How does Ethereum differ from Bitcoin in terms of functionality and use cases?
Ethereum and Bitcoin differ in terms of functionality and use cases. While Bitcoin primarily functions as a digital currency and decentralized payment system, Ethereum goes beyond that and offers a platform for developers to create smart contracts and decentralized applications (DApps). Ethereum’s blockchain is designed to support various types of transactions beyond simple currency transfers, allowing users to program complex logic into their transactions. This enables the creation of DApps with functionalities such as tokenization, decentralized finance (DeFi), supply chain management, identity verification, voting systems, and more.
Long answer
Bitcoin and Ethereum are both cryptocurrencies but have different functionalities and use cases due to variations in their design principles.
Bitcoin: Bitcoin was created as a digital currency and aims to serve as a decentralized peer-to-peer payment system. It facilitates monetary transfers globally without the need for intermediaries like banks. Bitcoin’s underlying technology is a secure, public ledger known as the blockchain. It uses proof-of-work consensus mechanism where miners compete to solve complex mathematical puzzles to validate transactions. Bitcoin’s primary focus is on financial transactions, allowing users to send/receive money securely while maintaining privacy.
Ethereum: In contrast, Ethereum extends the capabilities of blockchain beyond digital currency by introducing smart contracts. Smart contracts are self-executing agreements with predefined conditions that automatically execute once those conditions are met. Developed on Ethereum’s blockchain, these contracts can automate various processes eliminating intermediaries making them transparent, auditable, and tamper-proof.
Ethereum provides a platform for developers to utilize smart contracts and build DApps on top of its blockchain. These DApps enable a wide range of functionalities such as decentralized finance (DeFi), supply chain management solutions, voting systems, gaming platforms, identity verification systems, tokenization of assets, among others. To power the DApps running on its network, Ethereum introduced its own cryptocurrency called Ether (ETH). Ethereum utilizes the Proof-of-Work algorithm similar to Bitcoin but is in the process of transitioning to a Proof-of-Stake consensus mechanism (known as Ethereum 2.0) for improved scalability, security, and energy efficiency.
Overall, while Bitcoin primarily focuses on being a digital currency and payment system, Ethereum provides a versatile platform for developing decentralized applications through the utilization of smart contracts.