Will Ethereum replace Bitcoin’s monopoly in micropayments?

Crazy Review : Financial services company Wedbush Securities predicts that the market size of Bitcoin micropayments will reach $925 billion in 2025. Micropayments have always been a hot topic in the Bitcoin community. The Ethereum community has also begun to explore related technologies. Brainbot founder and CEO Heiko Hees has taken the lead in other similar projects and launched Raiden Network, an Ethereum project aimed at micropayments. Hees believes that Ethereum's dominant position will make it the largest micropayment platform in the future, and the prototype of the network will be released in about three months.

Translation: Annie_Xu

Micropayments have long been one of the most anticipated use cases for Bitcoin, but they will soon be available on Ethereum; the decentralized blockchain network that has recently reignited interest in the cryptocurrency space.

While the internet has historically prohibited payments for extremely small amounts, proponents of the micropayment use case believe it will eventually expand to everything from artwork to media payments to micropayments on social media.

Market observers predict that there will be a lucrative market for companies that provide micropayments in the future. For example, financial services company Wedbush Securities predicts that the Bitcoin micropayment market will reach $925 billion by 2025.

One of the early projects exploring micropayment applications on the Ethereum platform was Raiden Network, whose lead developer is Heiko Hees, the founder and CEO of Brainbot, a German smart contract and blockchain consulting company.

Hees believes that in the future the Ethereum network will be the largest micropayment platform, so small transactions on Ethereum will cost less than on the Bitcoin platform and settle faster. A common annoyance for Bitcoin users is that blocks on the network take 10 minutes to run, and the standard practice for blockchain users is that they need to confirm six times before they are sure that the settlement is complete.

Ethereum, on the other hand, is aiming to get its block time down to 12 seconds, although it’s currently at 15 seconds, and is perhaps the most obvious solution.

But Hees said that on the Ethereum platform, micropayments do not require consumers to personally process micropayments, but rather asset transfers between machines, that is, factory machines or autonomous machines that transfer value.

Hees calls this capability of Ethereum a “blockchain-based” IoT, and uses the example of machines that buy resources, like room temperature, that change according to a preset program. Even for an industry that’s always been innovative, this idea isn’t so commonplace.

21 Inc, the most funded Bitcoin startup, also places great emphasis on machine-to-machine payments and recently announced Sensor21, a proof-of-concept mechanism for regulating the buying and selling of weather data by machines on the platform.

“Enabling these small transfers could give rise to entirely new economic models.”

"The volume of transactions that machines can complete may be greater than the total volume of transactions completed by all humans."

Upgrade and expansion

Speaking of this, I can't help but think of the issue of future blockchain architecture.

Once deployed, the Raiden network may be able to expand Ethereum’s total capacity. Hees said the Raiden network will increase Ethereum’s transaction capacity from 25 transactions per second to 1 million transactions per second. The goal of the Raiden network is to increase the feasibility of other Ethereum functions, including certain smart contracts.

If you talk to decentralized currency enthusiasts, you will come to the conclusion that bringing blockchain technology to more people is the top priority. However, blockchain cannot handle the transaction volume of millions of users. Currently, Bitcoin and Ethereum can only reach 7 and 25 transactions per second; while Visa's transaction volume is 45,000. With the disagreement and debate in the Bitcoin community about the block size, the limitations of public blockchains have been widely known.

Currently, all users jointly run Bitcoin and Ethereum nodes to keep records of every transaction and then verify new transactions. The more transactions there are, the more burdensome the nodes will be to run.

After Joseph Poon and Thaddeus Dryja published a white paper in February 2015, the so-called Lightning Network became a much-anticipated improvement in the Bitcoin community.

Off-chain transactions like the Lightning Network could simplify the use of decentralized currencies and allow blockchain technology to truly achieve the capabilities it advertises to users - fast, near-infinite supply, and decentralized - the characteristics that distinguish Bitcoin and Ethereum from other digital payment methods.

If this is the case, most transactions will be completed off-chain, reducing the load on the blockchain.

In theory, this works because any party to a transaction can move it to the blockchain at any time, so either party can choose to terminate the transaction (but this technology has not yet been implemented, so some developers predict that the actual implementation may be too centralized).

Of course, Bitcoin and blockchain are different; Ethereum is billed as a "world-class computer" and often has the ambition to completely decentralize the Internet. It is a very flexible system that supports smart contracts and many experimental, decentralized applications, including Twitter, which does not require censorship, and Augur, a project that hopes to decentralize the prediction market.

However, although this technology is unique, its scalability is limited.

Ethereum plans to switch from a proof-of-work to a proof-of-stake consensus algorithm, which will help improve scalability; however, developers have concerns about the security of this approach.

Ethereum founder Vitalik Buterin has dismissed security concerns in several blog posts and a white paper, proposing solutions such as hypercubes to increase system capacity.

Advantages of Ethereum

Putting aside the scalability issue for the moment, Hees said that Ethereum’s Raiden implementation borrows heavily from the Lightning Network’s technology, but that it is easier to implement on Ethereum.

“It is complex to implement on the Bitcoin network because Bitcoin’s cryptographic language is quite restrictive. On the Ethereum blockchain, storage and settlement contracts are relatively straightforward.”

Many developers who support Ethereum also hold the same opinion, including blogger Robert McCone, who believes that the Raiden network exists at the center of Ethereum, rather than on top of the system like Bitcoin, thus reducing complexity.

The Raiden Network uses bidirectional micropayment channels so users can increase transaction volume in both directions.

This means that there is no need to directly connect users to the person on the other side of the payment channel, as they can use blockchain to link the channel, or complete the payment through a network of intermediaries until the recipient confirms it.

The Lightning Network document states that the trick of Hashed TimeLock Contracts prevents middlemen from stealing coins.

Heiko Hees

Hees explained:

"If A transfers money to C through B, the way to prevent B from running away with the money is that A sets a secret and hash lock for the cash. Only when A reveals the secret can B apply for the money on the blockchain. However, A will only reveal the secret after making sure that C has received the cash. Only after knowing the secret can the locked transfer be settled on the blockchain."

To provide this service, all hops on the payment channel chain will charge a small transaction fee until the recipient receives the cash.

There are many benefits of off-chain networks.

For example, Hees emphasized that Raiden-type technologies have the potential to provide privacy, a feature that developers in the blockchain field have long been interested in.

“But if you do an off-chain transaction, it’s not so obvious that you’re transferring money to another party. You’re transferring money directly to the other party, and there’s no need for the global ledger to review these transactions.”

Hees believes that after the Raiden network is completed, decentralized trading of different assets will become a natural thing, and users will no longer need to transfer assets to middlemen.

Hees plans to release a prototype of the network within three months.