2016 will be the best year for Bitcoin. And I’m not saying that because Bitcoin will scale from 7 to 14 transactions per seconds. I’m saying that because bitcoin will scale to support more than 15 millions of users irrespectively of the number of transaction.
Note that I’m using a big B for talking about the network and a small b for the currency. The two improvements that will allow such are OP_CHECKSEQUENCEVERIFY (already merged) and Segwit. Both improvements will allow to build bi-directionnal payment channels which can be indefinitively open without parties needing to run full nodes.
You can model a payment channel as an ingoing balance between two parties. This balance is reflected in a bitcoin transaction that is signed by both party but not broadcasted.
In this example, Alice has 0.5 BTC and Bob has 0.5, each of them can close the channel at any time by broadcasting the underlying bitcoin transaction.
Why bi-directionnal payment channels are important ?
I gave a talk in Tokyo about it, but basically payment channels are the building blocks of two new technologies: Payment Hubs and Lightning Network.
With these technologies, you can transfer bitcoin outside of the Bitcoin network, we call that off-chain transactions. This should not be confused with on-custody transactions where you trust your bitcoins to a third party which only swap IOUs. With Off-Chain transactions trust is minimized, as a user, you still transfer real bitcoins and not IOUs, except you are not using the Bitcoin Network.
The advantage of transfering bitcoins out of the Bitcoin network is obvious: No fees and unlimited transaction scalability.
Why off-chain transactions are important to Open Asset ?
The cool thing about the way open asset is designed, is that it is fully compatible with bi-directionnal payment channels.
As such, it is possible to transfer issued asset off-chain are reach quasi unlimited scalability and cheap transaction while still being secured by the Bitcoin Blockchain !
There is however an important limitation: An open asset Payment Hub or an open asset Lightning Network can support only one kind of asset at the same time.
Lightning network is a completely trustless and decentralized way to transfer bitcoins or colored coins.
However it is still not completely ready, and for colored coin we don’t need a completely trustless and decentralized way of transfering asset because we already have a trusted party: The issuer of the asset. We can round corners by using Payment Hubs operated by the issuer.
Payment Hubs act as an intermediary for transferring money from one point to another.
People who need to exchange an issued asset in a scalable way would only connect to those payment hub with a payment channel.
Then imagine, Alice wants to send money to Bob in the above image, she would send money to the Hub, then the Hub to the second Hub, then the second Hub to Bob.
Two things to note:
- Trust is minimized, Hubs can only steal money on the way to Bob.
- Hubs need to lock lots of reserves for being able to route payments effectively (the balance of a party in a payment channel can’t be negative)
But these two points do not matter if the Hub is itself the issuer of the currency being exchanged.
The issuer can print as much reserve as it need for operating, and already have the trust of the user exchanging its asset.
Each user can close their channel at any time and fallback to the Bitcoin Blockchain for transferring or swapping with another asset.
I hope to have convinced you that Bitcoin Blockchain is the best trustless and scalable way to transfer an issued asset.
If the Bitcoin Blockchain is the internet, payment hubs are intranets, Bitcoin Protocol is TCP/IP and Open Asset is HTTP.
I’m fully confident that the standard way of exchanging an issued asset in the future will be through Bitcoin despite not being designed for it, as much as phone lines were not designed for internet.