How Ethereum Differs from Bitcoin
While both Bitcoin and Ethereum utilize blockchain technology, they serve distinct purposes. Bitcoin primarily functions as a decentralized digital currency, whereas Ethereum extends its capabilities to support smart contracts and decentralized applications (dApps). Ethereum’s flexibility allows developers to build programmable logic into transactions, enabling automated agreements without intermediaries.
How the Bitcoin Blockchain Works
A Spreadsheet Analogy
Imagine a blockchain as a shared spreadsheet where:
- Every participant maintains an identical copy.
- Data entries are immutable (unchangeable once recorded).
- New entries require consensus from the majority of users.
This decentralized validation ensures transparency and security, eliminating the need for a central authority.
Bitcoin Transactions Explained
When Alice sends bitcoin to Bob:
- The transaction is recorded in a block with other pending transactions.
- Miners compete to solve a cryptographic puzzle to validate the block.
- Verified blocks are added to the public ledger, forming a chain.
👉 Discover how Bitcoin mining works
Key features:
- Decentralization: No single entity controls the network.
- Immutability: Transactions cannot be altered or reversed.
- Transparency: All transactions are publicly auditable.
The Role of Miners
Miners:
- Verify transactions by solving complex mathematical problems.
- Secure the network through proof of work (PoW).
- Earn bitcoin as rewards for adding new blocks.
Mining difficulty adjusts every 2,016 blocks to maintain a ~10-minute block time.
Consensus Mechanisms
Bitcoin relies on nodes (network participants) to enforce consensus rules:
- Nodes validate transactions and blocks.
- Changes to protocol require 95% network approval, preventing unilateral alterations.
How the Ethereum Blockchain Works
Ethereum builds upon Bitcoin’s foundation but introduces smart contracts and faster transactions (~14-second block time).
Account Types
- Externally Owned Accounts (EOAs): Controlled by private keys (like Bitcoin addresses).
- Contract Accounts: Execute code stored on the blockchain (e.g., smart contracts).
Ethereum Virtual Machine (EVM)
The EVM is a global computer that executes smart contracts deterministically across all nodes. Developers write contracts in Solidity, which compiles to EVM bytecode.
👉 Learn more about Ethereum’s technology
Mining and Uncles
Ethereum’s GHOST protocol incentivizes miners to include orphaned blocks ("uncles") in the chain, improving decentralization and security.
Transition to Proof of Stake (PoS)
Ethereum is shifting from PoW to Casper PoS, where validators stake ETH to propose/blocks. Benefits include:
- Reduced energy consumption.
- Enhanced scalability.
FAQs
1. What makes blockchain immutable?
Blockchain uses cryptographic hashing. Altering any block would require recalculating all subsequent blocks, which is computationally impractical.
2. How do miners earn rewards?
Miners receive newly minted cryptocurrency (e.g., bitcoin or ether) and transaction fees for validating blocks.
3. Can blockchain transactions be reversed?
No. Once confirmed, transactions are permanent due to consensus rules and immutability.
4. What’s the difference between Bitcoin and Ethereum?
Bitcoin is a digital currency, while Ethereum is a platform for decentralized applications via smart contracts.
5. How does PoS improve upon PoW?
PoS reduces energy use by replacing competitive mining with staked validators, enhancing efficiency and scalability.
6. What is gas in Ethereum?
Gas measures computational effort for transactions. Users pay gas fees in ETH to execute smart contracts or transfers.
Conclusion
Blockchain technology revolutionizes trust and transparency through decentralized ledgers. Bitcoin pioneered digital currency, while Ethereum expanded possibilities with programmable contracts. Understanding these mechanisms empowers users to navigate the evolving cryptocurrency landscape confidently.