Bitcoin and Ethereum are both blockchain platforms that support smart contracts, yet they serve distinct purposes and utilize different technologies. While both enable smart contract functionality, they share some security risks despite having unique vulnerabilities.
Additionally, Bitcoin and Ethereum are widely traded on major cryptocurrency exchanges, reflecting their high liquidity and strong investor adoption. In a 40-day rolling window ending in the year 2023, their correlation was estimated at 82%.
Ordinals for Bitcoin and Ethereum
Both Bitcoin and Ethereum utilize cryptocurrency, but their primary functions differ. Bitcoin mainly serves as a digital currency, whereas Ethereum leverages cryptocurrency to facilitate smart contracts. While both support smart contracts, Bitcoin relies on external integrations to extend its functionality beyond basic operations, whereas Ethereum inherently supports advanced smart contracts.
Bitcoin’s validation method, Proof of Work (PoW), requires validators to solve complex cryptographic puzzles, demanding significant computational resources and time. In contrast, Ethereum employs Proof of Stake (PoS), where validators stake cryptocurrency, making the process more energy-efficient and faster.
Smart Contract Platform
Bitcoin
As a smart contract platform, Bitcoin facilitates a decentralized payment network for exchanging digital currency through peer-to-peer connections, eliminating the need for a central authority like a bank or government. The network operates using digital units called bitcoins, which are divisible up to eight decimal places.
Participants in the Bitcoin network can conduct transactions via a distributed digital ledger, where records are maintained across multiple devices. This ledger stores transaction data in blocks, each containing a timestamp and a cryptographic hash of the previous block. These cryptographic links ensure transactions are securely recorded in chronological order and verified through digital signatures.
Ethereum
Ethereum as a smart contract platform automates contract terms by using blockchain technology in conjunction with specialized programming languages such as Solidity, resembling JavaScript and C. Smart contract codes are designed to execute contract terms when triggered by blockchain events.
A smart contract can release funds from an account once a blockchain transaction gets validated. Thus, to understand its functionality towards security vulnerabilities, it is important to understand some key features of the network:
- Transaction Validation: Each account in the chain is called a node, connected with a limited number of other accounts to receive blocks and unvalidated transactions from other network peers and to offer them to other accounts.
- Smart Contract Composability: Ethereum smart contracts perform highly complex functions similar to application programming interface (APIs). Thus, to extend their functionality, smart contracts can call other smart contracts or applications that combine smart contracts with frontend user interface, known as decentralized applications or apps.
Bitcoin vs Ethereum
Bitcoin is primarily a store of value, while Ethereum is functional. The main purpose of Bitcoin is to serve as a digital currency and store of value. Ethereum is a decentralized platform for smart contracts and decentralized applications.
Bitcoin uses a simple blockchain to secure peer-to-peer transactions. The transaction speed of Bitcoin is slow with higher fees, especially during high traffic. The supply of bitcoin is limited, which is 21 million coins, making it deflationary. It uses Proof of Work for proper security and mining rewards. In the market, bitcoin is considered “digital gold” and widely used for investment and payments.
On the other hand, Ethereum supports smart contracts, enabling decentralized finance (DeFi) and NFTs. The transaction speed is fast but has high gas fees, depending on network congestion. There is no fixed supply in Ethereum, but the 2.0 version introduced a burning mechanism to decrease inflation.
In the consensus mechanism of Ethereum, Proof of Stake is used to improve efficiency and decrease energy consumption. It powers a large ecosystem of DeFi, NFTs, and blockchain applications.
Security Issues
Both Bitcoin and Ethereum have strong security frameworks, but they face different threats and vulnerabilities. The issues are as follows:
- 51% Attack: In Bitcoin, if a single entity gains control of more than 50% of the network’s mining power, it can manipulate transactions. Under the previous PoW model, Ethereum also lacked security, but its transition to PoS decreased the risks.
- Smart Contract Vulnerabilities: Ethereum supports smart contracts, which have flawed codes. But Bitcoin has a simpler scripting language, reducing the risk of smart contract exploitation.
- Phishing and Social Engineering Attacks: In both Ethereum and Bitcoin, the users are targeted through phishing scams, fake wallets, and fraudulent exchanges that steal private information.
Conclusion
Bitcoin and Ethereum remain dominant forces in the cryptocurrency space, each serving a unique purpose while sharing some similarities. Bitcoin functions as the digital currency and store value, whereas Ethereum extends beyond cryptocurrency, enabling smart contracts and decentralized applications.