When it comes to cryptocurrencies, for many people Bitcoin and Ethereum are in the same category because both networks have a popular token, have been around for some time and are here to stay. However, while the Ethereum cryptocurrency, Ether, does work in the same way as Bitcoin if all you are doing with it is trading it on exchanges or sending payments in it, it was not designed just as a currency. Instead, it was created as a way of payment for certain actions that happen on the Ethereum network. Users are supposed to be getting ether as a reward when someone else on the network uses their computing power or when they compile and confirm transactions and deals that occur on the network.
The Ethereum network positions its token as a system resource and incentive for those who want to use the platform to run smart contracts and build applications on it. Bitcoin’s value comes from the security of the network, its decentralization, transparency and scarcity. The value of ether comes from the fact that users of the Ethereum platform need the token to execute applications, contracts and scripts on the network. Because of this, bitcoin can be compared to digital gold and ether can be compared to digital oil. However, this doesn’t mean that as currency ether is lacking something compared to other currencies or is substandard. In reality, most of the exchanges that support trading of Bitcoin also support Ether and users that visit popular exchanges such as Kraken and Coinbase to buy bitcoin can also visit them to buy ether.
One of the biggest differences between the bitcoin network and the Ethereum network is their development. The bitcoin network has only one function, which is to serve as a peer-to-peer cryptocurrency solution. Users can use the network to send and receive transactions and to mine bitcoins. As more and more people hear about bitcoin and the number of the users on the network increases, the value of bitcoin grows.
The value of ether currency has also grown significantly in 2017, but the circumstances around it were very different from bitcoin’s.
Vitalik Buterin believed that the Bitcoin network needed to expand its functionality. Failing to get agreement from others, Buterin started his own network, Ethereum. To fund the development of the network, Buterin and his co-founders ran a crowdsale of Ether tokens. During the crowdsale, Ethereum founders collected over USD$14 million in payments. These funds became the basis for the initial supply of Ethers. Contributors in the crowdsale received 60 million coins. About another 12 million went into the development fund for the project. Remaining ethers went to the Switzerland-based Ethereum non-profit foundation. The total number of ether tokens added to about 72 million. After this, the Ethereum network allowed the creation of blocks by miners that works in a similar way to how mining works on the Bitcoin network. One of the major differences is that instead of bitcoin’s proof of work algorithm, the Ethereum network uses an algorithm called proof of stake and most of the equipment miners use to mine bitcoins on the bitcoin network will not be as effective for mining ethers on the Ethereum network.
When mining ethers, miners get 5 ethers for every block they mine. This means that the network can add about 18 million ethers to circulation every year, which is very different from what occurs on the bitcoin network because the supply of bitcoins is capped at 21 million.
There is no cap of supply on the Ethereum network because its creators believe that steady but small rate of inflation occurring on the network would decrease over time.
To ensure that ether can serve as a way to enable access to computing power on the Ethereum network, the developers of the network came up with a concept of gas. The goal of the concept is to limit and manage the resources on the network. Gas is a mechanism that determines in real time the costs in ethers of smart contract execution by the network.
After you activate a smart contract on the Ethereum network, you will have miners on the network performing calculations for the contract. That’s what makes smart contracts so safe and valuable. There is no one authority that can go offline, get hacked or get corrupt. The entire network is managing your contract. Obviously, this costs time and energy and Gas is the mechanism that allows users to pay for these resources. The payment comes in ethers from a person who wants to run a contract and goes to miners who are running calculations. This is very similar to putting a coin into a vending machine or jukebox when you want to buy something or listen to a song. The payment that the person will send will equal to gas amount multiplied by gas price.
The bigger and more complex the contract, the more gas it will need to run. To continue the vending machine analogy, the more items you want to buy, the more coins you will need to put in.
The amount of gas that the network will need to run a contract is fixed for any contract. A multipurpose command line called Geth does an estimate for how much gas a contract will cost. However, it is the creator of the contract who specifies how much he or she is willing to pay to run the contract. Miners then look at the price and decide whether they want to include the contract into the blocks that they are mining. If you want miners to pick your contract quickly, you offer a high price, which is no different than any other marketplace.
Using the concept of gas allows the Ethereum network to run only the contracts that users care about and prevents spammers from flooding the network with useless contracts.