Beneath bitcoin: the quest for a new layer of Internet technology | The World Weekly
Is it worth investing in bitcoin? This question seems to be troubling an exponentially growing number of onlookers confused by the cryptocurrency, as infamous as it is famous for its seemingly unstoppable rise. The price of a single bitcoin has shot up more than fifteenfold this year, yet the number of disparaging comments from sceptics lamenting a massive speculative bubble seems to be growing just as fast.
To the cryptographically uninitiated, meanwhile, it is difficult to cut through the frenzied chatter over prices and make sense of where the saga will lead.
Many have drawn comparisons with the 17th-century tulip bulb mania. But cryptocurrencies have a technological basis which few disagree lends projects like bitcoin more hope for long-term use than growing decorative flowers.
The vast majority of these ‘coins’ are based on public digital ledgers known as blockchains. A blockchain’s decentralised nature allows its transactions to be verified without the need for a central authority, with changes passed around and confirmed by a community of users. This differentiates it from centralised databases like those held by governments, including community-based ones like Wikipedia which nonetheless still require a trusted third party.
Cryptocurrencies, the argument goes, make good on those benefits by offering a more secure way to exchange value without the vulnerabilities of relying on central powers. But while bitcoin was the first blockchain-based technology to take off, other applications are proving viable.
‘Smart contracts’, for example - algorithms that unlock a ‘transaction’ when the criteria of the agreement have been met by both parties - have been successfully built with blockchain technology. Ethereum, a blockchain-based platform on which the currently second-most valuable cryptocurrency Ether is based, is the leader in this field.
Ethereum has been widely used by other companies to build their own decentralised applications, which in turn have drawn a frenzy of funding through ‘Initial Coin Offerings’ (ICO). “Ethereum is in a way the HTTP protocol of the decentralised revolution,” Ransu Salovaara, CEO of Token Market, an ICO platform, told The World Weekly.
Blockchain enthusiasts herald a sweeping digital revolution: moving away from relying on human beings ‘outside’ the Internet as guarantors of what happens within, to letting programmes effectively validate changes themselves.
As Nick Szabo, the computer scientist and cryptographer who coined the idea of ‘smart contracts’ in 1993, put it: blockchains “allow one to seamlessly and securely work across human trust boundaries (e.g. national borders), in contrast to ‘call-the-cop’ architectures like PayPal and Visa that continually depend on expensive, error-prone and sometimes corruptible bureaucracies to function with a reasonable amount of integrity.”
Thus many suspect that the current frenzy will turn out to be more akin to the dotcom bubble of the late 1990s: bitcoin may ‘pop’, but the underlying technology offers plenty of long-term promise.
A distributed revolution
Yet what survives may be far different to anything on offer today. The current field is painted as a race to perfect cryptocurrencies, or decentralised apps like those built on Ethereum, but the most popular uses of distributed ledger technology (DLT) are far from the only ones available.
The World Weekly interviewed the brains behind one DLT platform, touted by some as a future rival to blockchain, about what this future might involve. Dr. Leemon Baird, the creator of Hashgraph, is confident that taking a radical departure from blockchain technology will unlock far more potential from DLT.
“The whole point of distributed ledgers is to have a group of computers coming to consensus in such a way that we don’t have to trust any one person,” Dr. Baird says, but such “consensus algorithms” can be built a number of other ways than with blockchains, a technology, he argues, still lacks in fairness.
The swelling number of crypto-offerings now available means cut-throat competition in the DLT world, with much of it down to speed and security. Many believe bitcoin, for example, will never rival the likes of Visa and Paypal because it works very slowly to verify transactions, and consumes a huge amount of power in the process.
Satoshi Nakamoto, the anonymous person or people who created bitcoin, is said to have made a drastic trade-off in favour of security and against speed. This trade-off is nothing unusual in financial technology, but has proved to be a particularly challenging bottleneck when it comes to many blockchain-based projects.
Dr. Baird says he was just as stringent in his quest for a secure ledger, but Hashgraph has caused something of a stir with its claims to speed. Hashgraph’s creators say it achieves more than 250,000 transactions per second - far beyond those of public blockchains such as bitcoin and ethereum, which manage about 10 transactions per second.
Many including Dr. Baird, however, are keen to quell such hyped-up comparisons, as hashgraph is a closed, or ‘permissioned’ network.
In the case of bitcoin, an open or ‘permissionless’ network, anyone can join the network, anyone can transact on it, and anyone can service the network by ‘mining’ bitcoins. Its security requirements are much more burdensome as a result.
In contrast, Hashgraph can manage up to 1,000 ‘nodes’ (connected computers) per network. Permissioned networks are by no means unpopular, however, with many companies offering bespoke distributed ledgers to businesses.
One such ledger, known as Ripple, is designed for banking and international money transfers. Ripple offers its own cryptocurrency, ‘XRP’, but determines who can act as transaction validators. Its technology has been licensed to a large number of financial companies including American Express, and XRP is the third most valuable cryptocurrency.
Distributed ledger technology is still in its raw stages, however, and many large projects have yet to prove themselves. Major DLT consortium R3 counts a growing number of big-name partnerships (including, as of this month, Amazon) as well as its share of setbacks. Earlier this year, for example, several Canadian banks declined to adopt R3's DLT after a year-long trial (though the Bank of Canada remains engaged for future trials).
Hashgraph appears to be taking a different approach: starting small, and letting its private ledger prove its own worth. It has been criticised for not allowing its code to be open to scrutiny as open-source, rendering its claims difficult to verify. Nevertheless, it has already been adopted for development by a major consortium of American credit unions.
Hashgraph’s ambitions appear to be no less lofty, however. Although Dr. Baird is keen to insist he has no immediate plans to turn his ledger public, his team has taken on board players with grand visions of “revolutionising” the blockchain space.
Indeed, Dr. Baird has a vision for what can be achieved with distributed technology - one which could be said to transcend the ‘permissioned’ versus ‘permissionless’ dichotomy.
His aim to build “shared worlds” in cyberspace inspired him to come up with hashgraph some years ago. DLT, says Dr. Baird, ought to give Internet users the ability to create their own spaces, “in which they’re guaranteed to see the same information, and guaranteed that whatever rules they’ve chosen will be enforced.”
It should be “free”, he adds, as DLT would let users store their ‘shared worlds’ on the hard drives of every community member rather than on centralised servers. Dr. Baird believes this could form the basis of anything from stock markets to online games.
He compares the current state of distributed technology as akin to the early days of the Internet, in which primitive versions of utilities like email were developed as separate “networks” before being glued together.
For now, the trade-off between speed and security could be too pervasive for blockchain to lose its dominant position in the market for bigger projects. But perhaps large, open ledgers like bitcoin and Ethereum will prove to be an attempt to ‘build the Internet’ before building email.
Just one application of DLT - cryptocurrencies - is now worth more than $370 billion as a whole. The fact that bitcoin makes up half of this shows just how much there is to lose if the bubble pops, but the other half belies an enormous market in which savvy investors are already trying to suss out which technologies have the lasting power to change the online world.
In any case, ‘coins’ are set to be just one side of a story which is only in its early stages.