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Blockchain for Beginners

Why the Bitcoin Blockchain Beats Out Competitors

In the six years since Bitcoin’s debut, there has been no shortage of attempts to repeat its success. Thousands of blockchains have arrived and fizzled out without much fanfare. But many hold out hope that one day an alternative contender will succeed. Amongst the countless options that are currently available, there are currently three notable contenders that have managed to gather the most attention — largely because they take heretical approaches to the problems the Bitcoin blockchain solves.

The first such contender is Ethereum. It is notable not only because of the whopping $18.4 million it raised from crowdfunding, but also because of the sheer number of features being promised by the project's directors.

While Bitcoin has focused on providing only the most basic services needed to sustain value transfer and the immutability of its transactions, Ethereum has instead sought to cross out nearly every item on the community's collective wish list. The most noteworthy and promising feature, “smart contracts,” consists of an extensive programming language by which value can be automatically routed by the network in response to new information. This allows blockchain technology to seamlessly execute the terms of contracts. But the current feature list has grown past its already ambitious initial goals to a list which includes anonymous instant messaging, decentralized file storage, identity and reputation management, a web browser and even a nice graphical user interface to make all of these features simple to use.

While the smart contracts that the Ethereum project provides have proven to be very impressive, the project is having a hard time getting its blockchain to bear the weight of its ambitions. The blockchain design itself is very similar to that of Bitcoin. But the burden of its additional features, coupled with an extremely fast settlement heartbeat (also known as “block time”) has caused the project directors to drastically scale back their ambitions and continuously push back their deadlines. While Ethereum may have some viability in the future, it is clear that the road ahead is a long one. And meanwhile, many of Ethereum's best features — most notably its "smart contract" features — have already been imported over to the Bitcoin network.

Next on the contender list is the venture-backed and well-marketed Ripple Labs. Whether this platform qualifies as a blockchain is up for debate, as transactions on the Ripple network are subject to the company's own moderation and management instead of network "mining." But what's certain is that the Ripple Labs project has turned to the "centralization" of its network management as a way to add features to Bitcoin.

Five Ripple-controlled servers keep the heartbeat of this network in sync, which contrasts starkly with the many thousands of systems managing risk in the Bitcoin network. Ripple Labs has needed to maintain this centralization in order to successfully promote itself as a next-generation competitor to payment clearing systems Swift and ACH. But it's apparent that this technology does not provide much in the way of immutability or settlement risk-reduction when compared to a conventional blockchain design.

Ripple throws out the need for traditional mining, by requiring that all actors in their system establish trust relationships with each other as well as trust in the Ripple Labs corporation itself. By centralizing this trust, Ripple has exposed the entire network to risk in the form of an easy point of failure and censorship. This has resulted in the recent and very embarrassing freezing of funds for one large digital currency exchange, as well as an anti-money-laundering fine levied by FinCen. Within a conventional blockchain design, by contrast, value transfers are final. Neither a court order nor the whims of a small number of participants would be able to freeze funds or levy fines.

The centralized nature of Ripple highlights the settlement risks incurred by such approaches to blockchain technology. It now appears that any user of the Ripple network who needs to settle value amongst untrusted and/or risky actors will do so by way of … well, a Bitcoin gateway attached to the Ripple network.

While Ripple may offer some advantages over the incumbent Swift and ACH architectures, Ripple's architecture alone does not settle or route actual value outside the incumbent banking system. Meanwhile, as the Ripple community attempts to bridge its network to Bitcoin, so too has the Bitcoin community added many of Ripple's features straight onto Bitcoin itself.

The final and most obtuse new strategy being promoted in the blockchain space is that of Eris Industries. Eris Industries is providing a set of software libraries and tools that enable users to design their own blockchains from scratch. However, the Eris approach completely removes the incentive for miners to mine on a blockchain by removing the reward for mining entirely.

The guiding philosopy of the Eris project is that value routing is not important or needed, and that a blockchain is useful merely as a data-notarization tool amongst trusted partners. The need for such a tool would appear dubious, as non-blockchain solutions have performed this service with significantly greater efficiency for years. (The most popular of these solutions would be Nonetheless, the venture capital funding for this project appears to have resulted in a positive marketing response thus far, and the project appears to be positioning itself to companies that don't see an economic efficiency in guaranteeing value settlement amongst untrusted actors. Immutability is not a feature of the Eris Industries project, which has even gone so far as to label its own tokens “junk” — seemingly to highlight this very point.

What has become evident with this most recent crop of blockchain newcomers is that in order for a blockchain to succeed, it needs to be a public resource. This lesson harkens back to the early days of the Internet, where many of the companies who saw the Internet's potential embarked upon a short-lived and largely fruitless "Intranet" strategy whereby the network effect of the Internet was squandered in an attempt to retain complete control of its users.

The value of the Internet's network effect wasn't immediately obvious at first. So too with Bitcoin do we see many newcomers scratching their heads in an attempt to replace the current blockchain with a series of controlled silos.

While there may be room for alternative blockchains in our future, the likelihood of any competitors achieving much traction outside a small niche seems increasingly unlikely. Similarly diminishing are critics’ reasons for finding Bitcoin unsuitable, particularly in light of recent moves by two of Bitcoin's newest and largest adopters.

Nasdaq and Overstock have each recently announced plans to make use of the Bitcoin blockchain. Much of the blockchain community was waiting to see which blockchain these companies would choose, as their decision would set in motion much of the network effect that is sure to follow. It would appear that both institutions recognize the immutability advantages of Bitcoin and the comparatively enormous advantages of using a public resource for their settlement needs.

This Bitcoin network effect shows no signs of slowing down. But if the last six years has shown us anything in the blockchain space, it's that alternate chains — and their believers — are ten satoshis a dozen.

The next article in this series will explore the future of blockchain technology.

Chris DeRose is the community director of the Counterparty Foundation. Follow him on Twitter @derosetech.


(9) Comments



Comments (9)
@derosetech, you may be just a touch presumptuous in assuming that reader have heard of the Counterparty Foundation and are aware of what it does. And your byline doesn't mention your role with the Bitcoin Meetup groups or other bitcoin activities in which you are engaged. I am not suggesting that you aren't qualified to write on blockchains, that isn't the issue. Just as we expect analyst to disclose any positions that they have in stocks they are covering, being upfront about any and all involvement you have with bitcoin would remove any possible perception that you are not being upfront with your readers.
Posted by R H | Tuesday, June 30 2015 at 11:25AM ET
@rh - my involvement in the Bitcoin space is clearly disclosed via my title at the bottom of the article (I'd put it at the top, but that's not this journal's format). Additionally, what other subject matter expert would you expect to write a series on blockchains, if not the ones who have been studying them for the longest.
Posted by derosetech | Tuesday, June 30 2015 at 9:59AM ET
In all fairness, the authors failure to disclose his heavy involvement as a bitcoin cheerleader does raise questions about his objectiveness.
Posted by R H | Tuesday, June 30 2015 at 9:41AM ET
@bonnieceo - Ripple is not a publically traded company. How exactly would you invest in Ripple, buy buying XRP? (Now who reeks)
Posted by derosetech | Sunday, June 28 2015 at 10:22AM ET You think it reeks?

P.S. Pssst.... Invest in Ripple...
Posted by BonnieCEO | Sunday, June 28 2015 at 9:49AM ET You think it reeks?
Posted by BonnieCEO | Sunday, June 28 2015 at 9:47AM ET
@jerry - there will be many, many successful projects in the crypto space. But they will be built upon a need for immutability. This need has only been delivered by one blockchain thus far. I suspect you're new to the space, as you may not be aware that there have been *thousands* of attempts to build blockchains, all of which have failed in a fairly certain and demonstrable way. This very closely mirrors the early days of the Internet, where many actors attempted to build Internet applications by rebuilding their own (inferior) Internet as a starting point. (AOL, Compuserve, Prodigy, Genie, etc)
Posted by derosetech | Friday, June 26 2015 at 3:41PM ET
Concise and well considered points, Mr.DeRose. With its first steps into this new technological paradigm, the finance industry will be tempted to hang on to vestiges of control and centralization with products like Ripple (see the RBS announcement today). However, products like Ripple will be sidelined as bitcoin's decentralization and open source model wins new applications. At present, all of Google's servers are less than 1% of the processing power of the entire bitcoin network. This will only increase as miners race to extract the remaining 6.5m bitcoin, which will add exponentially to the power and security of the network.
Posted by BankingShift | Friday, June 26 2015 at 12:25PM ET
So basically every crypto tech that's not Bitcoin is going fail? Give me a break Mr. Chris DeRose. I know many articles may have some sort of bias agenda, but this just reeks of it.
Posted by Jerry\ | Friday, June 26 2015 at 11:55AM ET
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