The rise of cryptocurrencies has recently faltered but there are three main digital assets that continue to remain in the crypto top ten; Bitcoin, Ethereum and Cardano. In this article, we look at each of them and explain the differences.
Bitcoin (BTC) is the granddaddy of all cryptocurrencies. It’s probably one of the main digital currencies that even non-crypto heads have heard of. Bitcoin was launched in 2009 by a mysterious developer or group, no one really knows, Satoshi Nakamato.
Bitcoin was the first to establish what is known as a Blockchain. A Blockchain is a kind of digital list (ledger) that contains all transactions that take place on a network. The ledger cannot easily be changed or deleted by users, making it extremely secure for transactions between people or entities that don’t trust each other. The concept behind bitcoin was to create an alternative financial system following the 2008 financial crash and the banking sector bailout. This allowed digital transfers between anyone without middlemen globally.
Users can get rewarded with free Bitcoins on the Bitcoin blockchain by carrying out a process called ‘mining’. Mining is the process whereby a user carries out a series of computer calculations that verifies the transactions on the Bitcoin network. The miner will carry out a series of mathematical puzzles to verify the transactions and store a value in the ledger. On successful completion, the miner is rewarded with Bitcoin.
Bitcoin has been criticised by some because this mining process, often referred to as ‘Proof of Work’ (PoW) requires a large amount of processing power and consequentially is energy intensive. Some argue that the environment is impacted by the power-hungry Bitcoin miners. A recent Cambridge study showed that Bitcoin mining used power in excess of some countries (121 Terra Watt Hours). Others argue that 76% of Bitcoin miners utilise green energy to power their computers.
The Bitcoin network operates on the basis that only 21 million Bitcoins will ever be produced. Currently, 19.103 Million Bitcoins have been produced. In theory, as more Bitcoins are produced and as demand rises this should cause the price of Bitcoin to rise. Some argue that this makes Bitcoin an excellent store of value. Others argue that since Bitcoin has no inherent use, unlike gold, for example, its ability to store value is limited.
Much like Bitcoin, Ethereum (ETH) is a decentralised blockchain that allows for trust-less transactions between individuals. Ethereum was launched in 2015 by Russian computer scientist Vitalik Buterin and co-founders Gavin Wood, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin. The native asset on the chain is called Ether or Eth.
The main difference between Bitcoin and Ethereum was that for the first time a blockchain offered the ability to create what’s known as a ‘Smart Contract’. A smart contract is a kind of programmable instruction set that allows the creator to distribute assets when certain conditions are met. Most importantly these transactions can be carried out automatically without centralised control. Programmable smart contracts allow for the creation of decentralised exchanges and decentralised finance applications or DeFi. DeFi allows for the possibility of an alternative to the centralised financial system in which brokers, banks and intermediaries play an important and arguably redundant role.
Users can be rewarded with free ETH via a system similar to Bitcoin’s ‘Proof of Work’. Users are rewarded after carrying out a series of puzzles on their machines to validate transactions on the network.
Much like Bitcoin, Ethereum has been criticised for its environmentally unfriendly ‘Proof of Work’ system for mining. To overcome this issue Ethereum is changing its ‘Proof of Work’ system to ‘Proof of Stake’ (PoS), in 2022 often called “The Merge”. Proof of Stake requires users to stake their digital assets (ETH) to verify transactions rather than utilising processing power. It is believed that this new system should reduce energy consumption on the network by 99.95%.
Unlike Bitcoin, Ethereum has no upper limit to the number of Ethereum that can be produced. Ethereum has around 115 million ETH in circulation. Many argue that as a result, this makes Ethereum more suitable as a digital currency than Bitcoin for everyday transactions. Others argue that due to high transaction costs, or ‘Gas Fees’, Ethereum as a digital currency is not scalable. The move to Proof of Stake should result in lower gas fees and better scalability down the road.
Much like Bitcoin and Ethereum, Cardano (ADA) is a decentralised blockchain that allows for transactions between individuals. Cardano was launched in 2017 by Charles Hoskinson. Hoskinson was mentioned earlier in this article and was an original co-founder of Ethereum. After disagreements with Vitalik, Hoskinson decided to branch out on his own and create Cardano. The native asset on the Cardano blockchain is Ada.
The main difference between Ethereum and Cardano is that Cardano supports both smart contracts and Proof of Stake. This makes Cardano much more energy efficient than both Bitcoin and Ethereum. Cardano launched smart contracts in 2021, which opened the door to DeFi and decentralised applications. Cardano also supports much lower transaction fees making the token more attractive for day-to-day transactions.
Users can be rewarded with Ada by staking their digital assets (ADA). Unlike Bitcoin or Ethereum there are two ways in which users can earn rewards on the Cardano network. The first is by delegating their Ada to a stake pool run by themselves or they can delegate to a public stake pool run by someone else.
Stake pools are network nodes (computers) run by operators who much like miners get compensated for running the nodes on the network and verifying transactions. The more Ada that is delegated to a node the more likely it is that the operator will generate a new block and be rewarded. As this system does not rely on processing speed the energy consumption is much less than that of Bitcoin and Ethereum.
Cardano has an upper limit of 45 billion Ada. In theory, this could mean the price of Cardano will rise as the coin becomes more widely used. Currently, there are around 33 billion coins in circulation. Some argue that this in combination with low transaction fees makes Cardano suitable for everyday transactions. Proponents of Cardano’s ecosystem argue that Cardano is a leaner, faster version of Ethereum. Critics state that Cardano’s adoption has been slow and that Ethereum has many years of first mover advantage in its favour.
As the oldest on the block, Bitcoin does not offer smart contract functionality and its use case point to speculation or a store of value. Ethereum and Cardano both offer smart contract capabilities which open the door to decentralised apps and DeFi. If Ethereum can move over to Proof of Stake successfully and reduce gas fees, its scalability would be increased greatly. Cardano on the other hand has smart contracts, low transaction costs and proof of stake already in hand, so mass adoption and the creation of DApps will be the key to market domination.
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