lightning network

RTGS Segwit red Lightning Network Procesamiento fuera de cadena y el futuro de BCH y de la Mineria

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What follows is a translation into Spanish of an article that appeared on Saturday. The translation is by Enrique Melero, a Crypto Finance Consultant based n Geneva.

Daily Fintech is branching out from its English roots by getting more translation into other languages. So far we have done some in German, Chinese and now Spanish. We would like to do more in those languages and add other languages (such as French).

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Este título parece popurrí SEO de términos técnicos. Perdón – lo desglosaré para aquellos que no viven en el mundo digital. Títulos alternativos podrían haber sido:

  • ●  Puedes vender tus BCH porque pronto podrás pagar el un café con BTC.
  • ●  Bitcoin será pronto de uso corriente, elevando todavía más su precio.
  • ●  Por qué puedes olvidarte de aquello que “Bitcoin está condenado a causa de su consumo de energía”
  • ●  Los mineros Bitcoin seguirán haciendo dinero pero ya no controlarán el ecosistema.

    Para tener una explicación de las tecnologías que Bitcoin necesita para escalar puedes ir a este artículo y aprender lo que es Segwit, Lightning Network, procesamiento fuera de la cadena etc.

    Para empezar, propongo una explicación para los que viven en el cyber espacio desde la vieja sala de máquinas de los pagos internacionales.

    SLBTR es el procesamiento fuera de la cadena

    Allá en la era de los dinosaurios, los bancos globales procesaban pagos internacionales a través de los bancos centrales usando un mecanismo llamado Sistema de Liquidación Bruta en Tiempo Real (a partir de ahora usaremos sus siglas en inglés, RTGS). Hoy todavía siguen haciéndolo de la misma forma. Permíteme que un dinosaurio como yo, te explique sus principios básicos y por qué es relevante para Bitcoin.

    RTGS es la forma en que los bancos centrales liquidan pagos entre ellos – es en tiempo real, pero solo los Bancos Centrales tienen acceso al sistema. Es rápido, cerrado a unos pocos y para grandes

cantidades. Piensa en RTGS como procesamiento dentro de la cadena de bloques. A partir de aquí los pagos entran el sistema de pagos nacional y los libros de cuentas de los bancos cambian y Pepito Pérez recibe y paga dinero usando mensajes que funcionan usando la red SWIFT. Este sistema nacional es lento, semi-abierto (cualquier miembro de SWIFT puede participar) y puede usarse para pequeñas cantidades. Piensa en ello como proceso fuera de la cadena de bloques.

Esta es la forma en la que funcionan los pagos internacionales hoy.

El mundo Bitcoin hacia el que nos dirigimos se parece a esto mismo, pero mejor. Las transacciones más grandes se harán en la cadena mientras que las pequeñas se harán fuera de la cadena. Ahí terminan las similitudes.

Este es el modelo de pagos internacionales que va a emerger con la red Lightning (gracias a Segwit):

  • ●  Rápidos: Para pequeñas transacciones fuera de cadena será quasi en tiempo real (algunos segundos). Los sistemas de pago nacionales (que tardan desde unos pocos días hasta unas pocas horas) serán irrelevantes porque los usuarios no entenderán por qué debe llevar más tiempo que un mensaje o una actualización en Facebook.
  • ●  Abiertos: será posible elegir si se quieres hacer un pago en la cadena o fuera de cadena. Todo el mundo podrá convertirse en banco central simplemente montando el equipo de minado y cualquiera con una cartera bitcoin tendrá los mismos privilegios que tienen hoy los participantes de SWIFT.

Nota: aquellos a los que les asusta la centralización que supone el procesamiento fuera de la cadena deben de estar tranquilos. Es como el email. Todos pueden o podrían poner en marcha un servidor de email, pero elegimos usar el de otros. De la misma forma podrías montar tu propia infraestructura de minado que sería el equivalente a un Banco Central, pero la mayoría elegimos no hacerlo.

Puedes vender tus BCH porque podrás pronto comprar café con BTC.

Si recibiste BCH después del hard fork podrías estar tentado a guardarlos porque BCH es más rápido y más barato para pequeños pagos lo que hará que suba su precio. BCH podría tener sentido hoy en día porque los pagos pequeños en BTC son lentos y caros. Pero eso será irrelevante cuando Bitcoin se integre con la red Lightning y el procesamiento fuera de la cadena.

¿Todavía te sientes a gusto guardando BCH? ¿o a lo mejor tiene más sentido venderlos mientras siga habiendo posibilidad de hacerlo antes de que la red Lightning y el procesamiento fuera de la cadena sean de uso corriente?

Bitcoin será pronto moneda de uso corriente, impulsando su precio.

La idea que que el precio de Bitcoin se sostiene gracias a que es oro digital no tiene ningún sentido. Es presentarlo como un taburete cojo e incita a pensar en él como algo inestable que terminará cayendo. El Bitcoin necesita otra pata para sostenerse. Necesita ser tanto una moneda como una reserva de valor. El oro es teóricamente una moneda además de ser reserva de valor, pero realmente es cuestionable su uso como moneda con las

dificultades de transporte que ofrece. Bitcoin puede que también lo sea, pero no tanto.

Un Bitcoin con esas dos patas – reserva de riqueza y moneda – puede ofrecer un valor creciente y que sea sostenible en el tiempo.

Una vez que la red Lightning y el procesamiento fuera de la cadena sean de uso corriente, volveremos a examinar la salud del ecosistema bitcoin y los números deberían ser diferentes.

Puedes olvidarte de aquello de que “Bitcoin está condenado a causa de su consumo de energía”

La web Motherboard hizo un gran trabajo sobre esto y sus argumentos son innegables: La mayoría de la energía eléctrica viene de combustibles fósiles y un consumo creciente de estos recursos es lo último que queremos para el planeta. La conclusión a la que llega Motherboard es que Bitcoin es malo.

Tendremos la oportunidad de ver aparecer muchos artículos de investigación sobre este tema en los próximos años. Hay demasiado dinero en juego gracias a Bitcoin con el que podrán pagarse (junto a otros muchos investigadores que honestamente creen que Bitcoin es malo porque consume mucha energia).

Imagínate un mundo en el que la red Lightning y el procesamiento fuera de la cadena se conviertan en uso corriente. Muchas menos transacciones grandes se hacen en la cadena y la mayoría de las pequeñas se hacen fuera de la cadena que consume probablemente tanta electricidad como poner al día tu estado de Facebook.

Los mineros Bitcoin seguirán haciendo dinero pero ya no controlarán el ecosistema.

Tiene todo el sentido del mundo que los mineros de Bitcoin se resistan a Segwit. Saben que con Segwit lo siguiente es la red Lightning y el uso corriente de transacciones fuera de la cadena. Actualmente los mineros se llevan lo mejor de los dos mundos. Procesan las transacciones grandes via BTC y las pequeñas como el pago de un café con BCH. Todo esto lo perderán cuando la red Lightning y el proceso de transacciones offline se establezcan en el procesamiento de BCH. Seguirán encargándose de las transacciones grandes, donde la seguridad de las transacciones en la cadena es crítica. El volumen de transacciones grandes via BTC se incrementará para poder liquidar todas esas transacciones fuera de la cadena. Los mineros seguirán estando bien. No controlarán el ecosistema Bitcoin pero todavía podrán contar con unos beneficios adecuados.

RTGS, Segwit, Lightning Network, Offchain processing and the future of BCH and the Mining business

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That is an SEO smorgasboard of tech jargon. Apologies – I will break it down for those who do not live in cyber land. Alternative titles which may encourage you to read on:

  • You can sell your BCH because buying your coffee with BTC will soon be viable.
  • Bitcoin will soon go mainstream as a currency, adding more fuel to the price rise.
  • Why you can ignore the “Bitcoin is doomed because of the electricity cost” stories.
  • Bitcoin Miners will make OK money but won’t control the ecosystem.

For an explainer on the technologies needed for Bitcoin to scale, please go to this post to learn about Segwit, Lightning Network, off chain processing etc.

First, an explainer that will be needed for those who live in cyber land, from the old engine room of cross border payments.

RTGS is off chain processing from ye olden days

Back in the dinosaur era, global banks processed cross border payments via central banks and a mechanism called Real Time Gross Settlement (RTGS). Actually they still do that. As I lived in the dinosaur era, let me explain the basics and why it is relevant to Bitcoin.

RTGS is how Central Banks settle among themselves – it is real time, but only Central Banks get access. It is fast, permissioned, big ticket. Think of that as Onchain processing. Then a payment gets into national payment systems and ledgers within banks get changed and Josephine Q. Public gets credited/debited after Banks process messages via the SWIFT network. This national settlement is slow, semi-permissioned (any SWIFT Member can do it) and can be small ticket. Think of that as Offchain processing.

That is how cross border payments work today.
The Bitcoin world we are moving to today will look similar but better. Big transactions will be done Onchain, small transactions will be done Offchain. That is where the similarity ends. The Bitcoin cross border payments model that will emerge with Lightning Network (which required Segwit) will be:

  • Human real time (within seconds) for small Offchain transactions. National faster payments systems (going from a few days to a few hours) will be irrelevant because consumers see no reason why payments should take longer than messages and Facebook updates.
  • Permissionless. You can transact Offchain or Onchain. You can set up like a central bank just by setting up a mining rig. Anybody with a Bitcoin wallet is like a SWIFT member today.

Note: those who bemoan the centralisation that comes with Offchain processing need to chill. Its like email. We all can/could run our own email servers, but most of us choose not to do that. You can run your own mining rig and be the modern equivalent of a Central Bank – but most of us will choose not to do so.

You can sell your BCH because buying your coffee with BTC will soon be viable.

If you received BCH after the hard fork, you might be tempted to keep them because BCH is faster/cheaper for small payments and so BCH will rise in price. BCH makes sense today because small ticket payments are slow and expensive. Now look at what happens when Bitcoin moves to Lightning Network and Offchain processing. Are you still comfortable holding BCH? Hint: it might be smarter to sell as there are still a lot of trading days until Lightning Network and Offchain processing go mainstream.

Bitcoin will soon go mainstream as a currency, adding more fuel to the price rise.

The idea that Bitcoin price could be sustained only as a digital gold makes no sense. It is a one legged stool and if that image conjures pictures of a crash that is deliberate. Bitcoin needs two legs to sustain itself. It needs to be a currency as well as a store of value. Gold is theoretically a currency as well as a store of value, but in reality it is lousy as a currency. Bitcoin maybe flawed as a currency but Gold is even more flawed.

However if Bitcoin becomes a two legged stool – store of value and currency – then the price rise looks sustainable.

Once Lightning Network and Offchain processing go mainstream we will do another Bitcoin Ecosystem Healthcheck and the numbers should be different.

Why you can ignore the “Bitcoin is doomed because of the electricity cost” stories.

Motherboard has done a great job with this. The numbers are staggering and with most electricity coming from fossil fuels this is the last thing the world needs. The conclusion – Bitcoin is bad. Expect a lot of well researched pieces on this subject. There is enough money threatened by Bitcoin’s rise to pay for research along these lines (and plenty of honest researchers who believe that the “Bitcoin is doomed because of the electricity cost” story is true).

Imagine a world where Lightning Network and Offchain processing go mainstream. A much smaller number of big ticket transactions are done Onchain via Miners and the vast majority of small ticket transactions are done Offchain which will consume about the same amount of electricity as updating your Facebook status.

Bitcoin Miners will make OK money but won’t control the ecosystem.

It makes total sense for Bitcoin Miners to resist Segwit. They know that Segwit leads to Lightning Network and Offchain processing going mainstream. Today, Miners get the best of both worlds. They process big ticket e-gold type transactions via BTC and small ticket coffee shop type transactions via BCH. All they will lose when Lightning Network and Offchain processing go mainstream is BCH processing. They will still process big ticket transactions, where the security of Onchain processing is critical. Volumes of big ticket e-gold type transactions via BTC will go up to settle all those Offchain transactions. Miners will be just fine. They won’t control the whole Bitcoin ecosystem but they will make a very good living.

Image Source.

Bernard Lunn is a Fintech deal-maker, author, investor and thought-leader.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 10th July 2017

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: Delaware House Passes Historic Blockchain Regulation

Decrypted: Delaware passed a landmark blockchain legislation that recognizes the trading of stocks using blockchain technology. Delaware is the home to more than 66% of Fortune 500 companies, 85% of IPOs, and where many private companies and startups incorporate.

This new bill, legally recognizes stock ledgers and other business records on blockchain, for companies incorporated in Delaware. When this is implemented, it would allow everyone to know with absolute accuracy, who owns what and in real time, trades being settle right away and investors directly owning their shares with no possibility of a company having more shares issued and outstanding, than were actually authorized.

The new law is big news. Its a first step towards a formal recognition of blockchain and creating the right environment for new blockchain innovations, while putting Delaware at the forefront of regulating this emerging space in the United States.

Our take: The Dutch East India Company gave birth to the practice of issuing and trading shares of stock in 1602. It’s considered to be the world’s first company to issue shares of stock to the general public and to be listed on an official stock exchange. Today, just about every economy in the world has a stock exchange. The practice of trading shares and payment settlement still remains archaic, even though electronic and Internet technologies has changed the means by which trading is conducted.

For startups, a blockchain distributed ledger could be a perfect fit, for keeping track of a company’s ownership structure. Many companies manage their own data in spreadsheets and pay lawyers to validate the information every time the table changes.

Mostly, its perfect for public companies, with thousands of investors and millions of executed trades every day. In 2015, Nasdaq announced the launch of an enterprise-wide blockchain initiative to expand and enhance equity management, ultimately to be used to record trades of stocks for public companies. Stock trading usually happens on an exchange, matching buyers and sellers of equities and reducing the risks associated with each trade. Nasdaq intends to use blockchain to streamline financial record keeping, making it cheaper and more accurate.

But beyond Nasdaq, some of the largest stock exchanges around the world are looking at ways to leverage DLT and change traditional trading processes.

The Australian Stock Exchange is working with Digital Asset Holdings to develop distributed ledger based solution for clearing and settling trades. Japan Exchange Group and IBM are working on testing blockchain technology for trading in low transaction markets. Korea Exchange has launched Korea Startup Market (KSM), using blockchain technology to enable equity shares of startup companies to be traded in the open market. In November 2016, Deutsche Börse and Deutsche Bundesbank presented a functional prototype for the blockchain technology based settlement of securities. In early 2017, India’s National Stock Exchange and a group of local banks collaborated on a KYC (know-your-customer) trial involving blockchain. The Luxembourg Stock Exchange has already introduced a security system using blockchain. As part of the PDTL Group, the London Stock Exchange is involved in ways to improve the post-trade using the blockchain technology.

Blockchain technology gives regulators and securities commissions, a new and more efficient way of managing stock trades, reconciliation, payments and settlements, clearing, and share registration. Distributed ledger technology is ideal for the equity trading ecosystem, allowing the exchange of instruments with no risk to either party, and in the shortest time possible.

Just like the Illinois Blockchain Initiative, Delaware is passing laws and working with blockchain companies, to create the regulatory framework and infrastructure to drive blockchain innovations.

The new Delaware legislation is an important piece of law, but remains a small step, especially when you compare it to regulations in countries like Japan and Australia that recognize Bitcoin as a legal form of payment. The federal government’s disconnect from Bitcoin and blockchain technology, can only drive individual states to push their own regulations, potentially creating future challenges for businesses that to build their operations on the the laws of any single state. Whatever avenues the federal government pursues, it will have to move quickly if it wants to be relevant.

News Item 2: Hackers Steal Billions in S.Korean Won by Hacking 4th Largest Bitcoin Exchange

Decrypted: Big news this week was the recent Bithumb hack. Bithumb, one of the largest Bitcoin and Ether exchanges in the world, was hacked resulting in a loss of hundreds of thousands of dollars worth in Bitcoin, Litecoin, Ethereum, Ripple and Ethereum Classic. Roughly 30,000 customers’ data was compromised and over $870,000 of coins stolen.

The company claims that its core servers were not compromised, and the personal information, user mobile phone numbers and email address, were leaked from an employee’s personal computer.

Even though Bithumb is planning to reimburse its customers that lost money in this breach, once again this incident raises serious questions about security and how exchanges and users, that hold bitcoin and other altcoins, can protect themselves.

Our take: Over the years, major Bitcoin exchanges have been hit again and again by hacks. You can find a ever growing list of Bitcoin exchanges that have been hacked at the Blockchain Graveyard. While these incidents can be damaging to the reputation of the company being hacked, ultimately they hurt the credibility of the entire industry and the people that end up loosing their money. No exchange or service provider is immune to security hacks. As the cryptocurrency market continues to get bigger, the attempts to steal will become more frequent and elaborate. Prevention is key.

Bitcoin makes it easy to transfer value anywhere and be in control of your money. But with great freedom comes great responsibility, primarily when it comes to security. You wouldn’t leave your wallet unattended, would you? Every day we make sure to keep safe our physical wallets, credit cards and other personal information. We need to take the same measures when it comes to our cryptocurrency. We need to make sure that our digital wallets are secure and not just rely on exchanges to keep our Bitcoins safe.

When we choose to store our Bitcoin in a custodial wallet or exchange, we are giving the exchange control over our bitcoins. Historically, 99% of stolen coins were never recovered. Unlike a credit card transaction, a transfer of a cryptocurrency is irreversible. Therefore, I think the responsibility needs to be a shared between users and exchanges.

Since the Mt. Gox hack for $450 million in early 2014, Bitcoin security has come a long way. Today, many exchanges have adopted strict security processes and technologies, including cold storage, multi-sig wallets, segregated client accounts, external audits of systems and two-factor authentication (2FA). But its the customer’s responsibility to use them correctly, otherwise risk sophisticated forms of social hacking or the physical access and tampering of devices.

Most of the time the human factor puts wallets at risk. Users can protect themselves by selecting reputable vendors and holding their keys in multiple wallets, using hardware wallets or paper wallets, making sure their phone carrier has in place a “do not port” on their mobile phone number, and use password managers, 2FA and Google Authenticator for two factor on their phone.

This is a grey area that needs regulation, in order to define the rules for everyone involved and to define the obligations for exchanges and customers. On one hand there is no question that exchanges need to follow procedures to keep funds safe and impose deposit insurance in the case of hacks, but on the other hand, users also need to take security measures and keep their cryptocurrencies safe and sound.

News Item 3: Smart Contracts for Bitcoin? Lightning’s Tadge Dryja Is Working on It

Decrypted: Tadge Dryja, a well-known Bitcoin developer has published a new proposal for how smart contracts could be added to the blockchain network. He came up with a method of adding some smart contract functionality to Bitcoin in a way that he believes could preserve both privacy and scalability.

Over the last year, Ethereum has gained a lot of attention, because the platform enables the execution of smart contracts. Simply put, smart contracts are a digitized version of a traditional contract. Smart contracts are computer programs that run on a blockchain and can be programmed to self-execute when certain conditions are met. Initial Coin Offerings (ICOs) are usually built on top of Ethereum and have been one of the biggest stories in cryptocurrencies over the past few of months. Smart contracts provide a tremendous advantage, allowing us to automate many processes throughout e-commerce, finance, real estate, legal contracts and anything else imaginable.

Our take: Smart contracts are an integral part of the cryptocurrency and blockchain ecosystem. Most people know Ethereum for its smart contract technology, but there are projects out there focusing building smart contract technology on other blockchains, including Bitcoin as well.

As unlikely as it may sound, smart contracts have been available to Bitcoin for some time. Many researchers and experts have looked into a wide range of solutions and technologies to use the Bitcoin blockchain as the foundation of a smart contract platform.

Through the Bithalo project,  we can effectively create contracts for Bitcoin, which auto-complete based on certain milestones and events. Another, Rootstock (RSK) is a smart contract platform that is connected to the Bitcoin blockchain through sidechain technology. Although the smart contracts aren’t actually deployed on the Bitcoin blockchain itself, RSK allows users to send Bitcoin directly onto the Rootstock chain, which are then converted into smart Bitcoins on the Rootstock blockchain.

Lightning Network is the most ambitious smart contract project the Bitcoin ecosystem has produced so far. Lightning takes the technology behind payment channels and creates a network of these channels, using smart contracts to ensure that the network can function in a decentralized capacity without counterparty risk. Lightning was modeled after former Bitcoin developer Mike Hearn’s work and Blockstream co-founder Matt Corallo’s payment channels. The basic concept behind the innovative Lightning Network is that by using Hashed Timelock Contract (HTLC) to multi-party contracts, it allows receivers to pre-determine the amount of transaction or the transaction itself before actually receiving it. Lightning can be fully utilized as a smart contract platform in the sense that users can agree to receive or send certain amounts of money prior to signing the actual transaction with a cryptographic proof.

Smart contracts are an exciting way to increase Bitcoin’s value proposition. Companies and projects will use the Bitcoin blockchain to integrate more smart contract functionality in the future. It looks like  2017 will be the year Bitcoin introduces them to the world, allowing enterprises and corporations to experiment with Bitcoin to settle smart contracts.

Opinion: Are cryptocurrencies about to go mainstream?

In 2008, a whitepaper was released under the pseudonym of Satoshi Nakamoto, describing the first modern cryptocurrency initiative. The idea combined concepts of decentralization, perfect anonymity, finite supply and blockchain technology to pave the way for what we know as Bitcoin.

Last week a message on 4Chan started a rumor that Vitalik Buterin, Ethereum’s founder, was killed in a car crash, but not before Ethereum’s market cap went down by $4 billion.

A lot has changed in the last 9 years and the crypto market is booming. Since the start of the year:

  • Bitcoin has tripled in value, reaching a market cap of $40 billion.

  • The Singaporean dollar was tokenized. Central banks are exploring the use of cryptocurrencies. The People’s Bank of China has run trials of its prototype cryptocurrency and the Danish central bank is considering a digital-only e-krone.

  • Japan recognized virtual currencies like Bitcoin as a legal method of payment that can be used as a means of payment.

  • The Digital Trade Chain Consortium is working with IBM to build a digital trade platform for SMEs.

  • A recent IMF report suggested that banks should seriously consider investing in cryptocurrencies.

  • Dozens of startups have already completed ICOs, with 30 raising about $540 million.

If 2015 was the year that financial institutions realized the power of blockchain technology, 2016 was the year that Bloomberg quoted Bitcoin as being the best performing currency and 2017 holds the promise to be a breakthrough year for cryptocurrencies and blockchain technology. While it remains to be seen how things play out, Bitcoin and altcoins have the potential to dramatically change how we conduct transactions on a global scale.

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

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

How Bitcoin will meet the scaling challenges needed to go mainstream

scaling

Updated as of early July. As a background briefing, the original post still stands. 

For some time it seemed rather academic or nerdy to think about Bitcoin scaling. Who cares whether Bitcoin will scale if it is only used by a few people for nefarious activities?

Now that one can buy Bitcoin at over 1,000 railway ticket booths that are now also Bitcoin ATMs in Switzerland (launched a week ago) the prospect of Bitcoin going mainstream no longer seems so much like science fiction. More and more countries (such as Japan) are also now regulating Bitcoin in a positive way. 

Now the scaling challenge has to be dealt with head on. This post shines a light on some different approaches to that challenge.

TL:DR. The scaling challenge is real but with all the tech brains and money committed to solving it, Bitcoin will meet the scaling challenge so that it can go mainstream if consumers want it.

Fortunately, during a year when Bitcoin fell deep into the slough of despond, a few developers remained committed to Bitcoin and worked hard on scaling solutions.

Note: I wrote that in November 2016, it is clearly not in slough of despond now.

This post shines a light on some of that work. Tech risk alert, some of this is still at the bleeding edge stage. 

Translating Tech for Fin and Fin for Tech is part of our mission at Daily Fintech. This post is the former. We want Bankers and Fintech entrepreneurs to understand the key technical issues related to Bitcoin and other public cryptocurrencies. For the Tech among you, this will be overview level suitable for a non-technical audience, please tell me if I have got anything wrong.

The scaling challenge defined

The scaling challenge is easy to define in comparison with Visa. 

VISA handles on average around 2,000 TPS (Transactions Per Second) and has a peak capacity of around 56,000 TPS. Bitcoin handles an average less than 2 TPS and has a peak capacity around 7 TPS.

Of course all these transaction also have to be done reliably. Nobody will thank you if you handle 2,000 TPS but leave a lot of those transactions open to fraud. That is where you need to understand transaction malleability (we will explain some key terms later).

It also has to be done fast. Consumers expect digital transactions to be “human real time” (the time it takes for digits to go back and forth ie few seconds).

And cheap. 

Massively scalable, totally reliable, fast and cheap. Nobody said that this would be easy!

Loose or tight coupling

The Bitcoin core is open source code that was first developed by an anonymous person (or persons) using the pseudonym Satoshi Nakamoto. It is now developed by a small team that is funded by donations from commercial organizations.

Changes to the Bitcoin core create a lot of acrimonious heat in the tech community. This went to such extremes that it has been likened to a civil war. You would witness these intense debates at events; entrepreneurs just wanting to get on with business were alienated.

Note; that was true in November 2016, by June 2017 it is 10x more so. The public shouting matches between proponents of SegWit and SegWit2x is like watch Red State Blue State political slanging matches in America. I guess decentralized governance is a new experiment being tested right now.  

The reason for the acrimonious heat is that making a mistake has disastrous consequences and it is very hard not to make a mistake in a tightly coupled system and the consequences of a mistake when Bitcoin goes mainstream are huge.

In contrast, loosely coupled systems are more tolerant to failure because dependencies are isolated through well defined interfaces. The trend in software architecture is therefore towards loosely coupled systems. There is an ecosystem around Bitcoin that in aggregate is a loosely coupled system. It is that ecosystem – wallets, exchanges, payment processors etc – that consumers interact with. It is like the Internet; 99.999% of us don’t care about Internet plumbing unless it goes wrong.

So we see a direction in which a few smart changes in the Bitcoin core enable more transactions to happen through the ecosystem through well defined interfaces. How those interfaces work is critical.

One Cryptocurrency or many?

We now have three types of Cryptocurrency:

1. Private tokens used in Permissioned Blockchain systems. These are enterprise IT B2B systems and have no need for a public Cryptocurrency. Enterprise scale is easy compared to Internet scale; so we don’t see any tough scalability issues here.

2. Public but issued by a Government. These are more at the White Paper stage, but there are many initiatives, These are legal and convertible to the traditional Fiat currency. National scale is easier than global scale; so we don’t see any tough scalability issues here.

3. Public. Bitcoin is the most famous public cryptocurrency, the others are referred to as Altcoins. Some are issued through a private venture or foundation (that acts like a Central Bank). Some like Z Cash have a specific value proposition (anonymity in case of Z Cash); a good loosely coupled Bitcoin architecture may allow these features to be replicated in Bitcoin. Others, like Ether, are tokens used within a specific Blockchain (Ethereum in the case of Ether). All are easily traded for Bitcoin and all have their fan base (an Altcoin owner makes a profit if the use of that Altcoin grows and that increases the price of each coin/token so we see a lot of what Wall Streeters call “talking your book”). However Bitcoin is far bigger than all the Altcoins and the only one with significant consumer mindshare, so I expect this divergence between the market leader and the long tail to continue;  from a scaling point of view, the one that matters is Bitcoin. 

Note: Ethereum almost caught up market cap in what was being called the “flipping”. Interestingly one reason Eth price declined IMHO is concern about Ethereum scaling. All those ICOs tested Ethereum scalability and it was found wanting.

Some key terms to understand

As you read the tech literature a few terms come up that you need to understand. 

Transaction Malleability. In short, fraud. In Bitcoin terms, can somebody change a transaction to steal money?

Bitcoin Block Size. This was the issue that created the civil war. Should it stay at 1MB or grow to enable more complex functionality? 

MultiSig. Multiple Signatures. This is critical to fraud prevention. It means that more than one person is need to release a transaction (payment or other value exchange). 

Segregated Witness

Often called SegWit.

What is it: keep signatures outside the Bitcoin block. Think of this like keeping signatures on a check outside the core transactional system (which only records that a signature was received and points to the system where evidence of that signature is stored). This becomes more important now that MultiSig means more signatures. This will be launched before the end of this year. 

Note: technically it is ready. Adoption is the issue. Many times we have seen declarations that the Bitcoin civil war is over, but as I write it seems more like  ceasefire with some undeclared sniping going on.

Who is behind it: this is a change done in Bitcoin core. 

Note: SegWit2X was created by the opposing camp, called Bitcoin Unlimited. They have given up on plans to increase Bitcoin to 2MB. Sounds like SegWit won, it is just SegWit but better. No. This would be a fork. It is hard enough explaining Bitcoin to mainstream. I cannot imagine explaining  two different Bitcoins. In my opinion, a Bitcoin hard fork may kill Bitcoin and would certainly crash the price well below $1,000. 

Lightning Network

What is it: a method of establishing payment channels on top of Bitcoin, creating an off-blockchain transaction layer that leverages Bitcoin’s security. It needs Segregated Witness

Who is behind it: This is a bit unclear. Some say it was Blockstream (a VC funded company in Montreal). The Lightning Network site has a lot about how it works, but not who is behind it. The question maybe academic as it is an open system specification that allows for commercial implementations.

Note: Ethereum is also working on similar technology called Raiden.

Bitfury Flare

What is it: a commercial implementation of a Lightning Network.

Who is behind it: Bitfury is a VC backed company with HQ in San Francisco and an office in Amsterdam. They are best known as the developers of  custom ASIC chips, printed circuit boards (PCB), servers and data centers  used in mining operations; they also run some of the largest Bitcoin mining operations in the world in data centers in Iceland and the Republic of Georgia.

The testing challenge

How do you test something that does not exist yet? Bitcoin is not yet mainstream, so you cannot just launch and see if it works.

Nor is Lightning Network quite ready to go live. Segregated Witness is needed first.

Performance testing of Enterprise scale systems is hard and has a few specialist companies.

Performance testing of Internet scale systems is a lot harder.

Fortunately a French company called ACINQ has done some work in this area by testing the Flare implementation of the Lightning Network.

There is constant talk about Internet scaling challenges. The Internet looks like one of those systems that should not work in theory but works well in practice – meaning that the theory is wrong. Decentralized, loosely coupled systems are hard to understand but seem to work well. The Bitcoin Blockchain maybe the same.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.