Thoughts on ETH and BTC (03.22.17)
This month (March, 2017) has been a roller-coaster ride for the digital currency market. The announcement of EEA (Enterprise Ethereum Alliance) a concerted effort between major firms like Microsoft, Accenture, JP Morgan, amongst others – led to a massive increase in the price of Ether (a near 400% 1-month return at the time of writing — making many early investors in the project rather happy.
Fundamentally, the EEA seems to be a recognition of the value proposition which underlies development in the crypto-sphere — specifically blockchain and its distributed consensus model. Importantly, the EEA acts as a verbal affirmation of a commitment for ongoing experimentation through “enterprise-grade” development.
Quoting the whitepaper, the Ethereum blockchain will help enterprises increase efficiency to: “improve banking trade settlement latency, increase transparency in supply chains, and create peer-to-peer markets where intermediaries typically were previously needed between counterparties.”
In my view, the commitment of these firms to the ethereum protocol — in the face of competing formalizations of blockchain through implementations like Bitcoin, Ripple, and Hyperledger speak to some degree towards the long-term potential of Vitalik Buterin, Vlad Zamfir, ConsenSys, and the wider ethereum project.
Bitcoin
Simultaneously, Bitcoin’s steady growth YTD seemed to falter due to concerns over the community’s ability to effectively implement a scaling solution to reduce the growing transaction tx paid out to miners. Uncertainties around a bitcoin hard-fork have led to some on Reddit to call for the coming “Flippening” — a situation where interest, hashpower, and market capitalization in the Ethereum blockchain would supersede that of Bitcoin.
While the market for cryptocurrencies has recently exceed 22 Billion USD, it is fundamentally still a market-driven ‘laboratory experiment’ — one which is being tested for its ability to solve economic problems related to:
- The economic inefficiency of financial intermediaries (wasted surplus)
- The inability for two parties to hold funds in a contractual escrow
- Issues associated with the ownership and rights to data.
The race to create the blockchain standard, draws parallels with the competition between technological standards in generations past (like VHS vs Betamax, for example). As with all technology wars, the winner will be decided through a mix of factors — like network effects, ease of adoption, and technological superiority.
The Current State of “Blockchain”
As we can see from the way bitcoin has stumbled, the key to success for blockchain will lie in its ability to effectively scale once its userbase begins to hit a critical mass. The kicker is that the network must effectively remain ‘decentralized’ — barriers to entry for computational mining must remain low in order to prevent oligopilistic collusion through a situation where, from the perspective of game theory, a Bertrand equilibrium emerged. Many argue that this is slowly starting to take place within the ecosystem — specifically, the mining “marketplace”.
Ethereum’s current ‘Proof-of-work’ hashing model, Ethash, differs from markedly from bitcoin’s SHA-256 model. It was specifically formalized to disincentivise the use of specialized ASICS which have taken over (and to some degree, centralized) the competitive market for bitcoin’s computational hash mining. Ethash accomplishes this goal by requiring 1–2 GB’s of RAM in order to fit the DAG while mining. This memory allocation thus disincentives specialized CPU’s and ASICS, thus disincentivising the creation of massive ‘mining pools’ like the data centers which have been built in China. Thus, PoW systems like Ethash promote GPU mining in an effort to keep the general hashrate decentralized and the computational hashing algorithm competitive.
However this proposition has not come without opposition, with technical insiders like Erik Vorhes stating,
“Changing Bitcoin’s proof-of-work to prevent miners from mining is the most absurd and reckless thing I’ve heard in the scaling debate. In order for a blockchain to effectively scale to critical mass, it needs to rig the technical requirements of a blockchain in a way that is grounded in a cogent economic incentive model.”
Other scaling options have been proposed like “Segregated Witness” (SegWit) which keeps block size at 1MB but removes transaction data from block and places it in a merkle derivative. An important facet of SegWit is that enables off-chain state transfers like Lightning Network, which would bolster the market for microtransactions.
Another proposal centers around the “Bitcoin Unlimited” (BU) chain fork— which would increase scalbility at the expense of decentralization by enacting a dynamic blocksize determined by the market. The main criticism of BU is that larger blocksize encourages consolidation and centralization of mining pools, effectively turning bitcoin into a “Paypal 2.0"
Key innovation: Proof-of-Stake
Rather then rely on a resource intensive and energy inefficient PoW system the Ethereum blockchain plans to migrate to a PoS system, formalized as through the Casper outline. Currently, PoS acts as a relatively untested ‘market-experiment’ where success relies on the correct formalization of monetary and allocation incentives. A key aspect of Casper
In Casper, If p% of the block validators actively participate in the consensus game, then they earn f(p) ≤ p% of the revenues they would earn if 100% of the validators were participating, for some increasing function f.
Key Concerns for PoS:
1. “Nothing-at-stake”– Casper implements ‘Slasher’ in order to solve this incentive problem through “rule-dependent” security deposits. With Slasher, you lose your block reward if you sign blocks at the same height on two forks (reward payout described above).
2. “Synchronicity Problem”– how do we know nodes are synchronized? Casper uses a loop of messages (code-bits) transferred across nodes to create a “heartbeat”. This is markedly different then the ‘timestamp’ approach used by other blockchains.
3. “Byzantine Generals Problem”– Casper, like other blockchains, is 50%-fault tolerant. It uses economic incentives to encourage consensus in the presence of ‘bad faith actors’
4. “Bribing attacker model — “By bribing game participants you can modify a game’s payoffs, and through this operation change its Nash Equilibriums.” Vlad Zamfir
Future Opportunities
Regardless of which blockchain becomes the de-facto standard for Web 3.0 identity, the winner(s) would be great candidates to be integrated with mobile operating systems.
Same as any other network, Ethereum needs emergent use-cases in the form of dApps (which replace the current digital ‘wallet-stack’ below) in order to showcase its ‘value-add’. Fundamentally a technology must satisfy two prerequisites in order to scale.
- Application Goals — Why do people use it? What value does it add.
- Network Growth Effects — How is the value added synergistic, what encourage armies of evangelists to push others into the adoption-plunge?
In examining the “ digital wallet-stack” of today’s mobile ecosystem, we find a sort of wall (or gatekeeper) in between each node. Fundamentally, the seperation between each functional node in the stack sucks away value either form of either money or user information. This wall between ecosystems is essentially a surplus-limiting tax which unnecessarily hits the two transacting parties in any voluntary economic exchange.
The blockchain ecosystem and its decentralized applications have the potential to ‘flatten’ this stack and remove the ‘gatekeepers’ which unnecessarily suck value, privacy, and economic surplus away from the transacting parties.
If a ‘blockchain standard’ leads to critical-mass adoption of a new, crypto-based identity standard – deep integration with mobile operating systems would make a lot of sense, especially considering the proliferation of deep hooks related to Web 2.0 Identity Standards by networks like Facebook.
In my next post, I will consider future growth avenues for mobile integration and tokenization, using ‘Wake Coin’ as an example for a theoretical framework for tokenization within the context of the university system.
