Will Ethereum Beat Bitcoin to Mainstream Microtransactions?

Micropayments have long been one of the most hotly-anticipated use cases for bitcoin, but similar tech may be coming soon to Ethereum, the decentralized blockchain network that has recently rejuvenated outside interest in the cryptocurrency space.

While payments that cost fractions of a cent have historically been prohibitive on the Internet, supporters of the use case believe it could one day enable everything from alternative ways of paying for art and journalism to promoting tipping on social media.

Market observers have forecasted that there could also be a lucrative market for the businesses that enable this future. Financial services firm Wedbush Securities, for example, has predicted bitcoin micropayments could be a $925bn market by 2025.

One of the earliest projects seeking to use the Ethereum platform for micropayments is Raiden Network, spearheaded by developer Heiko Hees, founder and CEO of Brainbot, a German-based smart contract and blockchain consulting company.

Hees believes the Ethereum network could prove to be the biggest enabler of micropayments, and that such transactions would cost less than they would on the bitcoin blockchain and be settled faster. A common annoyance for users of bitcoin, is that blocks on the network take 10 minutes to be processed, and to complicate matters, the standard practice by those who use the blockchain is to wait six confirmations until considering such transactions settled.

Ethereum, by contrast, has set its target on 12-second block times (though current block times are closer to 15 seconds), presenting perhaps the most notable possible solution.

But, Hees doesn't exactly see consumers interacting with micropayments. Rather, he is about machine-to-machine asset transfers, where machines, whether factory machines or drones, are the ones transferring value.

Hees called this ability a "building block" of the Internet of Things and offered the example whereby a machine could purchase resources, like the temperature in another room, based on predefined instructions. The vision is by no means unusual, even for an industry prone to big ideas.

Bitcoin's best-funded startup, 21 Inc, has been heavily focused on machine-to-machine payments, recently revealing Sensor21, a proof-of-concept for how machines could use its platform to buy and sell data related to the weather.

"This can spawn a whole new economy if you allow these very tiny transfers," he said, adding:

"Machines will do many, many transactions – probably more transactions than humans will ever do."

Scaling up

And then there’s the "future of blockchain architecture" consideration.

The Raiden network, when implemented, might help boost overall capacity of Ethereum. Hees said that Raiden network and will scale up the Ethereum network from 25 transactions per second to more than 1 million transactions per second. And Raiden Network aims to increase the availability other powerful Ethereum abilities, including some types of smart contracts.

If you talk to most decentralized currency enthusiasts, bringing the technology to more people is a huge priority. But blockchains can’t currently support the transactions of millions of people – bitcoin and Ethereum support seven and 25 per second respectively, while Visa can support 45,000 – and this limitation with public blockchain networks has become more widely understood with bitcoin’s divisive block size debate.

Every node on the bitcoin and Ethereum networks, which are today run by everyday users, keeps a record of all transactions made in order to verify new transactions. The more transactions, the more cumbersome it is to run a node.

In bitcoin, a proposal called the Lightning Network has become a popular suggested fix since the white paper was released in February 2015 by developers Joseph Poon and Thaddeus Dryja.

Lightning-style, off-chain transactions could make decentralized money easier to use and bring the technology's capabilities closer to how users were told it was "supposed to be" – fast and nearly limitless in supply, while still maintaining decentralization, a feature that distinguishes bitcoin and Ethereum from other digital payment methods.

According to this vision, most transactions will be made "off-chain," lifting the burden from the underlying blockchain.

The reason that this works, in theory (since the technology is not yet live, some developers speculate that it could become too centralized in practice), is that either party can kick the transaction back to the blockchain anytime they want, thus giving both parties the ability to end the interaction.

Of course, Ethereum and bitcoin are different beasts. Ethereum is branded as "the world computer", and is often associated with the ambitious goal of enabling the "total decentralization" of the Internet. It’s a flexible system that supports smart contracts and a range of experimental, decentralized applications, including an uncensorable Twitter and Augur, a project that wants to decentralize prediction markets.

Still, even though the technology is different, scalability limitations still apply.

Ethereum plans to transition from proof-of-work to a proof-of-stake consensus algorithm, which could help with scalability. But some developers question its level of security.

Ethereum creator Vitalik Buterin grappled with this problem in a series of blog posts and a white paper, suggesting a variety of methods, such as "hypercubes" to help the system support more people.

Ethereum's advantages

These scaling issues aside, Hees said that Raiden's implementation on Ethereum borrows many of the techniques from Lightning Network but that implementing them will be easier on Ethereum.

"It’s rather complex to implement on bitcoin because you have to use the limited features that bitcoin provides in its crypto language. In Ethereum, regarding the deposits on the blockchain and settlement contracts, that’s pretty straightforward," he said.

This opinion is shared by other Ethereum-minded developers, including blogger Robert McCone who has argued that the Raiden network could live "within" Ethereum, rather than on top of the network, like in bitcoin, thus reducing complexity.

Raiden network uses two-way micropayment channels so that users can update the transaction amount in both directions.

This would mean you don’t need to connect users directly to their buddy or a barista using a payment channel, because they can "chain channels," or send the payment through a network of middlemen until it reaches the recipient.

Intermediaries can’t steal the money because of a trick called Hashed TimeLock Contracts, as described in the Lightning Network paper.

Hees explained:

“If you transfer from Alice to Bob to Charlie, what prevents Bob from running away with the money is Alice would hash lock the transfer to Bob with a secret and Bob could only claim that amount on the blockchain if Alice reveals the secret. But Alice will not reveal the secret until she learns that Charlie receives the transfer from Bob. Transfers are locked and cannot be settled on the blockchain until the secret is.”

For providing the service, each hop in the chain of channels will receive a small transaction fee before it reaches the recipient.

And there might be other potential benefits of an off-chain network.

Hees, for example, highlighted that Raiden-type tech is a bright opportunity for privacy, a value long consistent with developers in the blockchain industry.

"But if you have off-chain transactions then it’s not obvious that you’re sending to some other party. You’re sending directly to another party without involving a global ledger recalling all these transactions," he said.

Once Raiden network is set up, Hees thinks that a decentralized exchange of different assets, where users don’t need to hand over funds to an intermediary, will come naturally.

Hees plans to unveil a prototype of the network in the next three months.

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