Will Ethereum Surpass Bitcoin?
Cryptocurrencies may have started out as alternate payment vehicles and separate asset classes, but with each passing day, they continue to upend the concepts and economics of traditional investments.
Although Bitcoin deserves immense credit for being the oldest cryptocurrency and paving the way for altcoins to follow up and diversify their utility and use cases over the years, it now faces competition from others as the numero unoof the crypto kingdom, especially from Ethereum.
Agreed, they are the two biggest cryptocurrencies by market capitalisation, with more overlapping similarities than we can count. But on a closer look, they are completely different animals, developed for different purposes and with different internal dynamics.
Let’s see about these differences and also explore whether Ethereum has what it takes to unseat Bitcoin as the king of crypto.
History and Fundamentals
Bitcoin first released on January 3rd 2009 and Ethereum’s live blockchain was launched initially on July 30th 2015. Both are built using blockchain technology. Decentralisation is the core principle that binds the networks of both the cryptocurrencies and they are both inherently digital forms of money or a store of value.
Having said that, the divergence between the two began way back in 2013 when Vitalik Buterin published the Ethereum White Paper and argued that a blockchain could do so much more than just be a money database. That brought a schism in the application, use and valuation between Bitcoin and Ethereum.
Bitcoin was designed to secure a peer-to-peer decentralised payment system. It works on a proof-of-work (PoW) system, meaning that in order to further the blockchain one must solve complex mathematical problems.
Ethereum, on the other hand, is so much more than just a payment system. It is a decentralised platform that (a) runs smart contracts and (b) allows developers to build other crypto-oriented apps (e.g. DeFi, NFT, DAO) on it. The Ethereum network also processes transactions faster than Bitcoin and it is less energy-intensive. Plus, many cryptocurrencies are actually issued over the Ethereum network, which gives it the character of a crypto-repository.
There is also a fundamental difference in the functionality of Ethereum. It’s currently undergoing transition from the PoW to the proof-of-stake (PoS) system. This means that unlike earlier when miners with the most math-solving ability (and computing power) had an edge in creating new tokens, now, miners with the largest ownership stakes have an advantage.
Bottom line is, Ethereum is more versatile than Bitcoin with a far greater number of use cases. Its flexibility gives its blockchain network limitless potential.
Blockchains of Contention
Allow us to answer a couple of questions which have been brewing inside your brain.
One. Why did developers choose Ethereum as a computing platform to build apps and not Bitcoin?
This has to do with history, to some extent. Ethereum was invented as an alternative to Bitcoin by some progressive crypto-developers in the early years whose suggestions to diversify the Bitcoin blockchain was blocked by the Bitcoin maximalists who wanted to keep it “simple”.
So, the developers went ahead and created a new blockchain with a new scripting language calling Solidity. This script or code, unlike Bitcoin’s, had loops. Loops which could be used to host more complex and a wider variety of smart contracts than Bitcoin.
Two. Why is Bitcoin more valuable, then?
It is because of its limited supply. There will only ever be 21 million Bitcoin tokens in existence which makes them a finite reserve and hence the prospect of its scarcity drives up its value, among other reasons.
Ethereal Truths
Bitcoin is still the leader amongst cryptocurrencies. But its potential isn’t exactly limitless. The finiteness in its availability is limit number one. Limit number two is the fact that it is a highly speculative asset which isn’t backed by anything despite having a trillion-dollar market cap. Bitcoin was created largely for one purpose — to make blockchain-enabled money transfers, or essentially, to be a cash replacement.
Ethereum, in addition to incorporating that purpose, incorporates others, making it a general purpose blockchain. Its derivative and accommodative nature offers room for creation of other softwares and applications to supplement the growth of the blockchain and also generate further possibilities.
One of the upgrades that has been included in Ethereum’s new and improved format (Ethereum 2.0) is sharding. Sharding is basically the pinnacle of decentralised blockchain technology which ensures that the speed and efficiency of data verification process in the chain isn’t hamstrung by the slowest participant. Instead, it enables parallel verification which increases capacity.
It is this flexibility of Ethereum that has enticed the developer community towards it. Its higher innovation index remains key to its advantage over Bitcoin. What proves this further is the fact that people are actually starting to hold their bitcoins on the Ethereum chain now. This is known as “wrapped Bitcoin”.
FYI: The native token of the Ethereum chain is called Ether (ETH). Other altcoins mirroring Ethereum are Cardano (ADA) and Solana (SOL).
Ethereal Limitations
The transition from PoW to PoS systems, though seems sensible, so as to avoid using tremendous amounts of computing power (and thus reduce carbon footprint). Yet, it is still flawed.
With PoS, users are now required to put up collateral or “stakes” in the form of ETH. Miners will be replaced by “validators”. But this also means that validators with large stakes can have excessive influence on transaction verification, potentially leading to forgery.
The next rider in Ethereum’s success is the issue of scalability. With its multifarious and multi-dimensional applications, the Ethereum network is often prone to clogging. This essentially overloads the chain and reduces transaction speed to as low as 15 per second.
With reduced transaction speed, there is a rise in transaction costs called “gas fees” which makes it untenable for people to opt for the network after a point. These problems have led to many users switching to Ethereum-identical networks like Cardano or Solana. The Ethereum 2.0 revamp is expected to mitigate these issues (throughput: 15,000 transactions per sec) but that is still a process in development.
Bitcoin is also comparatively more price-stable than Ethereum due to its outsized market cap and longer presence. Bitcoin’s mainstay has also made it the most popular investment entry point into cryptocurrencies. The crypto-regulatory overhaul that is slowly taking place around the world has also favoured Bitcoin as its vessel so far (ETFs etc.).
In any case, the success of Bitcoin and Ethereum are not mutually exclusive. In fact, when one studies their technical points of utility, it becomes clear that they are characteristically different. If Bitcoin is digital gold, then Ethereum is electricity. Ethereum is a supercomputer engine that powers the DeFi world whereas Bitcoin is a secure store of value. They are both still in the early days of development and it may be premature to predict their supremacy in the long run.
However, if the famous Silicon Valley ethos of “moving fast and breaking things” is any indication of success, then our bet is on the fast-evolving and all-encompassing Ethereum.
(Originally published October 30th 2021 in transfin.in)
