Category: Bitcoin

3 types of decentralised exchanges

On By mehranmuslimiblogIn Bitcoin, Blockchain, EthereumLeave a comment

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Cryptocurrencies are making steady progress in the traditional financial system. Their ascendance shines a spotlight on exchanges where people trade crypto assets and a number of them have been found wanting, due to a ‘single point of failure’ that allows hacks to occur.

The solution is decentralised exchanges (DEX), because this type of exchange allows users to keep control of their funds throughout the trading procedure. As might be expected there is more than one type of decentralised exchange to choose from, and there are three formats that are considered the most likely to be the exchange models of the future.

At the moment, decentralised exchanges are being developed in three modes:

  1. On-chain order books and settlements
  2. Off-chain order books with on-chain settlement
  3. Smart contract-managed reserves

On-chain order books and settlements

These are entirely blockchain based and are really the first generation model. With this DEX, every new order or adjustment to an existing order updates the state of the blockchain.

What’s the problem with this type of DEX?

Although it protects user privacy and security this form of DEX makes exchanges illiquid, slow, expensive and unable to operate with other DEX.

Off-chain order books and on-chain settlement

The Ox protocol is good example of this model. It is built on the Ethereum blockchain’s solution for off-chain orders. Execution of the trades happens on the Ethereum blockchain,which means users have control of their funds until the exchange takes place. The order books are hosted by a third party called Relayers. This enables the exchange to maintain liquidity and create a more robust infrastructure for traders. For example, after submitting an order to the Relayer, a market maker waits for an order to be filled, at which point the trade is trustlessly executed on the blockchain.

Smart contract-managed reserves

This model connects the buyer and seller function when there is low liquidity. With smart contract-managed reserves, instead of having to find a buyer for the bitcoin, a user can trade with an external reserve, depositing bitcoin into the reserve and receiving ether in return. Bancor is an example of this model.

Although the existing decentralised exchanges need work to bring them up to a comparable speed with the traditional centralised exchanges, there are several innovative entrepreneurs working on finding the best solutions, and hopefully we will see them next year, if not in 2018.

 

The case for decentralisation

On By mehranmuslimiblogIn Bitcoin, Blockchain, FintechLeave a comment

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Centralisation came in the second phase of Internet development. In the first phase of the web, Internet services were built on open protocols, but by the time of the new millennium this was rapidly changing to centralised platforms. Firms like Google and Amazon, Facebook and Apple (GAFA) designed software that outpaced the open protocols, and once smartphones arrived, the trend picked up speed.

The centralisation effect

What then happened is that startups found it much harder to grow their businesses online, because of the dominance of centralised platforms that could change the rules at any moment and take away the newcomers’ audience. Innovation has been stifled and the Internet environment is less dynamic because of it. Furthermore, centralisation has aided the rise of fake news and the numerous debates over privacy and biased algorithms.

One response to centralisation might be to impose government regulation on the largest Internet companies, but the problem here is that the web is software based, which means the networks can be redesigned to exploit market forces. So, this type of solution is not of much benefit.

Decentralisation is the answer

Cryptonetworks are a decentralised solution. They are governed by communities and have the potential to outperform centralised platforms.  The reason they are an answer is that they behave in a different way to those platforms that are centralised. For example, when a  centralised platform starts up they do everything they can to recruit users and third-parties like developers, businesses, and media organisations to give the service added value. Facebook is a good example of this. As platforms like this move up the adoption S-curve, their power over users and third parties steadily grows. Again, look at Facebook.

Cryptonetworks operate in a very different way. These decentralised networks “ use consensus mechanisms such as blockchains to maintain and update state, 2) use cryptocurrencies (coins/tokens) to incentivize consensus participants (miners/validators) and other network participants,” as Chris Dixon suggests.

Other advantages are that they also stay neutral as they grow, and use open source protocols, whereas centralised platforms use a ‘bait and switch’ approach. Users have a voice via the community that governs the decentralised network and users work together towards a common goal – community growth and strengthening the token’s value.

Ultimately, the question of whether decentralized or centralized systems will win the third era of the Internet depends on who is going to build the most compelling products. The entrepreneurs working on decentralised platforms are up against the strong cash flow of Google etc, but on the other hand they also have a growing fan base that will provide robust support.  Decentralisation also provides a more level playing field for third-party developers and businesses, and that could well be one of its biggest advantages.

 

 

 

A tale of two Canadas

On By mehranmuslimiblogIn Big Data, Bitcoin, FintechLeave a comment

As someone who grew up and was educated in Canada, even though I no longer live there, I’m always keen to keep up with what’s happening. So, I was fascinated to read this article by Trenton Paul, a tech enthusiast, on the gap between Toronto and Quebec. He describes Toronto as being all set to become the country’s first smart city, while Quebec has been overrun by bitcoin miners, which appears to be to the detriment of the city. He puts forward an interesting theory — that Canada can’t find a balance when it comes to implementing new technology.

In Quebec, he takes us on a brief tour of an old factory that is now owned by Bitfarms, one of North America’s largest cryptocurrency mining operations. Here there are 7,000 machines doing the same repetitious task, and their number is expected to double this summer. Fans whirr everywhere trying to keep the machines cool and he describes the working conditions as akin to “working in an IT sauna.” He points out that maintaining this process uses up more energy than the nearby Montreal Canadiens’ hockey arena. And, the local energy company Hydro-Quebec has been trying to attract more mining operations to the city, and the mining operations have been flocking there.

What’s the problem in Quebec?

Quite simply this: the number of applications from mining firms wanting to set up in Quebec could potentially make the city a global hub for crypto mining, which sounds great, until you realise that if all of them were in full operation they could cause the collapse of the electricity supply to the Quebec region.

Bitcoin miners also prefer to use clean energy, which means they avoid countries like the U.S. and China where fossil fuels are in wider use. Hydro-Quebec promises that mining operations there are fuelled by hydroelectric power and that the power used for the mining companies is “surplus” — an extra 100 terawatts of low-impact energy. The problem is this, as Trenton Paul says: “as demand grows and more energy is needed to power these machines, the power supply available will not be able to sustain much longer.”

Some joined up thinking is needed

Meanwhile in Toronto, city officials are getting ready to promote it as the country’s first smart city, with Alphabet’s subsidiary Sidewalk Labs planning a timeline for building a smart complex.

As we are still in the early days of this technological ‘gold rush’, it is impossible to say how this will all pan out to Canada’s benefit, but what is clearly required is a ‘One Canada’ policy that brings balance to the implementation of new technology and offers some sound, joined up thinking.

Why you need a decentralised identity

On By mehranmuslimiblogIn Bitcoin, BlockchainLeave a comment

We have all been warned about identity theft. Even the big banks like Barclays are running TV ad campaigns showing customers how a phone call that seems to legitimately come from your bank can be used to steal your online banking pin number. There is plenty of information out there about how to keep your details safe, but no matter what precautions we take, there are always bad actors out there (this is now a ‘polite’ way of referring to people who are nothing more than criminals) who are relentless in their search for new ways to access our private information.

Tomislav Markovski, writing on Medium tells a story about how he nearly became the victim of bank fraud when he rented a property. After providing every possible kind of document to the real estate agent, including bank statements and investment portfolio details, he received a call from his bank a few days after he had moved in saying that someone wanted to cash a large check drawn on his account. Markovski knew he didn’t have that much money in is account, but the bank then told him that “he” had made a transfer from his savings account by phone. Of course, he’d made no such call, and thanks to his bank calling when they did, the theft was stopped. But, as he says, it was a “masterfully crafted plan that involved just four key steps”

1. Call the bank pretending to be Markovski

2. Change his phone number (to confirm large withdrawal)

3. Transfer all his savings into his current account

4. Have a fake cheque made and present it to the bank for withdrawal

They were able to do this because they had access to all the necessary information on him, including his social security number. They couldn’t catch the scammer, but it made Markovski think about why so much information was required to rent an apartment and why are we still relying on physical documents.

Blockchain has a solution — decentralised identity

Blockchain technology is opening up a range of possibilities to prevent this kind of crime and decentralised identity could be the way forward. As Markovski says, decentralised identity is “publicly discoverable identity information.” It uses blockchain technology to provide tamper-evident information about an entity or a subject and “allows a model of truth to be established between parties that rely on communication and exchange of data.”

There are already a few platforms working on this, including Civic, uPort and Sovrin. As Markovski says: “Decentralized identity platforms will change the current broken identity system that relies on numerous online services requiring us to remember passwords for each of them. They can help us protect our personal information and allow us to control how this data is shared.”

Until these platforms gain mass adoption — be careful out there!