The popularity of bitcoin has spiked interest of investors and corporates in cryptocurrencies, in turn encouraging more such currencies like ethereum, blackcoin, litecoin, etc. to come up. Moreover, cryptocurrencies provide faster and secured transactions while charging a minuscule amount for it.

Following bitcoin’s mechanism, cryptocurrencies require solving complex algorithms, termed as ‘mining’ to reach a consensus on the ledger and validate a transaction.

Cryptocurrencies work on a decentralized, distributed ledger called the blockchain, and the process of mining talked above is used to create records on it. This structure of production and dissemination makes it possible for anyone to mine bitcoin, making this currency completely different from fiat money.

Ethereum vs Bitcoin

Bitcoin is secure and transparent because of the blockchain technology it uses. The blockchain solves the problem of double spending, counterfeiting, and verifies every transaction’s validity while storing it in a public ledger. Henceforth, nobody can decipher the user’s identity, but the transaction can be seen by anyone.

Must read: Apart from crazy rallies, cryptocurrencies have other perks too

Ethereum, which came into being only in 2014, is doing exceptionally well

But it was easier for Ether and other altcoins like Litecoin, Zetacoin etc., as they could tap into an existing cryptocurrency community built by the senior player bitcoin which came into being back in 2009.

Altcoins mainly try to target any limitation in bitcoin and thus, come up with alternatives as the name suggests.

Smart Contracts

As an altcoin, ethereum offers ‘smart contracts’ which are absent in bitcoin mechanism. Smart contracts are computer protocols capable of automatically verifying and enforcing the terms of a contract. It eliminates the complex processes and human intervention needed to make the concerned person or organization accountable.

“Ethereum is basically bitcoin plus. While bitcoin is purely a digital currency and nothing more, ethereum has a host of additional features,” said Aditya, an open-source program developer.

In contract code account, smart contract is initiated by the user when a transaction is sent to it from an externally owned account. This process eliminates middle-man business that consumes a lot of resources in business transactions or legal bindings.

Ethereum has two types of accounts – externally owned account for sending and receiving payments, and contract code account to use ‘smart contract’.

Timing advantage

Each bitcoin transaction has to verified by miners to be confirmed. Hence, users have to wait till they have finished the mining process. The bitcoin protocol has been structured in a way that mining of each block requires around 10 minutes.

Ethereum runs on a slightly different blockchain system than bitcoin and has a block time of 12 seconds in contrast with bitcoin’s 10 minutes for adding a new block to the chain and confirming actions quicker. “This quick time is enabled by ethereum’s GHOST protocol,” said Aditya.

The timing problem is to be solved soon as the bitcoin community recently reached a consensus on the scaling issue that earlier capped the block size to 1 megabyte. The block size was increased to 4 megabyte and Segregated Witness-- a new way of verifying transactions—was activated.

Earlier, blocks had signatures required at the time of validation by nodes in the bitcoin network. It created a bulk and accounted for 60 percent of the size of blockchain, according to bitcoin core developer Pieter Wuille. “Segregated Witness is about ignoring them [the signatures] where possible,” he said during a talk on the new mechanism.

For a bitcoin transaction, only a bitcoin address and a private key is needed. While the address is public and acts as an input, the private key is secret and can initiate transaction.

In the transaction, an input amount is sent to an output address. But there are no stored coins, only balances; the transactions result in decrease or increase of balance amount.