Bitcoin, schmitcoin. Let's play piggyback on the blockchain

Cryptocash isn't cool any more – and its core mechanism is being hijacked

Distributed compute and user buy-in

Flavien Charlon, founder of coloured coin rival CoinPrism, also uses OP_RETURN. The bloat problem isn’t as bad as people think, he argues.

“We use about 20 bytes per transaction, so it’s a really small amount of data,” Charlon said, adding that in its entire history, his system has taken up just a few hundred kilobytes on the blockchain.

He argues another point: customers will pay for it anyway. Whenever someone sends a Bitcoin transaction, they can include a transaction fee that persuades the miners to include it in their list of transactions to hash. It’s effectively an exchange of digital currency for computing power.

“I’m of the opinion that as long as someone pays for the transaction at the price that the market is willing to mine it, then people should be able to put that transaction in the blockchain,” he said.

There are probems with these points, though. Coloured coins have been even more niche than Bitcoin as an application right now. If they take off as much as Greenspan and Charlon would like, then they would become a far larger part of the blockchain’s data.

Secondly, transaction fees aren’t that relevant right now. The Bitcoin network awards a reward of 25 Bitcoins every ten minutes or so to the miner who successfully solves a constantly-changing mathematical puzzle and hashes the current transactions. That, rather than the small transaction fees, is the key motivation for mining Bitcoins. The block reward is set to halve in value at set intervals, meaning that transaction fees will become more important in the future, but this will be a slow process.

In any case, the Bitcoin blockchain will continue to be a battlefield as purists duke it out with developers wanting a free (or at least very cheap) ride on others’ work. Can the two co-exist happily together?

One approach is to use a concept called sidechains. These enable Bitcoins to be transferred from the Bitcoin blockchain to someone else’s blockchain, and used as assets there. They can then be transferred back when the user wants. This, at least, takes advantage of Bitcoin’s cryptographic security, without smearing other people’s transactions all over Bitcoin’s blockchain.

The problem with this is interoperability. The most elegant way to implement a sidechain would need a fundamental change to the Bitcoin protocol, but many core developers are notoriously conservative. Blocksteam, the company behind the sidechain approach, now appears to have gone with another option, in which a handful of miners change the way that they mine. Notwithstanding the difficulties, this approach is generating some interest among investors. In November, sidechain startup Blockstream scooped $21m in funding from LinkedIn's Reid Hoffman, Khosla Ventures, Eric Schmidt’s VC firm Innovation Endeavors, Lotus Notes creator Ray Ozzie, and AME Cloud Ventures (that VC firm is owned by Jerry Yang, who founded Yahoo).

Whether it’s by increasing the blockchain size or by using sidechains, one way or another something has to change. Cryptocurrency watchers from venture capitalists through to software scientists have been saying that the real potential for Bitcoin lies in the blockchain. It would be a shame to break it. ®