More on Distributed Ledger Technologies

We explan how blockchain is steadily improving its performances while impacting more sectors (beyond finance). We compare bitcoin with ether and other crypto-currencies and crypto-assets. We elaborate on the two sides of the same...cryptocoin, introducing some security, scalability, interoperability issues to be addressed.

The speed with which blockchain technologies handle transactions is crucial towards thier scalability and wide-scale deployment. The Bitcoin blockchain can process only fewer than ten (around seven) transactions per second (at the end of 2017, Bitcoin users had to pay around $28 in fees so their transactions wouldn’t take days to complete. Those problems resulted in a hard fork and a new Bitcoin-based currency, Bitcoin Cash, which moved on to increase the maximum block size up to eight megabytes from just one).

Many other, newer cryptocurrencies have attempted to create their own blockchains, which are allegedly faster and cheaper. Their primary goal was often to beat the centralised global payment systems. Visa in particular can process some 24,000 transactions per second. Many blockchains have surpassed that point, but mostly on paper.
It is important to recognise that while TPS, confirmation time and scalability in general might be important for mass adoption, they are not the only criteria. Many cryptocurrencies claim to have throughput, but the transaction speed is generally hard to measure - especially with real-time traffic instead of test networks, with their ideal conditions in terms of latency. As a result, many of the claimed TPS are different from their actual value.


The table summarises and compares some of the features of the following consensus mechanisms:

  • Proof of Work
  • Proof of Stake
  • Proof of Elapsed Time
  • Practical Byzantine Fault Tolerance & variants
  • Consortium Practical Byzantine Fault Tolerance

Proof of Work is typically used with permissionless networks (such as Bitcoin), Proof of Stake and Proof of Elapsed Time can be used with both permissionless and permissioned networks, whereas the Byzantine Fault Tolerance algorithms are typical of permissioned networks.

A token (or cryptocurrency) is needed for Proof of Work and Proof of Stake whereas it is not needed for Proof of Elapsed Time and the Practical Byzantine Fault Tolerance consensus approaches.

We can also compare the throughput and the speed features of the different consensus algorithms, with:

-Proof of Work and Proof of Stake displaying good nodes scalability to the expense of their low throughput (transactions per second)

-Practical Byzantine Fault Tolerance algorithms displaying moderate nodes scalability but high throughput (transactions per second)

https://ses.jrc.ec.europa.eu/sites/ses.jrc.ec.europa.eu/files/pictures/consensus_mechanisms_comparison.jpg


Blockchain technology can be used to implement other decentralised services besides currency transactions. One of the most important extra features is probably the use of smart contracts.

Smart contracts are computer programs that are capable of carrying out the terms of agreement between parties without the need for human coordination or intervention.

These agreements can be recorded and validated into a blockchain which can then automatically execute and enforce the contract usually under ‘if-then’ instructions: ‘if’ something happens (for example, if you rent and pay for a car and short-term insurance) ‘then’ certain transactions or actions are carried out (the car door unlocks and the payment is transferred).

A smart contract enables two or more parties to perform a trusted transaction without the need for intermediaries. The way in which transactions are verified and added on the blockchain guarantees that conflicts or inaccuracies are reconciled, and that in the end there is only one valid transaction (no double entries).

Smart contracts became popular with Ethereum. Other platforms are now also offering smart contract functionalities, such as Hyperledger’s umbrella projects.

Some argue, however, that this is actually a misnomer in the sense that smart contracts are neither ‘smart’ (capable of translating complex legal agreements into software) nor ‘contracts’ (they have no underlying legal or contractual provisions).

In addition, smart contracts are currently only feasible or applicable under limited conditions – for instance, when there is no need for dispute resolution.


BITCOIN

Key advantages

  • Bitcoin does not need any financial intermediaries. It aims to reduce delays in payments as well as transaction costs. This is particularly the case for international payment operations that usually require more time and extra costs compared to those executed in Bitcoins.
  • The Bitcoin blockchain is both the veteran under the blockchains and the most intensively used one in number of active addresses. Its security and dependability can be considered as very high. Thus it can be an interesting choice for storing or timestamping a document.

Main limitations

  • the currency remains highly volatile and therefore incurs additional risks. It is unfortunately mostly used as a speculative asset.
  • In terms of technology, the proof of work algorithm has limitations in transaction speed and latency, size of the blockchain and most importantly energy consumption.
  • Bitcoin only allows limited smart contracts (i.e. a ‘non Turing complete’ language is in place).

ETHEREUM

Key advantages

  • Ethereum can use Turing-complete smart contracts. It allows for realising complex smart contracts and can support a large variety of complex applications.
  • opportunity to adapt blockchain to various different use cases through smart contracts.
  • Ethereum is in a transition phase – this entails a switch to proof of stake as well as sharding (each node having only a part of the data on the blockchain, and not all the information). These two main changes should enable up to 10000 transactions per second.

Main limitations

  • Ether as a currency is also highly volatile and thus creates extra risks associated with the belonging cryptocurrency.
  • Even though Ethereum has been positioned as a completely secured network due to the blockchain technology use, in 2016 a hacker stole 3.6 million Ether (equal to more than 50 million USD) from a smart contract based, Decentralised Autonomous Organization (DAO).


 

The table compares some of the features of three blockchain technologies: Bitcoin, Ethereum and Hyperledger.

  • Concerning their main value proposition, Bitcoin is an alternative to traditional centralised banking systems, Ethereum is a platform for the creation of advanced smart contracts, Hyperledger Fabric is a toolkit to create custom B2B blockchains and Hyperledger Sawtooth is an industry solution to create public or permissioned blockchains with an alternative to Proof of Work
  • Cryptocurrency: Build-in cryptocurrency is the main ingredient within permissionless distributed payment systems (such as Bitcoin). Even though permissioned blockchains do not require a build-in cryptocurrency, Hyperledger Fabric still ensures the possibility for a native currency or a digital token.
  • Consensus: Permissioned blockchains mostly rely on asynchronous BFT protocols. Most of the platforms come with a hard-coded consensus except the Hyperledger Fabric. This implies that in case of different fault models, one must switch on a different blockchain environment. Thus, plug-and-play consensus such as one deployed by Hyperledger is particularly interesting.
  • Node Roles: While in Ethereum and Bitcoin roles and tasks of nodes participating in reaching consensus are identical, Hyperledger (Fabric) differentiates nodes (based on whether they are clients, peers or orderers). The motivation is to reach consensus and state synchronization across all nodes without requiring that all smart contracts are executed on all nodes.


Tokens are digital assets used as an exchange medium and normally associated with an underlying blockchain to register exchanges/transactions. (This can be with or without a counterpart: for example, Bitcoin is without a counterpart while Sardex has one).

It can provide for a relative right, whether it be a service, a commodity or financial rights.

Digital tokens could be used to represent not only a means of payment but could also be associated with a generic promise of delivering a payment or any other commodity or service.

It led to the emergence of ‘digital tokens’ as a new class of financial products and a new method of financial intermediation.

Technically, since tokens are digital assets, they require cryptographic tools to secure the transactions and the ledger. Typically, the technology used is a blockchain. The recent interest in tokens stems from the desire to find alternative means of funding for businesses and start-ups in particular, and to promote decentralised, mostly unregulated, mediums of exchange which can be used to support such firms.

Tokens are not something new per se, but they were not supported by digital technologies.

The dilemma currently facing regulators is whether they should offer protection to consumers, give certainty to emitters, or maintain flexibility in the system to accommodate an evolving technology with possible future economic benefits.


The blockchain technology in energy market is predicted to hike from USD 200 million in 2018 to around USD 18 billion by 2025 

However the blockchain business is a risky one. Let’s have a look at the start-ups which were financed through Initial Coin Offerings (ICOs). An initial coin offering (ICO) is the cryptocurrency’s equivalent to an initial public offering (IPO): a startup finances itself through crowdfunding and by issuing a token.

Behind the exponential growth in fund-raising through Initial Coin Offerings, the survival rate for start-ups after 120 days is only 44.2 %, (over half of the projects become inactive in four months)


A promising solution for private-by-design IoT data transfer is using a tiered architecture for blockchains.

Multiple private blockchains connect to a public blockchains, as shown in figure.

Here, users in separate private blockchains can choose to selectively communicate data to other blockchains.


Polkadot is a blockchain protocol that connects multiple specialized blockchains into one unified network. These might include public networks, permission-less networks, private consortium chains (or oracles, and other Web3 technologies). There is no requirement for a network fork.

It has two main chains, the Relay Chain, where transactions are permanent, and the Parachains, which are user-created networks:

  • The Relay Chain is the core chain of Polkadot. By design, it has minimum features. Its primary responsibility is to coordinate with different chains as a whole.  It holds a relatively small number of transaction types. It has minimal functionality, e.g smart contracts are not supported. Validations happen on-chain using DOT. Other specific functions are delegated to the parachains.
  • Parachains are shards that allow transactions to be processed in parallel instead of one-by-one. Parachains handle most of the computation in the Polkadot network. The parachains generate proof that can be validated by the validators assigned to the parachain. This proof verifies the state transition of the parachain. Parachains may be of different nature and use cases. Parachains have to win a parachain slot auction to secure a Relay Chain slot for a particular length of time.

Bridges make the Polkadot ecosystem compatible with external blockchains. Polkadot uses a native interoperability technology (called XCMP, Cross-chain Message Passing), which allows parachains to trustlessly communicate.


Despite an expected tripling of data centre workloads, the IEA projected a global data centre electricity demand growth by only 3% to 2020 thanks to efficiency improvements in IT hardware and data centre infrastructure.

Still, the data centres annual energy consumption has reached the level of the annual electricity consumption of two countries like Belgium+Netherlands together (~200 TWh).

As for the bitcoin energy consumption, the most widely cited reference is the Bitcoin Energy Consumption Index.

The machines performing the “work” are consuming huge amounts of energy while doing so. Moreover, the energy used is primarily sourced from fossil fuels.

The Bitcoin Energy Consumption Index was created to raise awareness on the unsustainability of the proof-of-work algorithm.

Most of the currently used methods to estimate Bitcoin’s energy demand still provide optimistic estimates as they overlook some market aspects.

 


When estimating the Bitcoin network’s energy consumption, one should consider the market dynamics, as well as the subsequent behavior of market participants.

The figure on the left hand side illustrates and compares the Bitcoin network computational power (TH/s) and total daily mining rewards (USD) over time. The colors in the graph mark different stages in the market cycle. Phase 1 and 4 indicate a growing market, while phase 3 indicates a declining market.

During growing market phases (such as in 2019) investors may tend to use all their devices for the mining process (the newest and more efficient but also the oldest and the least efficient ones) or even overclock their devices to take advantage of high profitability in a growing phase. Those behaviours cause a relatively higher increase in energy consumption.

The bigger the profitability of mining, the more it allows market participants to make decisions that result in suboptimal power efficiency of the Bitcoin network. Specifically, while the profitability of mining peaked during 2019, market participants were primarily using older generations of devices (less energy efficient).

To put this number into perspective, it represents the electricity use of a country like Belgium (87.9 TWh), exceeding commonly cited estimates of the Bitcoin’s network electricity consumption.

However (Figure on the right-hand side) using blockchain technology with non-PoW consensus – which is the case in an increasing number of business applications – already substantially mitigates the energy consumption and sustainability issues.

ALL REFERENCES FOR 2. DISTRIBUTED LEDGER TECHNOLOGIES