Decentralised currency, digital currency, and peer-to-peer money all refer to bank-free methods of transferring wealth or ownership of any other commodity without needing a third party such as Banks.
Bitcoin:
Bitcoin is a consensus network that enables a new payment system and completely digital money. It is the first decentralized peer-to-peer payment network. From a user perspective, Bitcoin is pretty much like cash for the Internet.
Ethereum:
Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum, and its own programming language, called Solidity.
As a blockchain network, Ethereum is a decentralized public ledger for verifying and recording transactions. The network’s users can create, publish, monetize, and use applications on the platform, and use its Ether cryptocurrency as payment. Insiders call the decentralized applications on the network “dapps“.
Proof-of-Work:
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back’s Hashcash. The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. For our timestamp network, we implement the proof-of-work by incrementing a nonce in the block until a value is found that gives the block’s hash the required zero bits. Once the CPU effort has been expended to make it satisfy the proof-of-work, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing all the blocks after it.
The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, It could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The Longest chain represented the majority decision. Which has the greatest proof-of-work effort invested in it. The honest chain will grow the fastest and outpace any competing chains if honest nodes control a majority of CPU power. To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes.
What did Ethereum borrow from Bitcoin?
The idea of operating through a decentralized network of computers that shared an accumulating record of transactions — the blockchain. Both systems are built on open source software. So developers can jump in and try to make improvements. Both networks also rely on members known as miners. Miners race to perform the complex calculations used to verify the transactions. Newly issued digital currency is rewarded to Miners.
This kind of verification system is called proof of work. It has come under increasing criticism for the energy it consumes and the pollution that energy creates. While comparisons are contentious, by one estimate the Bitcoin network uses more electricity than Sweden in a year.
How are Bitcoin and Ethereum different?
Ethereum is certainly faster than Bitcoin – with transactions typically settling in seconds, rather than minutes. But it also takes things further. While still blockchain based, and operating as a store of value, its fans and evangelists see it as a platform for distributed computing. It comes with its own built-in currency, called Ether.
The Bitcoin blockchain can simply be pictured as a database of accounts with an amount of currency stored in each. The Ethereum network blockchain is a more sophisticated construction. And is capable of storing computer code – applications – that can use the CPU power going into the network to execute.
The currency – Ether – represents this CPU power. So the idea is that Ether will be bought and sold by businesses, governments, or individuals to allow them to tap into the vast, distributed resources of the Ethereum network to run their own apps.
The first of these applications are known as “smart contracts”. This is a way of automating contracts so they will execute when consensus says that conditions have been filled. Though simple, their uses are potentially widespread. Such as enabling payment systems which will release funds on completion of work, or authorising the transfer of ownership of good when payment has been made.
The Ethereum network also allows the creation of other cryptocurrencies, or tokens, using the same protocol as Ether but distributed on different blockchains, which can be public or private. This can be used in organisations to represent shares, voting rights, or as means of proving identity or authorisation credentials.
Thanks for reading. We will explore some more topics in upcoming blogs.
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Well explained, Ayushi…