Purpose of the Assignment

The use and popularity of cryptocurrencies have currently increased worldwide. Cryptocurrencies have received a lot of fresh media attention. Though they existed for several years, most people are hearing them now. Cryptocurrencies massively use cryptographic algorithms to come up with their designs. The most popular cryptocurrency is bitcoin which was founded in 2008 with a market share of approximately $ 40 billion according to a survey conducted by google drive [1]. Bitcoin is followed by Ethereum, Litecoin, Dogecoin, and BAT to mention a few. Bitcoin and Ethereum are part of convertible virtual currencies commonly known as CVC. There are lots of cryptocurrencies across the world. The paper focuses on bitcoin and ethereum cryptocurrencies.

Bitcoin is based on a decentralized digital currency. All transactions registered are displayed in public distributed ledger. It provides a faster and secure transfer of money universally. It has no demographic boundaries. There is no centralization of authority that registers new users as far as blockchain does it [2]. Bitcoin is distributed through a process called mining. Mining refers to the supply of bitcoins in the system of connection.

Ethereum refers to a blockchain platform founded by Vitalik Buterin in 2014 and has since gained popularity in its rising value [3]. Ethereum has unique features that have interested the investors leading to its rise in value. The main platform’s objective is to provide an alternative protocol for the development of decentralized applications. The objective is achieved by abstract foundational layer built by Ethereum’s team which is based on blockchain technology with ‘built-in Turing-complete programming language Solidity’. It enables users to easily develop decentralized applications and smart contracts where they define rules of ownership, ownership, transaction formats and state transition functions [4].

The main success behind cryptocurrencies is the ability to minimize transaction cost and increase the efficiency of payments. Cryptocurrencies the main function is to supports the currency-related services and the demand has seen its popularity growth. Bitcoin dominates over the crypto exchanges due to its large market share [5]. For a crypto exchange to occur, the account information and personal credentials of each user are created. It is called a wallet which is required for each user to perform a bitcoin trading.

Ethereum is more flexible, and developers find it easier to create applications compared to the bitcoin blockchain platform. This has contributed to its rise in value. The ethereum architecture follows three main design principle known as simplicity, universality, and modality. The ethereum team made the platform to be as simple as possible in an attempt to achieve widespread adoption among developers. It has internal scripted language build in dapP [6]. All the transactions are defined by the concept of account which is required for transmission of value and information to occur. The accounts have information about users. The accounts consist of the nounce, contract code, storage, and current ethereum balance. Ethereum also uses the transaction concept. It refers to signed data package that stores sent messages. The data package main function is to store information on user’s transactions and protection against rejection of service attacks in the form of start gas and gasprice. In order to reduce risk of constant blowup and immense loops in code, any transaction sets a limit to the number of computation steps of code execution it can generate including both the original message and any added message that is produced during execution. STARTGAS refers to the limit while GASPRICE is the transactional fees paid to the user mining as per computational steps [6].

Overview of Bitcoin and Ethereum

Ether is the crypto-fuel of ethereum which is used to pay transactions. Ethereum has two types of accounts. Externally owned accounts that do not have codes and is controlled by private keys, making it possible for one to send messages externally by creation and signing of transactions. Another type of accounts is called contract accounts controlled by their contracts codes. In contracts accounts, receiving messages activates codes enabling one to interpret and rewrite to internal storage and convey other messages or creates contracts in return.

For transactions to occur there need to be a set limit to the number of computational steps of code to be executed. It is a challenge as users operating the Ethereum virtual machine (EVM) are not able to predict the number of resources needed to validate a transaction, which allows denial-of-service attacks. Hence errors are costly. In the occurrence of an error during the transaction, the gas price value is not consumed. Other challenges facing ethereum include security issues due to internet spamming, privacy as eternal accounts can receive messages and smart contract auditing [7].

Token Systems has many applications in the cryptocurrency industry including representation of assets such as USD or gold as sub-currencies to company stocks and ties with the conventional value. Bitcoin’s main function is to provide a faster means of transfer of money. Making it’s main network objective to maximize security [2]. It operates on the basis of transfer of tokens amongst users. Bitcoin uses coded language to ensure security in the network. The security measures makes transactions logged difficult and costly to reverse ones in the system.  Bitcoin uses the block reward function to achieve its objective by awarding a block reward token to the users who enhances the networks power to compute. Block reward function formula is indicated and the expected reward token is shown in terms of blocks. The clock reward function is proportional to the value of the reward token at all intervals. Users do not receive a block award at all intervals. But they do receive their expected value depending on their contribution rate [9].

Decentralized file storage has gain a lot of popularity on online file storage in the cryptocurrency concept. It allows users to back up data on the internet and enables access at any given time. Bitcoin uses a decentralized file storage system known as blockchain technology. Blockchain database is a decentralized for keeping information on transactions, accounts and balances. The data is not stored on the blockchain itself due to the availability of an incentive layer. The incentive layer enables the network at hand to allow the blockchain to work as a ledger for transactions or value exchanges and enable users to access files. The blockchain benefits include; immutable documentation of transactions, transparency, quick settling times, privacy and lower transaction fees. Blockchain does not store data, but provides a foundation for building a decentralized network which runs with no authority centralization.

Bitcoin Architecture

It is important to understand the differences and similarities between the two cryptocurrencies. Bitcoin was introduced in the year 2008 while Ethereum was introduced in 2015. Both the cryptocurrencies use blockchain technology in conducting their crypto exchanges. A blockchain refers to a public ledger of all the transactions that take place. The ledger is public and cannot be falsified by a single entity it as contains full blockchain. A node refers to any computer used to execute and verify transactions and is connected to the blockchain. Both Bitcoin and Ethereum use blockchain technology, but all have different objectives and goals which is evident in the coding protocols they use [8].

Bitcoin was devised to act as a safe peer to peer decentralization of the payment system. The public ledger where all transactions are shown help shows how valid and the requirement to trust other people is canceled out. Bitcoin emphasizes on security. They prioritize security buy use of coded language which makes it more difficult to hack the blockchains.  The speed of a transaction is also critical to bitcoin, and it can take less than one hour. Bitcoin also uses a token standard known as bitcoin while ethereum uses ERC20 and Ethereum approved standards [9].

Bitcoin and ethereum both operate on the proof-of-work concept. Proof-of-work is the technique where users solve complex mathematical or arithmetical problems in order to create blocks and add them to blockchain [10]. It helps prevent fraud as it assumes that it is costly and energy draining hence only genuine users can take time to participate. It helps to block fraud and mischievous activities due to the high expenditure involved in developing blocks. The proof-of-work involves a lot of energy when validating work and does not provide miners with incentives for collaboration meaning no action is taken against malicious activities [11]. Ethereum is working towards providing its users with the proof-of-stake algorithms as opposed to the proof-of-work system currently used by both the cryptocurrencies. Proof-of-stakes aims at providing a more energy saving and efficient platform for its users.

Ethereum was established to provide an alternative payment system. It is decentralized and operates smart contracts. The smart contracts refer to applications that run exactly as programmed with no downtime, censorship, fraud or interference of third parties [12]. Unlike bitcoin, ethereum are developed to enable and enhance flexibility and simplicity which increases functionality and provides the capability to program various types of smart contracts within the system. Also, ethereum is coded in seven different languages compared to Bitcoin which is written in C++. Another similarity between Ethereum is that the currency is also produced in through the mining process just like Bitcoin. Bitcoin has a maximum number of bitcoins in the market, unlike ether which does not have a cap but controls the amount released yearly [13].

Ethereum Architecture

Just like bitcoin, Ethereum operates on the basis of the proof-of-work concept. Mining results from processing transactions and executing smart contracts that create blocks [14].  Bitcoin is also currently the largest cryptocurrency in the market with a huge market share. The value of Ethereum is quickly rising, but it has not reached bitcoin yet. Researchers foresee ethereum overtaking bitcoin in the near future.

Conclusion

In conclusion, there are distinctive features and differences between bitcoin and ethereum. Both the cryptocurrency do not have an inverse relationship as they have different objectives and functions. Hence both can coexist. Even though they use the same blockchain technology, they have different functions. Bitcoin tends to prioritize security and provides a faster platform for operations, while ethereum provides smart contracts that allow transactions to take place and uses different coded language to provide security to users. Developers find the decentralized system of ethereum easy to use. Ethereum focuses on simplicity and flexibility to attract more users, and these have enabled an increase in value and market share of the product. Both the cryptocurrencies have benefits and increases in value going forward.

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