Finance

The Differences Between 1st and 2nd Generation Cryptocurrencies

03/28/2023
Bitcoin Ethereum News
  • Bitcoin is one of the first cryptocurrency which was launched in 2009. 
  • Ethereum is considered to be the second generation of cryptocurrency and was launched back in 2015.
  • As of March 2023, there are about 22,904 cryptocurrencies in existence and not all are active or valuable.

The initial generation of blockchain is called Blockchain 1.0 which was a simple form of decentralized ledger. The first generation of blockchain relies on the Proof-of-Work (PoW) consensus mechanism and helps in making digital transactions while storing transaction details across several nodes (computers) on the blockchain. This first generation includes cryptocurrencies like Bitcoin, Dogecoin, and Litecoin, etc. 

1st Generation vs. 2nd Generation 

This decentralized financial (DeFi) system was successful and served as the base for other cryptocurrency projects. Dogecoin and Litecoin are two early forks of Bitcoin. They simply changed the logo and hash function (it is a cryptographic algorithm that converts any digital data into an output string with a fixed number of characters) from SHA256 to a more memory efficient scrypt algorithm.

The main motive of the first generation was to replace or improve the existing traditional financial systems. Instead of relying on third parties, users could directly transfer funds by paying a small amount as transaction fees (or gas fees). The network is a decentralized system, without any central authority, and helps in keeping the network transparent. 

Bitcoin also played an essential role in the development of cryptocurrency exchanges like Coinbase, Kraken and Binance, apart from processing transactions on the digital network. The developer of Bitcoin is Satoshi Nakamoto, who brought this revolutionary technology to replace financial systems. Blockchain was set up on a shared public ledger that supported Bitcoin.

However, the first generation was only limited to simple trading and it was difficult to add terms and conditions to the transaction. The second generation of cryptocurrency, Ethereum, addressed this problem by introducing the concept of smart contracts. Smart contracts make transactions more safe and secure, and function in an organized manner. Smart contracts are actually protocols for automated transactions that are stored on a blockchain. The contract is triggered after a certain condition is met. This innovative technology helps in faster payments, is more secure and less expensive.   

Ethereum turned out to be a game-changer against Bitcoin, as it is based on Javascript codes and provides a much wider range of functionalities. Ethereum was created by Vitaly Dmitrievich Buterin, popularly known as Vitalik Buterin. The Ethereum blockchain supports the creation of decentralized applications (dApps) and smart contracts that enable trust agreements to be safely processed. 

Ethereum has created a trustless way to transact through smart contracts and has expanded its support to the development of several NFT projects. One key feature is that it offers a complete programming language named Solidity, which can be used by developers to create and deploy their own dApp. Ethereum has also allowed developers to launch their own cryptocurrency projects, creating an entire digital ecosystem. 

Previously, Ethereum had a PoW consensus mechanism which required intensive computational energy to validate transactions. In September 2022, Ethereum officially shifted to Proof-of-Stake (PoS) consensus because it’s less energy intensive. Ethereum is set to launch the Shanghai upgrade on 12th April, 2023, to give users access to their staked ether funds for the very first time. 

Cryptocurrencies were initially developed to make transactions faster, secure and transparent on the blockchain.

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Source: https://www.thecoinrepublic.com/2023/03/27/the-differences-between-1st-and-2nd-generation-cryptocurrencies/