Cryptocurrency Assignment : Ethreum and Bitcoin

Question

Assignment Description: A report containing a complete discussion and analysis of the given topic in the required context needs to be submitted on Moodle. The report must have following parts:

Part 1: Ethereum & Bitcoin: The students explore Ethereum & Bitcoin by reviewing the literature on the internet as papers, book chapters, and independent scholarly reports by experts, and research based videos. Students participating in the PBL are taught how to do the critical thinking for review of literature. At least three articles related to technology supporting Ethereum need to be analysed in depth by discussing the overall contribution, scope and limitations of each research work. Following aspects related to Ethereum must be discussed:

• Architecture
• Features
• Challenges

Part 2: Applications of Bitcoin: Students need to discuss at least one application in EACH of the following domains supported by Bitcoin:

• Token System
• Decentralised file storage

Part 3: Compare Ethereum and Bitcoin: Bitcoin and Ethereum are the two biggest giants of the cryptocurrency world. Bitcoin (BTC) was the first coin and Ethereum (ETH) followed a few years later. Discuss in detail similarities and differences between the two.

Answer

Ethereum Cryptocurrency
Architecture: The architecture and structure that is followed in Ethereum is quite similar to that of bitcoin. The nodes that are involved in Ethereum store the most recent state of the smart contracts along with the details of the ether transaction. In Ethereum, it is also necessary that a track of the state and current information is kept and stored in the node. Ethereum makes use of accounts, for instance, in the bank account transactions; the ether tokens appear in the wallet and can also be ported from one account to the other [1].

Ethereum Transactions

When a program is utilized in Ethereum, there is a network of thousands of computers that are involved to process the same. The smart contracts that are written in a specific programing language are put together which are referred as bytecode. Ethereum Virtual Machine (EVM) then reads and executed these bytecodes [2].

Ethereum Architecture

Every node present in the network comprises of the transaction copy and the history of the smart contact to ensure that current information and state is present. As a user performs certain action, the nodes in the network come together to an agreement to handle the change. There is a stack-based bytecode language that is used to carry out the actual computation using the EVM. There are miners involved in the transaction to make sure that any of the malicious activity is prevented and avoided.

Features
Smart contract accounts: It is the feature of Ethereum that distinguishes it from the rest of the cryptocurrencies being used. The feature provides the users to carry out the transactions just life the external users and also customize a specific program to manage and administer different set of functions. The business groups and individuals develop their own currency with this feature of Ethereum. There are a few solutions that are being proposed and presented to make sure that the Ethereum is more scalable and the processing speeds are also improved.

Sharding: This is one of the features of Ethereum that has been included to make sure that every node is not involved in the data verification and transaction processing. The Blockchain is therefore divided in shards. This leads to the part of the state to be stored by the node and the processing speed is improved upon. The shards of the Blockchain are involved in the processing of specific parts of the entire state. It is however necessary to develop a seamless communication mechanism between these shards [3].

Off chain Computations: It is a concept and feature of Ethereum that allows a layer apart from the Blockchain wherein all the computations and calculations are carried out irrespective of the complexity levels. This assists in the process of load balancing and also helps in decreasing the overall costs of the transactions involved. It also makes sure that only particular nodes are involved in the complex computations in the place of the involvement of all of the nodes. There are also verifiers engaged that verify the outcomes and solutions.

From proof of work to proof of stake: There is a proof of work mechanism that is associated with the Bitcoins as well as with Ethereum. There are certain drawbacks that are associated with proof of work in terms of transaction speed and scalability. Proof of stake is a feature that is associated with Ethereum in which validators are involved as the owner of the ethers and these will keep their own ethers at the stake at the time of validating a transaction. In case of a failure, the validators lose their own ethers and it does not have any impact on the rest of the transactions and ethers.

Challenges: The challenges that are associated with Ethereum can be broadly classified in two categories. These include obstacles to mass adoption and scalability issues. The smart contracts feature of Ethereum provides the users to carry out the transactions just life the external users and also customize a specific program to manage and administer different set of functions. The business groups and individuals develop their own currency with this feature of Ethereum. There are a few solutions that are being proposed and presented to make sure that the Ethereum is more scalable and the processing speeds are also improved [4].

Another concerning issue associated with Ethereum is the inflated transaction costs. There is an issue with Ethereum algorithm to estimate the transaction costs that may result in the overpay of transactions by up to 70%.

Applications of Bitcoin
Token Systems:Token System is one of the domains that are supported by Bitcoin. There are several applications that have been designed and developed as a part of this concept.

One such application is Bitshares. These are the digital tokens that are present on the Blockchain and reference particular assets, for instance, specific commodities or currencies. The token holders get the unique features and abilities to earn interest on these commodities. These may be in the form of gold, silver, oil, or the currency instruments along with dollars, euros, and likewise.

The features of the application are as listed below:

• Price-stable cryptocurrency: SmartCoins are used in Bitshares that provide the enhanced freedom that comes along with all the forms of cryptocurrencies. It also provides the stability that is guaranteed by dollars and euros [5].
• Dynamic Account Permissions: The application provides the users with the ability to control an account by making use of any weighted combination along with the use of the private keys. This feature makes sure that the risks associated with the security are eliminated.
• Recurring and Scheduled Payments: There is a built-in support in the application for recurring payments along with the subscription payments. The withdrawal of the payments can also be scheduled as per the start and finish dates and the withdrawal limit that is applied.
• Decentralized Asset Exchange: The users are provided with a fast and smooth trading platform.

Some of the other features that are offered by the application include industrial performance and scalability, stakeholder-approved project funding, user-issued assets, transferable named accounts, and delegated proof of stake consensus. Proof of stake is a feature that is associated with the application in which validators are involved as the owner of the accounts and these will keep their own accounts at the stake at the time of validating a transaction. In case of a failure, the validators lose their own accounts and it does not have any impact on the rest of the transactions and accounts.

Decentralized File Storage: Another domain that is associated with Bitcoin is decentralized file storage. One of the applications that have been developed under this domain is Augur.

Augur is a decentralized prediction market that provides the users with the ability to purchase and sell their shares on the basis of the anticipation of an event and the associated likelihood of an outcome that will come up as a result of the event. The application can also be used for the purpose of financial forecasting on the basis of the wisdom of crowds.

There are several features that are associated with the application and these are as listed below.

• Political forecasting can be carried out with the application as the political knowledge can be transformed in predictive power. The outcome of the elections and other political events can be made by the application [6].
• Event hedging is one of the use cases of the application and the events, such as natural calamities, market crashes, etc. may be hedged upon on the basis of the likelihood level attached with each of these events.
• Weather prediction is one of the other features that come along with the application. The possible events associated with the change in the weather conditions can also be predicted with the aid of this application.
• Company forecasting is one of the significant features of this application as the organizations may utilize it to predict their sales and revenues.

The cycle followed to carry out a specific function in Augur starts with the selection of the event followed by the creation of a market. Buy and sell shares and reporting the outcome are the next set of steps involved. The last step involved is claiming of the winnings.

Comparison of Ethereum & Bitcoin

Conclusion
Ethereum is a cryptocurrency in which every node present in the network comprises of the transaction copy and the history of the smart contact to ensure that current information and state is present. As a user performs certain action, the nodes in the network come together to an agreement to handle the change. Sharding is one of the features of Ethereum. It is one of the features of Ethereum that has been included to make sure that every node is not involved in the data verification and transaction processing. The Blockchain is therefore divided in shards. This leads to the part of the state to be stored by the node and the processing speed is improved upon. The challenges that are associated with Ethereum can be broadly classified in two categories. These include obstacles to mass adoption and scalability issues. Bitcoin is another cryptocurrency that is widely used. The application areas of Bitcoin include token systems, decentralized file storage, and many others. Bitshares is one of the applications of Bitcoin which includes the digital tokens that are present on the Blockchain and reference particular assets, for instance, specific commodities or currencies. The token holders get the unique features and abilities to earn interest on these commodities.

References
[1]V. Celeste, S. Corbet and C. Gurdgiev, "Fractal Dynamics and Wavelet Analysis: Deep Volatility Properties of Bitcoin, Ethereum and Ripple", SSRN Electronic Journal, 2018.

[2]S. Corbet, B. Lucey and L. Yarovaya, "Datestamping the Bitcoin and Ethereum bubbles", Finance Research Letters, 2017.

[3]J. Palsson, "Looking Beyond Bitcoin: The Key Features of Ethereum That Will Make it the Big Stack Bully of the…", Medium, 2018. [Online]. Available: https://medium.com/@johannpals/looking-beyond-bitcoin-the-key-features-of-ethereum-that-will-make-it-the-big-stack-bully-of-the-4b52f39394d3. [Accessed: 29- Aug- 2018].

[4]Medium, "Understanding Ethereum — Pertinent problems,Scalability, and Possible Solutions.", Medium, 2018. [Online]. Available: https://medium.com/coinmonks/understanding-ethereum-pertinent-problems-scalability-and-possible-solutions-eb4fec0405be. [Accessed: 29- Aug- 2018].

[5]Bitshares, "Index - BitShares", Bitshares.org, 2018. [Online]. Available: https://bitshares.org/. [Accessed: 29- Aug- 2018].

[6]Augur, "Augur | A Decentralized Oracle & Prediction Market Protocol", Augur | A Decentralized Oracle & Prediction Market Protocol, 2018. [Online]. Available: https://www.augur.net/. [Accessed: 29- Aug- 2018].

[7]C. Masiak, J. Block, T. Masiak, M. Neuenkirch and K. Pielen, "The Triangle of ICOs, Bitcoin and Ethereum: A Time Series Analysis", SSRN Electronic Journal, 2018.

[8]F. Guerra-Pujol, "Solving the Bitcoin Puzzle: A Legal, Normative, and Game-Theoretic Analysis of Bitcoin and Other Cyber-Currencies", SSRN Electronic Journal, 2012.