ethereum is decentralized in that it takes the big tech company and its computer servers filled with data out of the equation.

So, how’s it different?

To show you how Ethereum could change the internet as we know it and provide you with some of the many potential uses for it, let’s start with an example that everyone can relate to: texting. When two people are texting, there’s a third party like Facebook or Apple or Google that functions in between the two individuals (there are those big tech names again). So, the information is going from person to company to person. Now personally, I don’t care because it’s not like I can write my own code for some kind of application myself. But there are some iffy consequences of this set up; for example, all the information that’s being exchanged is being stored forever on these companies’ servers. On a decentralized Ethereum messaging app, it’s truly person-to-person communication – no middleman. It’s not run by a company, but instead the network of independent private computers from around the world. But your message and its content aren’t just circulated for everyone on the network to see, it’s actually encrypted (we are talking about cryptocurrency, remember?). Only the sender and receiver can see their messages.

A program like this example is called a decentralized app. You may have heard the term DeFi apps, which are just decentralized financial apps that runs on a network like Ethereum without any middleman companies, or the term DOA, which stands for decentralized autonomous organizations. Ethereum allows these apps and organizations to run without any middlemen because it uses smart contracts. Basically, you have someone writing agreed-upon rules into computer code that executes automatically when the agreed-upon rules are satisfied. The potential applications of smart contracts are endless, but I’ll give you one more example so you can see how cool this really is. With Ethereum and smart contracts, you could create smart insurance polices that are automatically sold and managed on these peer-to-peer systems. The smart contract could be structured to automatically charge you a small fee for only the miles you actually drive, making insurance more customized.

But wait… what about Ether?

As I briefly mentioned earlier, Ether is the native cryptocurrency on the Ethereum network. In order for these smart contracts to be able to automatically send and receive money, they need 100% digital money. Enter: Ether. In addition to smart contracts, Ether is used to pay all the volunteers who help to run the system with their computers, since they’re paying for electricity and using hardware to do this. Decentralized apps running on the Ethereum network also have to pay a small fee to use the network, which they use Ether to pay for, but it’s still a lot cheaper than the standard third-party fees paid to companies who store, organize and process the data online.

Let’s sum it all up

Decentralization is the main theme; it’s the underlying goal of the cryptocurrency world. Now, you know about the two most popular forms of cryptocurrency today. When you understand how two forms of cryptocurrency work and how they’re different, it becomes a lot easier to learn about other forms. Because Bitcoin and Ethereum laid the groundwork for the cryptocurrencies that followed, there’s not a whole lot more to learn with new cryptocurrencies except their names and nuances.

This article is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.

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