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How Is Ethereum Similar to Bitcoin?

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Ethereum Has an Inbuilt Cryptocurrency

Ethereum’s token is called Ether, shortened to ETH. This is a

cryptocurrency that can be traded for other cryptocurrencies or other

sovereign currencies, just like BTC. ETH ownership is tracked on the

Ethereum blockchain, just like BTC ownership is tracked on Bitcoin’s

blockchain.

Ethereum Has a Blockchain

Like Bitcoin, Ethereum has a blockchain, which contains blocks of data

(Pure ETH payments as well as smart contracts). The blocks are mined by

some participants and distributed to other participants who validate

them. You can explore this blockchain on etherscan.io.

Like Bitcoin, Ethereum blocks form a chain by referring to the hash of the

previous block.

Ethereum is Public and Permissionless

Like Bitcoin, the main Ethereum network is a public, permissionless

network. Anyone can download or write some software to connect to the

network and start creating transactions and smart contracts, validating

them, and mining blocks without needing to log in or sign up with any

other organisation.

When people talk about Ethereum they usually mean the main public

permissionless version of the network. However, like Bitcoin, you can

take Ethereum software, modify it slightly, and create private networks

that are not connected to the main public network. The private tokens

that are not connected to the main public network. The private tokens

and smart contracts won’t be compatible with the public tokens though,

just like private Bitcoin networks.

Ethereum Has Proof-of-Work (PoW) Mining

Like Bitcoin, mining participants create valid blocks by spending

electricity to find solutions to a mathematical challenge. Ethereum’s PoW

maths challenge, called Ethash, works slightly differently from Bitcoin’s,

and allows more common hardware to be used. It is deliberately designed

to reduce the efficiency edge of specialised chips called ASICs, which are

common in Bitcoin mining. Commodity hardware is allowed to compete

efficiently, and this allows for a greater decentralisation of miners. In

practice though, specialised hardware has been created and so most

blocks in Ethereum are created by one of a small group of miners.

 

                                                                                 Source

On Ethereum’s roadmap there is a plan to move from electricityexpensive,
proof-of-work mining, to a more energy-efficient, proof-ofstake
mining protocol called Casper in a future release of the Ethereum
software called Serenity. Proof-of-stake is a mining protocol in which
your chance of creating a valid block is proportional to the number of
coins (ETH) in your mining wallet—contrast this to proof-of-work, where
coins (ETH) in your mining wallet—contrast this to proof-of-work, where
your chance of creating a valid block is proportional to the amount of
computational cycles your hardware can crunch through.
How might this impact the community? For starters, this would
dramatically reduce the energy footprint of the cryptocurrency. Miners
will no longer need to consume electricity competitively in order to win
blocks. On the other hand, some people think that proof-of-stake is less
democratic, because those who already have accumulated a lot of ETH
will have a higher chance of winning more blocks. So, the argument goes,
new money will flow towards the wealthy, increasing the Gini
coefficient160 of Ethereum holders.
There are flaws in the ‘less democratic’ argument. With proof-of-work the
high capital costs and expertise required mean that only a very small
minority of people can actually make money mining, so it is not actually
that democratic. Whereas with proof-of-stake, every ETH has an identical
chance of winning a block, so you can get started with much less capital.
Think of it as an interest rate: If you have more money you get more
interest, but at least those with small amounts of money can still get
interest. I also think that reducing the negative externalities of pollution
caused by proof-of-work is a decent and honourable goal.
How Is Ethereum Different from Bitcoin?
This is where it gets more technical, and in many ways more complex.

The Ethereum Virtual Machine can run smart contracts
When you download and run the Ethereum software, it creates and starts
a segregated virtual computer on your machine called an ‘Ethereum
Virtual Machine’ (EVM). This EVM processes all the Ethereum
transactions and blocks, and keeps track of all the account balances and
results of the smart contracts. Each node on the Ethereum network runs
the same EVM and processes the same data, resulting in them all having
the same view of the world. Ethereum can be described as a replicated
state machine because all of the nodes running Ethereum are coming to
consensus about the state of the Ethereum Virtual Machine.
Compared with Bitcoin’s primitive scripting language, the code that can
be deployed in Ethereum and run as smart contracts is more advanced
and approachable for developers. We will describe smart contracts in
more detail later, but for now you can think of smart contracts as pieces
of code run by all the nodes in Ethereum’s Virtual Machine.
Gas
In Bitcoin, you can add a small amount of BTC as a transaction fee that
goes to the miner who successfully mines the block. This compensates the
miner for checking the validity of the transaction and including it in the
block they are mining. Likewise, in Ethereum, you can add a small
amount of ETH as a mining fee which goes to the miner who successfully
mines the block.
The complication with Ethereum is that there are more types of
transactions. Different transaction types have different computational
complexities. For example, a transaction performing a simple ETH
payment is less complex than a transaction to upload or run a smart
contract. Therefore, Ethereum has a concept of ‘gas’ which is a sort of
price list, based on the computational complexity of the different types of
operation you are instructing the miners to make in your transaction.
Operations include searching for data, retrieving it, making calculations,
storing data, and making changes to the ledger. Here is the price list from
the ethdocs.org website,161 but it can change over time if the majority of
the network agrees:

A basic transfer of ETH from one account to another uses 21,000 gas.
Uploading and running smart contracts uses more gas depending on their
complexity. When you submit an Ethereum transaction, you specify a gas
price (how much ETH you are willing to pay per gas used) and a gas limit
(the maximum amount of gas you will let the transaction use).
Mining fee (in ETH) = gas price (in ETH per gas) x gas consumed (in gas)
Gas price
The gas price is the amount of ETH you are prepared to pay per unit of
gas for the transaction to be processed. As with Bitcoin transaction fees,
this is a competitive market, and in general the busier the network the
higher the gas price people are willing to pay. In times of great demand
gas, prices spike.

Gas limit
The gas limit you set provides a ceiling for how much gas you are
prepared for a transaction to consume. This limit protects you from overspending
on mining fees and you know that the maximum mining fee will
be gas limit x gas price. This stops you over-paying if you accidentally
submitted a very complex transaction that you thought was simple.
Analogy time: Driving your car 10km will use up a certain amount of fuel.
If you run out of fuel, your car will stop before reaching the destination.
The price of fuel is dependent on market conditions and can go up and
down, but the price of fuel bears no relation to how far you may drive
your car with it. Gas in Ethereum is similar. When you submit an
Ethereum transaction, you specify how much gas you’re prepared to
spend on making the transaction ‘work’ (this is the gas limit), and how
much ETH you are prepared to pay the miner per unit of gas (this is the
gas price). This results in a total amount of ETH you’re prepared to pay
for the transaction to be processed.
The miner will execute the transaction and will charge you the amount of
gas taken, multiplied by the gas price you specified. As with Bitcoin, the
mining fee is up to you, and you need to bear in mind that you’re
competing with other transactions which may have set a higher gas price.
For example, a basic transaction of a transfer of ETH from one account to
another uses 21,000 gas, so you can set the gas limit for this kind of
transaction to 21,000, or higher; but it will only use 21,000 gas. If you set
the gas limit below the amount of gas it takes to process the transaction,
the transaction will fail and you will not be refunded your mining fee.
This is like trying to make a journey with insufficient fuel in your tank;
the fuel will be used, but you will not get to your destination.
ETH Units
Just like one dollar can be split into 100 cents, 1 BTC can be split into
100,000,000 Satoshi, and Ethereum too has its own unit naming
convention.
The smallest unit is a Wei and there are 1,000,000,000,000,000,000 of
them per ETH. There are also some other intermediate names: Finney,
Szabo, Shannon, Lovelace, Babbage, Ada—all named after people who
made significant contributions to fields related to cryptocurrencies or
networks.
Wei and Ether are the two most common denominations. Wei is usually
used for gas price (a gas price of 2-50 Giga-Wei per gas is common, where
1 GWei is 1,000,000,000 Wei).

Ethereum’s block time is shorter
In Ethereum the time between blocks is around 14 seconds, compared
with Bitcoin’s ~10 minutes. This means that, on average, if you made a
Bitcoin transaction and an Ethereum transaction, the Ethereum
transaction would be recorded into Ethereum’s blockchain faster than the
Bitcoin transaction into Bitcoin’s blockchain. You could say Bitcoin writes
to its database roughly every 10 minutes, whereas Ethereum writes to its
database roughly every 14 seconds. The history of Ethereum’s block times
has been quite interesting, as you can see on bitinfocharts.com:

                                                                  Source: Bitinfocharts162
Compare this with Bitcoin’s relatively stable block time (note the time
scale, as Bitcoin is much older than Ethereum):

Ethereum has smaller blocks
Currently, Bitcoin’s blocks are a little under 1MB in size whereas most
Ethereum blocks are about 15-20kb in size. However, we should not
compare blocks by the amount of data in them: While Bitcoin’s maximum
block size is specified in bytes, Ethereum’s block size is based on
complexity of contracts being run. It is known as a gas limit per block,
and the maximum is allowed to vary slightly from block to block. So
whereas Bitcoin’s block size limit is based on amount of data, Ethereum’s
block size limit is based on computational complexity.

Currently, the maximum block size in Ethereum is around 8 million gas.
Basic transactions, or payments of ETH from one account to another (i.e.,
uploading or invoking a smart contract), have a complexity of 21,000 gas;
so you can fit around 380 of those basic transactions into a block
(8,000,000 / 21,000). In Bitcoin, you currently get around 1,500-2,000
basic transactions in a 1MB block.
Uncles: blocks that don’t quite make it
Because Ethereum’s rate of block generation is much higher than
Bitcoin’s (250 blocks per hour on Ethereum vs six blocks per hour on
Bitcoin), the rate of ‘block clashes’ increases. Multiple valid blocks can get
created at almost the same time, but only one of them can make it into
the main chain. The other one ‘loses,’ and the data in them is not
considered part of the main ledger, even if the transactions are
technically valid.
In Bitcoin, these non-mainchain blocks are called orphans, or orphaned
blocks, and they do not form part of the main chain in any way and are
never referenced again by any subsequent blocks. In Ethereum they are
called uncles. Uncles can be referenced by a few of the subsequent blocks
and although the data in them is not used, the slightly smaller reward for
mining them is still valid.
mining them is still valid.
This achieves two important things:
1. It incentivises miners to mine even though there is a high chance of
creating a non-mainchain block (the high speed of block creation
results in more orphans or uncles)
2. It increases the security of the blockchain by acknowledging the
energy spent creating the uncle blocks
Transactions that end up in orphaned blocks simply end up being remined
on the main chain. They don’t cost the user any more gas, because
the transaction in the orphaned block is treated as if it was never
processed.
Accounts
Bitcoin uses the word address to describe accounts. Ethereum uses the
word account but technically they are also addresses. The words seem to
be more interchangeable with Ethereum. Maybe you can say, ‘What’s the
address of your Ethereum account?’ It doesn’t seem to matter165.
There are two types of Ethereum accounts:
1. Accounts that only store ETH
2. Accounts that contain smart contracts
Accounts that only store ETH are similar to Bitcoin addresses and are
sometimes known as Externally Owned Accounts. You make payments
from these accounts by signing transactions with the appropriate private
key. An example of an account that stores ETH is
0x2d7c76202834a11a99576acf2ca95a7e66928ba0166.
Accounts that contain smart contracts are activated by a transaction
sending ETH into it. Once the smart contract has been uploaded it sits
there at an address, waiting to be used. An example of an account that
has a smart contract is
0xcbe1060ee68bc0fed3c00f13d6f110b7eb6434f6167.
ETH token issuance
The issuance of Ether tokens is a bit more complicated than Bitcoin. The
number of ETH in existence are: Pre-mine + Block rewards + Uncle
rewards.
Source: Etherscan168
Pre-mine
Around 72 million ETH were created for the crowdsale in July/Aug 2014.
This is sometimes called a ‘pre-mine’ as they were just written in rather
than mined through proof-of-work hashing. These were distributed to
initial supporters of the project and to the project team itself. It was
decided that after the initial crowdsale, future ETH generation would be
capped at 25% of the pre-mine total, i.e., no more than 18m ETH could be
mined per year.
Block rewards
Originally, each block mined created five fresh ETH as the block reward.
Due to concerns about oversupply, this was reduced to 3 ETH, in a set of
changes to the protocol called the Byzantium update, in October 2017
(block 4,370,000).
Source: Etherscan169
Uncle rewards
Some blocks are mined but do not form part of the main blockchain. In
Bitcoin, these are called ‘orphans’ and are entirely discarded, and the
miner of the orphaned block receives no rewards. In Ethereum, these
discarded blocks are called ‘uncles’ and can be referenced by later blocks.
If a later block references an uncle, the miner of the uncle gets some ETH.
This is called the ‘uncle’ reward. The miner of the later block referencing
the uncle also gets an additional small reward called an ‘uncle
referencing’ reward.
The uncle reward used to be 4.375 ETH (7/8th of the full 5 ETH reward).
It was reduced in the Byzantium upgrade to 0.625-2.625 ETH.
It was reduced in the Byzantium upgrade to 0.625-2.625 ETH.
Source: https://etherscan.io/chart/uncles
The biggest difference between ETH and BTC token generation is that
BTC generation halves approximately every 4 years and has a planned
finite cap, whereas ETH generation continues to be generated at a
constant number every year indefinitely. Like any other parameter or
rule, however, this rule is subject to ongoing debate and can be changed if
the majority of the Ethereum network agrees.
The future of ETH generation
The Ethereum community hasn’t yet come to agreement about what
happens to the rate of issue when Ethereum moves from proof-of-work to
proof-of-stake. Some argue that perhaps the rate at which ETH is created
should decrease, as the value will not have to subsidise competitive
electricity usage.
Mining rewards
In Bitcoin, the miner of a block receives the block reward (new BTC), plus
transaction fees for transactions mined (existing BTC). In Ethereum, the
miner of a block receives the block and uncle referencing rewards (new
ETH), plus mining fees (gas amount x gas price) from transactions and
contracts that were run during the block.
Other parts to Ethereum: Swarm and Whisper
Computers need to be able to calculate, store data, and communicate. For
Ethereum to realise its vision as an unstoppable, censorship resistant,
Ethereum to realise its vision as an unstoppable, censorship resistant,
self-sustaining, decentralised, ‘world’ computer, it needs to be able to do
those three things in an efficient and robust way. The Ethereum Virtual
Machine is just one component of the whole, the element which does the
decentralised calculations.
Swarm is another component. This is for peer-to-peer file sharing, similar
to BitTorrent, but incentivised with micropayments of ETH. Files are
split into chunks, distributed and stored with participating volunteers.
These nodes that store and serve the chunks are compensated with ETH
from those storing and retrieving the data.
Whisper is an encrypted messaging protocol that allows nodes to send
messages directly to each other in a secure way and that also hides the
sender and receiver from third party snoopers.
Governance
Although Bitcoin and Ethereum are both open source projects and open,
permissionless networks, one of the biggest differences between them is
that Bitcoin doesn’t have an active, identified leader, whereas Ethereum
does. Vitalik Buterin, the creator of Ethereum is hugely influential, and
his opinions count. Although he can’t stop his creation or censor
transactions or participants, his vision and commentary have a big
impact on the technology. For instance, he championed a hard fork to
recover funds stolen in the DAO hack (this is explained later). He also
proposes changes to the protocol rules and the network economics.
Bitcoin, on the other hand, has a few influential developers, but none
with the clout that Vitalik has with Ethereum. Nick Tomaino argues in a
blog post170 that the governance of blockchains ‘may prove to be as
important as the computer science and economics of blockchains’.
Whether a single influencer is good or bad for decentralised
cryptocurrency networks is still be determined.

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