To the common observer, all cryptocurrencies can be viewed as a form of digital money, which in some cases, couldn’t be further from the truth. In order to give you a better understanding of what blockchain technology can achieve, we want to analyze and find the differences between these three cryptocurrencies: Bitcoin, Ethereum and Monero. By that order, they are currently on the top 5 for the largest market capitalizations in the blockchain space (the sum of the value of the current supply of coins).
We’ll start with Bitcoin, the first cryptocurrency ever created. It was introduced to the world as a means to transact value between people in a trustless and efficient way. Bitcoin is, in a sense, simple. It was created with a purpose and it serves that purpose with great efficiency: It’s a decentralized payment system. Bitcoin is considered the safest cryptocurrency, due to it’s Proof of Work consensus mechanism, the astonishing amount of computational power that secures it, and the amount of time it has been around.
Despite being the most used and traded cryptocurrency, Bitcoin suffers from some drawbacks when compared to newer cryptocurrencies, such as a slow average block time of 10 minutes (which makes transaction confirmation slow), the low amount of transactions per second (tps) possible, its transaction fees, and the alarming amount of computer power that is spent on it, which despite making Bitcoin efficient, is in rather wasteful. However, one of the biggest drawbacks in Bitcoin, is the lack of efficient governance, which makes upgrading and updating the code, extremely difficult.
Despite its shortcoming, Bitcoin is the backbone of the crypto space and many projects use its blockchain to issue tokens and coloured coins, store data, and secure their own blockchain.
To summarize: Bitcoin is a peer to peer digital currency and payment system that allow users to transact value between themselves without the need without any central authority due to its greatest invention: The blockchain, which records the history of all transactions ever made.
Ethereum was created by developers that loved the possibilities that blockchain technology opens, but saw the limitations Bitcoin’s nature imposes. Many blockchain projects were launched with one specific purpose, which is in fact wasteful, given the amount of resources needed to launch and maintain a blockchain. Instead, Ethereum offers a virtual machine (EVM) and a set of programming languages that can be used to create decentralized smart contracts using the Ethereum value token, Ether. Smart Contracts are, to summarize, contracts that execute themselves. A simple example would be a smart contract that is programmed to make a transaction to wallet1 if it identifies that wallet3 has received another specific transaction. Smart Contracts can also use oracles to execute themselves according to information that occurs outside of the Ethereum blockchain, although these contracts require a certain level of trust in the oracle itself.
Ethereum opens the possibility for various smart contract systems and decentralized applications to be built on it, which is already taking place. Decentralized applications (dapps) like Augur, a decentralized prediction market or First Blood, a peer to peer eSports platform and smart contract systems like The DAO, a decentralized venture capital and Xaurum, a gold backed crypto asset with an expanding gold reserve, are an example of what can be built on Ethereum.
Like Bitcoin, the Ethereum blockchain also uses a Proof of Work consensus method, but the Ethereum development team is working on delivering a novel Proof of Stake system called Casper. Proof of stake relies on the amount of coin a user holds, and not on the amount of computational power, to create new coins and reach consensus on the network.
Despite sharing the same consensus method, PoW, Ethereum’s hashing algorithm is ASIC-resistant meaning that Ethereum mining is possible with a graphic card, and does not require advanced mining hardware.
Ethereum has a much faster block time, averaging at ~14 seconds and the transaction fees in Ethereum are much lower than Bitcoin’s. Furthermore, Ethereum’s can easily reach decisions regarding forks on the network.
Despite this advantages, Ethereum is not as bullet proof as Bitcoin, as its vulnerable to DOS attacks. The programmable nature of Ethereum itself can also raise some security issues, as Smart Contracts can sometimes have flaws due to their complex nature, as we saw with The DAO hack.
To summarize: Ethereum is a decentralized computing platform that allows users to issue tokens and create complex applications and smart contract systems. It has many applications beyond a simple payment processor.
Monero was created with the same purpose of Bitcoin: To allow users to transact value between themselves with no central authority involved, however, Monero was also created in order to fix some of the problems Bitcoin currently holds, most noticeably the lack of privacy and fungibility created by the public ledger we call Blockchain. Blockchain fixed the double spending problem that other forms of cryptographic cash before it could not fix without relying on a central authority.
There’s a common misconception that Bitcoin is an anonymous currency, however, Bitcoin is in fact a pseudonymous currency, where balances and transactions are connected, not to the user’s personal information, but to their wallet address which can be considered their pseudonym. This allows blockchain analysis to be conducted in order to find a person’s identity through their patterns, timezone, services used, and transaction history. Mixing Bitcoins has become a popular practice that allows users to come together and scramble their transaction in order to throw off any blockchain analysis. Still, a fungibility problem remains, as coins can still be traced back to previous transactions that can be associated with criminal activity, making certain coins not as valuable as the rest of them. This is a grave problem when defining Bitcoin as money, since money must be fungible in order to be considered so.
Monero is, like Bitcoin, a Proof of Work cryptocurrency with an ASIC-resistant hashing algorithm, Cryptonote. It has no supply cap and its blocktime averages at 2 minutes, which makes Monero transactions much faster than Bitcoin’s but slower than Ethereum’s.
Monero uses a ring signature system to provide anonymous transactions. In a ring signature setting, a group of users have a set of keys that can confirm a transaction without revealing which user made it. Furthermore, Monero wallets are protected by viewkeys, meaning that only the wallet owners can see their balances on the blockchain. Monero is currently a work in progress and striving to achieve greater anonymity as the development progresses.
Faith in Monero’s achievements in terms of privacy has come a long way, as it has even been added to certain DeepWeb markets as the first alternative cryptocurrency to be used in this environment.
To summarize: Monero is a privacy-centric cryptocurrency created to address the privacy and fungibility issues found in Bitcoin, and to be used as a trustless and anonymous currency.