Coins Compared: Seven Differences Between Ripple and Bitcoin

Introduction

In our series on cryptocurrencies we started with mineable altcoins. In this series we explore the non-mineable variety of cryptocoins and crypto assets (generation 2). 

The first in this series is Ripple, the largest pre-mined currency by market cap and also one of the earliest competitors to Bitcoin.
Understanding the concept behind Ripple is a little confusing at first and raises many questions especially if one is looking at it from a Bitcoin point of view. For example, is Ripple a currency like bitcoin or not?  Is it decentralized? Why was it premined? Does Ripple have one universal ledger like the Bitcoin blockchain? Does Ripple share Bitcoin’s goals and use cases? 

This post is for those who like this blogger, grew up on a Bitcoin diet, and want a closer look at other alternatives.

How Ripple Works – A High Level Overview

Since this blog has an entire section on Bitcoin, those interested in a Bitcoin tour, can start with "The Disruptive Innovation of Bitcoin". And if you know how Ripple works, you can skip this section and head straight to the comparison. Note: Ripple’s distributed ledger technology will be covered in a separate post.  

Terminology:Ripple vs ripples vs rippled

Ripple is described as a payment protocol, exchange and remittance platform. In banking industry terms, Ripple Pay is a real time gross settlement (RTGS) platform. 

Bitcoin represents both, a network and the bitcoin currency.  Ripple is likewise, full of similar sounding lexicon with three or four different Ripples or ripples. 

Ripple is the name of the decentralized network. XRP or ripples is the native digital token or currency of the network. Ripple, aka Ripple Labs formerly OpenCoin, is also the name of the company that runs the Ripple distributed ledger which in turn is called Ripple Consensus Ledger (RCL). The software program that runs on the network servers is called rippled.  

Ripple Ecosystem: Transactions, Consensus Ledger and Validators 

Ripple is designed to allow people to make payments to one another in different currencies or commodities. This scope is quite vast. For example, Person A can use a fiat currency like US dollar to pay Person B in bitcoins or even gold, B can pay C in euros and so on, using the Ripple network. 

How is this different from conventional banking and remittances? This is where Ripple’s Distributed Consensus ledger technology comes in. A Ripple network consists of gateways (participating exchanges, banks or any business that accepts currencies), trusted validators and nodes. 

A payment transaction, like an everyday payment in the fiat world, is an IOU between a payor and the gateway. So if A wants to pay B in the above example, A, opens an account with a gateway (Bitstamp is a Ripple gateway)  and purchases a minimum token in ripples (XRP), as an account opening requirement. The transaction is submitted to the Ripple network which validates transactions details such as account and balances and submits the transaction record on a distributed ledger. 

Transactions are cryptographically signed by account holder’s private keys and only signed transactions are accepted by validators.  In the process, the Ripple network also makes programmatic decisions to determine cross currency/commodity conversions. Once the transaction is confirmed, the recipient receives an equivalent payment in (bitcoins in our example) from their receiving gateway (can be the same or different gateway). A small fraction of ripples (0.01 XRP) are said to be used up or burned in the process as transaction fees. The role of ripples is to act as a token asset in the transfer and prevent spam transactions.  

Gateways to Ripple and Market Makers

Gateways form the entry and exit points to the Ripple platform which is a globally distributed network of servers that each maintain a common ledger of transactions. The Ripple Consensus ledger is decentralized and the network uses a consensus method to validate transactions (ledger nodes automatically agree on which transaction block is accepted and added to the ledger chain). 

Ripples can be traded against other currencies on gateways through market makers (similar to an exchange that provides market liquidity and matches orders) and specific cryptocurrency exchanges. 

Seven Differences Between Ripple and Bitcoin

1. Coin Use

Both Bitcoin and Ripple are payment networks for digital cash. The difference is that bitcoins have entered into an ecosystem outside the network. Bitcoins can be used to make payments in the real world. There is a merchant, wallet and payment processor ecosystem for bitcoins. There is also a large trading and asset industry growing around bitcoins beyond currency exchanges. 

Ripples cannot be used as currency to make merchant payments outside the network, although some business had started accepted Ripple in its early days. Ripples exist as digital asset tokens within the Ripple network to prevent transaction spam. Malicious transactions intended to swap the network burn ripples at a higher rate making an attack inefficient. 

Ripples can be traded against other currencies on gateways through market makers and specific cryptocurrency exchanges.

2. Ownership

No one owns Bitcoin not even its pseudonymous creator Satoshi Nakamoto or the developer community that continues to maintain it. The network is distributed across nodes all over the world. 

Ripple on the other hand is a permissioned network owned and currently operated by Ripple. Parts of Ripple code, Ripple Trade and Ripple Charts that provide access to the Ripple ledger , is open source, but the network itself is driven by Ripple authorized nodes.

  

Ripple also determines the operation of the network. For example, Ripple’s own Trading platform, Ripple Trade was recently shutdown, and users had to withdraw funds from their accounts before they could move to the alternative platform Gatehub or other exchanges.  

3. Decentralized

Bitcoin is a true Internet peer to peer network. Two individuals anywhere in the world can exchange bitcoins directly from their wallets without using an exchange. Ripple wallets are available offline but  ripples can be used only via user accounts Ripple’s trading platform or gateways which are needed to access the Ripple Consensus Ledger. 

Ripple’s Consensus Ledger can be described as a decentralized technology. The concept of peer to peer users in Ripple applies largely to the market makers or financial institutions such as exchanges, banks, money transmitters or intermediaries than for individuals. It would be fitting to describe Ripple as a peer to peer payment network for trusted third parties.

4. Network Nodes

The Bitcoin blockchain runs on the permissionless network of participating nodes that run in full or light modes. The higher the nodes and longer the block height, the more difficult to attack or take over the network. Anyone can download and run a Bitcoin node. 

Ripple uses distributed ledgers on participating nodes across the globe but the difference is Ripple ledgers are allowed to run only in a permissioned network on trusted validators and unique nodes.

Ripple secures the network from attack by increasing XRP burn in a concerted attack such as very high transaction volumes from a single source. (Since decentralized, trustless distributed databases are automatically updated, it is possible for someone to take over transactions, although at huge cost, by taking over the majority required for consensus. The probability of attack is lowered by increasing odds or making the costs detrimental to the attacker). 

5. Mining

Bitcoins are generated by the miners when new blocks are added. There is a global mining economy that is actively mining the balance 5.5 million bitcoins from the 21 million limit, igniting several debates on the substantial energy consumed in the proof of work process. 

Ripples on the other hand are pre-mined. A 100 billion ripples were generated and are burned up during transactions. Unless Ripple becomes a global payments network there are enough Ripple waiting to be used. Which brings us to the next point.

6. Trading Value

Bitcoin rules markets with a $4oo average value and a $6.5 billion US market capitalization in 2016. Bitcoin’s value is driven by many factors but a big part lies in it emerging as an asset class with some governments recognizing it as a currency or commodity. 

Ripple has a lower market value and but the high volume and gateways/exchanges platforms have enabled substantial trading of ripples with fiat currencies and even bitcoins. Ripple grew its user base through giveaways from gateways and a Ripple-Bitcoin bridge. It is likely attracting long position speculators if the demand for Ripple as a settlement platform grows or those who believe Ripples may grow into a cryptocurrency ecosystem like Bitcoin.

Ripple’s roadmap at this points appears divided between in the direction of a global ledger for the worldwide financial system that is the Open Ledger project and going down a cryptocurrency path. 

7. Philosophy

Both Bitcoin and Ripple can be called disruptive systems. Bitcoin was launched to the world as an electronic cash network that removed the trusted third party transaction cost barrier for micropayments. Its design as a currency, and decentralized operation has created many more uses, including that as a alternative asset class on fiat doomsday (Greece and Iceland for example) or spurring digital economies in smaller countries such as Estonia. At the same time, Bitcoin’s open evolution and adaption is taking the path of natural selection and has equal chances of success or failure. 

Ripple aims to disrupt an industry process – lowering processing times and fees via a large global distributed ledger with a universal token. Both Bitcoin and Ripple are sometimes compared to the http protocol which made Internet the global peer to peer network today. In that they have adopted decentralized architecture.

But they differ more in philosophy and end goals than in technology.

Summary

The debates around whether Ripple is good or Bitcoin is bad or vice versa may be really for competitive mileage than anything else. 

Ripple is by itself, a significant technical achievement that serves a real need to in the world of settlements, which is not a small task in the globally interconnected, over-regulated and over-leveraged world of fiat currencies and stockpiled commodities. But maybe Ripple was able to leverage the Bitcoin “upstart” wave to come into prominence as a cryptocurrency and got its messages mixed up. That is an association which may ultimately have an impact on the future of Ripple, both positively and negatively.

In the final analysis, both Ripple and Bitcoin can end up having their respective places in the world. Ripple has the potential to create an impact within the financial services industry but Bitcoin’s blockchain, like the Internet, can have applications throughout the world.

Bitcoin Alternatives: The Top Five Mineable Altcoins by Market Capitalization

Overview

In the introductory posts on alternative cryptocurrencies to Bitcoin, we looked at the landscape of cryptocurrencies and evolving next generation of blockchain platforms that have grown since the arrival of litecoins and Ripple in 2011.

In this article we look at the top five minable altcoins that rule the cryptocurrency marketplace today. The infographic is a comparative summary of the top five mineable altcoins based on market ranking on March 10, 2016.

Bitcoin has a 80% market share and the largest network and value. Three other types of altcoins rule the top 100. The wave of altcoins are decentralized, and for purpose of this series,classified into two forms. The first two category consists of mineable cryptocurrencies which are covered in this article. The second form are crypto asset platforms using crypto tokens, many of which are fully mined or substantially premined. These can be used for applications within or built on top of the blockchain for purposes varying from financial settlements, resource management, gaming and so on.  

Ripple, MaidSafeCoin, Factom, NXT and Stellar are examples of fully mined cryptocurrencies.

The first generation of altcoins began as individual ventures and grew like Bitcoin with a community of users. Altcoins make use of the Bitcoin ecosystem with leading Bitcoin wallets, exchanges and payment services supporting leading altcoins. Some of the new wave of crypto asset platforms and centralized networks are building their own ecosystem. 

Poloniex, CCEX and CryptoCompare are popular exchanges for trading in a wide range of altcoins and currency pairs. 

Comparison Data

A quick explanation of the terms on the infographic

• Ticker: Trading ticker used in the marketplace.
• Currency Unit: A majority of cryptocoins use the same name as the currency, but the newer generation of crypto asset platforms denote the currency token by different names (ether). This is done probably to differentiate the token purpose (as not restrictive to being used as currency only). Crypto asset platforms such as Omni have multiple crypto-tokens such as MaidSafeCoin and Synereo). Other examples include NXT and Counterparty.
• Subdivisible: Bitcoin is divisible up to 8 decimal places the smallest unit called satoshi. Most altcoins are divisible to the same length the most subdivisible being ether where 1 wei equals one quintillionth of an ether or a divisibility up to 18 decimal places.
• Launch: The year the currencies began mining on production blockchain.
• Price: Altcoins trade the world over in different fiat currencies. The most popular being USD, Chinese Yen (CNY), Euro (EUR) and GBP. Major exchanges track prices on these currencies as well pegging them against BTC or bitcoin equivalent. Prices change frequently even in the course of the day and the ones listed in the infographic are from the week of March 7, 2016.
• Market cap: The coin price multiplied by the coins available in circulation. 
• Supply: Like Bitcoin, mineable coins are generated through block rewards and will eventually reach a designed cap. Block rewards themselves vary, mostly decreasing over time like Bitcoin’s halving. Coins already mined are those available for transactions while the mining limit denotes the total number of coins that will be generated after which mining rewards will consist of transaction fees only. Not all coins are available for transactions such as the genesis block or the first block in a blockchain, coins lost through invalid addresses and so on. 
• Block Time: The time for transaction confirmation, the time to build a block and receive confirmation by network consensus. Most altcoins compete on lower block confirmation times, although higher the confirmation time, lower the risk of double spending. 
• Block Reward: The number of coins generated as reward for successful creation of a block. Block reward generally decreases as blockchain grows in size. 
• Mining Proof: The method used to ensure effort was spent in creating a new block and it came from honest mode (covered in the post on altcoins differences).
• Application: The most common use of the cryptocurrency. The first generation of coins like Bitcoin are decentralized currencies. Newer cryptocurrencies are designed for applications such as crypto assets and smart contracts. 

The Top Five Minable Altcoins having Market Capitalization above $10 million

A short overview of the top five cryptocurrencies follows. Note that some of these platforms will be featured in depth later in this series, as we track the progress of blockchain applications and progress of cryptocurrency markets. This article has a brief coverage on the history and differentiating features of the top five altcoins and their performance in the cryptocurrency markets.

A comparison of the market performance of the five altcoins featured in this article, from their time of launch till March 2016. Source: coinmarketcap.com.

Ethereum: The Smart Contracts Platform

Just seven months old, Ethereum is the second largest cryptocurrency after Bitcoin, having overtaken the oldest altcoin Litecoin in market capitalization. Ethereum was proposed by Vitalik Buterin in 2013 and the Ethereum blockchain went live in 2015. Ethereum development was crowdfunded with an initial presale of 60 million ether in exchange for bitcoins.

Ethereum is designed to support smart contracts. Ethereum allows creation of smart contracts through its built in Turing complete language. Ethereum’s unit is ether which is used as crypto fuel to execute transactions through applications built on the Ethereum blockchain. Ethereum is an example of a cryptocurrency 2.0 platform. 

Later articles in this series will have an in-depth feature on Ethereum and other crypto asset platforms.

Litecoins: Silver to Bitcoin’s Gold

Litecoin was created in 2011 by Charles Lee, a former Google employee and brother of BTC China founder Bobby Lee. Litecoin was the first to use Scrypt as a proof of work, at the time intended to be a GPU mining resistant algorithm. Litecoin has 4X coin cap compared to bitcoin and block confirmations in 2.5 minutes, a fourth of of bitcoin's 10 minute block confirmations. 

Litecoin trades on all major exchanges and peaked soon after launch 2013. Litecoins have declined through 2014 and 2015, now trading in $3 range. Litecoins use the same ecosystem as bitcoins and are tradeable on almost all crypto exchanges. Charles Lee, the creator of Litecoins, who is now working for Coinbase, emphasized on improving the liquidity of litecoins by encouraging adoption by users and merchants over development of new features. With technical similarities to bitcoin, litecoin remains bearish though stable in the crowded market of altcoins.

Dash: Private Digital Currency

Dash stands for Digital Cash. Dash was introduced by British Developer Evan Duffield in 2014. DashCoin is e-cash, like Bitcoin, but was designed to improve on Bitcoin’s pseudonymous nature, transaction traceability and transaction times, trying to replicate the exact nature of physical world cash transactions.

Dashcoin was launched as XCoin, renamed to DarkCoin a month later and eventually rebranded as Dash in March 2015. 

Dash uses X-11 a chained hashing algorithm that Evan Duffield created, which utilizes a sequence of eleven scientific hashing algorithms for the proof-of-work, a feature that allows ASIC resistant mining while consuming lesser resources (than Bitcoin). Successive releases of Dash have improved on enabling complete transaction privacy (or anonymity) through a feature known as Darksend protocol which mixes user coins through a Masternodes a peer to peer coin mixing and anonymizing network for Dash, in addition to mining nodes. Masternodes are also used to provide near instant transaction confirmations through its InstantX service. 

Dash quickly appreciated very soon after launch rising to $10-$11 and number three after litecoin in market cap. It is priced higher than Litecoins in 2016 although having a lower market cap, due to lesser coins mined. 

Online casinos and drug marketplaces were early adopters of Dash, a path which Evan Duffield points out, was taken by Bitcoin. Dash’s value has increased, with its rebranding from Darkcoin and acceptance by mainstream merchants such as Overstock. 

Dash’s creator and community remain open and committed to the currency as they continue to develop new features, improvements and innovations making it likely to remain a strong altcoin/bitcoin competitor in the future. 

Dogecoin: Internet Tipping Currency

Dogecoin trades at a sub sub fraction of a dollar, yet it owes its market cap to the sheer volume of dogecoins, over 100 billion, that are available in the marketplace. Started as a light hearted cryptocurrency with an inspired Shibu Inu canine cuteness factor on coin logo, based on the famous Internet doge meme, Dogecoin has found a niche as an Internet tipping currency, where online users reward content contributors using dogecoins.

Dogecoin was created and launched by developer Billy Markus and Jackson Palmer in 2013. 

A notable feature of dogecoins is that the currency is inflationary, that is, there is no cap on coins. After the initial production of 100 billion dogecoins, the supply of coins will increase annually by 5.26 billion coins.

Monero: Secure, Private and Untraceable

Similar to Dash philosophy, Monero is a privacy centric currency, based on CryptoNote technology, an open source cryptocurrency protocol that is separate from Bitcoin’s code. Monero uses CryptoNote protocol for generating ring signatures and creating opacity on the blockchain. CryptoNote obfuscates the blockchain making transactions untraceable.  

Monero was created in April 2014. At the time of writing, Monero is trading almost at par with the US dollar.

The cryptocurrency market especially that of altcoins is in very early stages of development. Emerging altcoins and crypto asset platforms that under development, attract speculators who do not want to miss out on the next potential Bitcoin. Miners also benefit from trading easily minable coins in the premine stage, selling them as penny stocks.

As the next wave of blockchain applications take off, coin creators and investors can stand to gain major payoffs from the future valuation of start-ups and applications in the cryptocurrency landscape. Despite volatility driven by fast moving events in this emerging field, "pump and dump" scams that trigger underlying fear, uncertainty and doubt (FUD) alternating with increasing euphoria around the blockchain, the outlook for the multi-billion dollar altcoins market looks promising enough.

Blockchain Applications: An Update on Use Cases and Developments Across Industries

A view of raw blocks from different blockchains such as Bitcoin and Ethereum (top), title deeds (middle) and dictionary definitions of blockchain properties (bottom). Blockchains have applications to real world use cases across different industries dependent on contracts, delivering unbundled services and trusted third party intermediaries.

Introduction

The blockchain tech (protocol to be accurate) is viewed as an emerging technology which is widely anticipated to change how value is transferred using the world wide web. It is considered similar to early days of email communication and later, ecommerce applications. The applications in different industries are only limited by innovative thinking on blockchain applications and use cases. Naturally, start-ups have come up inspired by the design principles of the blockchain demonstrated by cryptocurrencies such as bitcoins.

Bitcoin is of course, the most emphatic validation of a blockchain application. But blockchain is not a technical achievement alone. Satoshi Nakamoto’s invention currently at a $6 billion market cap has demonstrated a technology that has immense significance in an area which is critical for functioning of systems (human, technological, societal, economic and so on). It is the making, securing and enforcing contracts.

At the cost of repetition, let us recap the properties of a blockchain as realized in Bitcoin. A blockchain is a distributed database. It is decentralized. It enables peer to peer transactions. It works in a trustless environment. It uses consensus methods to verify transactions in a peer to peer network. Transaction records are secured and verified using public private key cryptography. The longer and older the blockchain and the larger the network supporting it, the more impervious it is to attack or tampering. 

A blockchain can be implemented by making use of existing Internet infrastructure, technologies and encryption techniques with some innovative rules based programming. It does not require massive investments in timeline or money. The blockchain protocol is now considered as pervasive as http. 

Blockchain Properties and Key Use Cases

If the blockchain uses existing technology, its properties are what makes for the disruptive innovation and promise. This is how blockchain applications are being designed for different industries.

Application 1: Ownership History (Provenance) and Proof of Authenticity 

A blockchain represents an object as a public private key token which is generated from within it. As the blockchain grows, it retains an immutable history of the object right its inception through various events in time.  It can be called a single system of record that can be designed to represent a physical object identifier with characteristics such as state, ownership, behaviour depending on the application context. With a single system of record and held by public private key, a blockchain allows storage of contracts with the proof of ownership belonging to the owner of the private key. 

Another feature of Bitcoin is that ownership is pseudonymous, which also allows for secure records while preserving privacy and confidentiality. For example, in a pseudonymous property record blockchain,  a property owner can retain secure control with their private key over information on how many real estate assets they own and share it at their discretion without a third party (such as bank) having access to the same level of detail. Information required for public or third party verification remains secure on the blockchain structure. 

This has application to almost any area of rights or ownership. Different applications are being developed that enforce provenance (history of ownership) by maintaining the asset as a secure cryptoken on the blockchain from the time of its creation (or manufacture) through its lifetime.

Application 2: Decentralized, Trustless, Smart Contracts

Many blockchain applications can not only function as proof of ownership but go a step further by enforcing contract rules as well. Reclaiming ownership on lease expiry or transferring options in derivatives can be enforced as rules in a blockchain. 

A blockchain is not maintained or controlled by a central trusted authority that defines rules of operation in return for a service. This takes away the requirements of minimum scale and cost which are required to sustain central third party institutions. It also supports peer to peer transactions at lower transaction costs. 

One of the blockchain innovations is the use of smart contracts language which create automated rules for enforcing token values, security and distribution (example Ethereum’s in-built Turing-complete programming language). Transaction fees can be embedded within the blockchain rules. In doing so, transactions are fully automated without manual intervention or interpretation. This not only makes transactions possible over a wide magnitude of values but also at very high speed and scale. For example, bitcoin payments can be made for as less as 1 satoshi (1/100 millionth of a bitcoin) to purchases in millions. 

Blockchain is viewed as threat to intermediary institutions by reducing their bargaining power substantially. This is a pessimistic view, as use cases can be applied to instances where the costs of having a trusted party or intermediary are too high to sustain peer to peer or micro-transactions use cases (see the article on Bitcoin remittances regarding World Bank concerns on high costs of remittances). 

Based on these principles, these are among the first wave of blockchain applications that are being developed or proposed for industries as diverse as financial services, energy and entertainment.  

To keep it simple, we start off with an honourable mention to the pioneering Bitcoin as number one followed by the wave (or tsunami) of cryptocurrency 2.0 start-ups that grew through the crowdsourcing route. Many of them power blockchain applications in the examples that follow.

Payments Industry: Digital Cash

The first and most important the is digital cash use case for micro-payments and cross-currency, cross-border remittances with long settlement times across financial institutions. Bitcoin of course, to which we have devoted an entire series, addresses both issues and has launched the cryptocurrency revolution where the blockchain token of value is the scarcest of commodities – money. As also mentioned, the wave of altcoins that followed suit also have similar applications. 

Finance Industry: Trade and Settlements

Trade and settlements work through intermediary models and trusted third parties such as brokerages and clearing houses. Settlement times are driven by exchange of information and updating of records at each checkpoint, a process which takes days. By using a blockchain, settlement transactions can be made in minutes, upending the speed and scalability of settlements. Ripple, the payments protocol is based on this principle, allowing same day settlements at lower costs. R3 the bank consortia backed blockchain based on Ethereum is also being developed and tested  for trade and transaction settlements.

Financing Industry: Mortgage and Lease

Smart contracts for mortgage and leasing have started arriving, with a prototype of a digital vehicle record on a blockchain now available. Visa, global payments processor and Docusign, a solution provider for esignatures and digital transactions management, unveiled a proof of concept for a car leasing contract that uses the Bitcoin blockchain to assign and manage a unique digital identity for a vehicle and update subsequent related transactions on the blockchain.  

Capital Investment: Crowdfunding

Blockchain applications are not only relatively low on investment but they can fund themselves. The blockchain crypto tokens or coins have applications in many crowdsourcing use cases such as crowdfunding, where users can buy an equity in the platform currency or go one step further and create their own currency and drive crowdfunding for their Kickstarter type projects. Ethereum   and Augur  are among examples of crowdfunded blockchain platforms. Crowdfunding enables users to get a stake with minimal investments and provides an incentive to maintain a large network for a strong blockchain.

Insurance Industry

The insurance industry is almost entirely a system of contracts and a major use case for blockchain. From smart contracts for risk pooling in underwriting to enforcing claim pay outs and preventing fraud, insurance industry is probably only next in line of financial services after banking and finance for block chain applications. 

At the moment, the insurance industry is at the drawing board for the insurance killer app like Bitcoin– a smart contracts blockchain, reinsurance being a promising area. Allianz France, a subsidiary of German insurance giant Allianz, is working with Everledger, a blockchain start-up that certifies diamonds, to explore uses of blockchain as an asset registry. Axa another leading French insurer is also exploring applications for the blockchain and has invested in Blockstream, a Bitcoin platform provider  and pioneer in side chains.  

Energy Industry: Peer to Peer Micro-grids

Consumer energy is distributed through utility company grids. But solar cryptocurrency based start-ups are pioneering the idea of peer of peer solar energy micro-grids using the concept of energy blockchains. TransActive Grid, joint venture between consensus networks start-up LO3 Energy and Consensus Systems has launched a community microgrid project in a New York neighborhood that will enable homeowners and buildings in a neighborhood to buy or sell excess solar energy. The blockchain allows users to charge fees denominated in blockchain fees as well as enforce distribution rules. Transactive Grid’s blockchain is based on Ethereum.  

Entertainment Industry: Music Recording and Distribution

PeerTracks is a peer to peer network that allows musicians to distribute songs directly to fans. Buyers can acquire equity, purchase or stream songs by using the blockchain token. Costs are low as transaction fees are lower than other forms of payments (such as credit card fees). PeerTracks blockchain is called MUSE and is built on the Bitshares platforms. 

In future, music blockchains like PeerTracks can be used to protect artist rights by creating contract token and rules on the blockchain thus preventing piracy or unauthorized distribution without depending on recording companies and DRM technology. 

Luxury Goods Industry: Certificate of Authenticity

The luxury goods counterfeit industry may well be threatened by blockchain applications that can serve as provenance ledgers for high end goods, rare objects, gems and collectibles, in short, anything of premium value. 

Chronicled is a blockchain start-up targeting the premium “original” sneaker market.  Their Provenance blockchain platform provides a secure registry for high end sneaker brands, assigning and tracking smart tags embedded during manufacture on the blockchain, enabling owners to track history for proof of authenticity, using a mobile phone app. Everledger is another start-up focusing on the certification use case maintaining a registry of diamonds to combat theft, fraud and counterfeits. 

Internet of Things (IoT) Applications

In the IoT series, we covered self-actuation, context awareness and secured protocols as critical quality attributes in use cases for IoT solutions. The decentralized, crypto tokened blockchain can implement these attributes, furthermore, in a peer to peer network as opposed to cloud based brokers and middleware, a driving principle behind IoT blockchain applications. 

Filament  is an IoT meets blockchain start-up that provides an ad-hoc wireless infrastructure (branded Tap) through a network of sensors. Sensor data is encoded on the blockchain with private-key crypto hardware, enabling a decentralized peer to peer communications network. IBM, in partnership with Samsung has also created a proof of concept called ADEPT, an IoT transactions blockchain that combines Ethereum blockchain with peer to peer communications and network protocols.

Public and Personal Records on the Blockchain

Several start-ups are focusing on in this space creating applications that will serve citizens and government interests in preserving and securing records. A slew of online voting platforms such as FollowMyVote and BitCongress are making use of blockchain to create immutable voting records. Other start-ups are building applications on platforms such as Factom to build real estate registries and health histories. 

Governments are following suit. The European nation of Estonia,  is one of the leading adopters of blockchain implementing applications for voting in 2015, securing public health records, notarizing services and many others under its e-governance project. 

This is just the beginning. Everyday new start-ups and use cases arrive with applications as diverse as voting applications, health care and academic records on a blockchain. It is like early days of Internet and finding uses for it. In less than four score and twenty years, we are more than halfway towards a sentient web. That may well be a future scenario for blockchain.

Bitcoin, Banking, Fintech and Blockchain Developments: A Four Fold Approach to Blockchain Applications

Big Name Banking and Technology Businesses have invested in developing blockchain applications. In the financial industry, blockchain is treated as an emerging tech and a potential major disruptor in contracts and settlements. Bitcoin blockchain is the best demonstration of a secure distributed ledger.

Introduction

"Go forth and multiply.."

The first altcoins to bitcoins appeared on 2011. In the preceding post we saw the rise of cryptocurrencies and the next wave cryptocurrency platform. In this article we explore developments in the major mainstream adopters of blockchain applications – the financial industry. 

Poor Bitcoin (a paradoxical way to describe an asset with a market cap of 7 billion), has never received a (publicly) rousing welcome from the “fiat” based global financial industry. But the open source, paradigm shifting, “libertarian favorite" and  "upstart" cryptocurrency is going on nevertheless, thanks to a whole new start-up ecosystem that has built the Bitcoin economy and given birth to a crypto application industry.

This latter concept, a crypto industry, is another way to define blockchain applications, which, since 2015, seem to have found applications everywhere, across industries as diverse as healthcare, energy and finance. 

Somewhat like chickens coming home to roost (in a good way), leading names in Big Finance and Big Tech have become the most vocal proponents of block chain financial industry and technology industry, investing efforts and cash in exploring new use cases for innovative uses of the block chain, albeit without Bitcoin in the picture. 

Blockchain Revelations from Bitcoin

Bitcoin is the tipping point for cryto based security applications, that Nick Sbazo and others envisioned as early as 1997,  as a way to enforce trust in contractual transactions concerning tangible economic value between faceless participants and an equally anonymous “trusted” intermediary on a globally distributed public infrastructure of the Internet. The Bitcoin blockchain is the pioneer and demonstrated proof of such as application which has enabled others to follow suit. 

So what has been revealed in six years of Bitcoin? The Bitcoin blockchain has never been hacked. Transactions confirm in minutes. The transaction token itself (bitcoins, altcoins) becomes a usable store of value. Bitcoins and altcoins are now used as currency and commodity asset classes.

Angel investors, technology innovators and venture capitalists are backing developments in Bitcoin and blockchain. 

Big businesses are following suit for blockchain technology in part from foreseeing revolutionary value of the blockchain,  in part to ride the next big technology “wave” and become an early adopter. 

Banking and Technology Approach to Blockchain Applications

Its early days since big brand financial institutions (read global banks) have started exploring blockchain applications as an emerging technology. The overall process that the industry has followed is to jump start blockchain applications with collaborative and incremental investments on cryptocurrency 2.0 start-ups such as R3, Digital Asset Holdings and Ripple. To accelerate development and innovation, mixed model of open innovation (open source applications, providing application developer tools) in combination with industry sponsorship (banks, tech industry consortia) has been adopted.

A Timeline of Events – Big Finance and Blockchain circa 2015

Blockchain startup R3CEV LLC (R3) is spearheading the foundation of blockchain framework for the banking industry. R3 can be called a blockchain entity (maybe an eventual blockchain platform) which is focusing on blockchain use cases for smart contracts and settlements. In September 2015, a consortium of 9 global banks came together to build and test a distributed ledger technology. By November 2015, this number rose to 30 and 42 towards year end. First tests between sub-groups of this consortia have been running since January which have consisted of simulating transactions using crypto tokens in a permissioned block chain developed on Ethereum.

R3 is also heading Global Collaborative Labs, an umbrella that allows emerging blockchain platforms apart from Ethereum to create prototype applications and run trials with industry participants.  In March 2016, R3 announced that five blockchain cloud platforms were tested including Ethereum, solutions from IBM and Intel and hosted on IBM and Microsoft Azure cloud services.

IBM is adopting its mixed open source, shared, run on IBM cloud model that it has applied to its industry solutions such as Watson and Big Blue. While R3 is using Ethereum, IBM has partnered with Digital Asset Holding, a blockchain platform company that has moved its distributed ledger platform, called Hyperledger to the Linux Foundation. While R3 is a banking led consortia, Hyperledger is similarly made up of 30 founding companies, including R3, some of its consortia members such as JP Morgan and a mix of technology consulting companies including IBM and Accenture.

Big banking names are also in an accelerated patent filing mode. Bank of America has chalked up between 20-30 patents, covering apparently a whole cryptocurrency ecosystem from wallets to exchange, transaction confirmation etc. Since Bitcoin is open source, it remains to be seen if BoA patents are related to a new technology, a process, a trademark or something else. J P Morgan, an early mainstream competition to Bitcoin, tried to unsuccessfully patent a blockchain version in 2013. Goldman Sachs has filed a patent for SETLcoin, its propreitary token for a settlements blockchain.

The patent war while a common competitive process where industry innovation is concerned, signals that whatever banks view of the blockchain, there is little readiness to adopt a public decentralized model that Bitcoin has demonstrated so well. It reveals the extent to which some elements of the block chain will be used, while real industry disruption features may eventually be ignored or abandoned by established players that may view trustless decentralized systems as a threat.

Other industries such as insurance or energy or emerging market may well become those who build truly disruptive crypto applications. We will explore this and the blockchain versus Bitcoin debate in subsequent posts in this series. 

600 Shades of Bitcoins: The Landscape of Cryptocurrencies - Part 1

Between 2011 and 2016 between 600 to 700 different cryptocurrencies have been created and traded in across the world. Litecoins and Peercoins were the earliest versions called alt-coins, while the new wave or version 2 which includes Ripple, Stellar, NXT and Ethereum can be called crypto asset platforms.

Introduction

In the beginning of 2009 there was bitcoin...

In this series on digital payments, we started with the disruptive innovation of Bitcoin, the first successful adoption of a decentralized digital currency (in part owing to the 2008 economic meltdown). We covered Bitcoin and the ecosystem around it extensively, without referring to the larger world of cryptocurrencies and blockchain solutions that have grown with it.

But bitcoin is not alone. 

Satoshi Nakamoto’s first and most successful implementation of digital cash on a block chain in 2009, launched a revolution of cryptocurrencies and cryptoassets.  Today, coinmarketcap lists more than 635 different crypto currencies and 55 crypto assets with a combined market capitalization of USD 7.8 billion (as on March 1, 2016; Source: coinmarketcap.com). 

While bitcoin is still king of cryptocurrencies with 84% share of market capital, alt-coins, other crypto-coins, crypto-assets and blockchain applications are here to stay as well.

In this series, we turn the spotlight from bitcoins to the expanding landscape of other cryptocurrencies. We start with the evolution of bitcoin alternatives, their common features and differentiation followed by a comparison of leading cryptocurrencies.

Note: This series does not cover new wave of proposed bank coins and tech coin patents and proposals that have been announced recently. Most of them are on the drawing board and in all likelihood proprietary, contradictory to the concept of a decentralized public ledger, but a separate topic of discussion nevertheless.  

A Recap of Cryptocurrency Features

Cryptocurrencies have the same basis in their design as bitcoins. This are described in some detail in earlier articles on this site on the Bitcoin innovation and Bitcoin payments ecosystem. To save a long read and for newcomers, we have a quick and simplified recap below.

• Fiat currencies are secured with a legal tender issued by a central bank and sovereign government(s) with several features to verify their authenticity and double spending in payment transactions prevented by using trusted third party. Cryptocurrencies are encrypted adopting Adam Back’s hashcash based proof of work algorithms for authenticity.  
• Instead of being backed by a central authority, cryptocurrencies are maintained and verified via a distributed transaction database (or electronic ledger) over a peer to peer network. 
• The block chain is built as a linked chain of blocks of transactions to prevent double spending without the need for a trusted third party (a trust less environment). In general, the ledger is public, meaning the transaction can be accessible and verified computationally.
• Consensus method is used to prevent double spending and attacks to take control over on the network, all participants must agree to and use one version of the blockchain based on consensus rule.

Why so many alternative cryptocurrencies to bitcoins?

Reason 1: Anyone can do it! (almost)

A facetious and also correct answer is because you could. The vision of making your own brand of digital money has become accessible to anyone with practically no entry barriers. The Bitcoin code is open source and everyone could use the design or make a fork for their version of bitcoin. i.e. a de-centralized peer to peer digital cash or store of value.  The initial coins which started appearing with Litecoin in 2011 followed by Peercoin were called alt-coins. They created forks of the Bitcoin source code with different consensus methods. 

Reason 2: Cheaper Coins, Easier Mining, Faster Transactions

As bitcoin mining moved from commodity CPUs to special purpose ASIC hardware, other ASIC resistant versions were introduced to continue broader public participation in mining. Another feature was blockchains that confirmed transactions faster than the bitcoin blockchain. Alt-coins were also created as a less expensive alternative than buying bitcoins that have soared to hundreds of dollars in value. 

Reason 3: Blockchain Applications

And finally, the next generation of cryptocurrencies is designed to go beyond currency tokens and create crypto-assets and blockchain applications such as smart contracts, which we will explore in detail when covering leading cryptocurrency platforms.

Why cryptocurrencies succeed (or fail)

The 600 to 700 cryptocurrencies that have arrived (and often disappeared) outnumber 180 active fiat currencies by a ratio of four to one. Financial indicators are used to as a key measure the popularity of a cryptocurrency. These are the exchange rate and market capitalization with respect to fiat. Bitcoin has grown in six years from an experiment to an economy with USD 6 billion market cap and over 1 billion invested in bitcoin/blockchain firms. Of the remaining currencies, around 50 have a market cap of USD 1 million and above and only 20 trade at USD 1 or higher.

Financial indicators are not the only test of success, as some forms have been created for specific purpose and applications outside payments. To recall Satoshi Nakamoto's original bitcoin whitepaper, bitcoins are a secure token that have applications outside payments.

These are some reasons that can be attributed to success and failure of cryptocurrencies.

Network Effect

Peer to peer ecosystems can sustain through network effects. Most decentralized cryptocurrencies are open source and dependent on community participation to survive. As the network of users, developers and investors grows, the adoption increases exponentially. Networks also dismantle exponentially. Leading cryptocurrencies have a network of active developers, dedicated supporters, a knowledge community and growing base of users. Apart from bitcoin, the top ten cryptocurrencies have reached tipping point, with sustainable economic, technology and investor ecosystem supporting them. Ethereum used the crowdfunding route giving out the currency to build a community around the project even before it was launched.

Design and Ecosystem

The incentive of building an alternative eco-system is another factor. Alt-coins have grown for specific applications or as a means to addressing some of the issues with bitcoins. Alt-coins can use different programming variations and consensus rules but have to offer differentiated or comparable capabilities to the security, growth and transaction speed of bitcoins. Most are forks from the bitcoin code with some variation of consensus rules. The top alternative coins have an ecosystem of third party block explorers, exchanges, wallets and mining which are critical to maintaining currency circulation and value. Ripple and Stellar are examples of premined currencies with a large market cap. 

Purpose

As of 2016, 600 cryptocurrencies outnumber 180 fiat currencies by 400% but only 20 trade at 1 USD or higher. Not all cryptocurrencies are designed to replace fiat payments. Some operate similar to other forms of virtual currencies such as gaming currencies, online casino tokens or used in dark web transactions. Other started as experiments which did not take off or were abandoned (dogecoins are the most famous exception, having started as a joke and top in the top 10). In the unregulated world of cryptocurrencies, many short-lived cryptocoins were actually designed as "pump and dump" schemes by their creators, burning many investors.

In the second part of this article, we look at differentiating features in cryptocurrencies. 

Bitcoin Markets - A Profile of Leading Exchanges

In the last post, we explored the landscape of bitcoin markets - exchanges and the evolution of investment vehicles with bitcoin as the underlying asset.

In this article we profile a cross-section of bitcoin exchanges - volume leaders, peer to peer exchanges, derivatives exchanges and exchanges that have opted to be regulated under banking and investment laws. 

http://bitcointicker.co

Top Five Exchanges (by Volume)

The top five bitcoin exchanges handle around 85% of daily volumes. All of them have been also classified as “Big Four” at some time by various sources, though in the evolving world of bitcoin, this designation and definition is likely to have many candidates. 

Source: http://bitcoincharts.com/

BTCC 

BTCC is the largest exchange by volume handling between 40-50% of transactions and is the dominant exchange for BTC-CNY trading. Formerly known as BTC China and rebranded as BTCC, the exchange was launched in 2011. BTCC is headquartered in Shanghai, China and serves a global customer base.

BTCC is expanding the breadth and scale of their services on mining and trading. BTCC launched 100 nodes in December 2015 across five continents to address the issue of decreasing full nodes.  Their trading services now include ProExchange, a spot trading platform that provides 20x leverage and Block Priority, a service that expedites transaction confirmations for BTCC account holders.

Bitfinex

Owned and operated by iFinex (a British Virgin Island company), Hong Kong based Bitfinex, is the largest exchange by BTC-USD volume. Bitfinex’s platform was launched in 2014 and is in beta phase. 

Bitfinex’s trading platform is very popular and matches bitcoin lenders with margin traders allowing peer to peer margin liquidity. Bitfinex has become a “go to” source for bitcoin owners to earn passive income by lending to traders. Bitfinex also provides bank level security with over 100% reserves and securing coins in cold storage.

Bitstamp

Launched in 2011, the Bitstamp exchange operates from Slovenia and has offices in UK, USA and Luxembourg. Bitstamp supports trading in US dollars and Euros.   

Coinbase

Launched in 2013, US headquartered Coinbase is known for their full portfolio of offerings from wallet, exchange to payment processing. Coinbase launched their US based bitcoin exchange in 2015, becoming the regulated cryptocurrency exchange in the US. Within a year of operation the Coinbase exchange has expanded services to Canada, Europe and Asia. Coinbase US user deposits are FDIC insured and online wallets are insured.  

BTC-E

Also launched in 2011, Bulgaria based BTC-E supports trading in multiple currencies and crypto-currencies including the rouble and offshore yuan. BTC-E philosophy can be said to be diametrically opposite to Coinbase. BTC-E provides anonymous trading to users (the exchange does not ask for customer information to sign-up), operating as an online only business and the platform owners have remained anonymous. Although this has been flagged as a red flag, the volumes still signify the popularity of BTC-E.

Peer to Peer Marketplace

A P2P marketplace allows users to buy and sell bitcoins without the exchange acting as intermediary. 

LocalBitcoins.com

Finland based LocalBitcoins.com is the leading online peer to peer or (broker-less) OTC bitcoin marketplace. Launched in 2012, LocalBitcoins is among the top 10 exchanges. Its operation can be described as similar to Craigslist. Buyers and sellers use localbitcoins.com hosted wallet (or their own) to transact. Advertised listings are posted on the platform which include location and payment method information. Trades can be initiated and completed through an online only process or by making the exchange offline. The process on the platform offers buyer and seller protection through an escrow mechanism and dispute resolution process. Participants on the platform also rate sellers, a model similar to other peer to peer sharing businesses such as AirBnB. LocalBitcoins.com exchanges are available in 249 countries and over 13,000 cities. 

Derivatives Trading

Leveraged trading and investment products designed for capital market and institutional investments have started making frontlines in the bitcoin and cryptocurrency space and have received mixed feedback. 

BitMEX

Launched in 2014, Hong Kong based BitMEX (or Bitcoin Merchantile Exchange) is a bitcoin derivatives exchange that offers digital currency futures and options. BitMEX has a small user base primarily from Asia but daily trading volumes have reached $5 million within a year of operation. The latest offering is a leveraged China A50 stock index hybrid futures contract which gives bitcoin traders an option to take short or long positions on the Chinese stock exchange, with up to 25x leverage. 

Ledger X

LedgerX describe themselves as an institutional trading and clearing platform. New York headquartered Ledger X was founded in 2014 and aims to be the first US based bitcoin derivatives exchange, currently awaiting regulatory approval from the US Commodity and Futures Trading Commission (CFTC). Ledger X has received an order of temporary registration from the CFTC as a swap execution facility in September 2015. 

Coinut

Coinut exchange is owned by Singapore based Coinut and was launched in 2014. Coinut offers exchange traded bitcoin options (vanilla or binary) on the price of bitcoins. 

Licensed Exchanges

While different countries take different legal and regulatory approaches towards bitcoins, some exchange businesses have sought licenses applicable to banking and financial market operators. This arises from reasons such as ensuring business continuity in heavily regulated markets, serving legitimate customer interests, retaining access to capital markets and banking systems for investments and attracting institutional investors.  

While cryptocurrency specific licensing requirements such as the much debated BitLicense in US are one approach to compliance, these firms based in US have also opted to apply for licenses under the existing banking and financial services regime.

Genesis Trading

Genesis Trading, a subsidiary of the Digital Currency Group became the first fully licensed digital currency-centric broker-dealer in the US, in 2015. Genesis Trading was spun off from the bitcoin trading desk of Singapore based Second Market to become the first FINRA and SEC regulated broker to actively deal with bitcoins.  Genesis Trading offers derivatives and OTC trading for private and institutional investors. 

itBit

itBit, a bitcoin currency exchange operating in New York received a license to operate as a trust charter under New York Banking Law in May 2015. As a trust company, itBit is licensed to provide custodian services nationwide in the US, an overarching advantage over applying for state specific money transmittal licenses. itBit also has to ensure adequate capital reserves as per NYDFS requirements and client deposits  upto $250,000 are FDIC insured through itBit’s banking partner.

At last count there are 46 exchanges operating worldwide specializing in digital/crypto/blockchain currencies. Exchanges continue to launch, grow and fall but the marketplace for bitcoins continues to thrive around the world with investment options available for optimists and pessimists alike. 

An Overview of Bitcoin Exchanges and Trading

This article is part of the continuing series on Bitcoin and the Bitcoin Ecosystem.

Bitcoin exchanges provide platforms and services for the bitcoin marketplace enabling individuals and institutional investors to buy and sell bitcoins, trade in bitcoins as digital assets and exchange with fiat currencies (and other commodities such as gold and silver). 

An overview of bitcoin exchanges and trading marketplace around the $6 billion capitalization of bitcoin. Bitcoin exchanges worldwide support the large community of retail and institutional investors and have evolved different operating models. 

Note: Firms included in the illustration are representative examples in each category and may support more than one operating model.

Like the currency, bitcoin exchanges are de-centralized and many Bitcoin exchanges offer 24x7 trading.  A majority of exchanges are start-ups run as online businesses and support a multi-national client base. The largest exchanges are based in Europe, US and China which account for 90% of trading volume.

Source: http://bitcoincharts.com/charts/volumepie/

Influence of Exchanges

Exchanges play a key role in driving bitcoin supply and demand. Exchanges enable investors to trade bitcoin in currency or commodity of their choice. Today bitcoin exchanges allow bitcoins to be traded in more than 30 different fiat currencies, most cryptocurrencies and assets such as gold and silver. Bitcoins can be used in forex trading, CFDs and also as exchange traded notes. 

Because exchanges are decentralized and unregulated, many have been a source of risk for investors who have lost funds through online thefts, scams or poor mismanagement involving exchanges. 

Bitcoin’s exchange rate was established in 2009 at 1309 BTC equivalent to 1 USD (about half a million at today’s rate) and surpassed 100 USD in 2013 by which time, 40 web based exchanges were  operational. As many as 45% of shut down by April of that year, followed by the implosion of Mt Gox which had a virtual monopoly in bitcoin trading, in 2014 .While leading exchanges have since matured, exchanges failures still continue with around half of exchanges closed or inactive.

Exchange Service Offerings

Bitcoin exchanges compete on different fronts. Some offer full services around bitcoins from wallet hosting, trading and payments. Others offer trading and investment products structured around cryptocurrencies.  

As a peer to peer decentralized network, bitcoin traders can transact directly. Some exchanges offer online marketplace services, where buyers and sellers can contact one another and transact directly either online through the platform or offline.

Other exchanges work as intermediaries with providing automated trading platforms and/or broker services. Clients have to comply to KYC and AML requirements and generally link a fiat (usually client’s local currency) bank account to buy BTC or receive fiat currency from sales. The exchange platform accepts and matches buy and sell orders based on limit or ask pricing or through auctions. Exchanges may also support conversions to a limited basket of currencies. Exchanges charge transaction fees although BTC/BTC trades are usually free.

Different exchanges offer different fee structures, spread and trading options to leverage and short. Exchanges have also offering margin swaps and futures contracts representing an evolution of the marketplace. Because exchanges manage fiat transfers and hold customer funds, they are treated as money services businesses that have to comply with AML and KYC regulations.  

Over the Counter (OTC) trading marketplaces Bitcoin-OTC IRC channel are preferred for high value transactions, and major exchanges offer trading desks.

Evolution of the Bitcoin Trading Marketplace

Bitcoin exchanges have evolved in response to the growing adoption by mainstream users and institutional investors, as well as regulatory treatment and classification of bitcoins by different nations/jurisdictions. Again, some of these are arguably diametrically opposite to the peer to to peer version of the currency, but they underpin the growing maturity of bitcoin as an asset class.

These are some of the significant achievements in the short span of three years from 2013 to 2016.

Bitcoin Price Index

Bitcoin prices are generally indexed at BTC to USD, BTC to Euro and Yuan.

Bitcoin prices vary across exchanges across the world and arbitrage is possible. Services such as Bitcoin Average and CoinDesk introduced the concept of Bitcoin Price Index in 2013.  Bitcoin Price Indexes are based on averages from trading data from multiple exchanges across the world.

Coindesk’s XBP (Dollar and Yuan) is based on a simple average of prices from exchanges which meet pre-defined criteria such as an international client base, minimum transaction value and settlement time. Exchanges are added or removed depending on whether they meet the criteria.

In May 2015, NYSE introduced NYBXT its bitcoin pricing index using data from transactions on Coinbase, the leading US exchange.

Advanced Trading and Settlement Products

Exchanges and bitcoin broker dealers have offered financial products such as futures, short selling, margin trading, derivatives and other structured products. Derivative products and CFDs can bring in more liquidity and allow traders to speculate on bitcoin without holding the currency. Advanced products carry more than the usual risk as investors operate in a relatively limited market capitalization (of 6 billion USD). 

Bitcoin Backed Securities

Bitcoin backed securities are now available through XBT a bitcoin based exchange traded note (ETN) that was listed on Nasdaq Stockholm. The ETNs are 100% backed by bitcoin and are tradeable in USD and Euro. Bitcoin backed securities are another option to trade in bitcoins without buying the currency. 

Settlement Sidechain

Bitcoin node operator Blockstream announced their plan to launch an interoperable settlement sidechain (Liquid) which would allow consortium of participating exchanges and major institutional traders can make high volume trades and make instant settlements (a Ripple within bitcoin?). The stated goal of Liquid is to improve the liquidity and increase capital markets participation in bitcoin trading . 

Regulation

Exchanges providing fiat conversions or accepting funds in fiat have to comply to KYC and AML regulation in the countries they operate. In USA, different states and compliance bodies such as FINCEN have required registration from exchanges as money transmitting businesses.

Leading exchanges have tried to remain compliant with the local laws and regulations, applying and publicising licensing and registration information. itBit has secured a banking license in New York while Genesis Trading became the first licensed broker dealer in digital currencies, operating as a division of SecondMarkets, an SEC licensed broker-dealer regulated by FINRA and the SEC. Firms have also voluntarily adopted best practices (usually mandated in the financial services industry) for managing customer funds. Brokers such as UK based Coinfloor publish their methodology for storing client funds and publish a Provable Solvency Report on client funds. 

Risks and Challenges - An Uphill Battle for Bitcoin Markets

Bitcoin exchanges are diverging into blockchain and fintech, while others continue to support miners and daily conversions in bitcoins. Exchanges on the whole are still in start-up mode and the failure/burn rate still remains high. 

Volatility

Bitcoin prices fluctuate dramatically and so do transaction volumes. Between 2012 and 2016, the price has moved from $1 to $1200 at its peak and a $300-$400 average in 2016. Price spikes are triggered by developer announcements, legal status and judgements, geo-political events and exchange losses,thefts and closures. A security event can cause major run of exiting investors. While exchanges should maintain 100% of client bitcoins, this has often not been the case. In some case, fiat or bitcoin reserves have woefully underfunded. Exchanges have their bank funds frozen for suspect transactions, going into a death spiral. 

Regulation

Regulation around bitcoin is still evolving, especially at the intersection with fiat and other regulated financial products. Regulation is a double edged sword which can make or break exchange start-ups.

The costs of licensing and compliance can be a barrier to entry for smaller players. Further, the requirements for licensing, regulatory reporting and compliance are not clear as the treatment of bitcoin as a commodity or currency differs across countries. This has led to different countries or industries excluding or limiting bitcoin exchanges from access to existing banking system, as in the case of Australian banks freezing accounts of bitcoin companies.

Security

Exchanges have themselves become a risk factor in bitcoin pricing with many events such as thefts and closure shaking investor confidence and triggering sudden (and steep) declines or volatility in pricing. Many exchanges that closed have ultimately lost client funds through a combination of online security hacks, fraud and lax practices.

Bigger exchanges have matured since, and have taken up security practices such as offline cold storage of coins, maintaining reserves and insuring customer funds and replacing lost bitcoins. 

Complexity 

Bitcoin is currently undergoing through a major evolution and transformation phase as debates on blocksize, competing cryptocurrency and regulatory pushbacks create stress on over the top solutions. It may be too early to bring in structured financial products and create a trading and lending ecosystem using bitcoins with investors still coming to terms with the unique features of bitcoins.   

Bitcoin Exchange and Trading Trends

The evolution of Bitcoin exchanges and trading appears to be heading in different directions in different regions, and to an extent influenced by the state of financial markets there.

While transaction volumes are huge in China, where miner dominate, bitcoin exchanges in developed markets of US, Europe and Australia are headed towards inclusion of bitcoin in the existing capital and asset markets. Major exchanges are applying for regulatory permissions and licenses to operate as broker dealers or securities institutions to expand the reach and liquidity of bitcoins. Exchanges are also integrating other digital currencies and rebranding their offerings as block chain solutions than bitcoins.

In the next article, we cover a cross section of leading and innovative bitcoin exchanges.