Five Features of Smart Contracts on a Blockchain

 Bitcoin versus other Blockchain Projects

Towards the end of April, as bitcoins crossed the $450 mark, news articles started appearing focusing on Bitcoin’s seeming resilience despite all the negativity and the price of bitcoin having doubled from last year. 

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Despite so many initiatives coming up that claim to eventually sideline or displace Bitcoin altogether, that gloomy prognosis is still at least five years away. 

What could be the reason? For one, Bitcoin is a use case which was implemented using existing technology. Only two things can take down Bitcoin. One, a better Bitcoin application or two, a 51% attack. 

On the other hand, many blockchain projects are trying to create innovative technical designs while simultaneously looking for use cases that apply. This cart before horse approach is no doubt, where the future lies for enterprise solutions. However, it is both time consuming and expensive. 

In this article, we take a step back toward the underlying premise of Bitcoin and Ethereum applications, which is smart contracts, an idea which has its roots from some of earliest proponents of digital cash and Bit Gold such as Nick Szabo.

Cryptocurrency followers are familiar with the notion of smart contracts as explained through Nick Sbazo’s website, Satoshi Nakamoto’s white paper, articles on the Bitcoin wiki, as well as through Ethereum architecture. 

Long story short, a good blockchain use case should implement smart contracts. Otherwise you are better off with a highly redundant database locked away in a vault. 

What is a smart contract? These are the five features that one can consider as characteristics of a smart contract.

Note: In order to describe the concept, this article has taken several liberties with the definitions. Many terms are not strictly true to the dictionary definitions, but used in a more generic context without losing the meaning. 

1. Smart Contracts enable Peer to Peer Agreements

Contracts are made between two or more parties, who are both beneficiaries of the agreement. When two parties, or peers in this case, who are otherwise unknown to one another, enter into a contract, a third party enforces trust, dispute remediation or even intermediary services. 

For example, Uber, AirBnB or other sharing economy applications allow people to use services in a peer to peer model opening a vast supply of resources than conventional taxi or hotel industry can provide. Uber or AirBnB act as the trusted third party and also provide the platform to connect suppliers and consumers. A contract between two parties is made using the platform and payments are made to the service provider who charge the supplier. Thus Uber can drive pricing and control who can use the system.

In Satoshi Nakamoto’s introduction to Bitcoin on the P2P forum, the creator of Bitcoin has pointed out the disadvantage of a third party aka central authority. Centralized systems can shut down or be shut down leaving consumers and suppliers high and dry, many times causing them some loss as well. 

If Uber fails, consumers have to look for another platform provider. 

A smart contract uses the blockchain to allow two parties to make a contract automatically. Instead of using a third party to determine the pricing and participants for all, two parties can directly set-up and execute a contract with mutually agreed rules. 

For example, Alice and Bob who are unknown to one another can enter into a transaction for a precious asset say a diamond. Alice who owns the diamond can sell the diamond to a highest bidder, Bob in this case. Alice receives payment only when she delivers the diamond to Bob. If Bob does not receive the diamond after a specified interval of time, he receives an automatic refund. 

2. Smart Contracts Secure Rightful Ownership through Cryptography Technology Protocols

A smart contract allows two parties to define and enter into a custom contract. But a trusted third party provides one more function. It establishes who the rightful parties are and this knowledge is limited to the parties of the contract and the third party. 

In a smart contract, rightful ownership is established through security protocols such as cryptographic keys. Bitcoin and other blockchain applications use public private key cryptography to assign digital signatories to a contract. The public portion of the key establishes an identity and the private key is the signing authority. Public keys designate who the parties are and signing using a private key executes or enforces a contract. 

Trust is not limited to the ownership but also extends to the asset or contract object(ive). A smart contract can use cryptography protocols to establish unique and immutable digital identities to assets. 

For example, when Bob buys a diamond from Alice, he sends her digital money by signing the transaction with his private key. Alice has designated the diamond as an asset and she releases the asset by signing it with her private key. The money can now be transferred using Alice’s private key. In turn, the diamond’s ownership is assigned to Bob and only he can unlock it for future transactions such as a sale, a gift or heirloom. 

Three: Smart Contracts Enforce Contract Rules Automatically

A smart contract should include contract rules that can execute automatically. Most contracts involve an exchange (event) between two (or parties) subject to conditions which must be fulfilled (e.g. sufficient balance). These rules should be encoded within the contract. The objective being, of course, fulfilling the role of trust and enforcing rules more consistently, objectively and using escrow than escalation mechanisms. 

In the Alice and Bob example, there are four rules. The price at which Bob and Alice agree for the diamond. Alice should receive the money. Bob should receive the diamond. The transaction should be completed within a stipulated time. A smart contract application would enforce all these rules which would execute at a stipulated time and/or when an event such as payment receipt is triggered. 

Four: Smart Contract Transactions are Immutable

A smart contract once executed cannot be reversed through system rules, hacked or tampered with or violate agreed fulfillment rules. 

Smart contracts are immutable, in the sense that while some rules are changeable, the effects of a contract rule once executed, cannot be reversed or modified, without substantial (and meaningless) collateral damage. The blockchain makes transactions immutable to eliminate the “double spending” problem, another human problem that requires trusted third party. 

Alice can sell her diamond to Bob and then again to Carol, except that the blockchain (or a Merkle tree of transactions) will track her asset history and prevent her or another willing buyer to enter into another transaction unknown to Bob. If (and since) the blockchain is a distributed transaction ledger sitting on many different nodes or a peer to peer network,  timestamped (in real time or near real time), Alice’s transaction is buried under many other transactions and blocks. 

Five: Smart Contracts Enable Fungible Transactions

I think that the most important benefit of smart contracts is the technology allows for an immense scale of transactions from the infinitesimal to large scale. Transaction costs, market driven value and supply and demand, have always excluded micro-transactions or made customization very expensive. 

Like the sharing economy, smart contracts enable peer to peer transactions of smallest value possible. Bitcoins are fungible to 8 decimal places and can be used to make micro-payments and purchase of multi-million dollar luxury villas at the same transaction fee and speed. Smart contracts make allow pricing unit items such as blog article or Internet tipping, where a unit or contract token can break down into a million parts or more. 

Using a smart contract Alice can sell Bob a diamond, a used guitar or even rent a single room in her house, an idea that Slock.it, a smart contracts startup is pioneering on Ethereum.   

Summary

Smart contracts are the single most important use case that blockchain technology enables. Describing blockchains as a globally distributed database is looking at just one aspect. Applying smart contract features is one way to validate use cases for decentralized applications on a blockchain.

Ethereum Wallets: Featuring Mist And Other Options

As Ethereum gains traction, the demand for wallets, the means to store and transact ether, the cryptotoken for the Ethereum blockchain grows, almost on a daily basis. In this post, we profile wallets for ether.

Ethereum Wallet Uses

If you are new to the cryptocurrency world and the importance of wallets, do check this post in the Bitcoin series, explaining features and types of cryptocurrency wallets such as multi-sig, cold storage, desktop, mobile, hardware, hosted, paper wallets etc. 

Those who are familiar with Bitcoin wallets will find some similarities with the Ethereum wallet but also a slight learning curve on the user experience and concept of contracts. 

Bitcoin has a specific purpose, i.e. a digital cash payments network, wallets have a simple function, allow a user to send bitcoins from one address to another using their private keys.

Ethereum, on the other hand, is designed to run any type of smart contract application, as we covered in our post on the differences between Bitcoin and Ethereum. This means that other than storing ether, users/owners have to specify the type of contract which receives their ether, with a provision for some ether to be used as gas. 

The other question for those trading in ether is, how to move ether to and from an exchange to another cryptocurrency or fiat. There are different ways to achieve this in Ethereum.

Currently, most ether wallets come with some caveats, being in beta among one of them. Users have to verify that the wallet works with small amounts to begin with, and become familiar with the concept of gas fees which use up ether. Offline storage and backup are as important as any other crypto wallet. 

We start off the list with Mist, Ethereum’s native wallet which has established the design and terminology for ether wallets in general.

Mist 

Mist Platform

Like, Bitcoin, Ethereum also has a native support for a wallet. There are two variations geth, a command line option and Mist, a GUI desktop wallet.

Ethereum rolled out the Mist GUI wallet in beta form in October 2015, following the Frontier release. The Mist wallet has since upgraded from beta 6 to Wallet 0.7.2 (beta 16) and has ironed out several problems. A very helpful step-by-step (unofficial) guide is available on a blog by KLMoney which also sorts out some confusion between terms for wallet users.

Mist is available as a desktop download on different operating systems and installs with a full Ethereum node. 

Using Mist Wallet

Ethereum's Mist GUI desktop wallet

The wallet is used to create user (external) accounts and contract wallets. A user has to create an account to generate public address and private key and store their ether. Ethereum account is secured by the account password and the owner’s encrypted private key, both of which are required to access the ether stored in the account. 

It is critical to backup and secure the account password and keyfile generated by Mist.  

Another important requirement is to paste Ethereum’s 40 digit hexadecimal addresses rather than manually typing them – incorrect destination addresses means the ether is lost forever. The latest release of Mist uses checksum feature to flag potentially invalid addresses. 

In order to use the wallet for transactions on Ethereum, a contract wallet has to be created by the account, using some ether (or gas). A contract wallet differs from account in these respects.

One, sending or receiving ether from a contract wallet will require some gas (ether) to be spent as well. Second, contract wallets can be set-up as single owner or multi-sig wallets. Multi-sig wallets have features such as daily limits and multiple owner account keys for transactions. Multi-sig wallets can have one owner account as creator.

Mist also has some unique but useful features such as identicons which are visual icons generated for an account. 

Should one use an account or a contract wallet? 

Accounts are preferred for use cases whether ether is being traded like a currency such as between two accounts or with an exchange, as these transactions do not require gas. Note that an address will not appear on the Ethereum blockchain until there is some transaction made, i.e. gas spent.

When ether are used to execute smart contracts via decentralized apps on the blockchain, the sender is responsible for including the cost of transaction i.e. gas. Contract wallets are required for this purpose.

Exchange Integration

Mist also integrates with ShapeShift, the instant cryptocurrency converter which makes it possible to purchase ether for an account using bitcoins or other cryptocurrencies. Unlike bitcoins, crypto exchanges which trade ether do not have a hosted/online wallets for ether. Kraken and Poloniex have hosted Ethereum presale wallets that owners can import into their accounts using the Mist wallet. 

While Ethereum continues to upgrade Mist wallet with future versions including light nodes and cross platform options, third party developers are rolling out ether wallets to fill the gaps.

Client side Wallets for Ethereum

For end users who not want/need to download a full node and the familiar experience of a “bitcoin like” wallet, there a few options from other developers. Built as client side Javascript or browser extensions, these wallets allow users to transact in ether by creating the password and generating the private key. Bulk creation, import from exchanges and sending to a contract wallet are all supported. Import into Mist/geth is also supported.

Client side wallets are not web wallets or light clients, the generated wallet has to be download in JSON format to a user computer. Users are responsible storage, backup and/or maintaining a paper wallet. A QR code version is also provided in some wallets. 

Some commonly used client side wallets include MyEthereumWallet which is an open source Javascript ether wallet, Kryptokit’s Ethereum wallet and EthAddress, a paper wallet generator . 

MyEtherWallet a client side Javascript wallet generator

Ethaddress, a paper wallet generator

In February this year, Kryptokit has also recently released JAXX, a cross-platform wallet application that supports both bitcoins and ether. 

Multi-sig Web Wallet: Ether.li

Mist or other client side options still require a local computer or device for storage. Although web or hosted wallets are not the best sources for long term storage, they are a convenient option to quickly access accounts or move ether online. 

In March 2016, developers at BitGo, a Bitcoin start-up released Ether.li,  a multi-sig web wallet with SMS two-factor authentication for ether storage. Ether.li deploys a multi-sig smart contract on the Ethereum blockchain creating a 3 account wallet (ether.li being a co-signer that authorizes the user) with 2 accounts (the creator/owner’s) needed to sign off transactions. The wallet is still listed as a proof of concept, but it has the distinction of being the first web wallet for ether.

Ethereum Wallet Dapps

A number of additional options listed on the Ether Dapps list include EtherWall which is an open source wallet that works with geth, the command line wallet interface. Consensys have released IceBox, a cold storage wallet on Lightwallet, a client side Javascript wallet, also developed by them. 

Hardware Wallets: Coming in 2016

At the time of writing hardware wallets for ether are still not available in the market,  but solutions are expected later in 2016. In April, Bitcoin hardware wallet maker Ledger showcased the developer edition of Ledger Blue, their upcoming hardware wallet that can run PGP and an Ethereum wallet. Digix made an announcement in January that they were developing a hardware wallet to be called Troth. 

2016 and beyond: Future Developments on Ethereum Wallets 

Ethereum Foundation continues to work on the roadmap for the Ethereum platform. Future releases and third party solutions should see more capabilities added to wallets and application interfaces such as cross platform support, lightweight wallets,  exchanges with other crypto-tokens and added ease of use to move ether between different smart contracts.

DigixDAO: Understanding the DigixDAO platform and the first on chain crowdsale on Ethereum

"Gold is Old" but Digix Global's platforms and approach to tokenize physical gold into fungible tokens represent early innovation on the Ethereum blockchain. DigixDAO can start a virtuous cycle to accelerate a digital gold ecosystem on Ethereum.

Introduction

In our preceding article, we covered Digix Global, creators of the gold backed smart asset platform DigixCore which was launched on Ethereum in January 2016. Following the alpha release, Digix Global has now launched the DigixDAO on Ethereum. DigixDAO is a crowd sourced funding channel and rewards program for further developments of DigixCore and its ecosystem. 

In this post, we will cover the salient features of DigixDAO and participation crowdsale. Originally scheduled to run for two weeks from March 30 with to raise a maximum of $5.5 million USD in exchange for DigixDAO tokens, the crowdsale reached its target within 12 hours. The required sum was raised between 675 unique purchasers, with many others still waiting to get in. 

Ironically, in early interviews in February, Digix Global CEO and co-founder, KC Chng had modest expectations of this first DAO crowdsale on Ethereum, with a refund plan if the sale raised fewer than $500,000.

What is the Digix DAO

The DigixDAO is a smart contracts application that implements a Decentralized Autonomous Organization (DAO) on the Ethereum blockchain. 

The objective of the DAO is to get public participation to spur development of DigixCore roadmap and a collective ecosystem.

The DigixDAO membership/ownership is designated through digital tokens denoted as DGD. The DigixDAO has released an initial supply 2000,000 tokens, each token divisible upto 9 decimal places. 

The initial release of 2,000,0000 DGD tokens will be distributed between members of public (85%) and Digix Developers (15%). Token ownership give holders voting rights, in some cases in proportion to their holding. All raised funds are maintained in Ether at a public Ethereum address.

Token holders receive rewards/return on investment in the form of a share of transaction fees in DGX (0.13% capped at 1 gm) collected from asset transactions on the Digix platform. Rewards are also promised for user referrals on the DigixCore platform and ecosystem.

All token holders receive rights to pledge for projects in proportion to their holdings. Token holders can pledge their preferences around different development projects. Funds will be allocated by project to prioritize and accelerate development of Digix Core a platform ecosystem around Digix such as wallets, exchange APIs, addition of blockchain partners and so on. Additional privileges are tokenized through badges such as founder and proposer. The former can submit proposals directly or for vetting, vet and pledge proposals. The latter is not allowed to submit proposals directly.

Like the Proof of Asset certificate for gold assets on the DGX platform, a project proposal with budget and timelines is maintained on Inter Planetary File System, IPFS. Members pledge for or reject proposals and accepted proposals (with 51% majority) get approved. Approved projects are allocated funds from a multi-sig DAO wallets which holds the raised ether. 

Participant Rewards 

DGD tokens represent ownership in the DigixDAO. Tokens can be traded using an Ethereum wallet.

Token golders receive quarterly rewards in the form of DGX tokens, the gold backed token representing 1 gm of physical gold, generated on the smart asset core platform. Fees are divided by the total number of DAO tokens (2000,000) and distributed to individual holders as pro-rated reward benefits in DGX.

To recap, a DGD token holder whose funds are denominated in ETH, will receive DGX tokens on a daily basis in their wallet. The DGX token value is tagged to the value of 1 gm of physical gold and divisible upto 4 places. 

Return on Investment and Risks

DigixDAO’s rewards model once understood is quite an attractive proposition. A one time investment in ether will provide perpetual return in the form of gold backed DGX tokens in proportion to the growth of the platform. The actual return on investment is subject to many market variables such as ether price, gold prices and transaction volume.

Digix has cited eGold, the first digital gold backed currency in the early Internet ecommerce era, which rose  to a $2 billion annual transaction volume at its peak. 

In a scenario described in DigixDAO’s whitepaper, a USD 2 million DGX transaction daily volume, which nets a 10,000 DGD token holder 125.3772 DGX (or 125 gms physical gold) in the course of a year. Other scenarios and related risks have been discussed in various forums. For example, this calculation/explanation below on reddit by Digix Global’s CEO. 

How DigixDAO nets returns in DGX: A discusssion thread on reddit.

If DigixCore ecosystem takes off likewise and DGX tokens become the gold backed currency for other decentralized apps on Ethereum, token holders stand to have a potential "gold mine" on their hands.

The greatest risk where the crowdsale investment borders on speculation, is that it is a yet to be proved model on an as the emerging Ethereum platform. Other risks include any future regulation around DAO as investment/ownership vehicles and tax treatment of rewards. These risks are  not limited to DigixDAO alone and are applicable to the emerging world of cryptocurrency and blockchain applications as in the case of Bitcoin.

Digix DAO Crowdsale

After the go live of the alpha version of Digix Core in January, Digix made a formal announcement in March on the first Digix DAO Crowdsale.

The DigixDAO crowdsale public contract address and purchase transactions on the Etherium blockchain

This was the first crowdsale built and executed entirely on chain. Investors sent in Ether using their Ethereum wallets to a public contract address on Ethereum blockchain. Payments were also accepted in BTC, altcoins and fiat currency through integration using ShapeShift API. The target $5.5 million was raised within twelve hours. 

The Digix crowdsale stats are available on the DAO sale website and crowdsale transactions can be viewed on the Ethereum blockchain. 

What’s Next for DigixDAO

Post the crowdsale Digix Global have started several public communications such as this latest update and have opened a public Slack channel as well.  DGX tokens will be distributed and open for trading on April 28, 2016 on decentralized cryptocurrency exchange OpenLedger. Post distribution, token holders will be able to pledge approval for priority projects and new proposals. 

Summary

The DigixDAO’s purpose and incentive mechanism can start a virtuous cycle for creating a strong payments ecosystem on DigixCore with the same disruptive potential of Bitcoin. Even though the DAO is a yet to be tested model on an emerging platform, the business idea behind Digix Core is sound and as old as gold.

Digix: The Gold Backed Smart Asset Platform On Ethereum Blockchain

Digix, a Singapore smart assets start-up has been in the news last week regarding the DigixDAO (Distributed Autonomous Organization) crowdsale that was a smash hit, raising over $ 5.5 million USD using 200,000 ether within twelve hours of launch.

Digix has followed a structured roadmap before getting to their successful DAO crowdsale. Their value proposition is to become the first smart asset ecosystem on Ethereum by tokenizing physical assets into fungible crypto-tokens that can be managed in a decentralized trustless construct. 

Using gold as an underlying asset, Digix has launched a smart asset platform, a digital token DGX and the Digital Autonomous Organization, making use of multiple decentralized platforms such as Bitcoin, Ethereum and IPFS (Inter Planetary File System).

In this two part series, we look at Digix Global’s offerings on the blockchain.

About DigixGlobal

DigixGlobal was founded in Singapore as a self funded firm by TH Chng, former chairman / CEO of Fujitsu Asia Pte Ltd and Kc Chng a currency trader.

In January 2015, months ahead of the Ethereum blockchain going live, co-founder Kc Chng announced on the Ethereum forum that their firm was building the first smart asset company on Ethereum. 

By the third quarter of 2015, Digix had announced a partnership with Coinify to create (gold backed) cryptoassets on the Ethereum blockchain using payments made with Bitcoin.

In January this year, Digix released their gold asset smart contracts platform and on the Ethereum blockchain. Digix also released a whitepaper on the solution and public releases on benefits of trading gold using the Digix solution. On April 5, the DigixDAO was launched and Digix have been in news since releasing their roadmap and outcomes of the sale which are expected end of April.

How Digix Works

Digix has described the smart asset platform in detail on their website and whitepaper. The platform consists of digital token, provenance record and smart contract processes to record asset history from acquisition to liquidation.

Proof of Asset

Digix maintains asset provenance on the Ethereum blockchain through a Proof of Asset certificate which is a digitally signed contract records (for more on provenance, see our article on blockchain use cases). The proof of asset card which is maintained on the blockchain is a secure record chain of custody of the underlying physical gold. A proof of asset certificate is a sequential record of digital signed transactions that mark acquisition from a vendor, receipt from custodian of the physical gold and periodic independent audit verification records. Digital certificates are stored on IPFS.

Digix Tokens (DGX)

Digix tokenizes physical assets using the Ethereum blockchain The physical asset be gold or other precious commodities, real estate and so on. The first Digix application tokenizes physical gold.

Digix tokens are tagged to physical gold. Each token represents 1g of physical gold and is further divisible upto 0.001g. This reduces the price volatility of tokens a problem of other cryptocoins.

The Digix client is an Ethereum wallet. Customers can purchase DGX tokens using bitcoins, ether or other currencies via an exchange. 

Digix Smart Contracts

Digix tokens are generated on the Ethereum blockchain through Smart Minter smart contract process, whereby POA certificates are generated in exchange for DGX tokens. A recast smart contract process is used to exchange POA certificates in DGX tokens.

A token based user identification process is used to redeem DGX tokens into physical gold.

Digix also provides generic I/O contracts which are intended for third party dapps and other applications to build an ecosystem around Digix, using the DGX tokens (such as a remittance system).

Decentralization

Digix uses the blockchain to remove centralization out of the equation. Instead, using the decentralized app, users can directly purchase gold using Digix GOLD tokens using the wallet apps. Digix facilitates the chain of custody ecosystem vendors, custodians and auditors to individually sign the proof of asset but uses peer to peer file systems and the decentralized blockchain to manage assets. Digix’s proposition is that they have no influence on the user assets. They act as intermediaries with agreements held on the public blockchain.

Digix's Role

Digix is the custodian of the smart asset management platform and receive compensation in the form of fees. Transaction fees include fees Smart Minter, Recast and a storage fee, as well as liquidation into physical gold bars.

Digix has taken a strategic approach which combines regulatory compliance, transparency and safety for customers. Digix requires KYC and AML compliance. They are headquartered in Singapore, known for its stable and investor friendly economic regime especially for gold assets. Their proof of asset partners are established players in the industry. Physical gold is held in the form of London Gold Bullion Market Association bars supplied by Value Max, a Singapore bullion vendor. Bureau Veritas Inspectorate is the auditor participant. Malca-Amit which is located in Singapore is the safe custodian.

Summary

Digix has the potential to become the killer app for Ethereum and smart asset management on the blockchain, testified by the investor interest in the crowdsale. Their strategic and transparent approach and choice of Ethereum as the smart contract platform can be a major competitive advantage (compare with Xaurum, the other gold backed cryptocoin on the Bitcoin blockchain).

In the next article, the DigixDAO.

Bitcoin News Capsule: Analysis of Ten Developments in Q1 2016

Bitcoin News Capsule: Ten Developments in 2016

In the fast moving world of cryptocurrencies, Bitcoin still dominates headlines. In this post, a quick round-up of events in the Bitcoin universe in the first quarter of 2016.

From the blockchain, markets, blocksize debates and node divisions, Bitcoin businesses, regulation and the competition we have tried to cover notable events across all. 

One: Bitcoin Ruled the Cryptocurrency Markets and Competition

2016 started well for cryptocurrency market with the total market cap reaching nearly $8 billion. Bitcoin ruled finishing with $6.4 billion market cap and 80% market share. Prices remained steady at $400 levels throughout the quarter starting at $433 on January 1 and ending at $417.

Source: Coin Dance

The first quarter also saw the emergence of Ethereum. Ethereum is growing in market cap and Ethereum dapps attract a lot of attention. Ethereum, as we saw in the article comparing the two, is the most serious competitor to Bitcoin but it is not a Bitcoin killer. 

Banks, FinTech and BigTech consortia continued a slew of announcements of successful tests on blockchain technology, partnerships and more, using Ripple and Ethereum. The only reason this is included here is the fact that of headlines include the word Bitcoin blockchain technology, such as this one from Wall Street Journal.

Maybe the Bitcoin tide is needed to float all blockchain boats.

Two: Business as usual at the Bitcoin blockchain

 

The blockchain height grew to by 10,000 blocks to over 400,000, minting 25 new coins per blocks. 

Bitcoins in circulation also grew by 400,000 with a total of 15.4 million BTC at the end of the quarter. Average block sizes have started reaching the 1 MB limits. The blockchain size is now approaching 70 GB. 

Source: Satoshi.info

Three: Blocksize Forks - Nodes divided between Core, Classic, XT and Unlimited

The blocksize limitation debate has fragmented the Bitcoin developer community, businesses and miners with different parties implementing their vision for an immediate and long term fix in a different fork. 

At end of  Q1 2016, nodes are running four different versions Core followed by Classic which between them, account for 94% nodes, followed by Bitcoin XT and Bitcoin Unlimited, at 3%. 

Source: Coin Dance

Will Core or Classic attain the supermajority for consensus? The answer may be evident next year.

Four: Bitcoin Classic Released 2MB hard fork

At least one code release came through with support for 2MB blocksizes. Bitcoin Classic, supported by former released a 2MB hard fork in February 2016. Classic is supported by former core/XT developer Gavin Andresen, businesses Coinbase, Circle, Bitstamp and Genesis mining.  

Five: Bitcoin Roundtable Consensus

Also in February 2016, the Bitcoin Roundtable Consensus was announced, following a meeting in Hong Kong  which was organized by BTC China COO Sam Mow and attended by Bitcoin Core developers and leading miners such as BitFury. 

The agreement in effect rules out any immediate changes, but laid out the proposed roadmap for Bitcoin Core releases. The agreement supports a gradual increase in blocksize, retaining the 1 MB limit at present, with SegWit option to handle block limits, a proposal to release to release code to support 4MB blocks in June 2016 and a hard fork based on majority consensus occurring twelve months further down the line in July 2017.

The news had a positive impact on the price of Bitcoin.

Six: More on Block Size: Satoshi Roundtable and Other Recommendations

The annual Satoshi Roundtable, a private invite event/retreat attending leading names in Bitcoin and cryptocoin industry followed at the end of February. The major slant of the event was towards having a concrete solution for blocksize, such as adopting Classic Release which is now available and having a fallback alternative to Bitcoin Core.

Blocksize and Core roadmap versus Classic was the dominant focus of some of the posts from Gavin Andresen and Brian Armstrong who were among the attendees. The Satoshi Roundtable also ended with members signing a pledge in support of respectful dialogue (on Bitcoin).  

Other recommendations for block size kept coming through the quarter. BitPay, have proposed a release that uses dynamic scalability. Academia also joined the debate. The Initiative for CryptoCurrencies and Contracts (IC3) at the Jacobs Technion-Cornell Institute, Cornwell , released a study that recommends a 4MB block size. 

Seven: Bitcoin in danger of Centralization?

Blockstream, the blockchain solutions startup founded by Bitcoin Core developers, has been at the centre of many debates, primarily around proposed changes (or not) to Bitcoin Core which effectively keeps block size and scalability to be handled via side chains aka Liquid. 

Coinbase CEO Brian Armstrong, remained vocal about his concerns cum opposition to the Core roadmap. Xapo, the Fort Knox of Bitcoin has also moved away from Core and Blockstream.

BTCC and Blockstream (naturally) are those who defend the Core roadmap as the necessary for evolution of Bitcoin as a long term scalable settlements platform.

Will business interests centralize and/or cannibalize Bitcoin for good? Time will tell.

Eight: Funding Bitcoin Development

MIT's Digital Currency Initiative announced that it was setting up a $900,000 Bitcoin Developer Fund raised from contributions from industry and individuals to support development of the Bitcoin protocol.

Bitcoin developers Gavin Andresen, Wladimir van der Laan, and Cory Fields are former Bitcoin core developers who were offered positions with the Digital Currency Initiative after the Bitcoin Foundation ran out of funds in April 2015. Although these developers are associated with the Classic version, the Foundation funds will be used to pay salaries and other expenses to support development on the Bitcoin protocol than any specific position or project.

Nine: Startup Woes - Two More Exchanges Meltdown

CoinTrader the second largest Canadian Bitcoin exchange and its parent company joined the list of exchanges that shut down overnight, without warning and blaming a hack. More bad news were in store for clients Cryptsy, which suspended trading in January. A Florida court has taken control over the exchange's assets and placed it in receivership.

Ten: Bitcoin and Lawmakers

In good news, Australia is planning to end double taxation treatment for Bitcoin, while New Hampshire in USA rejected a proposal to accept tax payments in Bitcoin.

In the USA, six after Circle became the first company to receive BitLicense from New York Department of Financial Services, it remains the only one. Other Bitcoin businesses that have applied for BitLicense are still awaiting approval.

Bitcoin is currently legal in 71 countries.

Summary of Bitcoin in Q1 2016

By Bitcoin standards, Q1 2016 has ended on a fairly mild note. The block size debate has momentarily receded from headlines although nodes are running as many as four different versions of Bitcoin. No pricing bubbles burst and anyone hoping for some negativity to dent the $400 price to bargain levels, was left disappointed. Two exchanges went belly up, a few more governments accepted Bitcoin, and, thanks to the blockchain hype, there is more love going around for Bitcoin.

The second quarter is bound to see some serious action as block rewards drop from 25 to 12.5 bitcoins around June. 

Ethereum Dapps Showcase: Peer to Peer Insurance Applications

A dashboard view of decentralized apps on Ethereum as published on State of the Dapps website.

In the early days of online marketplaces, online shopping for insurance changed the insurance company-agent-customer relationship forever. Buyers could compare quotes from multiple insurance companies online instead of going to an insurance agent. Online quote comparisons changed information asymmetry, the economic term made popular by the 2009 bestseller Freakonomics in favor of buyers. 

The end result was that the bargaining power of insurance buyers increased. The role of agents was diluted and insurance companies were forced to become more transparent about their premiums and and offer competitive pricing. Today, insurance exchanges are a norm worldwide and one of the enablers of Obamacare in the United States. 

Like the disruptive insurance exchanges, decentralized apps on the blockchain hope to solve other gaps that have been either too costly, or inefficient, or simply unprofitable in the insurance industry model. 

We look at two applications that will soon be rolled out on the Ethereum blockchain, intended for the uninsured and underserved customer segment, using the model of peer to peer insurance on the decentralized blockchain.

InsureETH: SMART FLIGHT INSURANCE

What if you bought insurance and needed it but never made a claim? Many air travellers have been through this experience. A travel insurance policy is an essential pre-requisite for the large segment of air travellers all over the world. 

Travel insurance policies cover a wide range of risks from flight delays, lost baggage to  overseas hospitalization. While the prospect of hospitalization away from home is a daunting enough incentive to buy travel insurance, only a small percentage of total travellers have actually taken ill and were required to claim medical benefits.

On the other hand, the most common event, flight delays and lost baggage, ends up with fewer claims than experiences. Fliers have to submit claims in a limited window and approval can take days. This is a distraction for frequent business travellers. If evidence such as ticket stubs are lost, claims can be denied. Because the inconvenience is temporary and usually at a moderate cost, most fliers forgo reimbursement they are entitled to, in spite of paying for coverage. 

InsurETH is a startup that aims to solve this problem using Ethereum. Their idea, a smart flight application, was an award winner in the Programmable Assets category at the 2015 Hack the Block London Blockathon. 

Source: InsureETH demo

Using the InsurETH application on the Ethereum blockchain, fliers can purchase flight delay insurance through an ether payment transaction. The premium payment is recorded as a smart contract transaction on the Ethereum blockchain.  If the event that is, a flight delay occurs, the flier receives the claim amounts as per the terms coded in the contract. 

InsurETH also shifts the burden of proof of the claim from the policy holder. The application sources public flight data feeds using Oraclize, the "provably honest" blockchain application to verify the claim event and automatically pays out the claim as per the conditions of coverage. Investors can also purchase (shares presumably) in the pool using ether. I assume the investor feature provides risk liquidity to the pool and returns based on pool performance which may be claims experience and investment returns.

InsurETH’s solution should see massive adoption for two reasons. It tackles head on, the real problem of lost premiums in the travel insurance business due unclaimed travel insurance as well as denials from airlines. It also allows unbundling of travel risks. For example, domestic travellers or short stay globetrotters are are more likely to need only this one coverage can purchase insurance at a lower premium than an umbrella type of policy that is more suited for vacationers. 

The InsurETH application is in work in progress status on dapps dashboards but a demo version is available online. 

DYNAMIS: PEER TO PEER UNEMPLOYMENT INSURANCE

Source: Dyamis Website which features in-depth coverage on the vision and implementation of peer to peer insurance

Dymanis is a start-up creating and promoting peer to peer insurance applications using the Ethreum blockchain based on a Decentralized Autonomous Organization (DAO) framework. The broader vision of Dynamis is to create a DAC owned by the policy holders who contribute to a risk pool, for supplemental or low value variety of insurance. 

The Dynamis application which is also under development, offers supplemental unemployment insurance in a peer to peer model. Participants apply to the pool and are accepted based on their social capital status (an example of a social capital indicator can be their online footprint and reputation derived from participation on social media platforms such as Facebook) . Participants themselves evaluate applications and claim payouts or source out to a Human Intelligence Task (HIT) pool paying in ether.

The burden of claim is shifted from the policy holder or participant to a provably honest trustless platform.  Social network LinkedIn is used as an oracle to help evaluators verify employment records and approve claims. Approved claims are paid out based on the terms of the contract.

The Dynamis smart contract also offers policyholders benefits similar to self-insured groups and that of mutual insurance companies in the United States. If there are fewer claims (favourable claims experience), the participants can also receive back a portion of their contribution. 

The Dynamis website features a detailed white paper, infographics and blog posts expanding on the implementation of DAC insurance company. 

A New Wave of Peer to Peer Insurance?

Decentralized apps for peer to peer insurance have several innovative features. The decentralized model is suitable for many self-insured, small groups and niches that may remain in the uninsured segment (the anti-selection or high risk category usually declined by insurance underwriters). 

The more attractive proposition is the claims automation by using a decentralized oracle platform. This shifts burden of claim from the insured and the one-sided power of adjudication from insurance company (the process to approve or deny claims or determine claim amount which may be below contract terms).

Decentralized insurance is a very interesting concept and one that has a long history of using available technology to create smart contracts. This is because the 2000 year old insurance is the one place where, in game theory terminology, there is incentive for all stakeholders to be dishonest than otherwise. 

We will explore the concept of peer to peer insurance on the blockchain in future articles.

Cryptocurrencies or Blockchains: Comparing Ethereum and Bitcoin

Introduction

In this continuing series on cryptocurrencies we compare Bitcoin with Ethereum, a blockchain platform with a minable crypto token called ether. At the outset, it should be clarified that Ethereum is not designed to work solely as another alt-chain or altcoin. It is also not designed to work only as a payments network, the purpose of Bitcoin. Simply put, Ethereum is a platform and not an application. So what is it for?

Ethereum is the first smart contracts blockchain that has been developed separately from Bitcoin. Ethereum is a blockchain platform for any type of digital smart contracts including digital payments. The Ethereum platform called Frontier is designed to enable building and execution of decentralized applications on the Ethereum blockchain. 

One way to understand this is from a Ripple point of view. Ripple's distributed ledger is a blockchain application and the cross currency exchange and account balances in Ripple transactions can be called a smart contract.

How Ethereum Works – A High Level Overview

For those familiar with Bitcoin and its history, the context of Ethereum and its design is easier to follow and even appreciate. This blog has a complete section on Bitcoin, for Bitcoin newbies. Ethereum has been in public consciousness since Vitalik Buterin’s whitepaper in 2013 and the 2014 crowdsale to fund development. Since the launch of the Ethereum blockchain in July 2015, new developments are reported on a daily basis. 

For purposes of this article, there is a short overview section before moving on to the comparison between Bitcoin and Ethereum. The Ethereum Frontier platform, distributed apps ecosystem and roadmap, will be covered in a separate series of posts. The Ethereum website and Github wiki are go to sources for complete information on Ethereum.

"Say Uncle": The Six Building Blocks of Ethereum. Ethereum's differentiator is the smart contracts language Solidity and EVM that enables decentralized applications to run on the blockchain. 

Smart Contracts Language: Solidity and Ethereum Virtual Machine

The first release of the Ethereum source code, called Frontier, created the genesis block went live in July 2015. Ethereum has a new blockchain with two major enhancements over Bitcoin. The first is a Turing complete programming language for smart contracts called Solidity that supports loops and conditions for contract transactions. Ethereum also includes a runtime Ethereum Virtual Machine or EVM, that executes Solidity bytecode on the blockchain. 

Dapps

Applications which implement the smart contracts in Ethereum are called decentralized applications or dapps. Decentralized applications are different from conventional distributed application architectures. An Ethereum smart contract will execute on all nodes that run the blockchain.

Ether

The digital tokens or coins in Ethereum are called ether.  Ether are used are crypto fuel or costs of transaction. Developers have to use ether to submit smart contract rules/code to the blockchain and users have to spend or burn ether to invoke transactions for an application. Transactions will roll back if they run out of gas (the amount of ether specified).  Ether can be traded against bitcoins and other fiat currencies via cryptocurrency exchanges.

Blockchain 

The Ethereum blockchain in other respects is analogous to the Bitcoin protocol. The blockchain is public and decentralized. New blocks are generated through a mining process. The current version requires full nodes to be downloaded for better security. Ethereum blocks are generated every 12 seconds with uncle blocks allowed to link to the main chain.

Ethereum transactions contain information about accounts and transaction state. Ethereum accounts consist of two types of account (external) user accounts and contract accounts. Contract accounts execute smart contract rules in the EVM. 

Six Differences Between Ethereum and Bitcoin

One: Application

Bitcoins are a cryptocurrency and bitcoins have a complete ecosystem of merchant, wallets, exchanges and payment processors that runs on top of the blockchain. Bitcoins can be used to make payments in the real world. Bitcoin is a decentralized peer to peer network. Two individuals anywhere in the world can exchange bitcoins directly from their wallets without using an exchange. 

Ethereum can be called the next generation of the Bitcoin protocol. The Ethereum blockchain distributed consensus provides for peer to peer contracts without a trusted third party. This has applications for every use case where there is an exchange of value between two parties under a binding agreement or a contract.  Two individuals or parties anywhere in the world can code a smart contract and execute it using ether without the need of a trusted third party. 

The Ethereum website highlights multiple use cases from building your own cryptocurrency to a decentralized autonomous company using Ethereum.  Several industry applications are live on the Ethereum blockchain. We have highlighted some examples such as the solar energy micro-grid in the article on use cases for blockchain applications. 

Two: Ownership

No one owns the Bitcoin platform 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. Bitcoin’s roadmap is driven by the developer and mining community. As the blocksize increase issue has demonstrated, the absence of public owner(ship) and decision making authority is a risk for Bitcoin.

The Ethereum platform is owned and the roadmap defined by the Ethereum foundation. The Ethereum source code is open source. There is also a growing developer and technology ecosystem that is actively involved in 

a) Creating developer tools and infrastructure for dapps e.g. Consensys. Microsoft Azure BAAS.

b) Building new releases Frontier, Homestead, Casper, Serenity through the Ethereum foundation.

c) Building smart contract applications for Ethereum.

d) Building tools such as blockchain explorers and interfaces for the Ethereum blockchain.

e) To a lesser extent, alt-coins forks from Ethereum. 

Three: Blockchain

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. Bitcoin uses SHA256 proof of work algorithm to add valid blocks to the network using consensus method. 

The Ethereum blockchain can be said to be based on the Bitcoin protocol. Ethereum improves upon the problems that Bitcoin blockchain has run into. Miners in the current version download and run the full node and solve proof of work algorithm. Consensus method is used to reward the longest chain. 

Ethereum’s 12 second block rate significantly increases the rate of orphan blocks and forks as well as reducing incentive for miners on a slow network which is handled by including uncle blocks. Ethereum uses an innovative concept of compensation by accepting stale blocks called uncle blocks on the blockchain.

Uncle blocks solve the proof of work but lag behind the winning block. A maximum of two uncle blocks are accepted on the main chain and compensated at a fraction of the main block reward. Uncle blocks should not have parents older than six blocks.

Four: Coins

Bitcoin is a cryptocurrency and payments network. Bitcoins are designed to be in finite supply and deflationary. 21 million bitcoins will be generated through a halving mining block reward. As on April 2016,  15.3 million bitcoins have been mined and the block reward is 25 bitcoins. All bitcoins have been generated through mining.

Ether is the digital token used in Ethereum. Around 72 million ether were pre-mined and distributed through a crowdfunding sale in exchange for bitcoins to launch Ethereum platform development in 2014.  After the Frontier platform went live, Ether are generated as mining block rewards. As on April 2016, there are 78.7 million ether in supply.

Five ether are generated in the form mining reward for new blocks, with five ether per block and uncle blocks are compensated at 7/8th of the block reward or 4.375 ether with a maximum 2 uncles per block which implies a new block confirmation can produce a maximum of 13.75 ether.

Although, the supply of ether is not capped, a final issuance model appears to be under development. The current supply of ether is generated through block rewards.

Five: Mining

Bitcoins are generated by the miners when new blocks are added. Bitcoin uses SHA 256 proof of work method. Bitcoin’s increasing centralization due to high costs of ASIC mining, increased difficulty in proof of work, debates on energy consumed are some of the issues that have emerged as the currency has gone mainstream into public and institutional consciousness. 

Ethereum mining has tried to address the issues that have surfaced with Bitcoin mining. Because ether are not intended as cryptocurrency, there is no limitation on ether mining or changing the block reward. The current Frontier release uses Ethash proof of work algorithm which is ASIC resistant and memory hard. The proof of work is planned to be replaced with proof of stake in the next release.

Six: Market Value

As first mover, Bitcoin rules markets with a $4oo average value and a $6.5 billion market capitalization in 2016. Starting with a near zero market cap, Bitcoin has followed the path of natural evolution and set the stage for other crypto-platforms to follow. Bitcoin’s value is driven by its design properties as digital money (fungible, portable, scarce, divisible etc.). 

Ether has registered the highest growth in market cap starting at $1 USD in August 2015 on launch, and increasing tenfold in value trading at 1 billion or $11 USD in 2016. As the Ethereum protocol takes off, this value will increase based on the intrinsic value of blockchain companies and a potential “dapps economy” running on Ethereum. 

Summary

When comparing Bitcoin and Ethereum, it should be clear that they are not competing systems. Bitcoin can be considered the first successful implementation of a smart contracts platform that makes use of the decentralized nature of the Internet and digital cryptography to enforce contracts between human actors that previously required a trusted third party or intermediary.

As Ethereum matures, it is likely benefit Bitcoin which can go back to its original vision of a peer to peer digital cash payment network. Ethereum may become the defacto standard or protocol for decentralized public or private applications with the same advantages as the Internet and the rise of cheap computing. The Ethereum blockchain has the potential to disrupt many industries that are based on intermediary or arbitrator models. 

While Bitcoin is a public system, Ethereum needs a critical mass of smart contract applications to be feasible. Network security, scalability and using a decentralized datastore is a major paradigm shift to the closed world of technology where the Internet acts as a transport connecting closed application systems.

The evolution and developments of these platforms will be very exciting to watch in the coming months.