Bitcoin vs 2.0 platforms for assets

Monday 26 September 2016

Using the bitcoin blockchain for other purposes is a little like cleaning your ears with a biro lid. People do it, but it’s not what it’s designed for and some people view it with distaste.

Pen lid

Pen lids and bitcoin. Both designed for one thing. Both so apparently versatile.

You can use bitcoin for a lot of things besides sending money. Bitcoin was designed for transferring value peer-to-peer online, and it’s really good at it. The size and strength of the network means there’s no solution more secure for doing what it does. But it wasn’t designed for some of the other purposes to which it’s put - such as sending messages and encoding information that represents other assets like securities on the blockchain. There are pros and cons to doing that.

CounterParty is one such protocol, and it works relatively well. I like the idea of ‘riding on top of’ bitcoin, as they put it. But my overall feeling is that such 2.0 functionality should take place on a 2.0 platform that is expressly designed for the purpose.

Advantages of using bitcoin for 2.0 transactions

The major reason for using bitcoin’s protocol is security. Bitcoin has been around for years, the network is protected by massive hashrate and there’s a give confidence that comes with that. Any transaction secured on the bitcoin network will be, well, secure.

It’s a big attraction given the catastrophic consequences of a successful attack - effectively destroying not only the information your blockchain holds, but all confidence in it at the same time. However, it’s a chicken and egg problem: other protocols won’t have the security if no one uses them because bitcoin is the secure solution. And there are other issues to contend with.

Disadvantages of using bitcoin for 2.0 transactions

Among the disadvantages are the lack of flexibility of the bitcoin protocol. Sometimes bitcoiners level the criticism that submitting non-bitcoin transfers unnecessarily bloats the blockchain - an odd argument, really, if you’re looking for bitcoin adoption. CounterParty counter-argue

99%+ of Counterparty transactions utilize a data encoding method called OP_RETURN, which is fully “prunable”, meaning that the data may be safely discarded by Bitcoin nodes which wish to do so. For the remaining 1% of transactions, an different encoding method is utilized that produces fully “spendable” outputs. These outputs do not stick around in the critical list of unspent outputs (the “UTXO set”).
On top of this, every Counterparty transaction pays a fair fee to the network for inclusion.

Which seems pretty fair. And there’s no way to stop people doing it anyway. So.

A worse problem is the lack of space within each transaction. OP_RETURN allows you to store just 80 bytes. It’s limited - a strong case for using a purpose-designed blockchain that doesn’t force you to do what you need to in 80 bytes. In terms of arbitrary messages, even Twitter allows you 140 characters.

Then there’s the blocktime question. If you use bitcoin, you’re reliant on bitcoin’s 10-minute blocks - on a good day. You’re also vulnerable to spam attacks and bitcoin transactions backing up, delaying your transfers.

The bottom line for me is that while you can use bitcoin for 2.0 transactions, it’s sub-optimal. You can cut your lawn with nail scissors. You can write a novel with a can of paint on the motorway. But there are better options that make life a lot easier for you.

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