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Op-Ed

Challenges Associated with Smart Contracts and Its Implications

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Smart contracts

From vending machines to sophisticated algorithms that have driven human beings off the trading floor of NASDAQ, business logic coded as software has been automating and revolutionizing the world around us, long before the materialization of virtual currencies. In essence, smart contracts are here to stay.

Blockchain has a substantial promise of application in executing contractual obligations and undeniably multiple organizations are exploring different use cases for smart contracts. Applying blockchain technology enables the production of smart contracts with full automation in determining and enforcing contractual obligations without the need for third parties.

Bitcoin’s growth and adoption is proof that smart contracts can work in a public environment. Bitcoin’s cryptographic primitives based on simple scripting language allow the currency itself to exist.  It would be sensible then to expect Ethereum and its fully-fledged language—Turing-complete—to open up a whole world of new possibilities.

However, there are fundamental challenges facing smart contracts.  And until these challenges are overcome, it is still premature to presuppose their capabilities in enforcing actual legal contracts that have been concluded by parties.

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Hurdles Facing Smart Contracts

Below are at least five hurdles are facing smart contracts.

#1: There is no guarantee of transaction execution

Miners wrap transactions into blocks that are sent around the network for different nodes to confirm and run smart contracts. However, there is no contractual requirement that compels a miner to include the transaction in a block. You can attach a high fee with the transaction but it can still be disregarded by miners because of censorship, collusion, or just plain bad luck.

This means that some business models will not work. For instance, E-Trade provides a “2-second execution guarantee” which is not possible in bitcoin or Ethereum systems where transaction execution is based on game theory instead of service levels.

#2: Smart contracts are still slow

Bitcoin acts as a public ledger for keeping track of balances. The mathematical operation of addition is commutative (i.e., when crediting the balance, x+y=y+x, and when debiting the balance, x+ (-y) = (-y) +x)). Therefore, it does not matter how miners package their transactions in the block since the net result will always be the same.

There could be a dependency chain, but usually transactions will be isolated from one another to allow a node to process transactions immediately as they arrive instead of waiting for the mined block to be received.

However, things are quite different with the Ethereum smart contracts.

Consider a simple calculator that has a balance of 500.

If two incoming transactions tell the calculator to divide the balance by 100 and subtract 3, the result will be 2. However, if the order of transactions were to be reversed, the output will be 4.7. Because a Turing-complete smart contract can theoretically perform anything to the global state, smart contracts can only be executed in chronological order—parallel processing isn’t supported.

The net result is that a node in the Ethereum network must sit idle waiting for a new block to arrive and the exact order of transactions must be known. Otherwise, early processing will produce results that are inconsistent with that of the other nodes. With both Ethereum and bitcoin, if a computer is unable to finish its computations before the next block arrives, that computer will fall behind the rest of the network.

Ethereum’s target of new blocks arriving every 15 seconds is quite ambitious and can raise the risks of a node drowning in the backlog of work.  And the trade-off is clear—smart contracts will yield slow Blockchains.

#3: Scaling is a hurdle

The Ethereum network has been referred to as a “world computer.” Yet its model where every node must execute every smart contract just doesn’t scale.  This is the complete opposite of what the “world computer” should be.  The launch of Cryptokitties and its impact on traffic has raised more controversies about the future of Ethereum protocol.

Decades of research into real-world grid computing and parallel processing teaches us that when there is a lot of work to be processed, it is best to divide it into small tasks which are then distributed amongst the network nodes. This isn’t the case with Ethereum smart contracts.

The Ethereum community is aware of this hurdle and one proposed solution is to shard the computations by namespace i.e. split the network into smaller networks. Other ideas that have been mooted include fee markets for off-chain computations. Bitcoin protocol faces similar scaling hurdles and ideas such as sidechains and lightning, if deployed, can effectively shard the network too.

However, it remains to be seen whether any of the proposed solutions can maintain the key selling points of a public blockchain—decentralized, trustless, and permissionless.

#4: Public blockchains are struggling to remain decentralized

In the recent past, centralization has been the blockchain’s burning issue. End users prefer to execute lightweight software that prunes transactions to focus on their own.  The number of fully-validating computers has been declining and this presents a danger to the security model of the public blockchain.

Ethereum faces the same hurdles as it gains popularity and greater demands are placed on the network, proof of this already being seen in the proposal towards sharding of smart contract execution. So, here’s a question that we should ask ourselves: “If decentralization isn’t a fundamental obligation, why jump through the hoops when we can deploy smart contracts on private blockchains or conventional servers?”

#5: Oracles can break the trust model

The bitcoin protocol can operate as a pure trustless network because its primary function is to help move an internal token around a closed system. However, for smart contracts to be useful they have to execute computations using real-world data such as election results, stock prices, or football score.

Oracles—entities that provide this data—may not be trustworthy. In other words, can we trust oracles? And how will their reputation be determined? Who will record the potentially vast volumes of data to be used by an Oracle so that a particular node can replay the blockchain from the genesis block?

Final Word

Public blockchains are so far transparent but are yet to provide the level of privacy that consumers and businesses are accustomed to with regard to enforcing contractual obligations.  Human involvement is still required to settle the legal disputes that may arise.  Centralized systems provide vastly superior performance in terms of response time.

The absence of a clear use case, compelling business advantage or even social benefits seems to be little reason to deploy an application into production based on smart contracts on a blockchain – a technology that is still in embryonic phase.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 9 rated postsHira Saeed is a tech geek girl with a passion to write on latest technology trends. She is the Founder of Tech Geeks community in Pakistan and also runs her copywriting and social media agency, Digital Doers. Follow her on @heerasaeed.




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Market Overview

Comparing Nasdaq and Bitcoin: What Lessons Can We Learn?

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Bubbles

Over the past few months, lots of people have talked about the similarities between the .com bubble in the early 2000s and the bitcoin market today. It seems that the further down the bitcoin market goes; the more people are using this analogue to help them stay in the game for the long-run.

One of the influential people in the crypto space who often refers to this comparison is Teeka Tiwari at Palm Beach Research Group. While he usually compares the Nasdaq during the late 1990s with the total cryptocurrency market cap, we are here going to compare the Nasdaq during that same period with the market for bitcoin specifically.

Nasdaq vs Bitcoin

In the image above, the top chart is a weekly chart of bitcoin, while the bottom chart is a monthly chart of the Nasdaq 100 Index from 1989 to 2004.

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As we all know, the crypto market tends to behave like the stock market on steroids. Moves are larger, and trends change faster in crypto compared to in stocks. It therefore makes more sense to compare these two charts using different timeframes, which is why I have chosen the monthly chart for Nasdaq while bitcoin is represented with a weekly chart.

There are a few interesting things to take note of regarding this comparison:

The Nasdaq found support following the crash in 2000 and 2001, and has later gained more than 600%. The Nasdaq has, in other words, returned more than three times as much for investors than the broader S&P500 index has done.

One explanation for why all financial bubbles have so much in common is that the one thing that causes them – human fear and greed – never changes.

What was different during the dot-com bubble back in the early 2000s was that communication was slow and ineffective compared to the high-speed Internet connections we have today on our phones and laptops. This is one of the reasons why it took the Nasdaq a few years to rise 1,700%, while bitcoin managed to achieve the same return in just a few months.

Similarly, it took the Nasdaq 30 months to fall 78%, while bitcoin lost 70% in just one and a half month.

Another thing both markets have had in common is that when they were down 70% from the top, many people completely lost faith in the future of these markets.

It has been pointed out by observers that even the arguments these people used against investing in the said markets were largely the same: No underlying value, too much volatility, too much regulations/lack of regulations/bad regulations, lack of social responsibility from the market actors, etc.

In hindsight, it has become clear that only the investors who had the mental clarity to ignore all this noise during the early 2000s were able to catch the 600% move that followed in the Nasdaq.

Diversification saved investors

When we are talking about ignoring noise and riding out the storm, let’s not forget that many of the companies that made up the Nasdaq in the early 2000s did eventually go out of business. Betting everything on a single company, in many cases, ended up being a catastrophe for the investor, despite the fact that the sector as a whole did incredibly well. This really made the benefit of diversification clear to everyone.

We can assume that the same is true for the cryptocurrencies of today. Some will emerge and become hugely successful, while others will slowly but steadily decrease in value and become irrelevant. Which ones they are is extremely difficult to tell at this early stage, but the lesson to be learned is clear: Diversification may be the only free lunch we will ever get in the world.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 33 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Op-Ed

Is Manipulation Behind Bitcoin Cash’s Absurd Rally?

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Although you wouldn’t know it by today’s prices, bitcoin cash (BCH) has topped the crypto market leader board this month. The digital currency more than doubled over the span of 18 days, and in doing so far outpaced the broader market. But a closer examination of the value drivers suggest manipulation could be partly responsible for the rally.

As a reminder, the author has no vested interest in smearing BCH as I believe it to be one of the more advantageous coins on the market today. That said, the circumstances surrounding the most recent rally are peculiar to say the least.

What’s Up with Bitcoin.com?

A Hacked user informed me earlier this week that Bitcoin.com has been using the “BCH” ticker next to the word “bitcoin”. Normally, the ticker “BTC” is reserved for bitcoin, which is the original blockchain we all know about. Instead, the website quotes “BTC” next to the term “bitcoin core”.

In other words, BCH is quoted next to bitcoin and BTC is referred to as bitcoin core. See here for yourself:

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For most readers of Hacked, the distinction is easily discernible, but for new traders the difference isn’t easily gauged.

The first question I have is, how many people bought bitcoin (BCH) thinking they were receiving actual bitcoin (BTC)?

Bitcoin.com describes itself as the “premier source for everything bitcoin.” Although the website doesn’t appear to offer a full-fledged trading platform, users can purchase bitcoin and bitcoin cash using the following link.

It is unclear how long the website has been referring to BCH as bitcoin. For those of us who’ve been following the market for some time, the way BTC and BCH are quoted is certainly strange.

Antpool

A large cryptocurrency mining group by the name of Antpool has also been accused of pumping BCH in recent weeks. The pool announced about six days ago that it is responsible for confirming more than 8% of all bitcoin cash transactions. In addition to confirming those, Antpool is also said to be burning BCH on a daily basis in order to reduce supply and boost prices.

Of course, crypto pumps do not require such elaborate setups to achieve their goals. Pump-and-dumps can be orchestrated rather easily through a chat group on social media. But Antpool does have a large and privileged position in the BCH ecosystem, which has raised suspicion over its recent actions.

Bitcoin Cash is Overbought, According to Tom Lee

Fundstrat’s Tom Lee recently weighed in on the bitcoin cash phenomenon, concluding that the cryptocurrency was overbought. In his view, investors should stick with bitcoin if they had a choice between Core and Cash.

In a segment on CNBC’s Fast Money, Lee said:

“I prefer not to pick winners and losers when we’re looking at cryptocurrencies like bitcoin/bitcoin Cash… Both have merits but if I was putting new money to work today… I would be a lot more interested in buying a lagger that could attract inflows rather than something that’s potentially overbought.”

Bitcoin cash added around $1,000 to its value between Apr. 6 and 23, with prices peaking near $1,600. The cryptocurrency corrected sharply lower on Wednesday and was still declining as of Thursday’s early-morning session. At the time of writing, BCH/USD was down 4.6% at $1,268.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 453 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Decentralization

JP Morgan’s Surprise Cryptocurrency Fees are a Reminder of Why Decentralization Is Sorely Needed

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JP Morgan Chase & Co has been hit with a class-action lawsuit by cryptocurrency traders over allegations of unannounced fees and higher interest rates on purchases of digital currencies. Though the allegations have not been proven, extra fees are a tactic routinely employed by traditional banking institutions. In the case of JP Morgan, this has karma written all over it given the way its chief executive has ridiculed digital assets by associating them with fraud.

Class Action Lawsuit

Traders from across the United States are seeking statutory damages of $1 million for unannounced interest charges and fees on cryptocurrency transactions between January and February of this year. The named plaintiff in the lawsuit is Brady Tucker, an Idaho resident who paid a total of $163.91 in fees and surprise interest charges over a six-day stretch.

According to information obtained by Reuters, the lawsuit accuses the bank of violating the U.S. Truth in Lending Act, a piece of legislation that requires credit card issuers to inform customers in writing of any notable change in fees.

The lawsuit asserts that Tucker tried to resolve the dispute by calling Chase’s customer support service directly. His request was turned down, prompting him to seek legal help. According to Bloomberg, the case in question is Tucker v. Chase Bank USA NA, 18-cv-3155, U.S. District Court, Southern District of New York (Manhattan).

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The Growing Case for Decentralization

Depending on who you ask, the allegations against JP Morgan are akin to cryptocurrency fraud not unlike the kind Jamie Dimon talked about while ridiculing bitcoin. But the irony in Dimon’s comments extend far beyond Chase’s latest dealings.

As the actions of Chase bank and other financial institutions have clearly demonstrated over the years, those who control the size and growth rate of fiat money cannot be trusted to do the right thing. As Nassim Taleb argues in The Black Swan, banks have a tendency of losing as much money as they make in the long run due to shady business practices and high-risk ventures. Decisions like these are easy when you are Too Big to Fail.

Decentralization, like the kind advocated by blockchain startups and cryptocurrencies, allows users to trade directly with each other without having to go through a (predatory) middleman. Decentralized systems not only help participants avoid unnecessary fees, red tape and other forms of unwanted intervention, they are virtually impossible to shut down. In this vein, decentralized currencies give people a fighting chance in their battle against never-ending inflation. As we’ve argued before, this is not only a prudent fight, but a noble one as well.

Cryptocurrencies that rely on decentralization offer society a unique value proposition unlike anything we’ve seen in recent history. What’s more, their adoption is not contingent upon us leaving the realm of traditional finance – at least, not yet. That’s because cryptocurrency started off as an obscure and esoteric asset class but has since become a value store for investors. Tomorrow, it will become a viable medium of exchange accepted worldwide.

That said, we are still in the very early days of the crypto revolution and it may be a while still before we can conclusively prove people like Dimon wrong. But crypto backers and investors should take comfort in knowing that big banks rarely lead in disruption these days. They have the resources to play catch-up, which they are clearly doing with blockchain.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 453 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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