Bitcoin and Ethereum Blockchains: Beginner’s Guide

publish date February 12, 2018 Tags share article

Blockchain development hysteria has swallowed us like an endless Black Friday. So, one should choose: learn how to benefit from it or miss out on everything. If the second option is out of the question for you, it all starts with blockchain technology.

What is blockchain? And what’s the difference between the buzzword blockchains Bitcoin and Ethereum? Are their secrets accessible to people who aren’t comic-loving coders?

Let’s slice and dice!

1. What is blockchain technology

A blockchain is a sequence of interconnected blocks of information. Each next block points to the data stored in the previous block — and up to the very first block. You can imagine a thick ledger which pages cannot be replaced or taken away. Otherwise, the entire ledger would appear false. Instead of paper, the blockchain is stored and checked on thousands of devices simultaneously, so it is almost immutable to changes.

If James Bond-type archvillains wanted to alter the data in a blockchain, they would have to be a powerful organization (cough-cough, government) or Rick and Morty to execute the 51% attack. Since the blockchain members always accept the longest chain, an attacker has to control the majority of it to misguide the community. While theoretically realistic, such attack is impossible today.

Moving forward, blockchains consist of three technologies: public key cryptography, peer-to-peer (P2P) network, and a consensus protocol. Encryption is crucial here — using hashes, it ensures anonymity and transparency. For example, Johnny received three bitcoins. Nobody knows who stands behind the anonymous public address of the sponsor, but everybody on the network is aware that Johnny received exactly that amount in assets.

But why blockchain technology is often labeled “the next Internet”? Before, Johnny had to hold his savings in a bank account. If Johnny wanted to make an expensive purchase online, he would have to ask his bank to raise the limit and confirm his identity. Besides, Johnny pays different fees to several middlemen, and he sees them as needless expenses. What’s more, Johnny does not believe the bank protects his money.

On the other hand, blockchain provides a better alternative for Johnny: the history of all his transactions is stored in a single public ledger and it costs very little for international transfers. However, blockchain is not better than a centralized database when the only goal is confidentiality. Blockchain becomes almighty only when all of the following conditions are met:

  • a venture needs to secure digital relationships,
  • its data is dynamic with an audible history,
  • it should not be controlled by a central authority,
  • and the speed of transactions is not the most important factor.

2. Bitcoin Blockchain

When Satoshi Nakamoto published their paper on Bitcoin in 2008, he referred to it as a Peer-to-Peer Electronic Cash System. Released in 2009, the software represented the philosophy of transparency, anonymity, decentralization, speed, security, and trustworthiness. To make this work, each device (usually referred to as a node) connects to the network and encrypts the transactions that are executed under Proof-of-Work (PoW) protocol. This protocol also rewards the nodes called “miners” for confirming the credibility of the transactions and adding blocks to the chain.

When other nodes agree, they include a mined block to the blockchain to compute the next one. Under the PoW protocol, the miner receives newly created bitcoins as a reward. Today the reward is  12.5 BTC, though the number is divided by two every four years. Thanks to “mining,” the network solves the problems of double-spending and anonymity within the blockchain. Today, Bitcoin blockchain requires expensive ASIC mining which is advantageous in regions with affordable electricity. The currency is limited to 21 million units emitting fewer tokens while tasks get insanely hard to compute.

This is when a grand concept of decentralization loses its cool: the difference in computing power and lack of consensus among the members cause numerous conflicts. When nodes disagree, they might continue mining a parallel blockchain. Unless everybody neglects it, the developers will support it, and others use as payment. We know this phenomenon as a fork when the blockchain is being split in two. Have you not heard of Bitcoin Cash race? Sure, BCH offers lower fees and faster transactions, but it is doubtful that BTC holders approve the appearance of the alternative Bitcoin.

3. Ethereum Blockchain

Ethereum avoided the trap of becoming a digital store of monetary value such as Bitcoin. Unlike the latter, it is a Turing-complete blockchain and allows solving a variety of tasks. Also, the Ethereum Project developed own programming language called “Solidity,” for flexibility in creating a range of new applications. Known as smart contracts, its scripts served more practical uses and assisted in making Initial Coin Offerings (ICO), Distributed Applications (DApp), and Decentralized Autonomous Organizations (DAO). Ethereum’s currency is ether (ETH). The platform supplies the crypto market with enough ethers for developers of other projects. The recent example was CryptoKitties that caused lots of meow out there.

It takes seconds for the transaction confirmation, compared to 10 minutes in Bitcoin. Currently, Ethereum uses a PoW protocol that charges “gas,” a fee for a transaction of sorts. Besides, it relies on a “difficulty bomb” meaning an increasing difficulty and time of mining ether. It incorporates “ethash” algorithm while Bitcoin uses a hash algorithm called SHA-256. Ethereum also counters centralized pool mining with its Ghost Protocol preferring GPU computing power. But don’t get excited. Some folks have even applied their Teslas to do the work, and it appears inefficient.

The issuance of ETH is fixed for each year, but soon the emission would end. The project is moving to Proof-of-Stake (PoS) protocol under the Casper update. The mission of its founder Vitalik Buterin is to distribute the mining power in proportion to the assets each participant holds. Therefore, if one has only a few ethers, the mining power will be low and vice versa. There will be no need for wasting computing resources. Casper update will also increase the transaction speed and allow further market adoption. Therefore, Ethereum-like blockchains are expected to scale even faster.

4. Conclusion

The blockchain already improves current technologies across various domains. Since there are different types of blockchains, it is useful to realize the purposes of Bitcoin and Ethereum.

A few years ago BTC was a convenient way for transferring money seamlessly. Today, it is becoming more of asset storage. Ethereum helps to fuel new blockchain projects and promote the technology. Ethereum is flexible, scalable, and allows for fast decision-making. On the other side, Bitcoin scripts are limited.

Bitcoin-based projects increase transparency and trust, and their currencies have a limited token supply. Ethereum advances faster and offers immense potential for growth, stability and different business models. Both blockchain solutions differ substantially, but they are needed in the crypto market.