Background: The Blockchain Revolution
Vopy is a high-tech company who delivers groundbreaking solutions, many of them patented. The company is now developing a revolutionary new blockchain, the STEM / SEED Protocol.
We asked our CTO Zane Dawood to give us deeper insight into the rationale behind this decision.
Background: The Blockchain Revolution
In 2008, the Bitcoin white paper was published, introducing the world to blockchain computing — the technology which has the capacity to facilitate the secure, rapid and transparent exchange of value without the need for third parties, in the same way the Internet enables the secure, rapid and decentralized exchange of information through its networks.
Blockchain technology enables individuals and corporations to freely and rapidly transact with one another regardless of geographic constraints. Smart contracts, stored on blockchain technology, reduce transaction costs associated with traditional contracts and offer exciting new opportunities for innovation in supply chain and risk management by creating agreements that are self-executing.
On the blockchain ecosystem, digital tokens can represent two types of assets: fungible assets, where every digital token is identical and interchangeable like a currency; non-fungible assets, where each token is unique and therefore be utilized to represent scarce and non-interchangeable assets.
Digital tokens can present new global payment methods for hard assets such as metal and other commodities, as well as secure, track and store information on the production and supply of finite resources and traded through new digital and borderless marketplaces.
This tokenized approach enables the purchase, delivery and trading of hard assets to become more cost efficient with less reliance on third parties and existing banking systems, which in turn reduces overall systemic risks and ensures a more predictable long-term growth.
Despite the advent of blockchain innovation and infinite benefits it brings to users, the untapped potentials of cryptocurrency as a means of payment is locked in a seesaw battle between privacy and transparency, fungibility and traceability, speedy versus highly secured transaction which give rise to multi-faceted problems.
The Problem
One of the most prominent benefit of cryptocurrency is being able to cope with different forms of transaction across the world without any hassle; however, the unsatisfactory transaction speed, the loss associated with all-time high volatility and transaction fee, coupled with the poorly-thought-out architecture made the transaction of goods and services impractical.
Inadequate Transaction Speeds
As cryptocurrencies continue their rise in popularity, it is the critical time to discuss whether these digital coins have the potential of becoming the new mainstream mode of payment and creating added-value in facilitating B2B transactions. According to the latest statistics compiled by howmuch.net1, traditional payment networks like Visa can process up to 24,000 TPS compared to an average of 20 and 7 TPS if the same transaction is made with Ethereum and Bitcoin respectively.
Although e-commerce businesses are gradually being integrated into the domain of cryptocurrency, the nature of the crypto-payments protocol has yet to be proven as an efficient payment solution for mass transactions due to the following constraints:
Delays caused by a lack of hash power
According to the data retrieved from Crush Crypto Weekly2, on 12th of November 2017, there was a significant shift of mining power from Bitcoin to Bitcoin Cash given the higher profit the latter can provide to its miner, and hence it takes longer for Bitcoin blockchain to process the transaction with the diminishing hash power.
Delays caused by a lengthy verification process
To avoid any fatal cryptocurrency attacks ranging from “51% attacks” to “Finney attack”, it takes up to 6 confirmations of the respective blocks to ensure the safety of the transaction.
Delays caused by limited capacities
With the restriction caused by the block size limit of 1MB for Bitcoin, there is a limit to the number of transactions that can be confirmed at once, making it less efficient than mainstream payment methods.
At the end of 2017, statistics show that more than 200,000 transactions sit unconfirmed in the Bitcoin mempool despite the high transaction costs users are willing to pay. Hence, speeding up the payment process will be essential to the future of cryptocurrency to meet the increasing demand of internal and external transactions, or else, it cannot compete with other instant payment platforms.
High Volatility
The inconsistent rise and fall in the price of Bitcoin and other cryptocurrencies have been very problematic and makes them unfavourable as a medium of exchange. The price of Bitcoin fluctuated from USD$ 17,000 at its highest to USD$ 14,000 at its lowest. Hence, the fluctuation of cryptocurrency cannot match up to the stability of fiats to facilitate the transaction of goods and services.
High Fees for Micro-transactions
Much of everyday life is made up of micro-transactions. Despite the intention of crypto function as “Digital Cash”, it is not cost-effective for an average person conduct a small transaction like payment for a cup of coffee via the Bitcoin network as one would be subjected to increasingly higher transaction fees.
The concept can be illustrated in the following analogy: a fixed amount of 5 BTCs is charged per transaction regardless the value of goods and services. In this scenario, a transaction fee only accounts for 0.5% of an item which costs $1000 but up to 50% of a $10 purchase. Therefore, the disproportionally-high Bitcoin transaction cost is not favorable for micro-transactions.
However, the Bitcoin transaction fee rises and falls in response to the network transaction volume despite its uniform charge to goods at all values. Therefore, during a busy network day, buyers are subjected to higher transaction costs to incentivize mining. This further discourages micro-transactions in the Bitcoin network.
Incompatibility of Proposed Architecture with Existing Payment Gateway
While cryptocurrency showcases blockchain’s fundamental versatility, many crypto-based companies do not build a strong and appropriate architecture to support the existing operational system, which leads to poorly-established product with low usability and accessibility to facilitate value transaction.
Imperfect Market Product
There are three critical stages a crypto product has to go through in order to prove its feasibility and executive capacity in its target market:
1. Proof-of-Concept (POC);
2. Prototype; and
3. Minimum Viable Product (MVP)
However, statistically, it is rare for a new crypto innovation to satisfactorily present a complex idea in a desired product and be fully implemented in a ready market to endusers. As a result, many do not manage to get past the prototype stage. II.
Misconfigured Consensus Protocol (POW requires excessive time)
While Bitcoin and other cryptocurrencies have been classified as fast and reliable means of exchange which create ideal platforms needed for fast transactions, many crypto networks fail to identify corresponding consensus mechanisms to process the transactions efficiently.
If Proof-of-Work (POW) is applied to confirm transactions, it takes an average rate of 10 minutes for block formations. The complexity of algorithms varies depending on the total power of the network, which may further lengthen the transaction time and fee as it requires additional manpower to mine and arrange blocks.
Vulnerable Bitcoin Wallet Design
Cryptocurrency participants rely on hot and cold wallets to keep their assets safe while performing transactions. However, hackers can utilize the design flaws of both wallets and end up with irreversible and irrecoverable loss of assets of crypto users.
The biggest hack in the history is the $530M+ heist of XEM currency in January 2018. Coincheck3, a Japan-based currency exchange, was susceptible to large scale hack due to its insecure hot wallet infrastructure without the precautionary ground of multi-signature private keys and hence paved the way for hackers to unlock the digital wallet with a single private key.
On the other hand, cold wallets are easily exposed to MITM attack as a malware can replace the code responsible for generating the receiver’s address as its own address for money transferal. The problem was further reinforced by a report generated by Ledger in February 2018 addressing its high vulnerability .
Low Accessibility
Despite tech-savvy enthusiasts talking about cryptocurrency in the technology sector, only 8 % of Americans have engaged in cryptocurrencies activities.
The path to its mainstream adoption in today’s world is principally restricted to:
1. Complicated cryptocurrency system which requires users to equip themselves with adequate knowledge and conduct their own due diligence
2. Lack of industry standards to legitimise cryptocurrency exchanges which prevent participants from partaking in the highly unsecure crypto platforms
3. Low liquidity in the form of insufficient market participants on both buy and sell sides and limited exchanges available, which lead to low traded volumes
Conclusion
Despite a myriad of functionalities embedded in Bitcoin technology and its infinite potential to be applied on all forms of transaction, the “store of value” in Bitcoin is still far from scalability, bound to its high cost and lengthy duration, weak infrastructure and vulnerabilities.
With no proven technologies and consensus algorithm, a highly efficient and secure transaction cannot be achieved.