Making sense of the Blockchain ecosystem

Between 2009 and 2014, Bitcoin caught the public’s attention as the first viable and widely used cryptocurrency. In 2014 the world started to take an interest in the Blockchain (with capital “B”), the underlying distributed ledger used to securely record the Bitcoin transactions. Recently we reached a hype peak, hearing about blockchains (with an “s”) or distributed ledgers for everything. The news are all about Ethereum, Ripple, R3CEV, Digital Asset Holdings (DAH), Hyperledger, etc.

In order to make sense of the distributed ledger ecosystem, let’s make it simple and split it into three high-level categories:

  • Bitcoin Blockchain ecosystem: the systems built over the Blockchain
  • Alternative cryptocurrencies: currency-oriented distributed ledgers designed to compete with Bitcoin as a value exchange system
  • Business distributed ledgers: business-oriented distributed ledgers designed to enhance the capabilities of the Blockchain as a trust system

I will now detail each category, including lists of examples (non-exhaustive).

A. Bitcoin Blockchain ecosystem

  1. The Bitcoin Blockchain allows peer to peer exchanges of units of value in a secure way. The system is public (everyone has access to the history of transactions), permissionless (anyone can join the network), pseudonymous (a secure address is used as identity) and uses a “proof-of-work” consensus protocol to validate the transactions. The system itself ensures the trust between participants through cryptographic mechanisms, in a fully decentralized architecture (no need for a trusted central third-party, all nodes can participate in the validation of the transactions). Bitcoin network effect is key: in a permissionless environment, a large network ensures trust and security, and thus supports the increase of the cryptocurrency value, hence the growth of the network etc. (virtuous circle). Today Bitcoin represents the equivalent of $6.5B of capitalization and a network of ~6500 active nodes.
  2. Colored coins are systems that use Bitcoin scripting language to store small amounts of metadata on the Blockchain, allowing managing real “off-platform” assets on top of the Blockchain. Examples: ChromaWay, Open Assets by Coinprism, Colu Coloredcoins and CoinSpark by Coin Sciences. Counterparty and Omni (previously Mastercoin) use similar principles, but involve also their own tokens.
  3. Sidechains are alternative ledgers that are linked to the Blockchain via a two-way peg. They allow leveraging the Blockchain network while running distributed ledgers with specific features. Example: Blockstream Liquid
  4. Anchored chains are permissioned distributed ledgers that submit hashes of their block headers to the permissionless Bitcoin Blockchain, for auditability and immutability reasons. Example: Factom maintains permanent, time-stamped records of business data in its own permissioned distributed ledger (using a “Factoid” token). It regularly hashes its own transaction data into the Blockchain.
  5. Specialized chains
    Rootstock is a platform allowing to run smart contracts (automated programs that can execute the terms of any contract) on top of the Blockchain. Abra and Align Commerce offer payments and remittance services over Bitcoin Blockchain (it is transparent for the user that only manipulates fiat currencies). Lightning Network aims to build a payment clearing network that will settle on the Blockchain (white paper in progress).

 

B. Alternative cryptocurrencies

Alternative cryptocurrencies have been developed to overcome some limitations of Bitcoin. They are all based on permissionless distributed ledgers. Some use different cryptographic algorithms, different consensus protocols, or inflationary models. All claim to bring additional features, but so far none of them has become a serious competitor to Bitcoin in terms of network and capitalization.

Namecoin can store data and be used as decentralized DNS, and Emercoin also offer a distributed trusted storage service (note: Emercoin has partnered with Microsoft Azure BaaS).

The following systems offer enhanced services over a public distributed ledger, they use a token but are non-mineable: Bitshares (delegated proof of stake), Nxt (~220 nodes, proof of stake), NEM (~100 nodes, proof of importance).

C. Business blockchains

  1. Smart contracts
    Ethereum is the second largest permissionless distributed ledger (~$500M capitalization and ~3000 nodes) behind Bitcoin. Smart contracts are programmed using a Turing complete scripting language and stored on the distributed ledger; any Ethereum node can independently verify their inputs and execution. Eris and Tendermint offer a suite of tools to build smart contracts, they are ledger agnostic.
  2. Payments
    Ripple offers real-time gross settlement, remittance and currency exchange services. It is a permissionless system but not fully decentralized: specific participants in the network are given a validation role. Ripple XRP token is pre-mined (100B XRP) and the consensus protocol is proprietary.
    Stellar offer payments and remittance services. Started as a fork of Ripple, it uses a different consensus protocol and an inflationary currency. Stellar is a non-profit organization targeting individuals rather than businesses.
  3. Distributed ledgers frameworks provide toolkits to build permissioned distributed ledgers for specific business use-cases: Multichain (Coin Sciences), Bankchain (itBit), Setl, Bloq, Epiphyte, Symbiont, Clearmatics, Openchain (Coinprism), Blockstack (DAH), Chain, Microsoft Azure BaaS
  4. Consortiums aim to define the future standards for certain distributed ledger use-cases: R3CEV, Hyperledger (Linux Foundation, IBM, DAH…), Interledger (W3C, Ripple), Post Trade Distributed Ledger, Global Payments Innovation Initiative (Swift…). It is not clear yet what will come out of these efforts.

Finally, Financial Institutions themselves (banks, market exchanges, service providers, regulators, etc.) are also exploring distributed ledgers individually (Nasdaq “Linq”, JP Morgan “Juno”, etc.), using existing frameworks.

In this post I presented a simplified view of the ecosystem, but as we can see it is already very diversified! The distributed ledger technology is still emergent; use-cases are being explored generating high expectations. The ecosystem is evolving quickly and will probably change significantly in the next months.

Tagged with:

Leave a Reply

Your email address will not be published. Required fields are marked *