Scaling with Lightning & Loom; Legislation news makes Bitcoin tumble again below $8,000

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The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.

For the intro to this weekly series, please go here.

News Item 1: Ethereum’s First Production Scaling Project Is Here – But With a Catch

Decrypted: Ethereum introduced the era of decentralized applications (DAapps) and concepts never thought possible before, such as decentralized exchanges, decentralized organizations, decentralized anything.

Despite these revolutionary possibilities Ethereum brought us, there is still so much more of work needed on the development side. Ethereum has scaling issues, because it can only handle 7-15 transactions per second, with transaction speeds averaging 6 minutes. While it is considered to be the fastest cryptocurrency in the world, when it comes to block generation time, as more and more people use the Ethereum network, more than 15 transactions requested per second.

To tackle these issues, the Ethereum Foundation are trying to scale their network in order to handle more transactions per second. Solutions like Plasma and Casper are designed to expand Ethereum’s ability to process transactions and host DApps. But the reality is that these solutions are still far from being deployed.

This week, however, Loom Network deployed their own scaling solution for DApps to production, along with a test site–DelegateCall.

Our take: Loom Network, a Bangkok-based blockchain startup, released a new platform that allows developers to build large-scale decentralized apps (DApps) or games directly on the Ethereum blockchain, with the scale to avoid network congestion.

Loom Network aims to become a different breed of blockchain platform, as it mainly focuses on large-scale online games and applications. The new platform is the equivalent of Amazon Web Services (AWS) for blockchain apps. Loom, which recently raised $25 million in funding and is backed by accelerator program TechStars.

Loom Network’s scaling solution relies on creating side chains that are bonded to and Ethereum smart contract via a relay. Each DApp gets its own chain, allowing the DApp to scale while still being tied to the security of the Ethereum mining network. These side chains have their own DPoS consensus, and they support custom transaction types like creating accounts, posting messages, and voting.  Think of the Loom network not as a single DPoS sidechain, but an SDK for developers to spin up their own DAppChains to run heavy applications that can’t run now on Ethereum.

Loom Network will help build games which cannot be built without the blockchain. Although it sounds like a niche market, the project’s team has rather bold ambitions. With scarce items, traceable tokens, and multi-game-spanning universes, there are a lot of opportunities waiting to be explored. Additionally, the project also wants to build new types of social applications, not necessarily advertising based.

Today, complex operations in smart contracts require high of gas costs and make it impossible to deploy large scale applications, like a decentralized Facebook or Twitter on Ethereum. I don’t even want to imagine the transaction fees for millions of users tweeting on a decentralized application. Every second, on average, around 6,000 tweets are tweeted on Twitter.

If large scale systems, that require hundreds of thousands of transactions per second, are ever going to be built on blockchain, the technology needs to overcome several obstacles. While at the moment, Ethereum is decentralized and secure, it is not scalable.

In the future, Loom Network aims to support hundreds or thousands of different DApps, each running their own sidechains. It will be interesting to see how it develops, but building Twitter-scale apps on top of Ethereum will not be an easy task. It may be possible in the future, but today Loom Network seems to offer a lot of additional scaling solutions for Ethereum in its current form.

 News Item 2: Lightning Labs Launches Beta With Twitter CEO Backing

Decrypted: Another scaling story, this time about Bitcoin. This week, Lightning Labs officially launched the beta version of its software called Lightning Network Daemon (LND). Lightning Network is considered to be one of the most important solutions for the scalability of the Bitcoin network.

The company also announced that it has raised $2.5 million in seed funding to date from numerous big names in payments and beyond, including Square and Twitter co-founder Jack Dorsey,  Square exec Jacqueline Reses, serial-founder-turned investor David Sacks, Litecoin creator Charlie Lee, Eventbrite co-founder Kevin Hartz, BitGo CTO Ben Davenport and Robinhood co-founder Vlad Tenev, along with The Hive, Digital Currency Group and others.

Our take: The release from Lightning Labs comes after more than a year of extensive testing from thousands of developers and other volunteers all over the world. There are also other implementations of the Lightning Network still in development. However, LND is the first one to see a beta release.

A beta version of Lightning Network went live on the Bitcoin Mainnet on March 15th with significant restrictions. As reported by Coindesk:

Stark’s team built in a few safety measures to limit the amount of cryptocurrency people can send for now to roughly $1,400 worth per channel, or around $400 per payment. The target demographic for the release is developers and ‘advanced users’ who are able to run a full node and use LND’s command-line interface.

The release had its critics, that voiced fears over rolling out the technology too quickly, without thorough testing, according to CoinTelegraph.

Lightning Network aims to make Bitcoin transactions cheaper and faster. The beta release is compatible with various Bitcoin implementations. It already has more than 1,500 nodes connected in the testnet and people have already been making real transactions.

Lightning Labs, the company behind the original development, is moving to the production environment, meaning, you will have the option to use off-chain payment channels to do transactions. Now you can setup a lighting node, which will re-route payments to other nodes, and get paid to do that. You can start using it as a consumer to send money to another person, or pay a business.

We can expect the transaction fees to decrease exponentially, as miners will only register and validate final balances from the off-chain channels onto the blockchain.

While its still early, if Lightning Network succeeds and is able to scale the number of transactions on the Bitcoin network, it could fundamentally change how Bitcoin is used. When you consider fast, nearly zero-cost transactions, we could see things like micro-payments, push Bitcoin into mainstream and extending it far beyond its current status, as a store of value. Now that’s exciting!

News Item 3: Bitcoin briefly drops below $8,000 again

Decrypted: Bitcoin (BTC) surged from less than one dollar in 2010 to $997 at the start of the 2017 and again to nearly $20,000 last December. This past week Bitcoin dropped below $8,000, with other cryptocurrencies following dropping as well.

The first quarter of 2018 has been marked by rampant volatility. Coming off an all time high in December 2017, negative publicity has cause the entire cryptocurrency market to plunge, after surpassing $800 billion in early January 2018.

Last week, the Securities and Exchange Commission (SEC) vowed to regulate cryptocurrencies at the same time as traders were rattled by claims of hacking in the market. It also took a hit this week, after Google revealed stricter advertising policies which will impact cryptocurrencies and initial coin offerings (ICOs). A sell-off of crypto assets by a Japanese Bitcoin holder known as the “Tokyo Whale“, added to chaos in the crypto world. Finally the Internal Revenue Service (IRS) said it would tax as a capital gain, anything purchased using a digital currency. The perfect storm!

Our take: The  threat of regulatory crackdowns has played a major role in the recent price drop for Bitcoin and the entire market. At the upcoming G20 summit, in Buenos Aires, Argentina, cryptocurrency will be a hot topic. Japan asked its G20 counterparts for help in the fight against digital currency-utilized money laundering. France and Germany are set to put forth joint proposals calling for strict regulation of the cryptocurrency market. But Japan, France, and Germany may find themselves in the minority, as the majority of G20 nations have expressed minimal interest in imposing regulations on cryptocurrencies. Many countries would rather not risk stifling innovation, by imposing restrictions, like other short-sighted governments have done, for example China.

In 2017, blockchain and cryptocurrencies became too big to ignore. In 2018, they will become too big to fail. As the market grows further, regulatory scrutiny is expected and regulators will be more assertive. But that’s not necessarily a bad thing.

Retail and institutional investors are ready for a regulated and liquid marketplace for digital currencies and assets. The certainty that regulations bring is very important, more than people think or realize. Appropriate regulation should ultimately help promote best practices and provide protection to consumers.

While regulatory news out of US, Japan and other countries have impacted cryptocurrencies, the reality is that it should not have caused any alarm or panic, especially when you at the big picture. The future is bright!

Cryptocurrencies are still in the early stages of development. We can expect prices to surge, as technologies scale transaction levels and some other developments come out of the woodwork.

Bitcoin is positioned for a dramatic rise in adoption in 2018. The Lightning Network scaling solution is right around the corner.

A recent Nomura Instinet survey of US-based merchants using the Square payment processing platform found that 60% of surveyed merchants would accept Bitcoin as a form of payment.

Institutional investors are getting into the race. Goldman Sachs-backed mobile Bank Circle recently acquired Poloniex, in a power move that brings traditional financial giants directly into the crypto space.

The Blockchain Research Institute, is investigating the ways blockchain will transform ten major industries: financial services, retail and consumer goods, government and democracy, energy, higher education, transportation, manufacturing, media and telecommunications, technology, healthcare, and resources. In all these industries we already see striking innovations piloted by massive organizations. Supply chains are a $60 trillion industry containing juggernauts like Foxconn and Walmart, both who are digging into blockchain for transformative implementations.

Meanwhile, many of the best new startups are architected on decentralized models. In 2017, ICOs raised funds for utility tokens. Most token purchases were driven by short-term speculative gain. But the promise of ICOs is not to enable speculation, but to enable the funding of innovation. In 2018, we can expect security tokens to explode. These will be digital assets that represent stocks, bonds and futures contracts. New and existing companies will taking a better look how they can build communities with their ICOs, not just speculators trying to make a quick buck. Consider a company like SpaceX or Tesla doing an ICO. There are millions of Tesla fans around the world that can’t buy a Tesla car, but would love to be part of the community and have a stake in the company’s future. Tesla could issue a security token to represent ownership in a product, in the company, or for example to entice individuals to reduce their carbon footprint.

So, HODL to your Bitcoin and other cryptocurrencies. Cryptocurrencies are a long term play, not for the faint-hearted.

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Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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