However, most of the processing power of the Bitcoin network is wasted, generating random numbers in the proof-of-work algorithm to add blocks to the blockchain.
The Ethereum network allows programmers and companies to create applications that run on a decentralized network of computers. This better utilizes the computing power of the network and means applications run across an entire network of computers, not just one central server.
Decentralized Applications (dApps)
Currently, almost all applications and websites are centralized, meaning they are installed and run from one central server.
For example, when you upload photos to Facebook, the photos are stored on Facebook’s servers. Facebook controls all the servers and data on them. If the Facebook servers crashed or were hacked, all of the photos and information on these servers would be vulnerable.
For people living in countries run by dictatorships, governments can shut down centralized servers and websites that contain any information critical of the government.
dApps utilize the computing power, storage space, and resources of the entire network of computers connected to it. Decentralized apps don’t have a single entity controlling them and they don’t run on centralized servers. Decentralized Applications (dApps) run across all the computers connected to the network.
When photos are uploaded, they are distributed across a network of computers, if one of the computers on the network was hacked or crashed, the other computers would not be impacted.
Governments can’t shut down websites or servers that they disapprove of, if they remove one computer from the network, the application and information will still run across all other computers on the network.
Smart contracts are contracts that don’t require lawyers or courts to enforce them. They are written in a computer programming language that runs on the blockchain. The computer code automatically verifies contracts, executes and enforces the contract terms.
The degree of autonomy of the smart contracts can be decided, they can be fully or partially self-enforcing and self-executing. Smart contracts do not have to be purely financial transactions, almost anything of value can be exchanged using a smart contract.
Companies are currently building smart contracts in a wide range of different industries such as music licenses, loyalty programs, product warranties, verifying digital images, insurance contracts and more.
Benefits of smart contracts
A major risk with Bitcoin transactions is that if you send bitcoins to an address, the other person has automatic ownership of the bitcoins. There is no way to reverse the transaction, request a refund or contact any third-party intermediary if there is a dispute or issue with the transaction.
If you are purchasing an item and you send bitcoins to the seller address first, there is no guarantee the seller will send the items. As Bitcoin wallets are also anonymous, you have no way to contact the person you sent the bitcoins to.
If bitcoins are sent to the wrong address or the receiver of the bitcoins doesn’t send you the item purchased then your bitcoins are gone and you have no way to get them back. Smart contracts can reduce many of the risks involved with transactions as they act as intermediaries ensuring the conditions of a transaction are met and enforced.
Ethereum Tokens and ICOs
Ethereum allows programmers to create their own coins on the Ethereum blockchain known as tokens. This allows companies to quickly utilize blockchain technology without having to create and manage their own blockchain.
Recently there have been a large number of companies raising money through Initial Coin Offerings (ICOs) which are usually tokens issued on the Ethereum network.
Many of the new cryptocurrencies being created are not stand-alone cryptocurrencies with their own blockchains but are tokens issued on top of the Ethereum blockchain.
Ethereum and Blockchain 2.0
One of the key foundation technologies of Bitcoin is the blockchain. Bitcoin created the first blockchain, which can be considered blockchain 1.0, it is used primarily as a distributed ledger for storing transactions on the Bitcoin network.
Ethereum has taken the possibilities of blockchain beyond the original blockchain concept. The capabilities that the Ethereum platform has enabled through decentralized applications and smart contracts can be considered blockchain 2.0.
When the future of blockchain technology is discussed, it is generally referring to blockchain 2.0, dApps and smart contracts. The new capabilities of blockchain 2.0 are predicted to have a much greater impact on the world than Bitcoin has. Blockchain 2.0 takes blockchain technology into areas far outside of financial transactions.
Bitcoin is a decentralized distributed ledger mainly used for financial transactions but Ethereum is a decentralized computing platform mainly used for running applications and smart contracts. Bitcoin is designed to be used for payment and exchange of value.
The currency on the Ethereum network called “Ether” is designed to be used as payment for computing power when running decentralized applications and smart contracts. Ethereum along with the “Ether” currency was never designed to be a replacement for Bitcoin.
It serves an entirely different purpose and while it is growing in popularity and value faster than Bitcoin, it is not seen as a competitor to Bitcoin for financial transactions.
Litecoin is built on the same foundations of Bitcoin, however, it split off from the original Bitcoin blockchain into a completely different blockchain and cryptocurrency.
The Bitcoin network is the largest cryptocurrency network, the majority of the network must often reach an agreement about the direction of the network or changes to the programming code.
As the Bitcoin network is so large, this has held the Bitcoin network back in recent years as it has failed to reach majority agreement on many decisions. Litecoin has been able to make greater improvements to the network compared to Bitcoin. Litecoin adds a block to the blockchain every 2.5 minutes, compared to Bitcoin, which adds a block every 10 minutes.
The block sizes are smaller on the Litecoin network, meaning more transactions can be included in every block. Litecoin has faster processing times for transactions and payments and continues to make improvements while the Bitcoin network still struggles to reach agreement on many changes.
Some people believe that Litecoin will be a better network for payments and transactions and become more widely used than Bitcoin in the future.
Ripple is a cryptocurrency payment network that is being created in collaboration with major financial institutions. It is being heralded as the new global payment network for settling transactions between banks and financial institutions.
Bitcoin along with the underlying blockchain technology was seen as a way to remove centralized control of payments from governments, banks, and financial institutions. Bitcoin and the original blockchain technology was created to be open source and decentralized.
Each person on the network is able to view the Bitcoin code and transact directly with each other without financial intermediaries being involved.
Ripple is not decentralized or open-source, it is seen as banks and large financial institutions taking decentralized, open-source blockchain technology and turning into traditional centralized, closed source systems.
While Ripple may change the way banks and financial institutions settle transactions, for many people it is seen as moving away from what Bitcoin and blockchain technology was originally designed for by putting power and control of payments back into the hands of large financial institutions.
On the Bitcoin blockchain, there are a limited number of transactions that can be included in each block. A block is a data file of transactions which is limited by a file size of 1MB. Each transaction added increases the file size, once the data file reaches 1MB, no more transactions can be added.
A block is added every 10 minutes, so any pending transactions not added in a block will need to wait at least 10 minutes to be processed. The more transactions that occur on the Bitcoin blockchain, the greater the number of pending transactions waiting to be processed. This leads to a backlog of unprocessed transactions and slower transaction processing times.
Bitcoin Cash was created when the Bitcoin network couldn’t reach an agreement about which changes to implement to resolve these issues. This disagreement resulted in part of the network splitting off to create a new cryptocurrency known as Bitcoin Cash.
Bitcoin Cash aims to resolve slow processing times by significantly increasing the file size allowing an almost unlimited number of transactions in each block. There are other features that the developers behind Bitcoin Cash plan to implement to improve the functionality of Bitcoin Cash compared to Bitcoin.
While “Bitcoin Cash” contains the word “Bitcoin” in its name, it is not the same as Bitcoin. There is only one Bitcoin, known as “Bitcoin”, with no additional words on the end.
This is the original Bitcoin blockchain that was created, which most alternative cryptocurrencies are based on. Bitcoin Cash is an altcoin, it copied the Bitcoin source code and blockchain and created a new cryptocurrency. Everyone that held Bitcoin at the time of the split was entitled to receive the same amount of Bitcoin Cash.
It is very easy to create a new cryptocurrency and there are thousands of other cryptocurrencies similar to Bitcoin Cash. Most of these have also copied the Bitcoin source code and blockchain before creating their own cryptocurrencies.
There are several that also have the word “Bitcoin” in their name, such as “Bitcoin Dark” and “Bitcoin Plus”. Buying Bitcoin Cash is similar to buying Bitcoin Dark, Bitcoin Plus or Litecoin.
They are all alternative cryptocurrencies that can be used in similar ways to Bitcoin. However, they are not Bitcoin and are less likely to be accepted as a payment method or store their value in the future.
Bitcoin Cash has only recently been created and has not implemented many of the changes proposed. It is still unclear what benefits and features that Bitcoin Cash will offer over Bitcoin.