How Blockstream is scaling up Bitcoin-related technologies

August 23, 2018 11:52
Ben Richman, Director of Data Services at Blockstream, says his firm is committed to enhancing the Bitcoin scale while maintaining privacy for users. Photos: Reuters, Blockstream

In 2016, Blockstream, a provider of blockchain technology, won backing from Horizons Ventures, a venture capital firm owned by Hong Kong tycoon Li Ka-shing. Ben Richman, Director of Data Services at Blockstream, describes Li as a “visionary” and says Horizons Ventures had been actively providing resources to help Blockstream revolutionize blockchain technology.

As the leading cryptocurrency, Bitcoin is a form of electronic cash. Its most important characteristic is that it is immutable and decentralized, without a central bank or single administrator controlling the Bitcoin network. Bitcoins can be sent from user to user on the peer-to-peer Bitcoin network directly, without the need for intermediaries.

It uses blockchain technology as its underlying technology platform, which is the distributed ledger that synchronizes every 10 minutes and can process and settle transactions without the need for third-party verification.

Emerging with Bitcoin, blockchain technology has fueled a lot of hype about possible applications from enterprises, with some promising use cases in sectors like banking, supply chain and even voting under development.

In an interview to EJ Insight recently, Richman said his firm, which was established in 2014 and is headquartered in San Francisco in the United States, is focused on "building an infrastructure for a global decentralized economy" and that it is committed to enhancing the Bitcoin scale while maintaining privacy for users.

Blockstream is considered a leader in the development of the underlying technologies in the blockchain industry, primarily because of its all-star development team. Many of its members are contributors to Bitcoin Core. Co-founder and CEO, British cryptographer Dr. Adam Back, is recognized as one of the pioneers in the field of digital money.

Invented in 2009 by a person (or group) using the identity "Satoshi Nakamoto", Bitcoin was created with an aim to create "a new electronic cash system" that was "completely decentralized with no server or central authority.”

In 2011, Nakamoto turned over the source code and domains to others in the Bitcoin community, with the “Bitcoin Core” being the direct descendant of the original Bitcoin software client released by Nakamoto after he published the Bitcoin whitepaper. Developers of the "Bitcoin Core” project are the major contributors developing code for Bitcoin.

Given the strong credentials of its development team, Blockstream won instant attention from famous technology investors across the world. The company has raised more than US$80 million so far from investors including LinkedIn founder Reid Hoffman, former Google chairman Eric Schmidt, Digital Garage, and Li Ka-shing's Horizons Ventures.

Horizons Ventures led Blockstream’s series A funding round in 2016 where the company raised US$55 million, and won a board seat at Blockstream. Richman described Li as a "visionary who could see the disruptive ability of the (Bitcoin) technology".

Horizons Ventures "provides us with resources while playing a very active role in board meetings and in assisting the company to assess strategic decisions”, the executive said, without going into details.

Bitcoin has been popular all over the world in the past three years, but last year users experienced longer queues, and there were also more unconfirmed transactions because of the overloaded Bitcoin transaction network, which was seen as a major obstacle to the application of Bitcoin as a payment method.

To solve this problem, Blockstream has been working on layer 2 scaling technologies. One of those technologies is a "sidechain”, a blockchain linked to the Bitcoin blockchain.

A “sidechain” is a separate blockchain that is linked to its parent blockchain, referred to as a “main chain”, allowing tokens and other digital assets to be securely used in the sidechain and then moved back to the original blockchain if needed. Blockchain startups and groups like Blockstream have been exploring the idea as a new means to improve the efficiency of blockchain processing and optimize the blockchain for large scale usage.

In the interview, Richman mentioned the company's earlier launch of the Bitcoin micropayments system "Lightning Network" for small transactions. According to Richman, to reduce the transaction load on the main chain, Lightning Network allows the two parties to establish a "payment channel" through which the two parties can make multiple real-time transactions amongst themselves and others in the Lightning Network. After the two parties close the channel, the system will settle the transaction on the main chain. He believes this feature will allow Bitcoin to be widely used in small, point-to-point daily transactions like buying coffee.

To promote the application of virtual currency as a payment method in everyday life, Intercontinental Exchange (ICE), the parent company of New York Stock Exchange, announced this month the establishment of Bakkt, a Bitcoin firm dedicated to the research and development of virtual currency payment platforms. Bakkt will cooperate with businesses such as the Starbucks coffee chain to guide customers to exchange their virtual assets into dollars and use them at stores.

In March, ICE had joined hands with Blockstream to launch a Cryptocurrency Data Feed (Version 2 launch was announced at the end of the last month). By connecting more than 25 virtual currency exchanges around the world, the data feed provides real-time quotes for a variety of cryptocurrencies for investment institutions such as banks, brokerages, and asset management companies.

Richman pointed out that compared to Lightning Network, which has been built for small, fast transactions, the data feed will focus on corporate investors, and fill the void of real-time and detailed cryptocurrency data in the market which will help traders make investment strategies. He believes that there are still a large number of professional investors and institutions “waiting on the sidelines”. As the cryptocurrency market becomes more transparent and the regulations becomes clearer, a large number of investors will flood into the cryptocurrency investment market.

Cryptocurrencies have seen their prices fall since the beginning of this year; recently Bitcoin even slipped below the US$6,000 mark. According to Coinmarketcap, since an investment boom faded early this year, the total market cap for virtual currencies has evaporated at least US$600 billion. Richman says the bitcoin bloodbath will help "minimize some of the "noise in the market so that we can continue to concentrate on our work."

At the end of the last year, a US$20,000 level for Bitcoin was a much talked about topic within the investor community. As an insider, Richman admitted in the interview that he felt that the 20,000 dollar price tag is "difficult to maintain."

He stressed that his team was not influenced by the price of cryptocurrencies, even amidst the recent downtrend. However, he mentioned that as a blockchain technology advocate, his biggest concern was not the cryptocurrency price trend, but regulators around the world. He cited worries that authorities, through their rules, could make it difficult for the general application of cryptocurrencies.

At present, governments including mainland China, Japan, South Korea, and the United States have adopted regulatory measures for cryptocurrencies. Among these countries, China has taken the toughest stance. After shuttering Bitcoin exchanges in 2017, the government has been calling a halt to domestic mining business.

Despite that, Richman believes China will be a giant market for cryptocurrency and blockchain in future. Blockstream is paying great attention to that market, he said.

In the last year, Blockstream brought in a chief strategy officer, Samson Mow, and hired staff in Shanghai. But Richman admitted that China's tough stance poses a challenge for the company in business expansion in the country.

"I hope the Chinese government will develop confidence in the cryptocurrency market and gradually ease the restrictions,” he said.

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EJ Insight writer