Introduction to Qtum. Part 3

Qtum as a Combination of Bitcoin and Ethereum. Limitations of Bitcoin. Advantages of Ethereum

 

Another limitation of Bitcoin is its transactional capacity. Satoshi Nakamoto has designed the network to create a block of the Bitcoin blockchain every 10 minutes and to be up to 1 megabyte in size. In practical terms, this means that the Bitcoin network can process between three and seven transactions per second while major financial networks such as Visa can process tens of thousands transactions per second.

Bitcoin’s transactional capacity has not been an issue up to 2017, yet it 2017, when the network started becoming really popular, the capacity has become an issue.

When a person sends funds on the Bitcoin network, he or she can choose to include a transaction fee. The fee is completely voluntary, but miners on the Bitcoin network can also choose which transactions they include in the blocks of the Bitcoin blockchain that they create.

Satoshi Nakamoto designed the Bitcoin network to create new coins up until the number of coins reaches 21 million, which should happen at some point in the twenty-second century. According to Nakamoto’s plan, after that the network would continue operating because miners would still have an incentive to create blocks of the Bitcoin blockchain, it is just that after all twenty one million coins are in circulation, the incentive to keep doing the work would be coming from transaction fees on the Bitcoin network.

The fees has not been a problem for a long time (from 2009 until the end of 2016) because miners get a reward from the Bitcoin network for creating blocks of the Bitcoin blockchain, which means that even if a miner creates a block consisting entirely of no-fee transactions, he or she will still get a reward from the network for creating the block.

However, as the network started to become more and more popular, the number of transactions increased significantly. Speaking in economic terms, this meant that the supply stayed the same, yet the demand has increased significantly. If in the past all miners cared about was processing enough transactions to compile them into a block of the Bitcoin blockchain and get their reward for creating the block, now they could become really picky about transactions they were including into the blocks because the block space stayed the same, yet the number of transactions skyrocketed. Because of this, the transaction fee on the Bitcoin network went from around USD$0.35 on January 1, 2017 to USD$52 in December of 2017. While the transaction fee went down since then (you can check the chart with average transaction fees and see what the fees are by visiting this website: https://bitinfocharts.com/comparison/bitcoin-transactionfees.html), the bigger problem remains, which is that for a cryptocurrency to gain true mass adoption, it can’t have fees with 50x fluctuation. Mass adoption would mean that people would start using cryptocurrencies in the daily transactions, such as buying bread, coffee, vegetables, lunch, paying for a gym membership and so on, yet nobody is going to be using a currency to pay for a $10 lunch if the fee to use the currency is $50 when they can use United States dollars and pay no fees whatsoever.

 

Advantages of the Ethereum Network

Vitalik Buterin has launched the Ethereum Network in 2015, six years after the launch of the Bitcoin network.

Just like Bitcoin, Ethereum is a decentralized network with its own cryptocurrency called Ether.

The biggest practical difference between Ethereum and Bitcoin is that Ethereum offers expanded functionality to the users of the Ethereum Network. Bitcoin is a financial network. While Ethereum does have financial features, it is much more than a financial blockchain because it allows developers to create smart contracts and decentralized applications on the Ethereum platform.

The software of the Bitcoin network allows members of the network to send and receive funds. Miners on the network can also use software from the Bitcoin network to compile transactions into the blocks of the Bitcoin blockchain. The Bitcoin software does not provide any other functionality. On the Ethereum network, miners can compile transactions into blocks on the Ethereum blockchain, users can send and receive funds, yet the network also provides tools for developers allowing them to create their own applications.

In practical terms, the main difference between the Bitcoin network and the Ethereum network is that the Ethereum network has the Ethereum Virtual Machine or EVM. The EVM allows developers and members of the Ethereum network to run many different types of software in different programming languages. Depending on the type and on the language, running the software may require a lot of resources from the network, but the capability of the network to execute the software is there. For this reason, from the perspective of a developer on the Ethereum network, Bitcoin is simply a financial decentralized application.

 

Smart Contracts

One of the biggest ideas and innovations that the Ethereum network has brought to the world of blockchain networks has been the idea of a smart contract. As explained earlier, a blockchain network offers a tamper-proof way of storing information, be it information about financial transactions, cargo movement, or verification data for some other kind of asset. In practical terms this also means that a blockchain network could store an agreement between parties and then computer code could monitor the conditions of the agreement and execute them when the conditions are met.

Here is a very simple example of a smart contract. Suppose you want to rent an apartment from someone and you want to pay rent in a cryptocurrency. You and the prospective landlord create a smart contract. You deposit the funds, but the landlord doesn’t receive them yet. The funds are in escrow on a blockchain network. If you receive a digital key to the apartment by an agreed date, the contract releases the money to the landlord. If you don’t get the key, you get a refund from the contract.

As you can see, smart contracts eliminate a need for a third-party verification because verification can occur directly on the network. Because the network is decentralized, it will not discriminate against anyone, be it people, governments, businesses or non-profits.

Most of the records in the world today are stored on paper because before the invention of decentralized networks paper has been the most secure way to store information, even though paper can be damaged and destroyed, intentionally or unintentionally. With blockchain networks, it is impossible to alter information and it is almost impossible to take over a popular blockchain network and edit the information.

With this being said, it is important to note that the Ethereum network executes smart contracts in the way they have been programmed. This means that if you enter into an agreement and later realize that one of the conditions of the agreement works very differently from what you thought would happen, you would not be able to do anything about it. This irreversibility of contract obligations is similar to irreversibility of financial transactions on cryptocurrency networks. It also means that hiring an attorney and going over your future contracts may not be a bad idea, even when the network does not need an attorney or any other legal professional or authority to execute a contract.