Fast, decentralized, and secure, the distributed ledger system known as a blockchain is taking the financial world by storm. Even global financial powerhouse JP Morgan Chase & Co. has taken notice:
— J.P. Morgan (@jpmorgan) August 1, 2016
The blockchain was pioneered by pseudonymous Bitcoin creator Satoshi Nakamoto. Many consider it to be one of the most significant breakthroughs in computer science in decades.
But is it actually, well, fast? Bitcoin's block time is approximately 10 minutes, but during times of heavy network congestion, the Bitcoin network can take an hour or longer to settle funds.
Newcomer Ethereum, which some see as a potential rival to the Bitcoin network, may soon have subsecond confirmation times thanks to a next generation technology built for it called the Raiden Network. We spoke with Raiden creator and CEO/founder of brainbot technologies, Heiko Hees, to learn more:
In your IBT interview, you suggested to the reporter Ethereum may be better suited for fast off chain payments than Bitcoin, why is that?
First of all, Bitcoin is not ready yet. They need to fork to fix the transaction malleability issue. Currently no one knows if and when this will happen. Also Raiden supports any (ERC20 compatible) token that is defined on Ethereum. We'll see many different tokens like AppCoins, reward points, reputation points, stable coins, even fiat money pegged coins on Ethereum.
Another improvement over Bitcoin Lightning are "smart transfers", i.e. transfers which only execute if a certain condition on-chain is satisfied. It basically extends the smart contract capabilities to the Raiden network allowing for advanced off-chain based applications like, betting or financial derivatives.
What other applications or use cases could you see emerging from such fast and cheap transfers. Are any game designers, banks, etc looking at off chain, specifically, to speed things up?
Basically all blockchain based applications that want to scale to real world usage will benefit from Raiden. It can be used for applications like asset trading in gaming or finance, retail payments, micropayments for content (think the next YouTube or Spotify where creators are directly paid for every second consumed). But it's also suitable as an infrastructure for cheaper, faster and more secure correspondent banking. Especially the upcoming machine-to-machine economy will likely use blockchain as an easy to integrate permissionless infrastructure. Some expected applications of Raiden here will be decentralized energy trading, on-demand payments for bandwidth, API-access, sensor data or access to property and infrastructure.
One last question, what are the security implications? From a layman's viewpoint, how is Raiden keeping everything secure until it gets reconciled on the main chain?
It works by having deposits in a smart contract on the blockchain which are used to transfer tokens according to what the participants of a channel signed as updated balances off-chain. This is secure as long as a node is online and can monitor the channel, so that it does not get closed with wrong (i.e. old) signatures provided by the other node in the channel. But challenging invalid settlement information can easily be delegated to a third party without having to trust it with the funds. Off-chain multihop transfers (which are needed as there usually is no direct channel between sender and receiver) are secured by using so called hashlocks. In a transfer Alice to Charlie where Bob is in the middle and needed to help facilitate the transfer, this prevents Bob from running away with the funds sent by Alice.
There is one known attack vector which is spamming the blockchain with transactions so that an invalid settlement can not be challenged. This can be mitigated by having an Oracle contract which would signal if a there was an attack, and settlement timeouts would be increased to deal with the attack.
Thanks for your time. You can all watch Heiko Hees present Raiden in the video clip below from Ethereum Devcon1:
Disclosure: At time of publication, I hold some bitcoin, ether, gold and U.S. dollars in my long term portfolio.