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. 

Life On A Wrist: Five Use Cases for the Smartwatch

More than a fashionable smartphone accessory? Smartwatch and wrist wearable technologies  are converging in use cases for security, senior healthcare, child safety and docomotion.

Introduction

Year 2015 ended with a phenomenal increase in smartwatch sales led by Apple Watch. Although the market  forecasts remained upbeat in the first quarter of 2016, cutbacks such as Pebble’s staff layoffs and Apple’s $50 reduction in Apple Watch pricing have started waning the enthusiasm. Like any emerging products, industry sentiments on the the three year old smartwatch fluctuates almost daily between short term fad versus a future necessity.

It may be a safer bet to say smartwatches are here to stay. What is likely to happen is a convergence of many wearable uses cases being adapted into a smartwatch. Like smartphones which became more than just telephony (and that is understating it!), smartwatches will come to represent many different applications of electronic wrist wearables.

The use of a smartwatch as a wrist strapped mobile device has variety of applications in everyday consumer and industry use cases where hands-free and/or gesture based communication is required.

In this article we look at the five quietly evolving use cases and value additions of the smartwatch.

Between them, they represent a bright future for the technology as the platforms improve and developers and consumers find innovative applications for the watch.

Use Case 1: Insuring Smartphones from Physical Damage

As smartphones continue to grow bigger in size and price, smartwatches will provide value as a safer and more convenient accessory. Smartphone losses alone make a solid case for smartwatches. Sample some of the statistics reported on lost smartphones. In 2013, Consumer Reports Group estimated that a combined 4.5 million phones were lost or stolen. Dropping phones (into undesirable places) is a major cause of damage. A majority of people were willing to spend equal or more than the cost of the phone to recover stolen phones. When Apple introduced kill switches for the iPhone, an expert estimated the industry would save $34 billion. Mobile insurance premiums offered for theft or damage can cost almost as much as the phone $650 premium including deductible for an iPhone 6s. (Sources: Consumer Reports, CNET, Wired).

Peace of mind on smartphone whereabouts? With a paired smartwatch, smartphone loss and damage statistics might just improve.

Image: A composite from Consumer Reports and Visual.ly. 

By using a smartwatch as wrist accessory, the incidents of leaving smartphones can decrease. In fact a smartwatch accessory can be used to lower the underwriting risk and premium of an insured smartphone.

Use Case 2: Senior Care and Emergency Assistance

Wrist tags indicating serious health conditions and emergency measures are commonly used by sufferers of chronic ailments of all age groups and by seniors living alone. A smartwatch app can enhance this capability. For example, the app can use in built GPS functions to locate nearby hospitals or send location information. Users can use the voice control to look up information, send notifications or alter emergency services automatically in case of an incident. The smartwatch fitness sensors can continue to provide health indicators such as heart rate. By combining timing and alert functions, with Internet access and health sensors, it is possible for users to keep track of critical health indicators such as heart rate and take prompt remedial measures in case of an emergency. The fitness apps monitor health parameters and can retain history in the cloud. If sensors detect readings exceeding a threshold the app can prompt users to take the necessary action such as taking a required medication in a prescribed time limit. Apps can also send notifications to take additional action such as asking users to stop driving, alerting emergency contacts or notifying emergency services.

Lively, a smartwatch for senior citizens provides many such functions. The watch is waterproof and can be used in a bath or shower. An emergency button dials for assistance when needed. The watch communicates with other wellness sensors such as pillbox and food monitoring sensors in the home and sends notifications to users and designated family members.

The Lively smartwatch is specially designed for seniors living alone

Use Case 3: Child Safety

Smartwatches designed for kids are really built for the safety use case for concerned parents. This range of smartwatches provide time keeping as well as location tracking, walkie-talkie and GPS functions to enable parents to monitor the child’s location, receive alerts when they move out of designated safe areas or get in touch using call or voicemail functions. These wrist wearables let parents and their children stay remotely connected when away or in crowded public areas such as malls, amusement parks or airports.

FiLIP and Jumpy are two start-ups that make smartwatches designed for location tracking and call functions using GPS and GSM technologies. The Filip smartwatch is actually described on their website as a wearable phone and locator. The device does not pair with a connected smartphone, instead it works as a locator and sends notifications to a companion app on the parent’s smartphone using their patented technology that combines GPS, GSM and Wi-Fi triangulation.

FiLIP and Jumpy smartwatches feature child friendly designs and combine GSM/GPS capabilities to provide calling and location tracking functions for parents.

Use Case 4: Remote Control

The consumer electronic/IoT industry is grappling with the problem of basket of remotes for a long time. Smart home device management comes equipped with mobile apps that work as remote controls and control centers of smart home devices from TVs and thermostats to garages and entry doors. The smartwatch can perform the remote activation function allowing users to perform actions through gestures or wrist motions. Pebble watch users have built apps to open garage doors, while Apple Watch  has a growing list of apps from leading smart home automation companies that perform functions from security access to controlling connected devices.

Home automation management through remote control apps. Apple Watch app from alarm.com is available on iTunes (left) and (right) a universal remote control app extention on Google Play for Sony smartwatch on Android Wear.

Samsung is building remote management capabilities integrating SmartThings automation into the Tizen OS which powers the Gear smartwatches and Samsung’s new line of smart home entertainment TVs and appliances.

A major concern in this area is the security vulnerabilities in the current range of smartwatches themselves although one can expect future versions will have improved security features.

Use Case 5: Access Control

From public transportation to accessing secured areas in building, a smartwatch access app can be a convenient replacement to the smartphone. A smartwatch can also replace handheld magnetic strip cards such as in office building and hotel room keys, allowing gesture based access without having to pull out a card or smartphone. Similarly, a smartwatch security access can allow photo ids or unique personal identifier such as fingerprints to be stored on the watch instead of a card.

Biometric identification is also a possibility using in built health sensors. Samsung has recently received a patent for a biometric access enabling feature. Samsung’s patent envisions using a unique vein image of a wearer to unlock the watch. This can also have potential use to authenticate access to a home or car in future. FiDELYS is another venture that announced designs in 2014 for a smartwatch that can provide biometric security using iris detection technology.

Samsung's patent for a biometric access mechanism using vein signature (left) and (right) FiDELYS proposed smartwatch design that uses iris scan technology.

These use cases and more are indicators of the future of the smartwatch industries. Like smartphone, smartwatches will eventually come to mean wrist wearables that will have a very wide spectrum of applications from notifications and payments of today to the intelligent voice assistant of the future. To reiterate what we observed in the first post in this series covering the industry landscape, technology companies will ultimately shape the future of this domain.

Smartwatch Comparison Guide: The Six Key Components of a Smartwatch from Case to Glass

Introduction

A smartwatch crams in a lot of features in one and a half square inches of space at an affordable price. The wear on the wrist feels like a conventional watch or better. Smartwatches pack in notifications via smartphone communication, an array of sensors from health monitors to GPS, capability to run apps and personalization through interactive watch faces all delivered in through interactive high resolution display technology. This does come at some loss of convenience that is a given with regular timekeeping watches. Battery life is a major issue that is still to find a satisfactory answer.

This article breaks down key components that go into making a smartwatch. While not intended to be a full technical teardown (iFixit has wonderfully detailed technical teardowns of major models described with style and aplomb), it hopefully gives some context to the features used to advertise these new best selling wearables.

The Six (or Seven) Key Features (excluding price)

From case to glass these are the components that go into the building of a smartwatch.

Case

The case is the watch container. Watch cases come in stainless steel, the standard for most watches, aluminium steel, gold at the high end and plastic in budget watches.  Case design dictates the watch shape. Cases come in square and round shapes with some design contours and profiles. For example, Pebble watch features a curved profile that fits better on the wearer’s wrist.

The case also includes watch band (or strap) attachment, ports for internal built in microphone and speakers for voice control (if included) and user navigation controls such as buttons or bezels on the side. 

Bands (or Straps if you prefer)

Bands attach to the watch case and come in standard 16 mm, 20 mm and 22 mm sizes. The preferred band material matches their conventional counterparts and are available in leather, leather steel, elastomer materials. Flexible silicone bands are preferred for outdoor and sport watches. Smartwatches allow user personalization options through watch faces, providing more than one band to match the watch face. A quick release feature is provided in some brands such as Apple Watch to allow users to change bands securely without using tools.

Battery

Battery could be the number one reason that smartwatches do not succeed in taking over the conventional watch industry. From the 18-hour life for all day use of Apple Watch to 7 days for Pebble watches that use e-Paper technology, battery is dependent largely on the application usage and display (in general, the smarter the watch, the more power it consumes).  

Smartwatches generally feature sealed cases with enclosed industry standard rechargeable lithium ion polymer batteries. Smartwatches rely on wireless induction charging eliminating use of pin technology or ports on a limited surface area. Instead of contact charging,  a magnetic connector or port at the back of the case charges the battery through an internal induction coil when connected to a charging dock.

To lower user exasperation of having to look at a battery drained or switched off display, most watches switch to power saving mode, conserving batteries only to tell the time, a display feature known as “always on”.

Processing Unit

The smarts in the smartwatch are thanks to the processing circuit that includes an integrated processor (ARM processors are the most commonly used), flash storage, wireless interfaces and sensors. The watch software - the operating system, system applications and pre-loaded apps are included with some additional space for user apps and personalization. The smartwatch platform determines compatibility with the host smartphone. 

As we saw in the previous article on the industry, smartwatch lines can support connectivity to Android or iOS phones. Wireless interfaces include Bluetooth connectivity, wi-fi 802.11 and NFC (Apple Watch features NFC allowing mobile payments using Apple Pay). Recent smartwatch editions such as Samsung Gear S2 also include a SIM for 3G connectivity. 

Sensors are a key part of the smartwatch processing hardware. On board sensors can include motion detectors, ambient light sensors and notification sensors (for vibration or audio notifications from phone, when watch is out of wireless range etc.). Fitness tracking sensors can range from pedometers, accelerometers, heart rate monitor and motion detectors. GPS sensors include inbuilt gyrometers, GPS and compass.

Navigation

While most smartwatches feature touch screen displays for user interaction, it is not the only interface. Smartwatches support other forms of navigation, allowing users to scroll and switch between different applications. 

Because watches have small surface area, smart watch makers have turned to innovative ways – from the Digital Crown in Apple Watch, the rotating bezel in Samsung Gear and tactile buttons in Pebble Watch. These controls function similar to the smartphone buttons, which allow users to perform functions such as returning to home screen, using the camera and scrolling through menus. 

Display

Displays are a major selling feature of smartwatches, where, in a limited 400 x 400 pixel area, usability in all environments and battery conservation trump high definition needs. Display screens vary from AMOLED (active-matrix organic light emitting diode) displays which are at the high end, displaying full-color screen and illuminate individual pixels. OLED technology displays allow the same options but support single and multi-color screens as well. Other display technologies include LCD backlit displays and e-ink displays that use less battery and enable viewing in outdoor environments such as in bright sunlight.

Touch screen displays enable users to interact with tap or swipe or pressure touch which brings up more menu or app access options on the watch.

To conserve battery life, some smartwatches turn off the display like a smartphone. Others watches have an “always on” feature where the display shows time like a regular watch instead of coming to life on notifications or user activation.  

Glass

The cover of the watch is made of fortified glass to handle daily use. Chemically strengthened Gorilla Glass or naturally resistant material such as sapphire and sapphire onyx which are known for their scratch resistant and durability features are used in most smartwatches.

This article was a high level overview of the building blocks of a smartwatch. Many comparison and buying guides on manufacturer sites, review sites and shopping sites will feature the highlights and specifications of these components (such as this comparison from gizmag).

In the next article in the series on smart wearables, we will cover uses cases for the smartwatch.

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.

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. 

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.