Today, technological progress occurs so rapidly that innovations which once seemed to set a new standard — think Betamax, VHS, and even DVD — have become a mere footnote. This same trend may or may not continue when it comes to digital transactions and cryptocurrency. Using new technologies, consumers can quickly and easily make purchases using bitcoins or Ethereum tokens (known as ether). Cryptocurrency offers several advantages, such as increased security and mobility, but the emergence of several different cryptocurrencies and transaction processes has added a complexity that could be blunting market acceptance.
What Are Bitcoin and Ethereum?
Introduced in 2008, Bitcoin has steadily grown in popularity and value. The value of one bitcoin was about equal to $5,590 on October 13, 2017 at 3pm Pacific time. And Bitcoin seems to have reached some level of market acceptance as well, with major online retailers like Overstock.com and Expedia now accepting Bitcoin transactions.
Despite — or perhaps because of — Bitcoin’s success, competition has surfaced. Ethereum, developed in 2014, relies on a decentralized platform to handle digital currency transactions. Worth less than a bitcoin, one Ethereum token, or ether, was about $340 on October 13, 2017 at 3pm Pacific time. There are currently 94.5 million ether in circulation, and major corporations, such as Microsoft, now support the cryptocurrency.
A Basic Look at Blockchain Cryptocurrency Transactions
Bitcoin and Ethereum transactions are built on variations of a shared global infrastructure called blockchain. Developers can use blockchain to create markets, move funds according to contract stipulations, and store debt registries. This peer-to-peer network allows direct transactions to occur between individual entities, and blockchain also provides increased security against unauthorized access to funds.
Blockchain combines private and public cryptography with a distributed network; digital transactions occur through secure digital identity references defined by the owners of cryptographic keys. The interaction between public and private keys creates the consent and authentication (using a digital signature) needed to approve a transaction. Permissions involved with the digital signature also establish ownership for the transaction.
The size of each blockchain network affects its security: when a transaction occurs, groups of validators simultaneously indicate that an authenticated and approved transaction has taken place using mathematical algorithms. The output from the execution of the algorithms produces a computed “hash,” and comparing the computed value to a known hash value ensures the integrity of the data.
Designed by the National Security Agency, the Secure Hash Algorithm for cryptographic transactions produces the signature for a text or data file. An SHA-256 algorithm generates a unique 256-bit signature. In turn, each hash-per-second represents the number of SHA-256 computations performed per second. To place all of this into perspective, 3,500,000 trillion hashes per second (TH/s) secure one bitcoin, while 12.5 TH/s secure an ether.
When a Bitcoin transaction occurs, one entity uses a private key to send and attach a cryptocurrency amount to another public key. The Bitcoin blockchain generates a block that contains the digital signature, a timestamp, and information about the transaction, then the block is broadcast to all nodes in the network. A blockchain contains specific protocols that govern the creation of new blocks as well as rules for verifying each transaction.
The network limits transactions to unique ownership so that one bitcoin cannot participate in more than one transaction. To ensure fraud does not occur, each network node creates and maintains a transaction register that lists a shared history of transactions.
Ethereum transactions take a slightly different approach to blockchain that includes fund as well as contract transactions. With Ethereum, developers use Turing-complete programming to write programs that achieve flexibility by using blockchains that control and automate outcomes. Using this approach, Ethereum developers can build applications or agreements that provide services independent of money.
The resulting smart contracts allow entities to set new rules for ownership, use different formats for transactions, and establish different methods for transferring assets. The nodes in an Ethereum network store the current state of these smart contracts as well as all ether transactions, and algorithms track the balance and the smart contract code. The execution of a contract occurs at each node through an Ethereum virtual machine that uses stack-based bytecode language.
Gettting to Widespread Retail Acceptance
The very complexity that ensures cryptocurrency authentication while preventing fraud, thus gaining some acceptance, may be precisely what is inhibiting even wider spread retail acceptance. As the number of transactions grows, blockchain networks lose speed. Complexity also results in higher transaction costs. While these factors may not negatively impact large or bulk purchases, the combination of slower transaction speeds and higher transaction fees potentially makes cryptocurrency a poor fit for small retail transactions.
Varying levels of cryptocurrency acceptance by national governments also impacts market acceptance. While the U.S. House of Representatives passed a nonbinding resolution that supports digital currencies and blockchain technologies, China recently rejected sales and currency conversions that occur through cryptocurrency. In April 2017, two major Japanese retailers opted to accept Bitcoin payments after Japan formally recognized Bitcoin as a method of payment. More than 5,000 stores and websites in Japan now accept Bitcoin, with others slated to join the digital currency movement soon.
There are clear legal and technical hurdles that constrict cryptocurrencies in becoming completely ubiquitous for now, but these hurdles seem very surmountable over time. With all the momentum built up so far, we’re very optimistic about the future of cryptocurrency.