Cryptocurrency trading has been on the rise with people realizing a new way of making money compared to more orthodox methods like currency pairs, CDFs and commodities. We at Elite CurrenSea are naturally curious about where this will take the trading community, which is why we are keeping a close eye on the crypto-market.
We start our journey by analysing Ethereum scalability as a platform for smart contracts (ICO) and Payment Transactions (Ethereum currency). The Ethereum blockchain network had a slowdown which was caused by, bear with us here, Crypto Kitties, which is a digital cats phenomenon built on Ethereum Network. It slowed down the network by as much as 15% recently.
First, there are some core terms that you’d need to understand before we address the issue of Ethereum scalability through. Feel free to skip this part if you are familiar with these concepts.
Ethereum: Second biggest cryptocurrency that offers additional functionality to traditional blockchain technology by introducing smart contracts – a way for users to build on top of the main blockchain.
Smart Contract: Most of the cryptocurrencies like Bitcoin support them, however Ethereum offers a more advanced approach and relies on smart-contracts to be a distinguishing characteristic of the coin. Ethereum Smart contracts allow developers to go beyond currency use-cases and can also:
- Function as ‘multi-signature’ accounts, so that funds are spent only when a required percentage of people agree
- Manage agreements between users, say, if one buys insurance from the other
- Store information about an application, such as domain registration information or membership records.
You can learn more about from a more technical community here. Our goal is to analyse risks and benefits of underlying assets, while providing thought on how to invest/not invest in these markets.
Initial Coin Offering (ICO) was given birth by the introduction of smart contracts and currently numerous new business start-ups which are monetising through the Ethereum Network. In that sense ICO’s are like IPO’s, where new tech allows companies to forgo complicated technical IPO processes (as well as numerous legal-roadblocks), while essentially getting a similar result: obtaining money for the company from the public.
Crypto kitties is a smart app/game which utilizes a digital asset in a form of cartoon kitties/cats and it is based on the Ethereum blockchain in which the users purchase computer-generated cats and breeds them. It was developed to increase the number of Ethereum transactions by making the Ethereum cryptocurrency more accessible. Traders are able to directly interact with the Ethereum blockchain without the need of Initial Coin Offering (ICO), which would be taking up a lot of space.
What was Ethereum Blockchain Slow Down About?
Since we got some of basic terminology out of the way, let’s talk about how and why some “crypto cats” extravaganza can negatively impact (network slowdown) such a sophisticated technology.
Recently, the number of unconfirmed Ethereum transactions have surpassed 30,000 in a single day, which is mostly due to high traffic caused by crypto kitties. Some say it’s a progress for Ethereum in general because it shows yet another way the tech can be utilised. However, a lot of users were concerned, primarily due to their transactions being slowed down by forces beyond their control. After all, a slower blockchain means delays with pay-outs for ICOs, higher transactions fees, and slower peer-to-peer transactions.
Crypto Kitties success was underestimated by everyone, so the excess amount of people, who have turned up to participate in the crypto kittie auction, overloaded the network so much that the other users were affected greatly as well.
How to fix similar problems
To solve the problem with pending transactions and the reduced rate of carrying out transactions, developers have introduced several technologies including the raidEX and the Raiden network for Ethereum. Both the raidEX and Raiden networks help in improving the performance of the Ethereum blockchain.
Raiden network was derived from the Lightning network which is a micropayment system being developed for Bitcoin to quicken the transactions. Therefore, both Lightning and Raiden are networks designed to make transactions in the respective blockchains work faster.
The Raiden is actually a scaling solution which operates off-chain thus making it possible for almost free scalable payments. It helps compliment the Ethereum blockchain and works with any token that is compatible with ERC20.
On the other hand, raidEX is a decentralized exchange which is based on Ethereum and the Raiden Network. It helps leverage interactions with tokens and apps, such as the Crypto Kitties, which are found in the Ethereum ecosystem.
So, how does Raiden really work?
Let us suppose that David and Kate want to interact using Raiden.
To start with, David and Kate will have to open an off-chain payment channel by organizing for a smart contract.
Then, they both have to invest some form of security/cash deposit in the organized smart contract.
Now, if David decides to send Kate 4 tokens, then David will just have to sign the message as “4” and send it to Kate. At that point, Kate will have proof that David sent 4 tokens to her.
If David still wants to send an additional 2 tokens, she will just have to update the state of the message to “6”. This shows that the message shows the current and previous transaction.
When Kate wants to redeem the tokens sent by David, she will just have to close the blockchain and the channel and she will automatically get the 6 tokens sent from David.
The information is relayed on the blockchain. However, the only information displayed is that Kate received 6 tokens from David. The multiple transactions made aren’t indicated; only the final is reflected.
Benefits of using Raiden
Some of the benefits which Raiden has brought to the Ethereum blockchain include:
- Raiden transfers are very fast. They are actually as fast as sending a text message. When you receive a signed Raiden transfer, you are certain that you now own the exchanged value.
- The transfer fees in the Raiden network are very low compared to the chain. You only pay for the final settlement of the private payment channel (either the peer-to-peer or machine-to-machine) rather than paying for the global consensus of the transaction.
- Even if you compare Raiden technology to Master Card it wins by a lot in both speed and cost, while also security-wise it promises a superior solution.
- According to developer, using Raiden, the payee, payer and nodes are accorded with the benefit of conducting their transactions in a secure environment so that they can settle their transfers off the main chain before getting to the public blockchain.
Is Bitcoin Also Vulnerable to “Crypto-kitty” Effect?
Since Bitcoin Smart Contracts are not designed to be used as smart contracts, the crypto kitties are only an issue for the Ethereum blockchain. However, while Bitcoin is safe from the crypto-kitty effect by now – it might be missing out on the smart-contract functionality in a long run to remain dominant in the crypto-currency world.
Final Thoughts: What’s Next for Ethereum Blockchain Technology and Overload?
From what it seems, the crypto kitties are a very vulnerable form of unintentional viral attack and it only requires one hit to bring them down. The issue with Crypto kitties, however, is a great example of how vulnerable and unexplored Crypto is at the moment.
For now, Ethereum developer’s plan for the Raiden solution would solve the scalability issue , so then users would be able to make off-chain transactions before going to the main network. Raiden is still being worked on and currently offers developers a way to participate in “hunting bugs”. Meanwhile, Ethereum price bounced back, indicating that community and traders have faith in the future solution and will keep working on Ethereum for better day-to-day practical and less practical products.
WIsh you good trading,
Elite CurrenSea team