As the name seems to clearly suggest, a Bitcoin Improvement Proposal (BIP) is a standard that has been devised to help in the alteration of BTCs core protocol. However, in a few notable cases BIPs have even served as a source for crucial information for the Bitcoin community at large.

From a more technical standpoint, we can see that the aforementioned proposals seek to facilitate certain consensus-based critical changes (such as soft and hard forks) as well as usher in other modifications related to Bitcoin’s peer-to-peer layer and seed framework. With that being said, it needs to be made abundantly clear that not every change made via a Bitcoin software implementation has a direct effect on the core BTC protocol. In this regard, we can see that certain changes that are routinely put forth by independent developers do not require a BIP to be accepted by the community at large.

Origins

When looking at the back story of how the first Bitcoin Improvement Proposal (BIP) came to be, we can see that the first such proposal was introduced by an early crypto dev named Amir Taaki, who is widely credited as being the creator of the world’s first alternative implementation of the Bitcoin protocol — Libbitcoin.

According to a blog released by Taaki around a decade back, he made it abundantly clear that BIPs, if used correctly, has the potential to greatly benefit the overall development of Bitcoin (by making the cryptocurrency’s native ecosystem more structured and accountable.)

Not only that, as per data available online, we can see that Taaki submitted the first BIP (referred to as BIP 0001) to the Bitcoin community sometime during mid-2011. The document essentially highlighted how the entire process surrounding BIPs should be conducted and was largely inspired by the process that is currently used to improve the nitty-gritty associated with a famous digital programming language called Python (as described in PEP0).

How are BIPs vetted?

As with any proposal, a BIP starts off as a basic draft that is submitted by one or more authors. Also, prior to its submission, a BIP is discussed at length informally across a host of BTC-oriented mailing lists, Internet Relay Chat (IRC) channels, etc. Also, during its lifetime as a draft, a BIP can be modified and changed by its authors (based on community feedback) any number of times.

Also, in the case of a Bitcoin protocol change, a code-based reference implementation is necessary. Lastly, it goes without saying that a proposal is only considered final if it reaches community consensus.

Source: GitHub

Key topics worth exploring

BIP numbers:

As the name sort of alludes to, a BIP number can be thought of as a catalog code that is assigned to a proposal as per the wishes of the designated BIP editor after the draft has fulfilled a majority of the criteria (such as formatting) set forth by the global BTC community.

The BIP editor reserves a number of special rights:

When it comes to improvement proposals, the appointed BIP editor has the power to reserve certain groups of numbers for proposals that share a common link.

BIPs are non-binding:

A core aspect of BIPs worth pointing out is that they are not binding and thus legal action based on them cannot be upheld in a court of law.

What are the different types of BIPs that exist today?

In all, there exist a total of three major types of Bitcoin Improvement Proposals — namely Standards Track BIPs; Informational BIPs and Process BIPs. In this section, we will describe each of these concepts in brief:

(i) Standards Track BIPs:

These are proposals that seek to make changes to the BTC network protocol, block data or even the way in which the ecosystem validates its native transactions. Additionally, Standards Track BIPs also look to change the interoperability of two versions of BIPs and require community consensus to come into effect. A perfect illustration of such a proposal is BIP 91.

(ii) Informational BIPs:

As the name suggests, Informational BIPs are aimed at highlighting various design issues, general guidelines, and other similar data that does not have to be taken seriously by the community at large. BIP 32 is a direct representation of such a proposal.

(iii) Process BIPs:

These kinds of improvement proposals seek to implement a change in the core processes underlying the Bitcoin ecosystem. In their most basic sense, Process BIPs can somewhat be compared to Standards Track BIPs since they entail major changes that need to be vetted through a consensus vote. An example that perfectly fits into this category is BIP 2.

BIP Life Cycle

Depending upon the kind of BIP that needs to be passed, it may or may not require community consensus. However, before things reach such a stage, the submitted proposal has to go through a number of phases such as:

• Drafting
• Verification
• Community Acceptance
• Acceptance/Rejections or Amendments.

Famous BIP Examples

1. BIP 141

BIP 141 (better known as SegWit or Segregated Witness) was a proposal that was introduced all the way back in 2015 by a couple of developers who at the time were working on the Bitcoin Core project. As many of our readers may already be aware of, BIP 141 seeks to increase BTCs native network scalability as well as solve many of the issues related to the currency’s transaction throughput. Additionally, it should be pointed out that the proposal was brought into effect via a soft fork which required over 95% of the network’s miners to signal for the upgrade over a fixed period of 14 days.

In layman’s terms, one can think of Segregated Witness (aka SegWit) as being a blockchain scaling solution that allows for more transactions to take place within a single BTC block.

2. BIP 91

Quite similar to BIP 141, BIP 91 was also a soft fork proposal that was brought forth by Bitmain’s James Hilliard back in mid-2017. The goal of BIP 91 was to activate the existing SegWit solution (i.e. BIP 141) with a hash power majority of less than 95%.

3. BIP 148

BIP 148 is a user-activated soft-fork SegWit solution that was introduced during the first quarter of 2017 by an individual who goes by the pseudonym ‘Shaolin Fry’. Simply put, the proposal provides the global crypto community with a unique way in which to scale up Bitcoin’s total Tx capacity. Additionally, it bears mentioning that at the time of its deployment, BIP 148 required 50+% BTCs full node users to upgrade their software.

4. Lightning Network

The BIP associated with the Lightning Network was conceived back in 2015 by Joseph Poon and Thaddeus Dryja. The protocol makes BTC’s tx framework more scalable by allowing for instant payments to take place off-chain. This is primarily achieved through the creation of micropayment channels that allow for money transfers to go through without the risk of any counterparty thefts.

From a technical standpoint, we can see that the utility of LN is made possible through the introduction of multi-signature wallets that allow for an infinite number of transactions to take place without there being any need to store the associated data on the native BTC blockchain. The only data that is recorded onto the blockchain is the total volume of BTC that is available in the associated wallet as well as the contribution percentages of the involved parties.

Lastly, in addition to enabling instant transactions, the Lightning Network also helps in the enabling of cross-chain payments as well as smart contract utilization.

5. M.A.S.T

Merkelized Abstract Syntax Trees (or MAST as they are commonly known as) is a cryptographic tool that allows for complicated data sets to be merged into BTC tx’s in a highly streamlined manner. This allows for the total amount of data to be added to the blockchain to be greatly reduced. Technically, we can see that M.A.S.T. is an amalgamation of two separate tools — namely Merkle Trees and Abstract Syntax Trees. For those of our readers who may not be aware, Merkle trees can be thought of as algorithmic structures that allow for data to be recorded without the need for it to be downloaded. Similarly, Abstract Syntax Trees allow for complex data sets to be added to a blockchain while bringing down the total amount of data (that has been recognized as being part of a particular transaction) associated with the tx.

In this regard, there are three BIPs that seek to implement M.A.S.T. into the Bitcoin network. These include:

BIP 114:

This proposal was submitted by BTC Core dev Johnson Lau with the aim of increasing Bitcoin’s native security levels by introducing a new merkelized script into the currency’s ecosystem. Additionally, BIP 114 seeks to greatly reduce the need for large amounts of transaction data while maintaining user privacy at all times.

BIP 116:

BIP 116 was proposed by Bitcoin Core developer Mark Friedenbach as a means of allowing native BTC data to be confirmed without there being any need of disclosing the entire data set associated with the tx.

BIP 117:

Also referred to as Tail Call Semantics, BIP 117 is a proposal which when used in conjunction with BIP 116 aims to generalize the core concepts underlying M.A.S.T. while providing full support for native SegWit addresses.

The deployment of M.A.S.T allows for a number of benefits such as:

• Enhanced privacy
• Faster transaction speeds
• Inclusion of complex data (example: smart contracts)
• Increased scalability as well as overall tx volume.

6. Confidential Transactions

As the name clearly suggests, the BIP concerned with Confidential Transactions seeks to usher in a new level of privacy for the data contained within the Bitcoin network. The proposal was submitted by a well-respected blockchain developer by the name of Gregory Maxwell. It will allow bitcoin users to gain access to a host of privacy-related benefits — much like what other privacy-centric coins such as Monero (XMR) and Zcash (ZEC) currently offer their users.

7. Dandelion

Dandelion is an important BIP that seeks to redesign BTCs core network stack so as to make the premier cryptocurrency more anonymous as well as reduce many of the vulnerabilities that are currently associated with the disclosure of BTCs tx identities. Some of the core benefits of Dandelion include:

• Increased difficulty in confirming the origin of a particular transaction
• Reduced risks of third-party intrusions
• Lowered possibility of miscreants linking BTC Txs with their source IP

8. Numerifides Trust Consensus Protocol

This is another proposal that delineates the creation of a network that is secure, decentralized and features human-readable names. It was submitted by Taylor Hawkins who in a GitHub draft mentioned the following:

“Rather than deriving justice and authority from a system that’s not supposed to look but too often does, I propose a DECENTRALIZED CONSENSUS PROTOCOL that enables a system of decentralized authority on a public piece of data, on an open blockchain and any independent, skeptical user or actor operating the consensus protocol can verify any other actor’s statement of authority in a decentralized, fair and privacy-protective manner.”

Other core facets of this BIP include:

• It allows users to establish their aliases which they wish to transact on the network.
• In order for this proposal to work, users are required to lock up a certain amount of Bitcoin as well as provide a PoW confirmation for the same.

Conclusion

Despite Bitcoin Improvement Proposals receiving a lot of flak over the years, we need to admit that their importance, at least as far as redefining the Bitcoin ecosystem goes, has been nothing short of monumental. And while a large number of people believe that regular BIPs can lead to more forks in the BTC network, we need to bear in mind that these changes can only be implemented through community consensus.

To keep track of BIPs, crypto enthusiasts can either choose to visit technical digital currency/blockchain portals such as GitHub — which is widely considered by many to be the largest repository of all things crypto. Alternatively, people can also follow crypto news related to this space through a number of different websites such as Bitcoinexchangeguide, Coindesk, Cointelegraph, etc.

Aziz, Master the Crypto Founder

I’m Aziz, a seasoned cryptocurrency trader who’s really passionate about 2 things; #1) the awesome-revolutionary blockchain technology underlying crypto and #2) helping make bitcoin great ‘again’!

The post Bitcoin Improvement Proposal: What is a BIP, How It Works? appeared first on Master The Crypto.

This privacy coin analysis takes a look at the two leading coins focusing on anonymizing transactions; Monero (XMR) and ZCash (ZEC).

Cryptocurrencies were launched with the aim of anonymizing online payments completely. Some of the most popular cryptocurrencies – Bitcoin, Litecoin and Ethereum – are created with specific characteristics; Bitcoin is used mainly as digital cash, Ethereum facilitates the creation of decentralized applications (dApps) and smart contracts, while Litecoin is characterized as the ‘silver‘ to Bitcoin’s gold. Unfortunately, due to their massive popularity, major coins leave lots to be desired when it comes to anonymity. For a truly private coin, you have to consider other purpose-built cryptocurrencies.

There are currently two major coins that are leading the quest for complete anonymity; Zcash and Monero. They offer a completely private online payment system but are powered by a different technology. In this article, we’re going to discuss and compare the privacy features of these coins and ascertain each of their use cases.

(Read also: Guide on Privacy Coins: Comparison of Anonymous Cryptocurrencies)

Private Cryptocurrencies

Cryptocurrencies should, in spirit and principle, be completely private. Blockchain privacy is determined by a coin’s features that obscure transactional data such as addresses and transfer amounts. Without hiding this data, blockchain forensic experts can quite easily identify users, especially since know-your-customer (KYC) laws are enforced by cryptocurrency exchanges.

Monero

Monero (XMR) adopts ‘ring signatures’, ‘ring confidential transactions’ and stealth address to obscure transactional data (the transacting parties and the amount transacted). Ring confidential transaction technology hides the route of the transaction and its amount. Stealth addresses allow the two parties to publish one address but receive payments through several unlinked addresses. This keeps, or attempts to keep sender and recipient information completely private.

Previously in 2017, it was claimed that Monero’s technology had major flaws in hiding transactional information. It was claimed that coin’s ring signatures could be de-anonymized through ‘chain-reaction analysis’.

With the integration of RingCT and stealth addresses however, those claims have been taken care of according to the Monero developer team.

Zcash

Zcash’s (ZEC) approach to privacy takes a different approach, by using a technology called ‘zk-snarks’. Basically, zk-snarks uses a concept called ‘zero-knowledge’ proofs. What this means is that you prove something while revealing a minimal amount of information. An interesting thing to note about Zcash is that stealth transactions are optional, rather than a default feature.

Trust in Zcash’s privacy was shaken when it was found that 69 percent of shielded transactions could be linked to either founders or miners. Since this is a fairly recent problem, it has still not been rectified completely.

(See also: Guide on Identifying Scam Coins)

Cryptocurrency Network Privacy

Network privacy refers to anonymizing of user information such as IP addresses through features like Tor and I2P networks.

Monero

Although Monero is a private coin that obscures its user’s data on the blockchain, it is still possible to identify users via the leaking of IP addresses. To stop this ‘vulnerability’, the Monero team is currently working on Kovri, a C++ version of the current I2P network. Kovri is being designed to de-link IP addresses from transactions and hide geolocations.

This is definitely a step in the right directions towards ensuring complete anonymity for Monero users. Kovri is still in the alpha stage so for now, users have to manage their own network protection.

Zcash

Zcash users can choose to operate on the Tor network. But like blockchain privacy, this is also optional. Unlike Monero, there are no plans for built-in network privacy features for Zcash.

Read more: Category of Cryptocurrency Market: Social Network Coins)

Default / Mandatory Privacy

Depending on the cryptocurrency, privacy features can optional or mandatory. Since there are side effects of enabling strict privacy on blockchain transfers, it’s natural that some coins will give users this choice.

Monero

Monero is a truly private cryptocurrency since it has privacy enabled by default. This default setting ensures that all transactions are carried on the same private standard. Of course, there is greater overhead fees associated with private transactions as they place a heavier workload on the network. Performance of the private network is being constantly improved by the developers.

Zcash

Perhaps one of the biggest flaws of Zcash as a privacy coin is that stealth operations are optional. This flexibility appears to be a benefit, but in reality, it just leads to a lot of confusion. Users who switch between public and private version of the blockchain risk leaking metadata that can result in reduced anonymity.

What’s more, just 13.4 percent of Zcash transactions are private. This goes to show that Zcash isn’t really being used as a privacy coin. Private transactions are expensive and few wallets support them, so this doesn’t come as much of a surprise.

Zcash is essentially a Bitcoin fork, so it’s easier for wallets to support regular transactions. Fortunately, stealth transactions on the network are becoming less expensive thanks to zk-snarks efficiency improvements. These improvements might lead to Zcash one day becoming a privacy-only coin in the future. We willl have to wait and see.

(See more: Public Vs Private Blockchain: What’s The Difference?)

Privacy-Related Drawbacks

Monero

Monero is a privacy coin by default, and as such comes with high fees and slow confirmations. The October 18th hardfork which integrates bulletproofs into RingCT has made things better as it aims to reduce transaction data by up to 80 percent.

Zcash

Keeping in mind the increased processing requirements, only a few portions of Zcash users choose stealth transactions. The Sapling upgrade has made stealth transactions much less taxing by reducing RAM requirements from 3 GB to just 40MB.

For a greater understanding of the limitations of blockchain technology (slow confirmations, high fees etc.), it is vital to understand the issue of scalability. Here is an article that breaks down scalability.

Which is the Better Privacy Coin?

Cryptocurrency is still a fairly nascent technology, and as such hasn’t been fully realized yet. Even the best private coin will eventually reveal some flaws that are simply there because the technology hasn’t matured well enough.

Still, if you are looking for the best private cryptocurrency, Monero should be your top choice. Yes, it does come with high fees and slow confirmations but its blockchain and network-level privacy are almost peerless. What’s more, you can rest assured that your transaction will be completely private as it’s the default for this coin.  The key for individuals who want to keep their Monero safe is to use a secure anonymous wallet for their transactions.

So even though Monero appears to be the cryptocurrency of choice for cybercriminals, it is still a very secure technology. We really can’t blame Monero for how it is being used, just like it’s illogical to blame traditional paper money for a bank heist.

Zcash is making progress in being a great privacy coin but unless it mandates privacy by default, it can’t really be recommended.

(You might also be interested in: Cryptocurrency Guides: Comprehensive List of Crypto Guides For Beginners)

Beneficial Resources To Get You Started

If you’re starting your journey into the complex world of cryptocurrencies, here’s a list of useful resources and guides that will get you on your way:

Trading & Exchange

• Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
• Guide to Bittrex Exchange: How to Trade on Bittrex
• Guide to Binance Exchange: How to Open Binance Account and What You Should Know
• Guide to Etherdelta Exchange: How to Trade on Etherdelta
• Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
• Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
• Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience

Wallets

• Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
• Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
• Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)

Read also: Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience and Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis.

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You can also join our Facebook group at Master The Crypto: Advanced Cryptocurrency Knowledge to ask any questions regarding cryptocurrencies.

Aziz, Master the Crypto Founder

I’m Aziz, a seasoned cryptocurrency trader who’s really passionate about 2 things; #1) the awesome-revolutionary blockchain technology underlying crypto and #2) helping make bitcoin great ‘again’!

The post Privacy Coin Analysis: Monero (XMR) vs ZCash (ZEC) appeared first on Master The Crypto.

This article takes a look at what is the difference between a crypto mainnet vs testnet, two technical terms that serve different functions.

Mainnets and testnets are common technical terms used in the cryptocurrency world to denote blockchain networks that possess vital functions. Let’s take a look at the differences between a cryptocurrency mainnet and testnet:

What is a Mainnet?

Mainnet – short for main network – is the original and functional blockchain where actual transactions take place in the distributed ledger and the native cryptocurrencies possess real economic value. In other words, the mainnet refers to the actual open-sourced blockchain itself that is publicly verifiable. The mainnet carries out the functionality of executing real transactions within the network which is stored on the blockchain and is referred to as the ‘end product’ that is open for the public to use.

Each transaction executed on the blockchain requires participants to pay a transaction fee (payable in the native coin) so as to incentivize miners to validate the transactions and prevent network spamming. For their hard work, miners will be rewarded with native coins from the protocol and also the transaction fees paid by the participants.

(Read more: Coins, Tokens & Altcoins: What’s the Difference?)

Importance of Mainnet

A mainnet serves a variety of vital functions that include:

1) Proof of Development

A Mainnet is a verifiable proof that the project has developed a functional and working blockchain where actual transactions can take place. Having a mainnet is a sign that the project is now live and is in technical progress. Additionally, a live mainnet would put the functionalities and capabilities of the blockchain to the test, since the public can participate in the network and any malfunction could compromise the inner workings of the blockchain. Therefore, launching the mainnet takes a considerable amount of resources and development to ensure that every component is working as it should. More than that, a mainnet serves as a working proof that the project is executing their vision well.

2) Credibility

A project with a mainnet possesses undoubtedly more credibility than a project without one. Since a mainnet is an actual and functioning protocol, all transactions are live and participants can transact with one another with the native coins of the blockchain. interested parties in the community can opt to become a participating node and download the protocol software. Assuming that the blockchain is open-sourced and free for anyone to participate in, the underlying codes of the blockchain is visible to the public and any concerns or issues can be highlighted by participants. The point is, the existence of a mainnet enables the creation of a live ecosystem of participants that facilitates real interaction and transactions to occur with full transparency. Without a mainnet, the project is purely conceptual or ‘theoretical’ with no working product for participants to test out. This is particularly important to understand when evaluating an ICO project that is trying to raise money; it is much harder to evaluate projects without a mainnet or even a testnet.

(See more: A Guide To Fundamental Analysis For Cryptocurrencies)

What is a Testnet?

The testnet- short for test network – is an exact replica of the original blockchain, with the same technology, software, and functionalities. The only difference is that transactions on the testnet are simulated (or ‘fake’) and the coins in the testnet does not possess any real value outside of the testnet environment.

The native coins in a testnet are like monopoly money. You can’t buy anything with that.

The testnet is a simulated environment where the functionalities and capabilities of the (original) blockchain are constantly tested and tweaked by application developers and testers. The purpose of having a mainnet is to develop the blockchain before it goes live or for ongoing testing of blockchain functionalities in a sandbox environment that is separate from the actual blockchain. The transactions on the mainnet are ‘fake’ since they are test transactions, with no transaction costs incurred and no deployment costs required by developers. Since the coins on the testnet are worthless, there is no economic incentive for miners to mine since their only purpose is to facilitate transaction testing.

In summary, activities deployed on the mainnet serves as a simulation of how the protocol would function on the mainnet itself.

Just like how pilots need to undertake 3D-simulation of flying planes before flying an actual plane, a testnet provides a testing ground for developers to test the protocol’s functionalities.

(Read also: Is it Too Late to Buy Bitcoin and Is It too Late to Invest in Cryptocurrency?)

Importance of Testnet

Testnet serves a variety of vital functions that include:

1) Constant Development

Blockchain technology is still in the infancy stages and a tremendous amount of testing and development is needed to enable mainstream adoption and usage. For instance, one of the main issues that are being addressed in the blockchain community is scalability. Rigorous research and development are being undertaken by a wide range of projects to enhance a blockchain’s capability of processing more transactions. In order to constantly enhance a blockchain’s capabilities, numerous testing on smart contract functionality, transactions, and the mining process must be undertaken. The testnet serves as a simulation on how the actual blockchain protocol (mainnet) would work under real-world conditions.

2) Prevent Disruption

A testnet allows testers and application developers to experiment on the features and functions of the protocol in a separate environment, without worrying about disrupting the main blockchain. Making the tests on the mainnet would be a nightmare since the complex interactions between components in the protocol could compromise the network or break the main chain. This would cause massive disruptions to the blockchain and could undermine the protocol. It is thus a common practice for projects to run a prototype on a testnet first, in order to iron out the technical details and ensure that everything is in order.

3) Free Testing

For blockchains that allow smart contract functionality, native coins are required to be spent in order to execute smart contract transactions. For instance, Ether (ETH) is needed to pay for computations that occur in the Ethereum blockchain (Similarly called ‘Ethereum Virtual Machine’). Testnets provide a testing ground for developers who are keen to create applications on the blockchain or test out certain functionalities without spending real currencies. It would be extremely expensive for developers to test out their application features or run experiments on the mainnet, since they would then need to buy real-value coins in bulk.

(See also: Public Vs Private Blockchain: What’s The Difference?)

Mainnet vs Testnet in Action

In order to get a better grasp of the differences between mainnet and testnet, let us take a look at Ethereum blockchain. Ethereum is an open-source, decentralized platform that facilitates smart contract functionality and allows for the creation of decentralized applications (dApps) to run securely without any control from intermediaries or third party.

Think of Bitcoin as a single app in your smartphone that is great in what it does, which is to facilitate value efficiently (digital cash). Ethereum on the other hand is like the app store, which enables anyone to create any kind of mobile applications and can be downloaded and used by anyone. Blockchain platforms like Ethereum expand the functionality of blockchain technology, while Bitcoin is just a single representation of this revolutionary technology.

A mainnet and a testnet are two separate networks that operate independently from each other. Here’s an illustration from the context of Ethereum:

Ropsten is the most popular public testnet for Ethereum and is often used as a testing network for developers creating their own dApps on the Ethereum blockchain. Using Ropsten network, DApp developers can experiment on the functionalities on the dApp and also avoid using valuable ETH that is needed for transaction fees and smart contract deployment. Once they’re confident that their dApps work and testing is complete, they can confidently deploy their dApp on the main Ethereum network!

What sets a mainnet and testnet apart are the following factors:

1. Network ID: A network ID is just an identifier for a network, similar to your ID card that represents your identity. If a new node wants to join the actual Ethereum blockchain itself), they will need to join the mainnet which has a network ID of 1. If they’re keen on joining the testnet instead, they can join the Ropsten testnet which is identified using a network ID of 3.
2. Genesis Block: This refers to the very first block in the blockchain, which represents the starting point. Since both the mainnet and tesnet are different networks, they have a different genesis block. However, the content of the genesis block can be similar.

(Read more: Guide to Ethereum: What is Gas, Gas Limit and Gas Price?)

Upgrades

From time to time, projects would undergo changes to enhance the capabilities of the blockchain. This is akin to the software updates of your smartphones that has solved previous issues or bugs associated with the previous software versions. Although we mentioned early on that mainnets are the ‘end product’, it may not be the ‘final product’. The blockchain can undergo updates or revisions to a particular functionality, depending on the need of doing so by the developers and the greater community. In order to upgrade the blockchain, a hardfork is required. Here is a detailed guide that explains the complex concept of hard forks.

(See more: Guide to Forks: Everything You Need to Know About Forks, Hard Fork and Soft Fork)

Mainnet Swap

When a project is starting out, it will issue their tokens on other blockchains such as Ethereum or NEO to raise funds. Once they have developed their own blockchain, they will need to migrate the existing tokens issued on other blockchains to the project’s native blockchain (mainnet). This is common practice for new projects in the ICO phase.

This process is called a mainnet swap or a token swap, involving the exchange of one coin for another coin on a one-to-one ratio. The old coin that is issued on another blockchain is discarded and a new coin is issued on the new native blockchain that has been developed and launched by the project. Mainnet swaps usually occur in the following way:

1. Registration & Auditing: Coin holders are expected to register their coin through the project’s developers, who will then accredit these coins through a supported digital wallet. At the scheduled mainnet swap date, the old tokens are burned while the new, official coins will replace the old coins in the same wallet.
2. Cryptocurrency Exchange Support: Once the announcement is made, coin holders are invited to keep their coins in the cryptocurrency exchange that supports the swapping process. At the scheduled swap date, the exchange will handle the auditing, accrediting and exchange of the older coin for the newer ones.

(Read also: Breaking: 88% of Crypto Exchanges are Manipulating Trading Volume to ‘Boost’ Rankings)

Effects of Mainnet on Price

The release of a project’s mainnet can cause tremendous excitement in the community, which could affect the coin’s price. This could also contribute to an increase in volatility of the coin’s prices during that period. Let’s take a look at several instances where a mainnet launch coincided with spikes in prices.

Golem (GNT)

Golem is a project that is focused on creating a decentralized marketplace for sharing computing power. They released their mainnet – called Brass – on April 2018. Here’s a look at how prices reacted to the launch of the mainnet.

Golem announced on mid-February that their mainnet would be ready by the end of March to early April. The duration leading up to the mainnet launch saw GNT’s prices consolidating with relatively low volatility, as indicated by a technical analysis indicator called the Relative Volatility Index (RVI) at the bottom of the chart. When Golem officially launched their mainnet on April 10, prices started to soar tremendously, going from $0.20 to $0.60 within a span of 3 days. That’s a three-fold increase in prices! We can also see that there is an increase in volatility after the mainnet launch, which means that there is an increase in risk during that period.

(See also: 4 Types of Coins to Diversify Your Crypto Portfolio & Manage Risks)

Tron (TRX)

Tron is a blockchain platform focused on creating a decentralized entertainment ecosystem. It’s mainnet – called Odyssey 2.0 – was officially launched on June 1. Let’s see how it affected prices:

The announcement for the release of Tron’s mainnet was made on April 9, which saw TRX’s prices increase from $0.035 to $0.1 within 2 weeks. That’s a solid 3-fold increase in prices. This pump in prices is also caused by Tron’s announcement of distributing an airdrop of over $1.7 million on April 21, as a show of gratitude to their token holders. However, the hype generated by Tron was too great and led to a price decline a month before the actual release of their mainnet. In fact, prices continued to move downhill even after the official mainnet release, with no apparent fundamental reason that substantiates an increase or a decrease. We can imply that the hype around Tron’s mainnet was purely fuelled by sentiments.

A mainnet launch is one of the many factors that may affect the value of a cryptocurrency since its launch represents a successful start by the developers in delivering the promises set in their project roadmap. From then on, the team is expected to drive the project development forward through continual enhancement and upgrading. Although a mainnet is an essential technical aspect to consider when investing in a project, it is not unusual for the absence of mainnets or testnets in cryptocurrency projects, especially if they’re starting out and are in the ICO stages. However, rigorous due diligence has to be done in order to assess the quality and viability of the project. From our examples in Golem and Tron, it is not substantive that mainnet launches have a positive or negative impact on prices since it is largely based on the context behind the projects.

(See more: Bitcoin vs Alt Coins Returns: Comparison of Gains Between Bitcoin & Altcoins Investing)

All in All

Mainnets and testnets represent two fundamentally different networks that each represent a vital purpose for any project. A testnet is often used as a testing site for the development and continual enhancement of the mainnet, while the mainnet itself is the actual, functioning protocol that powers the blockchain network. It is important for any investor to evaluate a project based on the success of both their testnets and mainnets, since they represent a good proxy for the technical development of the project’s vision.

(You should also read: Guide to Market Capitalization: Everything You Need to Know About Market Cap)

Beneficial Resources To Get You Started

If you’re starting your journey into the complex world of cryptocurrencies, here’s a list of useful resources and guides that will get you on your way:

Trading & Exchange

• Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
• Guide to Bittrex Exchange: How to Trade on Bittrex
• Guide to Binance Exchange: How to Open Binance Account and What You Should Know
• Guide to Etherdelta Exchange: How to Trade on Etherdelta
• Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
• Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
• Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience

Wallets

• Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
• Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
• Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)

Read also: Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience and Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis.

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This article takes a deeper look at second layer blockchain scaling off-chain solutions, with various implementations that are progressing as we speak.

The internet was born as an instrument for radical self-expression. When the web was young, it was all about creativity and experimentation in a truly decentralized peer-to-peer fashion. However, over time it grew from a network of hobbyists into a multi-billion industry and gradually its great power was usurped by corporations, governments, and large ISPs. Over three billion people use the internet monthly, although it’s just a handful of ISPs that serve the majority of the traffic in each country. The internet has grown to billions of websites, but most user activity is happening on Facebook, Google, Twitter, and other major platforms.

(Read also: Guide to Open Source: Importance of Open Source Technology in Cryptocurrency)

Blockchain Technology

The creation of Bitcoin in 2008 was a ground-breaking advancement in technology, promising to bring real changes to our world. The elements of decentralization, transparency, and immutability captured the imagination of many and posed a threat to traditional systems. This revolution was similar to that of the internet back in the 1990s, but with much greater intensity.

After almost a decade, the cryptocurrency landscape has evolved into a vibrant and diverse ecosystem with numerous coins and tokens with trying to solve different problems. However, much is still to be done for blockchain technology to be accessible to the mainstream public.

(See also: 3 Major Industries That Blockchain Technology is Changing)

Main Problem: Scalability

The goal of any real blockchain technology is to empower the masses through freedom and true decentralization. Bitcoin is the digital equivalent of money, but unlike traditional fiat money, it is not controlled by any single entity. Another popular manifestation of blockchain technology is Ethereum, which is a blockchain platform that facilitates the creation of decentralized applications (dApps) and tokens.

While very few can undermine the potential of blockchain technology, there are still major hurdles that limit its capabilities. In the pursuit of decentralization and immutability, blockchain technology suffers from scalability and speed issues. This phenomenon has a formal proof and is called the Decentralization, Consensus or Scale (DSC) trilema or DCS Theorem. In order words, a blockchain can achieve only two of the following three properties in a distributed system:

1. Decentralization: This addresses the question main questions; ‘To what extent the system is resistant to the failure of its singular element?’ and ‘How much power or influence does an entity possess?’
2. Consensus: This refers to whether decisions are made by a consensus of all parties or single-handedly by a small group of users
3. Scale: This refers to the capability of a system to cater to a larger user base, without slowing down or compromising the system

A blockchain cannot have all 3 properties; only 2 attributes can be chosen. That is why scalability, speed and throughput is an inherent problem for a public blockchain focused on upholding the principles of decentralization. However, the cryptocurrency community has been hard at work to find solutions that will address the issue of scalability.

(Read more: Top 10 Crypto/Blockchain Infographics You Must Know)

Other Pressing Issues

Another major issue faced by blockchains is privacy. The nature of consensus-driven distributed databases like Bitcoin and Ethereum is that all transaction data is stored on the blockchain and is tamper-proof. This means that all transaction data can be publicly verified and cannot be changed or altered in any way. This is important for achieving decentralization but not necessarily ideal for personal or commercial privacy. Second layer scaling solutions are addressing this issue.

Before diving deep into the analysis of existing solutions, it is worth noting that off-chain scaling is not the only option. For instance, one can achieve good scaling capabilities by sacrificing the decentralization attribute of a blockchain. Such an approach is pioneered by Delegated Proof-of-Stake (DPoS) blockchains, such as Bitshares and EOS. In a DPOS system, the network nominates a few nodes as representatives. This requires a degree of trust since these nodes are responsible for processing transactions in an honest manner.

Public blockchains are pretty much ideal examples of the network effect; high usage of the network attracts more applications, businesses, and users. That is why there won’t be too many base-level (protocol) blockchain platforms in the market; rather, all usage will converge on a few of the most advanced, highly secure and widely used networks. For instance, Bitcoin being used for payments and money while Ethereum is used for dApps and trustless code execution.

(See also: Guide to Blockchain Protocols: Comparison of Major Protocol Coins)

Blockchain Scaling Solutions

There are already several solutions that try to solve the issue of blockchain scalability.

From the classification above, there are 4 categories of scaling solutions that is being explored by the community;

1. First Layer (On-Chain) Solutions: Also known as the protocol-layer solution, first-layer solutions require fundamental changes to be made onto the codebase of the actual blockchain (hence the term “on-chain”. This entails engaging in updates such as increasing the block size limit or reducing the block creation time.
2. Second Layer (Off-Chain) Solutions: This refers to secondary applications or channels that are built on top of the main blockchain and do not require any fundamental changes to the actual blockchain. The bulk of transactions are ‘off-loaded’ to the secondary channels to reduce network congestion and facilitate faster processing speeds.
3. Consensus Mechanisms: Perhaps the most important mechanism of any blockchain, scalable consensus mechanisms streamline the consensus process to allow for greater scalability and transaction processing output.
4. Scalable Distributed Ledgers: Another form of distributed systems that have a different data structure compared to a blockchain. Distributed ledgers usually use a linear data structure rather than organizing transaction data into chained, sequential blocks like a blockchain do.

This article would be focused on examining second-layer scaling solutions, which are also called off-chain scaling solutions.

Classification of Layer 2 Solutions

Sidechains were one of the first proposals on achieving unlimited scaling and preserving privacy while maintaining the security of the base-layer protocol. Sidechains allow users to lock some coins up on the main chain and in return get coins on the parallel chain with its own rules, consensus and much more flexibility on how the protocol is governed. Sidechains add throughput, flexibility and allow one to experiment with consensus rules. Some implementations of sidechains that are close to ready include Liquid and Rootstock sidechains for Bitcoin, and Plasma for Ethereum.

Another type of off-chain solutions is state channels, which is similar in concept to sidechains. A state channel is an approach where one completely re-imagines the idea of trustless consensus between two parties. Instead of coming up with a global consensus on a public network, we can use local consensus. In order to take advantage of state channels, one must create a payment channel with a node that’s connected to a larger network. Security in state channels is usually achieved by locking up some tokens on the main network and keeping them as collateral to ensure honest behavior. Here is an example of a payment channel:

Let’s look at the different implementations of layer 2 solutions out there.

1) Plasma

Plasma is the sidechain implementation for Ethereum Blockchain which is leverages on smart contracts that takes care of all the rules and validation/governance on the Plasma chain.

Block validation on the sidechain is either done by a single operator or by a consensus of a much smaller set of validators than that of the base layer. This alone allows for the quickening of block frequency and the number of maximum possible transactions in each block. Moreover, this will avoid the issue of block propagation and latency which is always the case for base-layer blockchains, where the block must be accepted by tens of thousands of nodes around the world.

The main drawback and problem with this approach is that sidechains always introduce some degree of centralization. Ethereum developers are constantly innovating and pushing the boundaries to preserve the principle of decentralization and trustlessness as much as possible. The gateway that transfers Ether (ETH) or Bitcoin (BTC) is usually controlled by a single party and can be vulnerable to various attacks. Even though the chain operators cannot necessarily steal user funds due to the protocol rules, they still can acquire transaction data, deanonymize users or withhold some information.

(Read also: Analyzing Cryptocurrency Risk: Existing Coins vs ICO)

2) Lightning Network

Lightning Network is probably the most well-known second layer payment network which is built for Bitcoin and Bitcoin-like blockchains (e.g. Decred, Litecoin). The idea of having a peer-to-peer network that consists of payment channels is almost as old as Bitcoin itself. Satoshi Nakamoto mentioned this approach in his comments on a BitcoinTalk forum back in 2010. The Lightning Network utilizes the concept of payment channels to provide bi-directional monetary transfers and envisions a network with near-instantaneous speed, zero counterparty risk, and low fees.

The main concept in LN is a payment channel that can be opened among any two users by including a special funding transaction in the underlying blockchain. Such a transaction is completed in a form of 2-of-2 multi-sig, meaning no party can single-handedly withdraw the money. In ensuring that funds won’t be lost forever in the channel in the case of non-cooperation, or if the private key is lost, both sides are required to sign each other’s transactions to execute the transaction.

Once the channel is open and funded with some BTC, both parties can transact as fast as their peer-to-peer connection allows and pay no fees for doing so. Lightning transactions are completed in the form of cryptographic commitments. This allows for completely trustless payments; any party can close the channel and fix the outstanding trading balance on the Bitcoin blockchain at any time. In addition, LN ensures that it is impossible to cheat your trading partner by publishing an outdated commitment. This is done by having some lockup time on funds in the multi-sig. If Alice sees that Bob tries to cheat her by publishing some outdated state of their trading history (the one that is beneficial for him), she can simply provide proof in a form of a later commitment and free her funds from the multi-sig. Bob, in turn, will be punished for cheating by the protocol rules. It is the same general approach that Plasma uses to proof honesty on Plasma chain operators, though it is implemented in a different manner.

In most cases, both parties have an incentive to collaborate. In this case, the channel is closed with full cooperation of both parties by constructing a normal transaction from the original 2-of-2 escrow. This transaction would pay out the respective balance to each member, based on the most recent commitments. Neither individual has to go through the slow process of paying additional on-chain fees, nor lose out on the opportunity costs of having their BTC locked up by the protocol.

The practical use-case of LN is not that every single user will publish an onchain transaction whenever they need to make a payment; rather it will work as an actual network. If Alice does not have a direct channel opened with Bob, she can always create a multi-hop transaction that will use several channels to reach its destination – pretty much the way internet works.

Another benefit of LN is that it’s not controlled by any corporation or even a group of developers. The development started with writing a documentation called BOLT (Basis of the Lightning Technology). These BOLTs describe every aspect of the protocol in forensic detail using pseudocode and plain English. There are multiple teams around the world building an actual implementation of Lightning Network using different programming languages and platforms, but since they all collaborate on the same reference specification, the resulting software is interoperable.

The beautiful thing is that actions required to make or receive payment in Bitcoin via Lightning Network rarely takes place on-chain. This saves tremendous costs and speeds up trading significantly.

(See more: Guide to Bitcoin Scalability Solution: What is Lightning Network?)

3) GEO Protocol

GEO protocol is an off-chain scaling solution that can be built on top of any existing public blockchain and connect them in a single cross-chain network. There is no common ledger that requires computationally-expensive nodes and power to secure. Instead, it is an off-chain protocol that leverages on a distributed network of state channels and trustlines connecting them.  The advantage is that unlike Bitcoin, Ethereum or Plasma, a GEO node can be spun up on a comparably slow and cheap device – like a smartphone or Raspberry Pi computer.

GEO is leveraging the concept of trustlines which was pioneered by Ryan Fugger from Ripple. The idea is quite similar to bidirectional channels in LN or Raiden, but the main difference being that trustlines occur when there is a bilateral agreement between exactly two users. This agreement consists of two credit lines (liabilities), as well as a balance indicating if, and how much, one party owes the other. Payments between non-trusting strangers are implemented by propagating balance updates through a network of trustlines until the payment reaches the receiver.

Trustlines mechanics

Trustlines consist of IOU (I Owe You) channels where users can issue their own currency or asset and the network facilitates free and unrestricted exchange of that asset. This also allows cross-blockchain exchange of value directly between holders without engaging with centralized exchanges. In order to preserve the decentralized and trustless nature of blockchain technology, the protocol does not allow freezing of either account or trustline.

Another concept developed by GEO protocol is composite channels, which are a combination of trustlines with user-issued assets and classic state channels with cryptocurrency locked up in an on-chain multisig wallet. This combines almost infinite scalability with a trustlessness of the base layer blockchain or multiple blockchains. At the end of the day, the user is allowed to not only make cryptocurrency transactions, but also tokenized fiat money, real world property and other assets. One tangible example of this technology would be a cross-chain DEx (decentralized exchange) enabled by the protocol from scratch.

4) Celer Network

Celer Network is a blockchain agnostic and horizontally scalable protocol that increases the scalability of blockchains through off-chain scaling. It utilizes a layered technology architecture, with several core technical innovations including:

• Channel construct suite with sidechain channels and flexible support for generalized off-chain dApp state transitions
• Optimal state routing algorithm with 15x higher transaction throughput than existing state-of-the-art solutions
• Off-chain operating system that simplifies development and usage of off-chain applications on various platforms

It should be noted that there are other solutions that have taken a similar approach such as the Lightning Network, Raiden, Trinity and Plasma. Celer Network differentiates itself because it will be compatible with all the other projects fighting to scale on-chain. This is important to consider because other projects in this space such as the Lightning Network (LN) cannot work with ETH or EOS.

(Read also: Guide to Crypto Derivatives: What is Cryptocurrency Derivatives?)

5) Raiden Network

Just like Lightning Network for Bitcoin, Raiden creates a sequence of payment channels outside of the blockchain itself to resolve transactions quickly. Raiden, however, has its own ERC20-based token called RDN which is not required to make payments but will be used to get access to additional services. At some point, the team has raised $33 million to fund the development of the project via an ICO – initial coin offering.

One of the first implementations of Raiden Network is called µRaiden, which is specifically designed for micro payments in ERC20-based tokens. The difference is that µRaiden only uses unidirectional payment channels, whereas Lightning Network is leveraging bidirectional payment channels.

What Does the Future Hold?

It is imperative that blockchains radically enhance their scaling capabilities to support higher transaction output and allow for mass adoption. Solving the issue of scalability is being rigorously undertaken by the cryptocurrency community, as can be seen from the above examples. It is only a matter of time before different variations of blockchains are able to preserve the principles of decentralization as well as possessing the scaling capabilities similar to traditional payment processes such as Visa or Mastercard. Second layer networks will extend the capacity of blockchain technology and open new use-cases that in turn will bring Ethereum, Bitcoin and other technologies into the hands of the next billion people.

(You might also be interested in: Crypto ICO vs. Stock IPO: What’s the Difference?)

Beneficial Resources To Get You Started

If you’re starting your journey into the complex world of cryptocurrencies, here’s a list of useful resources and guides that will get you on your way:

Trading & Exchange

• Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
• Guide to Bittrex Exchange: How to Trade on Bittrex
• Guide to Binance Exchange: How to Open Binance Account and What You Should Know
• Guide to Etherdelta Exchange: How to Trade on Etherdelta
• Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
• Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
• Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience

Wallets

• Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
• Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
• Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)

Read also: Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience and Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis.

Enroll in our Free Cryptocurrency Webinar now to learn everything you need to know about crypto investing.

Get our exclusive e-book which will guide you on the step-by-step process to get started with making money via Cryptocurrency investments!

You can also join our Facebook group at Master The Crypto: Advanced Cryptocurrency Knowledge to ask any questions regarding cryptos!

Stepan Gershuni

The post Second Layer Blockchain Scaling: Off-Chain Solutions appeared first on Master The Crypto.