Distributed Ledger Technologies (part II)

Distributed Ledger Technologies

The Blockchain and the Bitcoin have already been live for a decade.

We are reviewing in this set of articles the caracteristics of the Blockchain, the changes made to the Blockchain, the alternative distributed ledgers to the Blockchain, the difficulties to run financial services on a distributed ledger without a legal tender.

This second part explains which changes have been made to the Blockchain.

Part II: Changes made to the Blockchain

As explained in the first article, to modify the software that runs the Blockchain, a majority of the computing power that used to generate the Proof of Work must be persuaded to change for the new version of the software.

The Blockchain is often presented as a faultless system that has been running without difficulties for the past ten years.

There is a page1 that records many vulnerabilities of the system according to the version of the software that is used. Some changes are important to security but are not substantial. Others are coming as improvement to the global system are require an update of users of the Blockchain. For instance, the Bitcoin Improvement Proposal (BIP) 342 was introduced and completely rolled out. It has a clause that states that if 95% of miners have switched to the new verison, the remaining 5% are rejected unless they switch version.

Forks

Some new versions of the Blockchain software have been introduced without a complete switch of miners. In this process, from a given date and time, the registry of transactions run at the same time with the old version and the new version, resulting in two registries and in two coins, the older Bitcoin and an Alternative Bitcoin, or Altcoin.

This process called a fork has now happened many times with the Bitcoin generating coins like Bitcoin XT, Bitcoin Classic, Bitcoin Cash, the previously mentioned Bitcoin Gold, SegWit, Bitcoin private, United Bitcoin, Bitcoin Unlimited, Bitcoin Diamond, and many others are planned.

It seems obvious that the initiators of these forks who want to introduce a new feature do not necessarily intend to switch all miners from one chain to theirs but they would like to benefit from the Bitcoin notoriety to launch their improved coin.

So, as a Bitcoin holder on a given day, you might become also the owner of an Altcoin on the next day. In the equity world, this would be called a demerger operation which is allocating the value of the demerged company to the two spin-off companies. In the cryptocurrency world, as there is no intrinsic value of the coins, so Altcoins may have a value of its own without impacting the initial coin value.

If some Altcoin designers expect to overtake the Bitcoin as they are introducing an incremental technical improvement, it seems that miners were not really convinced by the changes. The AltBitcoins need to gain credibility and support from miners rapidly if they intend to surpass the Bitcoin.

Unless they use a different mecanism than Proof of Work to guarantee Immutability, these AltCoins may more easily be subject to a majority attack. This has happened to the Bitcoin Gold just mentioned in May 2018.

Some other coins, like Namecoin, have reused the Blockchain technology which is open-source without leveraging the existing transaction database and the existing users of the Bitcoin and have launched independently with a slight alteration of source code. They can be considered as an independent fork.

Ethereum, the sandbox

It is possible to introduce a different technology and infrastructure to launch a completely new coin, rather than an offspring of an existing coin. This is exactly what Ethereum has done in 2014, launching from a modified Blockchain code.

The main feature of the Ethereum platform is the capability to run scripts. It is important to note that the founders of the platform are still defining it as an evolving prototype, rather than an industrial product.

Running scripts give the capability to launch token, rather than coins, or to write contracts on the ethereum platform. The first difficulty is to write scripts that are flawless. Because the platform is natively open, anyone may take advantage of a script flaw and ruins a project, just like it happened with the DAO project that lost 50 millions American Dollars.

Standards for these tokens have emerged, so that users know in advance what to expect. The Ethereum Request for Comment (ERC) is used to publish standards. The ERC-20 is the definition of a token with basic functionalities, the ERC-223 is an upgrade of the previous one with a functionality to avoid to lose tokens, the ERC-721 defines a standard in which all tokens are unique and non-fungible. It is used to digitally represent unique items.

Many tokens have been today launched on the Ethereum framework as this is exactly the purpose of Ethereum. When using the ethereum platform, you must pay a small fee based on the amount of computer usage of your script using the ether, which is the coin of the ethereum platform.

<continue to part III>

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