Commentaries and insightful analyses on the world of finance, technology and IT.

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July 20, 2015

Design considerations when using crypto currencies and distributed ledgers

Crypto currencies and distributed ledgers are the latest buzz in the financial services industry. Surprised! - Did not Bitcoin originate as a radical innovation and soon got dumped in to the dark side of underworld transactions? Central banks were concerned about how to control Bitcoin usage and warned of its risks, slowing down its adoption by mainstream. Nevertheless, researchers and innovators continued to build on Bitcoin and its technologies. Quietly, new innovations based on the utility of Blockchain and solutions to inherent issues in Bitcoin emerged. The technology has evolved from Bitcoin to Alt-coins to new technology layers on top of Blockchain to new peer to peer distributed ledgers very different from Bitcoin. Now, the world sees Bitcoin as an important nascent step in the evolution of crypto currencies and distributed ledgers.

While Bitcoin found it difficult to enter mainstream, these new technologies are making inroads into banks and financial institutions. One fundamental shift is that innovators are working towards aligning the technology to solve the problems in mainstream. Of late, many banks and financial institutions have started experimenting with these technologies - some looking at it to solve specific problems like simplifying cross border money transfers, some using the power of distributed ledgers in asset management. But there are lot of others who are still caught in the fancy of crypto currency and overlooking the fundamental design of crypto currencies and distributed ledgers. This blog is an attempt to demystify some of the important technical pieces when designing systems based on crypto currencies and distributed ledgers.


1. De-centralized and peer to peer system

Yeah, the technology is a 'crypto currency' but it is a 'de-centralized and peer-to-peer' network. Lot of people see only the crypto currency and miss the other part. Simply, trying to create a new coin system or just trying to forcefully push for de-centralization is not the right approach. The key is - the problem that you are trying to solve should require de-centralization and peer to peer value exchange. Ask if the use case really requires decentralization. For example, is there any value in using the technology for loyalty management system? Yeah, such systems create and distribute value digitally (rewards points). But, do they have to be a Bitcoin like system? Similarly, what about internal enterprise level use cases or for transactions involving value exchange among a closed group of entities. They probably need a good ledger software but not always a public, distributed, and peer to peer ledger with crypto currency.  There are valuable use cases for distributed ledgers like cross border payments, KYC and identity management, securities and asset management. But you don't have to force fit the technology to every use case that requires a ledger and value transfer.


2. Scalability and latency of the consensus algorithm

A risk with distributed ledgers is the need to make sure all the ledger instances across the network is synced up with all the transactions that has passed through the network. This needs to happen very quickly, probably less than a minute and very often. Bitcoin includes about 7-8 transactions in a block which will take about 15-30 mts or sometimes more for validation and inclusion in the block chain. Compare this against the volume handled by VISA or MasterCard network - they handle about 2000 tps with a peak capacity of more than 50,000 tps. While this looks like an apples vs oranges comparison, it is important to think about how scalable is the consensus process underlying the distributed ledger. The degree of latency acceptable for the use case is very important. Today, a cross border money transfer could take many days or up to a week with the conventional system. So, even a latency of few hours is still valuable but the current latency in distributed ledgers will not be acceptable if you are using it for e-commerce payments. Of course, the space is evolving and new consensus algorithms like in Ripple are being developed that could further scale up the volume and reduce latency. Nevertheless, it is very important to consider the scalability and latency requirements of the use case when designing a system based on distributed ledgers.


3. Trusts and validators of transactions

Often, we hear that one's strength is its own weakness and vice versa! Bitcoin (or rather its predecessor Bit Gold) showed the world that a very secure transaction validation method can be achieved without a central operator through the concept of Mining. However, mining as a process itself is turning into a major issue for Bitcoin. Another view that is very common is that Bitcoin is bad but Blockchain is good. We should recognize that Blockchain cannot exist without Bitcoin (the process of mining that validates, adds the block to the chain, and creates Bitcoin). What it means is that in decentralized and distributed ledgers, validation of transactions is a very important component of the design. It is important to think about who acts as validators and what the incentive is for them.  Ripple, a much talked about alternative for Bitcoin, particularly for cross border money transfers has a different model of trusted validators (currently centralized though). HyperLedger is another such upcoming player that encourages validators to work with contractual obligations.


There are few other important design considerations. For e.g. identity management and regulatory compliance check/reporting for transactions. These are to be considered as additional application layers on top of the distributed ledgers. Existing enterprise systems for identity, risk and regulatory compliance need to be integrated in the design.

Bitcoin started as a crypto currency and led the way to new developments where the focus now is on distributed ledgers and its benefits. The technology has lot of potential in financial services. Already, many banks are experimenting with these technologies. The three design considerations answer some of the fundamental questions to think about when experimenting with crypto currencies and distributed ledgers.


July 15, 2015

Bitcoin ATMs - A hype or the future?

-by Irene Varghese and Shivani Aggarwal

Human race has seen drastic change in the money system, from barter system to physical currencies and now the much talked about crypto currencies - Bitcoins for example. If estimates are to be believed, then the number of active bitcoin users worldwide will reach more than 4 million by the end of 2019. If cash gets replaced by Bitcoin, then why not Cash ATMs by Bitcoin ATMs?

Jargonized Bitcoin ATMs, provide an efficient and secure way for people to exchange bitcoins - the decentralized digital currency - for cash without the need for a humans to facilitate the transaction through bitcoin exchanges - which faces hacking and fraud threats. The world's first-ever Bitcoin ATM was opened in Canada, in Oct 2013, by Robocoin - enabling Bitcoin owners to exchange the digital currency for cash, and vice versa!

Bitcoin ATMs are gaining popularity, with the number of Bitcoin ATMs going upto 400, registering impressive growth in 2014. North America is leading with more than 130 machines installed throughout the U.S., and 69 machines in Canada.

Bitcoin ATMs are worthwhile mainly because they make peer-to-peer, decentralized currency, online money transmission easy and in a near instant exchange time - taking less than a minute! Moreover, facilitates anonymity by allowing you to convert directly from cash to Bitcoin -- without attaching a bank account or identity credentials. Only a biometric palm identification is required, which is easy, quick, and at the same time, a unique identity confirmation. For consumers who want to use crypto currency right away to make purchases, buying Bitcoin through an ATM involves much less time and risk! Bitcoin ATMs also assist tourists' withdrawal of cash in native cash at competitive rates, without needing a bank account or ATM card.

Peeping into the days ahead, Bitcoin ATMs look promising for a cashless future, as they may prove to be the most useful tool in enabling cross-border e-commerce especially for the under-banked parts of the world! Robocoin has very recently released a second-generation Bitcoin wallet, which facilitates instant person-to-person money transfers. Consumers can send money on one end, and a consumer at the other end can withdraw it from a Bitcoin ATM even in under-banked parts of the world!

When crypto currency as a concept succeeds, ATMs will become incredibly opportune and a simple way for mainstream consumers to exchange cash for crypto currency. Thus, Bitcoin ATMs definitely have a future - promising truly hassle-free money transactions.