Architecture Differences in Virtual Currencies
Bitcoin continues to receive the majority of attention in the virtual currency space. Originally designed as a means of payment, many view bitcoin as a place to store value and the virtual currency experienced price increases of over 1,400% in 2017. The trusted nature of bitcoin is based on the fact that each bitcoin transaction is immutably recorded on bitcoin’s public blockchain, validated by a network participant, and this validation is proven to every participant in the network by a mathematically verifiable “proof-of-work.” Other virtual currencies have not tied their design to a permissionless blockchain architecture like bitcoin and have realized competitive advantages over bitcoin for certain functions. For example, Ripple maintains a network that enables transactions in Ripple’s virtual currency, XRP. Transactions in XRP do not require validation to be proven to every other node in Ripple’s network. Rather, each participating node in the Ripple network is free to select the other participants it has decided to trust, and such trusted participants are granted permission to validate transactions. A transaction is validated when a super majority of trusted participants relevant to the transaction have voted to accept the transaction. Validated transactions are then added to Ripple’s record of transactions (distributed ledger), which is stored on each node in the Ripple network. Eliminating the need to demonstrate “proof-of-work” to every other network participant significantly increases the speed of transaction confirmation. Currently, Ripple’s distributed ledger confirms a transaction in approximately 5-10 seconds, whereas bitcoin confirmations are averaging 44 minutes and have taken over 48 hours in the last few days. In addition to speed, permissioned architectures, such as Ripple’s, have proven more suitable to certain real world contexts. For example, Ripple is increasingly seeing adoption among financial institutions where participants have significant legal obligations to know the identity of their counterparties for the purposes of detecting fraud and money laundering. Real world functionality has also been a major driver in the value of virtual currencies. Indeed, for as much as bitcoin’s price increase was celebrated last year, it was Ripple’s XRP that had the most successful growth in 2017, with a net price increase of 3,800%. For more information concerning virtual currencies and how they can impact your business, please contact Andrew Wichmann.