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Federated Blockchain

Federated Blockchain

There are three broad categories of blockchains: The Public Blockchain, The Private Blockchain, and The Federated Blockchain. In this article, we are going to discuss Federated Blockchain. The Federated Blockchain is the blockchain that we see developing over time is still pretty much based on the full blockchain, except there is a slight difference in the way consensus is built. Also, let us just remind you that the benefit of the blockchain is that it is decentralized and trust-neutral. That means that it obviates the need for intermediate institutions to provide the element of trust.

Think about that for a minute. The first catastrophic element of this is a major part of a bank’s business. The bank is typically the center of the financial transaction and it allows for parties to understate transactions because there is a bank in the middle that allows them to take comfort that a trustworthy party is involved.

But in federated blockchain, that trust is not necessary, and this results in three direct consequences. More relationships can be entered into, increasing the frequency of business and thereby increasing the potential and probability of profit. The second is that it reduces the cost of the transaction while still maintaining a high level of trust in the relationship. Third, it opens up new and vibrant ways to conduct new business and micro-business, where the transactions are numerous and the cost or the profits are small but add up.

The blockchain also provides security in two ways. The first way provides the security of maintaining the data integrity. Secondly, it provides security of the data itself against attack. In a blockchain, data is immutable. Bad actors can’t hack the system and delete the data. Let’s see how that works and why it makes currencies built on top of blockchains secure and inexpensive.

The feature inherent in the blockchain is the consensus algorithm. This is the main piece of the puzzle that allows the network to maintain its data integrity. Look at it this way. If a bad actor tries to change the data that is already in the blockchain, there are two things that he would have to do. First, he would have to change the data itself, which will inadvertently alter the block. The moment the block is altered it no longer will fit in with the block that comes after it. Remember the nonce and the hash.

So to change something that has already been confirmed into a block requires tremendous resources to change – even if it is just one block. Because that requires even more resources to change the block that comes ahead of it and the subsequent block after it. This alone is no longer viable unless a new computing ability enters the market where creating 25 terahashes is a trivial matter. Such a level of computing power may exist in quantum computing, but that is not commercially available just yet. When it does get to the market, it will still require a tremendous amount of real-time input to change the course of the current transactions. All in all, it is not a viable proposition.

The second form of security it provides is in the event of a virus. Nodes that do not conform to the network standards are not allowed to broadcast, so when that happens, the node is disabled and it can only accept data instead of writing to another node. At the same time the port 8333 where the information comes in, uses a sector of the hard drive that is encrypted. In Bitcoin the data is transparent, but the thing that holds them together is the SHA256 encryption that changes drastically the moment even one bit of data in the original file is changed. So the likelihood of viruses and trojans passing from one node to the other is slim.

But the possibility still exists, however small, that someone could figure out a way to transmit malware via the network. When they do, the safeguards are in place, none of which include antivirus packages that will isolate and the node. New data can then be written over it, rendering the virus inoperable.

This makes for a robust system. However, there are areas where it can still be improved.

Areas Where Blockchains Still Fall Short

Not everything in the blockchain world is a bed of roses. There are still significant areas that need to be improved upon and problems that need to be solved before the widespread adoption can be contemplated. At this point in time, we find pockets of users, the largest pocket undoubtedly being Bitcoin. These smaller pockets allow the limitations of the blockchain to go seemingly unnoticed, but there will be a time in the near future when we start to see this effect have a real impact on the layers above the blockchain. Here are just some of the things that you need to watch out for and find solutions to.

The first, as it applies to cryptocurrencies layered on top of the blockchain, is the scalability of the system. For comparison, you need to understand that payment systems like Visa that process payments around the world, can handle at least 2000 transactions per second. By contrast, PayPal handles about 8% of that, averaging about 155 transactions per second. That may not seem bad, but that is in a world still pretty new to e-commerce. Imagine what it would be like a decade from now when online retail goes through its explosive growth. In 2016, 1.86 Trillion US dollars was spent around the world on e-commerce. Every single one of those transactions had to be executed via some form of payment processing gateways like Visa or PayPal, or some form of cryptocurrency. Just as a side note, you can readily see that the payment gateways make a tremendous amount on fees.

So understandably, they’re hesitant to endorse any technology like blockchain technology and cryptocurrencies, seeing them as disruptive technologies that will eventually displace them. Hence, there is a lot of propaganda and government lobbying to rule out cryptocurrencies.
Ok, back to the payment processing industry. This year (2021), that spending number is expected to reach Five Trillion US dollars. For that kind of quantum, robust systems are needed to handle payment processing. The current speed of transactions Bitcoin is able to handle is 5 transactions per second. Remembering that Visa is 2000 transactions per second, do you see what a bottleneck this could be? The next iteration of blockchain needs to devise a systemically faster way to process payments.

We can almost see that Bitcoin and the blockchain that it sits on, have significant issues when it comes to transaction times. It needs to get to a point where you are able to transact at least a million transactions every second for it to become viable and relevant in the 21st century, especially post-2021. At the moment, Ethereum’s blockchain is able to handle 100 transactions per second; a rate that is twenty times greater than its predecessor. As it stands, Bitcoin is already starting to feel dated.

But the thing to also note is that the folks at Bitcoin are looking into ways to handle the transaction rate, and this is working into some viable BIPs (Bitcoin Implementation Proposals). Only time will tell if they are successful, but if they don’t come up with any, there are other blockchains that are coming online which do indeed have the capacity to give Visa a run for their money.

A further problem with the Bitcoin network is that there is now a fee for each transaction. We are not upset that there is a fee, but what is cumbersome is that the fee is not implemented in a way that promotes the use of cryptos. In fact, it makes micropayment unviable. Here is what the fee on the Bitcoin blockchain looks like.

They charge based on the size of the transaction in bytes. It’s not the amount of BTC that you remit or receive. It is the size of the file that you send. So if you have a long note in the transaction, then the size of the file to be included in the block changes the price at this point in time, 20 satoshis per byte of data.

Ok, let’s unpack that before we go on. What is a satoshi and how do you look at the size of the data in your transaction?

Here is how it works.

1 Satoshi is one hundred millionth of a coin. In other words, 1 satoshi is 0.00000001 BTC. So 20 satoshi per byte works out to being 0.0000002 BTC per byte. A typical message is 226 bytes. That means the fee, at minimum, is 4520 satoshi or 0.0000452 BTC, which is $2.26 at the current exchange rate.

There are two inherent problems with this fee schedule, even though it is still cheaper than any other service we can think of. The first is, this is the minimum fee required. Miners don’t look at the minimum fee, they look for the ones that are willing to pay the most, and those are the transactions that they will process first. Miners get their income from two sources. One of those sources is from the new bitcoins they get a reward when they process or ‘find’ a block. The second is that they get all the fees that are accumulated from all the transactions in the block. While it is important for the miners to make money, the fee is also subject to one other fact: the miner is able to choose which transaction he wants to include in his block.

If the miner only chooses blocks with huge transaction fees, then what happens is that the ones that have those high fees tend to take a longer time to become part of the blocks. Ok, so this is not such a big deal, but the one thing problematic is that as the price of bitcoin goes up (almost $50,000 at the time of writing), it means that the fee is $2.50.

When BTC was $5, that fee would be less than a penny. And so macro payments and transactions were viable. That was one of the great pulls of the crypto. You could send small payments anywhere around the world. Now if you want to spend $1, it will cost you 50% in fees to only do that. What happens when you want to send a penny?

This needs to be reconsidered in the next iteration of the blockchain and how to democratize the block inclusion criteria. At the moment, the transaction is not treated with neutrality as it should be. This means, after all, we are creating a platform that is amazing in every other way; a little more thought into how to charge for it should be happening!

The third area of the blockchain within the Bitcoin universe that needs improvement is the Proof of Work formula they are using. Ethereum has made concrete plans to move away from this and move to a Proof of Stake formula. A proof of work formula is a novel idea and suited the Bitcoin ecosystem when it first came online, but today the computational proof of work it requires is one that has a detrimental carbon footprint.

How? Let us explain.

We are not going to get into the full block creation process. But what we need to keep in mind to make the current topic relevant, is the fact that massive quantities of electricity are used, generating huge amounts of heat, to compute the hashes that satisfy the difficulty rating.

In short, the entire bitcoin network uses 30 terawatt-hours of energy to keep the network going. This is the computational proof of work that it must compute, using the processing power of the computer, or more typically the GPU or the ASICs (Application Specific Integrated Circuits) that are more efficient in hash rates. Whatever the device or the equipment, the power consumption is a lot more than people realize. And the issue does not end there.

The way it is set up if you recall is that it needs to keep the gaps at 10 minutes. So with that in mind, let us run a simple thought experiment by you. Let’s say you have 1000 machines taking up 1 gigawatt of power and the algorithm decides that with so much hashing power it needs to raise the difficulty level. This means it takes more computations to get to the desired puzzle solution. That results in the ten-minute block time. That is fine. Now let’s say people find that because the price of bitcoin has gone up, more people find it lucrative to mine the coin and so now the hashing power doubles. Now you have 2000 machines taking up 2 gigawatts of energy.

But the moment the hashing power increases, the system detects that and increases the required difficulty to keep the block times at 10 minutes. So now what is happening is that the entry of more miners increases the aggregate power consumption of the entire network, but the block times stay the same by design.

So what effect does this have? Well, two effects come to mind. First, the more people learn about mining and joining mining pools or set up their own mining rigs; that consumes more electricity overall. If the hashing power increases by tenfold, the difficulty will also be increased and the block times will revert to their 10-minute intervals. All this increases the usage of current. It would be ten times as much as at the beginning of this thought experiment I’ve shared with you.

The problem with this is that many countries subsidize their power. Many countries also do not use clean fuel for power but instead use coal-fired plants or other non-greenhouse fuels, emitting gases. On average in total to this point, the bitcoin industry alone sucks up 30 terawatt-hours of energy per year and leaves a carbon footprint of 740,000 metric tons of carbon dioxide.

That is a catastrophic amount. Something better in terms of proof of work needs to be instituted because at the moment the market price of Bitcoin is driving a large number of miners to come in for a piece of the action. The only thing that is doing is increasing the carbon emissions and raising the total energy consumption. The current price for carbon credits is approximately $15 per metric ton. For 740,000 metric tons across the Bitcoin ecosystem in a year, that works out to be $11.1 million.

Maybe the miners could find a way to purchase these credits if and where applicable. That’s just for Bitcoin though. There are more than 1200 other cryptos in the world today, and none of them come close to the kind of volume that Bitcoin miners generate; more than 25% of the total market value by exchange transaction, and significantly more than that in terms of mining activity. Just to give you an idea of the total hashing power, the Bitcoin blockchain ecosystem has 25 million terahashes per second. The closest second is Ethereum, which has 250,000 gigahashes per second.

Energy consumption and carbon emission are not something that most miners and cryptocurrency enthusiasts talk about. And admittedly it is not something that one thinks about when mining is so lucrative compared to the cost of power. In the future when power is in abundance because we have managed to tap solar, geothermal, nuclear and wind power (forms of clean energy), then it will make more sense. But for now, better proof of works are needed to drive the blockchain effort forward. These are the main problems of the bitcoin blockchain that can be easily rectified in the future.

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Era Innovator

Era Innovator is a growing Technical Information Provider and a Web and App development company in India that offers clients ceaseless experience. Here you can find all the latest Tech related content which will help you in your daily needs.

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