By Laura Shin for Forbes
In 2015, as financial institutions woke up to the possibility for blockchain technology, which powers Bitcoin, to improve their processes, a horse race began for incumbents to take advantage of the technology before the Bitcoin network gobbles up too much of their business. Throwing both money and human capital at building their own private blockchains, they seem keen to avoid the fate suffered by newspapers, video stores and record stores at the hands of the Internet.
One of the advantages of Bitcoin is that the money can be transferred in 10 minutes, on average, using software. In contrast, a credit card transaction appears to be instantaneous but usually takes about three days and several middlemen for the funds to actually be moved.
But Bitcoin’s technology is so new that so far the network is only capable of processing about six or seven transactions a second. In contrast, Visa V +0.83% has the capacity to process 65,000 per second.
While many cite the mantra “open beats closed,” so far, in the private vs. public blockchain race, the public Bitcoin protocol seemed to be hobbled by ideological infighting among developers who seemed loath to even double transaction processing capacity. Meanwhile, several incumbents created code, built in conjunction with blockchain startup Chain, for private blockchains that could process tens of thousands of transactions per second.
But on Monday, Bitcoin startup Blockchain released the code for a promising new technology called Thunder that enables instantaneous transactions between peers, at a scale of 100,000 transactions per second, and was previously outlined in a white paper (and introduced then as Lightning).
“If you think about a cash poker game, you buy in, and that’s a transaction, and you do a transaction with every single hand you play with the other players, but you don’t settle that game until you cash out,” says Blockchain chief executive Peter Smith. “The Thunder network is a similar idea.”
With two smartphones or computers, two parties can “pay” each other with what is the equivalent of poker chips multiple times and then finalize it by settling the funds on the main Bitcoin network whose transactions are openly published on ledgers held on computers around the world.
“It will enable people to make instantaneous transactions at an even lower cost. It looks like we’ll be able to use the technology to reach near-Visa scale and do transactions for somewhere in the region of a hundredth to a thousandth of a penny,” says Smith.
The cost will be almost nil because, if, say, you and your friend create 200 transactions on Thunder, you’ll only pay a fee when you interact with the Bitcoin blockchain again. “It’s like taking an Uber Pool for your transactions,” says Smith.
The introduction of Thunder follows shortly after other startups released code for blockchains for financial institutions. San Francisco-based Chain, which is creating helping enterprise companies build blockchain solutions, unveiled itsChain Open Standard, which it developed in collaboration with Visa, Citi, Nasdaq and other financial institutions. Like Thunder, Chain OS is capable of processing tens of thousands of transactions per second. Unlike Thunder, it will not power peer-to-peer applications but ones which are controlled by financial institutions.
Previously, R3CEV, a consortium of almost 50 global banks, released a distributed ledger system for financial services called Corda, though it eschewed some of the fundamental aspects of blockchain systems and focuses specifically on facilitating legal agreements between financial institutions.
In the race between the public Bitcoin network and the blockchains being built by private institutions, Thunder (or any similar Lightning implementations by other companies) would keep public blockchains competitive. But the technology is in an extremely early alpha phase, and most likely won’t be widely available for at least a year. Upgrades need to be made to the main Bitcoin protocol, and other software needs to be built.
But once Thunder or a similar technology is rolled out, Smith could see it fueling micropayments, maybe to browse the web ad-free, and machine-to-machine payments, such as if your browser or phone transacts with another computer or server in the background.
“People usually trust new systems with lower amounts of value,” says Smith. “So there’s a consumer behavior here that we need to work on — even after the tech rolls out and is upgraded, we need to start the long process of technological adoption.… If you say to someone, Do you want to move $500, they’ll probably say, I don’t think so, but if you say, Do you want to move 5 cents, they’ll say, hey, why not?”
First appeared at Forbes