Bitcoin vs. Ripple:  An Overview

From the outside, the cryptocurrency investing universe seems limited to bitcoin. As the most well-known cryptocurrency, bitcoin is the leader in market capitalization and overall traction with investors.

But there are several other options for those interested in diversifying their portfolio and experimenting with coins that offer a different take on the concept of digital currencies. Ripple’s XRP is one of them. In July 2021, the cryptocurrency ranked sixth in terms of total market capitalization. Let’s take a closer look at what distinguishes XRP from Bitcoin and other top digital tokens.

Bitcoin

Bitcoin operates on a public blockchain ledger that supports a digital currency used to facilitate payments for goods and services. The bitcoin network is based on the blockchain concept, a public ledger of verified transactions and record keeping.

Miners verify transactions on an ongoing basis and add them to the Bitcoin blockchain. In exchange for their time and the computing power necessary to validate the ledger in this way, miners are rewarded with BTC upon successfully validating transactions.

Ripple

XRP is the native cryptocurrency for products developed by Ripple Labs. Its products are used for payment settlement, asset exchange, and remittance systems that work more like SWIFT, a service for international money and security transfers used by a network of banks and financial intermediaries. XRP is pre-mined and uses a less complicated method of mining as compared to Bitcoin.

The company was founded as a peer-to-peer trust network that leveraged social media. Users within a network could bypass banks and make loans and open credit lines with each other. But the network failed to take off.

In 2012, three years after Bitcoin ushered in the cryptocurrency era, Ripple changed tracks and became OpenCoin—a network for money transfers where large businesses and financial services firms acted as counterparties to transactions.

XRP, its cryptocurrency, was launched in the same year with 80 billion tokens going to the company and 20 billion to its co-founders. The purpose of XRP was to serve as an intermediate mechanism of exchange between two currencies or networks. OpenCoin became Ripple Labs in September 2013.

Ripple describes itself as a global payments network and counts major banks and financial services amongst its customers. XRP is used in its products to facilitate quick conversion between different currencies.

Key Differences

The main differences between Bitcoin and XRP are as follows:

Both Have Different Methods to Validate Transactions

Instead of using the blockchain mining concept, the Ripple network uses a unique distributed consensus mechanism to validate transactions in which participating nodes verify the authenticity of a transaction by conducting a poll. This enables almost instant confirmations without a central authority.

The result is that XRP remains decentralized and is faster and more reliable than many of its competitors. It also means that the XRP consensus system consumes negligible amounts of energy as compared to Bitcoin, which is considered an energy hog.   

XRP Is Cheaper and Faster than Bitcoin

Due to the complicated and intensive nature of mining used in the cryptocurrency, Bitcoin transaction confirmations may take many minutes and are associated with high transaction costs. XRP transactions are confirmed within seconds and generally occur at very low costs.

Similar to the bitcoin transaction processing fee, XRP transactions are charged. Each time a transaction is performed on the Ripple network, a small amount of XRP is charged to the user (individual or organization).

XRP Has More Coins in the Market 

About 1 billion XRP were pre-mined at launch and have been released gradually into the market by its main investors. In contrast, Bitcoin’s supply is capped at 21 million, meaning there will only ever be 21 million Bitcoin in existence. BTC’s artificial scarcity has helped generate investor interest in its potential as a store of value.

XRP and Bitcoin Have Different Circulation Mechanisms

Bitcoins are released and added to the network as and when miners find them. They do not adhere to a release schedule and their supply depends mostly on network speeds and difficulty of the algorithm used to mine coins.

A smart contract controls the release of XRP. Ripple planned to release a maximum of 1 billion XRP tokens each month as governed by an in-built smart contract; the current circulation is over 50 billion.

Any unused portion of the XRP in a particular month will be shifted back to an escrow account. This mechanism ensures that there will be no possibility of misuse due to an oversupply of XRP cryptocoins, and it will take many years before all the cryptocoins will be available.

Bitcoin vs. Ripple Example

To understand both with real-world comparisons, below are some analogies.

Peter, living in America, visits Walmart and pays for his purchases in US dollars. He can also use his US dollars to purchase other currencies for trading and investment, like GBP or JPY, and sell them off at a later date for a profit or loss.

Bitcoin is an equivalent digital currency—an alternative to real-world US dollars, for example. Peter can make a purchase and pay for it in bitcoins, or he can purchase bitcoins for trading and investments and sell them off at a later date for profit or loss, just like trading any other fiat currency like the GBP or JPY.

If Peter in America wants to send $100 to Paul in Italy, he can do so by instructing his American bank to execute the transaction. After taking necessary charges, Peter’s American bank will issue instructions using the present-day SWIFT system that will credit Paul’s Italian bank account with the equivalent euros (or USD). This process may involve high charges at both ends and takes a certain number of days for processing.

Enter Ripple, the payment and settlement system that also has a currency, the XRP.

Ripple’s payment system uses XRP tokens for the transfer of assets on the Ripple network. The same $100 can be converted instantly by Peter to equivalent XRP tokens, which can be instantly transferred to Paul’s account over the Ripple network.

Upon suitable verification and authentication of the transaction by the decentralized Ripple network, Paul will receive the XRP tokens. He will have the option to convert it back to USD's or any other currency of his choice, or even retain it as XRP tokens. The verification process is faster than those of bitcoin and traditional money transfer systems.

The Bottom Line

While Ripple works in a bit more complicated way, the above example explains its basic workings. The Ripple system scores better than the bitcoin network for its lower processing times and lower transaction charges. On the other hand, BTC is generally more widespread and better known than XRP, giving it the advantage in other ways.

Bitcoin remains a truly public system that is not owned by any single individual, authority, or government. The Ripple network, although decentralized, is owned and operated by a private company with the same name. Despite both having their unique cryptocurrency tokens, the two popular virtual systems cater to different uses.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

Several recent reports have drawn attention to the massive amounts of energy used for bitcoin mining operations. The statistics are staggering. According to the Digiconomist website, a bitcoin country would rank 64th in the world for overall energy usage.

Bitcoin’s annual energy consumption is estimated to be 30 TWh. (Wikipedia defines one terawatt hour as being equal to a sustained power of 114 megawatts for a period of one year). On a more granular level, approximately 10 U.S. households can be powered for a single day using electricity required for a single bitcoin transaction. (See also: Is Bitcoin Mining Still Profitable?) 

Energy accounts for between 90% to 95% of bitcoin mining costs and plays an extremely critical role in determining profitability for the cryptocurrency’s miners. In turn, profitability is important to attract more miners and grow the bitcoin mining ecosystem as demand for bitcoin spirals. (See also: How Does Bitcoin Mining Work?) Does the increased cost of bitcoin translate to higher future prices? 

The Relationship Between Mining Energy Costs And Bitcoin Price

Energy usage for miners is contingent upon several factors, from availability of cheap and plentiful power to energy-efficient hardware to the difficulty of problems being solved by machines to earn bitcoin rewards. For example, a difficult problem is computation-intensive (versus an easy problem) and, subsequently, will need additional energy resources for solving. A Forbes post last year suggested that bitcoin’s seigniorage (or the difference in its cost of production and overall value) will become unviable, unless the mining process becomes more energy-efficient.

Over the years, bitcoin miners have cut back on energy costs by moving production to China, a country which reportedly accounts for 60% of bitcoin production operations. A majority of Chinese bitcoin mines are situated in its Sichuan province, where hydropower dominates.

Iceland, which provides naturally cooling Arctic air for overheated systems and uses geothermal energy, is also a prominent venue for bitcoin mining operations. Chinese miners have not provided estimates for bitcoin production costs. But Genesis mining, which shifted its mines from China to Iceland, estimated that it cost $60 for the company to produce a single bitcoin.  

In a 2015 paper, Investopedia writer Adam Hayes estimated a cost production model for bitcoin (of which energy was the main cost) and concluded that technological progress, in the form of faster and more energy-efficient hardware, would bring down the market price of bitcoin.

“As real-world mining efficiency increases, which is a likely result of competition, the break-even price for bitcoin producers will tend to decrease. Low-cost producers will compete in the marketplace by offering their product at lower and lower prices,” Hayes wrote.  

But that hasn’t happened. An increase in bitcoin numbers has paralleled a jump in bitcoin’s price. Why? The answer to that question is complicated.

Why An Increase In Bitcoin Production Hasn’t Declined Its Price

To be sure, there have been significant improvements in hardware processing power and costs. 

Even as energy costs have declined, however, the difficulty levels for bitcoin mining have increased on an overall basis. With the exception of two instances, the difficulty levels rose consistently over the last year. This increases the cryptocurrency's hash rate and is necessary to ensure bitcoin’s security. Even though it costs more energy, a significantly difficult problem set translates to a more secure bitcoin network.

Halving of rewards for bitcoin mining from 25 to 12.5 has also ensured that mines have to work harder to earn the same number of bitcoins as earlier. Then there is speculation, which has played a prominent role in driving up prices for the cryptocurrency. Recent forks within the cryptocurrency have introduced new algorithms that require less processing power. For example, the recent Bitcoin Cash fork adjusts problem difficulty depending on hash rate, thereby enabling lower power consumption. 

The net effect is that energy costs still comprise the majority component of bitcoin mining costs but exert minimal influence on its price. The energy costs associated with bitcoin mining operations ensure that it remains a significant barrier to enter the industry.

Bitcoin vs. Bitcoin Cash: An Overview

Since its inception, there have been questions surrounding Bitcoin’s ability to scale effectively. Transactions involving the digital currency Bitcoin are processed, verified, and stored within a digital ledger known as a blockchain. Blockchain is a revolutionary ledger-recording technology. It makes ledgers far more difficult to manipulate because the reality of what has transpired is verified by majority rule, not by an individual actor. Additionally, this network is decentralized; it exists on computers all around the world.

The problem with blockchain technology in the Bitcoin network is that it’s slow, especially compared to banks that deal with credit card transactions. Popular credit card company Visa Inc. (V), for instance, processes an average of 564 million transactions per day, which is about 6,527 transactions per second.

How many transactions can the Bitcoin network process per second? As of Jan. 31, 2022, the rate is 4.43 per second. Transactions can take several minutes or more to process. As the network of Bitcoin users has grown, waiting times have become longer because there are more transactions to process without a change in the underlying technology that processes them.

Ongoing debates around Bitcoin’s technology have been concerned with this central problem of scaling and increasing the speed of the transaction verification process. Developers and cryptocurrency miners have come up with two major solutions to this problem:

1. The first involves making the amount of data that needs to be verified in each block smaller, thus creating transactions that are faster and cheaper.
2. The second requires making the blocks of data bigger so that more information can be processed at one time.

Bitcoin Cash (BCH) developed out of these solutions. Below, we’ll take a closer look at how Bitcoin and BCH differ from one another.

Bitcoin

In July 2017, mining pools and companies representing roughly 80% to 90% of Bitcoin computing power voted to incorporate a technology known as a segregated witness (SegWit). This fix makes the amount of data that needs to be verified in each block smaller by removing signature data from the block of data that needs to be processed in each transaction and attaching it in an extended block. Signature data has been estimated to account for up to 65% of data processed in each block, so this is not an insignificant technological shift.

Talk of doubling the size of blocks from 1 MB to 2 MB ramped up in 2017 and 2018. As of February 2019, the average block size of Bitcoin increased to 1.305 MB, surpassing previous records. By Jan. 31, 2022, the block size was 1.39 MB on average. The larger block size helps in terms of improving Bitcoin’s scalability.

In September 2017, research released by cryptocurrency exchange BitMEX showed that SegWit implementation had helped increase the block size amid a steady adoption rate for the technology. Proposals to both implement SegWit and double the block size were known as SegWit2×.

Bitcoin Cash

Bitcoin Cash is a different story. Bitcoin Cash was started by Bitcoin miners and developers equally concerned with the future of the cryptocurrency and its ability to scale effectively. However, these individuals had their reservations about the adoption of a Segregated Witness technology. They felt that SegWit2× did not address the fundamental problem of scalability in a meaningful way, nor did it follow the roadmap initially outlined by Satoshi Nakamoto, the anonymous party who first proposed the blockchain technology behind cryptocurrency.

Furthermore, the process of introducing SegWit2× as the road forward was anything but transparent, and there were concerns that its introduction undermined the decentralization and democratization of the currency.

In August 2017, some miners and developers initiated what is known as a hard fork, effectively creating a new currency: BCH. BCH has its own blockchain and specifications, including one very important distinction from bitcoin. BCH implemented an increased block size of 8 MB to accelerate the verification process, with an adjustable level of difficulty to ensure the chain’s survival and transaction verification speed, regardless of the number of miners supporting it.

As of March 2022, the maximum block size for BCH was increased fourfold to 32 MB.

Bitcoin Cash is thus able to process transactions more quickly than the Bitcoin network, meaning that wait times are shorter and transaction processing fees tend to be lower. The Bitcoin Cash network can handle many more transactions per second than the Bitcoin network can. However, downsides also come with the faster transaction verification time. One potential issue with the larger block size associated with BCH is that security could be compromised relative to the Bitcoin network. Similarly, Bitcoin remains the most popular cryptocurrency in the world as well as the largest by market capitalization, so BCH users may find that liquidity and real-world usability are lower than they are for Bitcoin.

The debate about scalability, transaction processing, and blocks has continued beyond the fork that led to Bitcoin Cash. In November 2018, for example, the Bitcoin Cash network experienced its own hard fork, resulting in the creation of yet another derivation of Bitcoin called Bitcoin SV. Bitcoin SV was created in an effort to stay true to the original vision for Bitcoin that Satoshi Nakamoto described in the Bitcoin white paper while making modifications to facilitate scalability and faster transaction speeds.

The debate about the future of Bitcoin appears to show no signs of being resolved.

Since its introduction in a 2008 whitepaper, Bitcoin (BTCUSD) has generated controversy and news. Its enthusiasts herald the cryptocurrency’s launch as the advent of a new and equitable monetary system. Critics point to the cryptocurrency’s role in criminal activities and the absence of legal recognition as proof that it is “rat poison squared”. The reality, probably, lies somewhere in between. 

Meanwhile, governments around the world are eyeing Bitcoin’s advance warily. Some, like El Salvador, have adopted it as currency. But major economies, including the United States, refuse to recognize it as legal tender. They have good reasons for doing so. 

Among other things, Bitcoin enables the citizens of a country to undermine government authority by circumventing capital controls imposed by it. It also facilitates nefarious activities by helping criminals evade detection. Finally, by removing intermediaries, Bitcoin can potentially throw a wrench in the existing financial infrastructure system and destabilize it.  

In What Do We Trust? 

To understand why governments are circumspect about Bitcoin, it is important to understand the role that fiat currencies play in a country’s economy. Fiat refers to conventional currencies issued by governments. Fiat money is backed by the full faith and credit of a government. This means that governments promise to make the borrower of a currency whole, in case of a default. 

The U.S. government relies on the Federal Reserve, a central bank on which Congress only has partial authority, to print or create money for its economy. The cycle of transactions in the US economy—one that involves borrowers, lenders, and consumers—relies on a chain of trust between transacting parties. The Federal Reserve, which is also known as a lender of the last resort, is the final leg of that chain. 

Bitcoin advocates charge the Fed with creating money out of thin air i.e., the currency is not backed by tangible assets. By manipulating the supply of money in the US economy, the central bank also manufactures asset bubbles and crises, they say.

Governments facilitate the role of central banks in an economy. While central banks are involved in making policy related to money, they do not have authority to regulate its use. That responsibility lies with the government. Through a series of intermediaries, such as banks and financial institutions, governments distribute and regulate the flow and use of money in an economy. Thus, they can dictate how it is transferred, sectors where it is distributed, and trace its utility. They also earn revenue from it by taxing earnings of individuals and corporations. 

Bitcoin Undermines the Cycle of Trust 

Bitcoin’s decentralized system has the potential to dismantle the system described above. Its network does away with intermediaries and, by extension, the elements of a government’s system. 

A central bank is no longer required because Bitcoin, the currency, can be produced by anyone running a full node. Peer-to-peer transfers between two parties on Bitcoin’s network means that intermediaries are no longer required to manage and distribute currency.  

The chain of trust underpinning the current financial infrastructure becomes an algorithmic construct in Bitcoin’s network. A transaction is not included in the central ledger unless it is approved by all full nodes. Even a single disagreement or error in a transaction entry can result in its rejection. 

Theoretically, at least, the streamlining of operations between individuals and between various actors on Bitcoin’s blockchain can rearrange the current system. The financial infrastructure is decentralized and the power to increase or decrease currency supply is not appointed with a single or group of authorities. Thus, in the new setup, the role of governments in managing and regulating economic policy through intermediaries may become superfluous.    

Why Are Governments Wary of Bitcoin? 

Whether the state- and regulation-less future envisaged by Bitcoin evangelists comes to pass is still an open question. Meanwhile, governments around the world are trying to understand the effect that the cryptocurrency might have on their economies in the near-term. Specifically, they are grappling with the following three problems presented by Bitcoin in its current form. 

Bitcoin can circumvent government-imposed capital controls  

Governments often institute capital controls to prevent outflows of a currency because exports could debase its value. For some, this is another form of control exerted by governments on economic and fiscal policy. In such instances, the state-less nature of bitcoin comes in handy to circumventing capital controls and exporting wealth. 

One of the more well-known instances of capital flight using Bitcoin has occurred in China. The country’s citizens have an annual limit of $50,000 to purchase foreign currency. A report by Chainalysis, a crypto forensics firm, found that more than $50 billion moved from China-based bitcoin wallets to wallets in other countries in 2020, meaning Chinese citizens may have converted the local currency to Bitcoin and transferred it across borders to sidestep government regulation.

Bitcoin ties to illegal activity 

The ability to bypass existing financial infrastructure for a country is a blessing in disguise for criminals because it enables them to camouflage their involvement in such activities. Bitcoin’s network is pseudonymous, meaning users are identified only by their addresses on the network. it is difficult to trace the provenance of a transaction or the identity of an individual or organization behind the address. Besides this, the algorithmic trust engendered by Bitcoin’s network obviates the need for trusted contacts at either end of an illegal transaction. 

Not surprisingly, Bitcoin is a favored conduit for criminals for financial transactions. The most famous example of a crime involving bitcoin was the Silk Road case. Briefly, Silk Road was a marketplace for guns and illegal drugs, among other things, on the Dark Web. It allowed users to pay in bitcoins. The cryptocurrency was held in escrow until the buyer confirmed receipt of goods. It was difficult for law enforcement to trace parties involved in the transaction because they only had blockchain addresses as identification. Eventually, however, the FBI was able to take down the marketplace and seize 174,000 BTC. 

In recent times, infecting popular applications with ransomware and demanding payment in bitcoin has also become popular with hackers. The 2021 Colonial Pipeline hack, which resulted in energy supply disruptions in various states, demonstrated the degree to which such attacks can become national security issues.

Bitcoin is not regulated 

More than a decade after Bitcoin was introduced, governments around the world are still trying to figure out ways to regulate the cryptocurrency. There are multiple strands to bitcoin’s regulation problem. 

For example, changing narratives about Bitcoin utility has complicated questions relating to the appropriate government agency to oversee the cryptocurrency, definitions to be used for lawmaking or, even, the approach for formulation of laws. 

Is Bitcoin a currency to be used in daily transactions or a store of value that is primarily used for investment purposes? Is Bitcoin a safe haven asset during the times of global economic turmoil? Neither the so-called Bitcoin expert nor the average bitcoin investor seem to know. 

It could be argued that the use of Bitcoin in investing products like futures is proof of its attractiveness to traders. However, the underlying markets for such derivatives are unregulated because none of the major cryptocurrency exchanges, used to set Bitcoin’s price for futures markets, are registered with the Securities and Exchange Commission (SEC).  

An Opaque Ecosystem 

While Bitcoin has the potential to upend established dynamics of the existing financial ecosystem, it is still plagued by several problems. Government wariness about the cryptocurrency can be partly attributed to fear and partly to the lack of transparency about its ecosystem. Those latter concerns are not misplaced. 

Not much is known about the cause-and-effect relationship between Bitcoin price and global developments. That is an important sticking point in light of the cryptocurrency’s volatile price swings. Numerous scams have pervaded its development as an asset class. As the SEC outlined in a January 2018 letter, there are several issues, from an absence of transparency to the presence of bitcoin whales, related to the workings of cryptocurrency exchanges.

The Bottom Line 

Bitcoin has become a touchstone for controversy since it was introduced to the world in the aftermath of the financial crisis. Governments have become wary, even fearful, of Bitcoin, and have alternated between criticizing the cryptocurrency and investigating its use for their ends. 

While it has the potential to decentralize and change the workings of the existing financial infrastructure, the cryptocurrency’s ecosystem is still rife with scandals and criminals. Until the time that its ecosystem matures and a significant use case for it is found, Bitcoin will continue to provoke distrust and criticism from established authorities.  

Even as other industries are swept up in waves of disruption unleashed by technology, the energy industry has been slow to embrace change. But the introduction of blockchain promises to speed things up and radically transform the industry's processes and markets. As of this writing, there are two prominent use cases for blockchain in the energy industry.

The first one is in enabling a peer-to-peer energy trading model. The proliferation of Distributed Energy Grids (DERs) or independent renewable energy sources (such as solar panels) that connect to the grid has helped convert energy consumers into producers who are able to sell excess power back to the grid. (See also: The Current State of the Solar Industry). 

However, that process retains the existing dynamic of the electricity markets, centralizing the task of buying and selling energy under the control of the utilities. Bitcoin's decentralized network could disrupt that paradigm and enable customers to sell excess power to each other within a given area. Several startups and utilities around the world have already developed pilots or are considering projects to test this possibility. For example, Brooklyn Microgrid is developing an app that enables energy trading between consumers in a neighborhood within the borough. Similarly, Grid Singularity, a European startup, is focusing on the exchange of granular and private data between different parties within the energy market.

Even large energy firms are getting in on the action.  British Petroleum p.l.c. (BP) and Austria's Wien Energy are among the firms that participated in an energy trading platform trial earlier this year. (See also: How Blockchain Is Helping to Change Government Services.)

Another common use case for blockchain within the energy industry is development of cryptocurrencies for monetary payments. Several utilities have already begun pilot projects to enable such transactions. For example, Marubeni Corporation (MARUY) accepts cryptocurrency payments in some regions of Japan. In certain scenarios, the utility of blockchains goes beyond payments. For example, Bankymoon, a South Africa-based blockchain startup, partnered with Usizo to enable cryptocurrency monetary payments for bitcoin-compatible smart meters located in remote areas.

But this is just the start. Blockchain could lead to further changes within the energy ecosystem. For example, a distributed ledger with several energy consumers and producers could lead to multiple rates within markets instead of the single utility-set rate that is currently prevalent. (See also: How Blockchain Is Changing Real Estate.)

Bitcoin vs. Ethereum: An Overview 

Ether (ETH), the cryptocurrency of the Ethereum network, is the second most popular digital token after bitcoin (BTC). As the second-largest cryptocurrency by market capitalization (market cap), comparisons between Ether and bitcoin are only natural.

Ether and bitcoin are similar in many ways: Each is a digital currency traded via online exchanges and stored in various types of cryptocurrency wallets. Both of these tokens are decentralized, meaning that they are not issued or regulated by a central bank or other authority. Both make use of the distributed ledger technology known as blockchain.

However, there are also many crucial distinctions between the two most popular cryptocurrencies by market cap. Below, we’ll take a closer look at the similarities and differences between bitcoin and ether.

Bitcoin Basics

Bitcoin was launched in January 2009. It introduced a novel idea set out in a white paper by the mysterious Satoshi Nakamoto—bitcoin offers the promise of an online currency that is secured without any central authority, unlike government-issued currencies. There are no physical bitcoins, only balances associated with a cryptographically secured public ledger.

Although bitcoin was not the first attempt at an online currency of this type, it was the most successful in its early efforts, and it has come to be known as a predecessor in some way to virtually all cryptocurrencies that have been developed over the past decade.

Over the years, the concept of a virtual, decentralized currency has gained acceptance among regulators and government bodies. Although it isn’t a formally recognized medium of payment or store of value, cryptocurrency has managed to carve out a niche for itself and continues to co-exist with the financial system despite being regularly scrutinized and debated.

Ethereum Basics

Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July 2015, Ethereum is the largest and most well-established, open-ended decentralized software platform.

Ethereum enables the deployment of smart contracts and decentralized applications (dApps) to be built and run without any downtime, fraud, control, or interference from a third party. Ethereum comes complete with its own programming language that runs on a blockchain, enabling developers to build and run distributed applications.

The potential applications of Ethereum are wide-ranging and are powered by its native cryptographic token, ether (commonly abbreviated as ETH). In 2014, Ethereum launched a presale for ether, which received an overwhelming response. Ether is like the fuel for running commands on the Ethereum platform and is used by developers to build and run applications on the platform.

Ether is used mainly for two purposes: It is traded as a digital currency on exchanges in the same fashion as other cryptocurrencies, and it is used on the Ethereum network to run applications. According to Ethereum, “people all over the world use ETH to make payments, as a store of value, or as collateral.”

Key Differences

While both the Bitcoin and Ethereum networks are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. For example, transactions on the Ethereum network may contain executable code, while data affixed to Bitcoin network transactions are generally only for keeping notes. Other differences include block time (an ether transaction is confirmed in seconds, compared to minutes for bitcoin) and the algorithms on which they run: SHA-256 for Bitcoin and Ethash for Ethereum.

Both Bitcoin and Ethereum currently use a consensus protocol called proof of work (PoW), which allows the nodes of the respective networks to agree on the state of all information recorded on their blockchains and prevent certain types of economic attacks on the networks. In 2022, Ethereum will be moving to a different system called proof of stake (PoS) as part of its Eth2 upgrade, a set of interconnected upgrades that will make Ethereum more scalable, secure, and sustainable.

A major criticism of proof of work is that it is highly energy-intensive because of the computational power required. Proof of stake substitutes computational power with staking—making it less energy-intensive—and replaces miners with validators, who stake their cryptocurrency holdings to activate the ability to create new blocks.

More importantly, though, the Bitcoin and Ethereum networks are different with respect to their overall aims. While bitcoin was created as an alternative to national currencies and thus aspires to be a medium of exchange and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts and applications via its own currency. 

BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system but rather to facilitate and monetize the operation of the Ethereum smart contract and dApp platform.

Ethereum is another use case for a blockchain that supports the Bitcoin network and theoretically should not really compete with Bitcoin. However, the popularity of ether has pushed it into competition with all cryptocurrencies, especially from the perspective of traders. For most of its history since the mid-2015 launch, ether has been close behind bitcoin on rankings of the top cryptocurrencies by market cap.

The Ethereum ecosystem is growing by leaps and bounds, thanks to the surging popularity of its dApps in areas such as finance (decentralized finance, or DeFi apps), arts and collectibles (non-fungible tokens, or NFTs), gaming, and technology. This has enabled ETH to surge 510% in 2021 (as of Nov. 29, 2021), compared with a 93% gain for BTC. As a result, while ETH’s market cap was only about one-tenth of BTC’s in January 2020, ETH’s market cap of $528 billion was about one-half that of BTC’s $1.08 trillion as of November 2021.

Do Non-Fungible Tokens (NFTs) Harm the Environment?

You may have heard something about non-fungible tokens (NFTs) and how they impact the environment. Even though NFTs themselves do not cause any environmental impact, the impact on our climate is linked to how an NFT is produced.

The way that NFTs are created is highly energy-intensive. Most NFTs are minted using the proof-of-work operating method, which uses large amounts of electricity. Any energy-intensive process, crypto-related or otherwise, can exacerbate climate change by adding to the atmosphere's carbon dioxide emissions. However, there are other more environment-friendly ways to mint NFTs, in particular, methods using proof-of-stake.

Minting an NFT doesn't have to use vast amounts of energy. Keep reading to understand more about how NFT production consumes energy, and learn the options available to acquire NFTs without harming the environment.

How NFTs Impact the Environment

NFTs themselves do not impact the environment, but how they are minted can have substantial environmental consequences. Let's take a look at how NFTs using proof-of-work are generated, to understand how their production uses so much energy.

• NFT is listed in a digital marketplace: Usually, before an NFT is minted, it's listed in an NFT marketplace. While listing an NFT is not energy-intensive, the location of the NFT listing will generally determine how much energy the minting process will require. Choosing an NFT marketplace, like OpenSea, that hosts the Ethereum platform, which uses proof-of-work, means that the minting process will be energy-intensive, at least for now.
• NFT is purchased: The purchase of an NFT is often the catalyst for the NFT to be minted. Using proof-of-work, the NFT is minted—"mined"—by cryptocurrency miners who control extensive computing resources. The mining process is energy-intensive, with specialized computing hardware using vast amounts of electricity. Miners race to quickly solve complex math problems, thus earning the right to mint the NFT.
• NFT is stored or transferred: Once the NFT purchase is complete, you can store the NFT or transfer it to another person. If you transfer the NFT to another NFT marketplace that uses proof-of-work, then the same energy-intensive process that was used to mint the NFT is repeated for the transfer. Simply storing an NFT does not consume energy.

You may be wondering exactly how the mining process consumes energy. Only miners with the most computing power are likely to succeed at solving the complex math problems the fastest, meaning that miners must operate a large quantity of computing hardware—and use a lot of electricity. A worldwide network of miners is competing to validate blocks of transactions, including NFT transactions, requiring every participating miner to extensively consume electricity—even though only one miner is selected to validate each new block of transactions.

Every transaction on the Ethereum proof-of-work platform, including every NFT transaction, uses more than 260 kilowatt-hours of electricity—equivalent to the electricity used by an average U.S. household over 9.05 days.

Can NFTs Use Less Energy?

Minting or transferring an NFT is usually energy intensive, but does not need to be. Blockchain platforms using the proof-of-stake operating method can generate NFTs without excessively using electricity and negatively impacting the environment.

The proof-of-stake method uses less energy than proof-of-work because it does not require the extensive use of computing hardware. Whereas miners participating in a proof-of-work blockchain network are motivated to consume electricity in attempt to successfully mine a block, validators contributing to a proof-of-stake blockchain are obligated to stake—agree to not trade or sell—their cryptocurrency holdings. Implementing a staking requirement for blockchain validators is way to secure a blockchain without requiring the network's participants to excessively consume energy.

NFTs, in other creative ways, can be less impactful to the environment. Here are some options:

• Use renewable energy: Miners using proof-of-work to generate NFTs can use renewable sources of energy. While proof-of-work mining is energy-intensive, the source of the required energy can be emissions-free. Solar power is a popular choice, but other options include wind- and hydro-generated electricity.
• Invest in renewable energy: With some NFTs selling for impressive prices, it's possible to devote a portion of those proceeds to renewable energy investments. A large-scale shift to renewable energy could curb or eliminate the environmental impact of producing NFTs.
• Invest in experimental technologies: The proceeds from NFT sales can also be invested in experimental technologies designed to mitigate or reverse the effects of climate change. Carbon capture and storage, which collects and pumps carbon dioxide emissions into the ground, is an example of an experimental technology that some believe can solve the climate change conundrum.
• Buy carbon offset credits: NFT investors who wish to offset the environmental impact of an NFT purchase can buy carbon offset credits. While purchasing carbon credits does not actually reduce carbon dioxide emissions, it provides a financial incentive for others to minimize their total emissions on an annual basis.
  

Where to Buy Energy-Efficient NFTs

If you want to buy an NFT without causing harm to the environment, then you have several options for purchasing the non-fungible token. Each of these blockchain platforms uses proof-of-stake and supports the creation and exchange of NFTs:

• Solana: The Solana blockchain supports a broad range of NFT marketplaces, including Magic Eden, Solanart, and Rabbit Hole.
• Algorand: The Algorand blockchain supports Aorist, a climate-focused NFT blockchain for artists, in addition to several NFT marketplaces. The Algorand blockchain is well suited to support NFTs because the blockchain is designed to never fork—split—into duplicate versions.
• Cardano: Cardano is the blockchain known for being environmentally friendly. NFT marketplaces hosted on Cardano include CNFT and Galaxy of Art.
• Tezos: The Tezos blockchain hosts several NFT marketplaces including Rarible, which both operates an NFT marketplace and supports artists' creation of NFTs.

Can Environmentalists Invest In NFTs?

If you care about fighting climate change but want to invest in NFTs, then you might feel that those two objectives are at odds. You can protect the environment and still purchase an NFT, but to avoid using almost nine days' worth of electricity, you can't purchase just any NFT.

If you are committed to aligning your investment portfolio with your stance on climate change, then aim to invest only in NFTs that are generated using the proof-of-stake consensus method. While that currently limits your purchase options, the limitation is likely only temporary. After the Ethereum platform completes its transition to proof of stake, then environmentalists can buy NFTs using Ether (ETH) with a clear conscience.