How a Bitcoin Backbone Gives Small Miners a Leg Up: Matt Corrallo’s Relay Network

Bitcoin Magazine
How a Bitcoin Backbone Gives Small Miners a Leg Up: Matt Corrallo’s Relay Network
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Bitcoin is designed as a peer-to-peer network, where nodes randomly connect to other nodes. Transactions and blocks are transmitted over this network by these nodes, until each node receives all the latest transactions and blocks. This works quite well, as the distributed model makes Bitcoin relatively censorship-resistant; there is no central point of control to shut down or pressure into compliance.

But there are other, more centralized alternatives for transmitting transaction data, too. The best known of these is “the” relay network, introduced in 2014 and maintained by Bitcoin Core developer Matt Corallo: “It’s centralizing, but, hopefully, democratizing.”

On propagation

Corallo’s relay network serves two distinct purposes. First, it adds diversity to Bitcoin. Rather than just needing to rely on the peer-to-peer network, Bitcoin users can opt to receive transaction data and blocks through an alternative channel. This makes it harder to successfully attack the Bitcoin network; the relay network functions as a fallback. But the second, and more important reason, is a potential decrease of network latency.

Speaking to Bitcoin Magazine, Corallo explained:

The peer-to-peer code in Bitcoin Core is pretty gnarly. It’s stable and it works, but it’s not very efficient, and it’s not very fast. The resulting network latency is a problem, especially for miners. It can sometimes take 10, 15 seconds before they receive newly mined blocks. If you’re a miner, 10 seconds is like 1.5 percent loss in revenue. That is potentially a big deal. You don’t want that.”

Some of the bigger miners (typically mining pools) have therefore come up with an alternative solution. Rather than using the peer-to-peer network to transmit new blocks, they have created an alternative – private – network. If one of these miners finds a new block, that miner immediately sends it over to the other miners on their private network, meaning all these miners can start mining on the new block immediately.

The problem, of course, is that this disadvantages all miners not using this private network. When a select group of miners starts mining on a new block faster than other miners this select group gets a head start every time one of them finds a block. This is especially worrisome because it is typically the bigger miners who have the time and resources to set up private networks. Smaller miners might, therefore, become less profitable and eventually drop off the network entirely, which centralizes mining even further.

A Leg Up

Corallo’s relay network is essentially a hub-and-spoke network, which consists of servers set up in eight well-connected Internet traffic hubs: New York, Seattle, Amsterdam, Beijing, Tokyo, Singapore, Hong Kong and Novosibirsk (located in central Russia). Additionally, the relay network uses a fairly basic compression algorithm. Any Bitcoin node can connect to the nearest hub on Corallo’s relay network, and send and receive transactions and blocks to and from other connected nodes.

But unlike Bitcoin’s original peer-to-peer network, Corallo’s relay network is centrally controlled: by Corallo. This means that users of the network need to rely on Corallo, most importantly for maintenance. (Though this doesn’t stop the peer-to-peer network from propagating transactions and blocks in the mean time, of course.)

The relay network is not the most reliable thing,” Corallo acknowledged. “There is no service-level agreement … once in a while servers go down and I don’t fix it right away… sometimes I’m sleeping, or drunk.”

But absent better alternatives, the relay network can still save small miners on cost, meaning they can increase their profit, and remain competitive, Corallo hopes.

It’s democratizing in the sense that larger miners do something like this already,” he said. “The relay network gives smaller miners a leg up, since they don’t need to spend a proportionally large portion of their resources to establish these types of relay networks themselves. So it’s centralizing in some ways, but, hopefully decentralizing, in others.”

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Align Commerce Raises $12.5 Million, Launches Blockchain-based Cross-border B2B Payment System

In April, Bitcoin Magazine reported that global payment provider Align Commerce launched a public beta of its payments platform, the first in the industry to use the Bitcoin blockchain transparently to enable faster and cheaper global payments.

Transactions appear as traditional payments at both the sending and the receiving end, but Align Commerce pipes the transfer through the blockchain instead of using several intermediate banking relays, halving both time and cost of traditional international wire transfers.

Now Align Commerce announced that it has raised a $12.5 million Series A round led by Kleiner Perkins Caufield & Byers (KPCB), The Wall Street Journal reports . This is the first investment of the renowned venture capital firm in a blockchain-based fintech company.

Align estimates that small businesses currently pay $50 billion in wire and exchange fees. Forbes notes that, while wire transfers typically incur fees from the initiating bank, intermediaries and the recipient’s bank, plus the foreign exchange fee, Align charges only a low 1.9 percent foreign-exchange rate.

“We were looking for applications of the blockchain for the last couple of years in ways that could build real businesses and add real value that weren’t at the mercy of the currency valuation which will move up and down and all over the place,” said KPCB general partner Randy Komisar, who will join Align’s board, in a statement reported by Forbes . “And of those blockchain companies, we invested in Align, because we believe it’s a market that’s underserved, with a CEO who understood it well and early traction from customers who reinforced that value.”

The Align Commerce platform is targeted at mainstream business-to-business (B2B) payments. The users on both ends don’t have to know that such things as Bitcoin or the blockchain exist; the only thing they have to know is that the platform processes payments faster and cheaper, with a single 1.9 percent fee paid by the party converting the currency.

“The Align Commerce platform is not only a creative and transformative use of the blockchain technology, but a fundamental reimagining of how global payments can and should be done,” said Komisar in an interview quoted by PYMNTS . “We see incredible potential in Align Commerce as a superior digital path to convenient, transparent cross-border transactions.”

If a company located in the United States buys from a seller located in the Eurozone, the seller invoices in Euros, and the buyer pays in U.S. dollars plus the currency conversion fee. The fact that Align Commerce can reduce transaction fees by as much as 50 percent while still making a profit is an indication of the radical change that the blockchain can bring to the financial industry.

Transparency is another important benefit of the Align Commerce platform, which permits real-time tracking of all operations.

“The $24 trillion cross-border payments market is growing at a breakneck pace, expected to eclipse $54 trillion by 2022, despite a highly inefficient and expensive system in which businesses spend over $50 billion on wire and foreign exchange fees, wait up to seven days for transactions to complete, and have no visibility into the process,” said former Western Union executive Marwan Forzley, now founder and CEO of Align Commerce, in April.

“The blockchain offers a ready alternative,” Forzley said. “The Align Commerce Payments Platform is the first in the industry to use this global rail to help small and medium-sized businesses quickly collect and receive payments in their local currency while avoiding high wire fees and various hidden fees.”

TechCrunch notes that Align isn’t the only company looking to get into cross-border payments based on blockchain technology and Bitcoin. Uphold — the re-branded Bitreserve covered by Bitcoin Magazine in October — also plans to use the blockchain as a transparent layer for cross-border transactions.

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Bitcoin Is Growing up – an Infographic of the Bitcoin Ecosystem

On January 3, 2009, the Genesis block, or the first block in the Bitcoin blockchain, was created. In the coinbase parameter, there was a simple message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” From that one block, Bitcoin was born.

Bitcoin has come a long way from that initial statement by Bitcoin’s pseudonymous founder, Satoshi Nakamoto. The technology is growing up and changing from its early days as a project adopted by impassioned technologists and libertarians to a technology widely researched and used by financial institutions worldwide.

Bitcoin had a rough road ahead of it, as did many early technologies including the Internet. It dealt with newspaper headlines lambasting Bitcoin because of its connection to Silk Road and drugs. Early adopters suffered millions of dollars in losses when early exchange Mt.Gox imploded. “Bitcoin is Dead,” many prophesied.

And yet, as Bitcoin approaches its seventh birthday, we see things changing. It is turning into that curious, wide-eyed technology with ideas as widespread as any normal 7-year-old. Cross-border payments, machine-to-machine transactions, smart contracts, microtransactions, and stock settlements all have been discussed and developed. Nothing is off limits; no question goes unasked.

From the early days of mining using a laptop computer, now bitcoin miners are setting up industrial-sized data centers with hundreds of thousands of high-powered, specialized machines. In January 2014, the Bitcoin network hashrate was only 10 million GH/s. Now it is 504 million GH/s. And as new mining machines are built and sold, the hashrate has continued to increase. During same time frame, there were around 50,000 bitcoin transactions daily. That measure of network utility has increased to about 170,000 bitcoin transactions daily.

A big part of this growth in transactions is linked to the growth in bitcoin-accepting merchants. In mid-2014, there were approximately 65,000 merchants who accepted bitcoin. By mid-year 2015, there were 100,000, which is a 50 percent increase. TigerDirect, a publicly-traded online electronics retailer, has seen incredible results. Of all the buyers that used bitcoin, 46 percent of them were brand new to TigerDirect. Further, orders placed with bitcoin were 30 percent bigger. In August 2015, BitPay, a bitcoin payment processor, recorded an all-time high of 70,000 bitcoin transactions. Bitcoin as a tool of transaction is growing.

Bitcoin as an asset class is also maturing. For the majority of 2015, the price has stayed relatively nonvolatile and constant, with the price fluctuating from $200 to $300. It’s only the past few weeks where the price has experienced such a significant increase, reminiscent of the early years. From January 1, 2013 to January 1, 2014, the price went from $13.41 to $808.05, going as high as $1,147.25 on December 4. Just one month earlier, on November 4, 2013, the price was $225.20. Even the “bubbles” in bitcoin are maturing. On the other hand, the market cap of bitcoin is down from an all-time high of nearly $14 billion to around $5 billion at time of writing.

Venture capital funding, however, continues to poor into the space. In 2013, bitcoin companies raised only $93.8 million. In 2014, firms raised $314.7 million. With another two months remaining in the current year, bitcoin and blockchain companies have raised more than $1 billion.

Regulations are also changing. Before, there were politicians decrying bitcoin because of its use on the underground marketplace Silk Road. Now, organizations such as Coin Center and the Chamber of Digital Commerce work to help these politicians and regulators draft rules that will ensure Bitcoin can continue to grow worldwide. New York has led the regulatory charge with its recent BitLicense. The European Union also recently ruled that Bitcoin was not subject to VAT, giving significant clarity for those participating in the ecosystem.

Finally, the next stage of blockchain companies continues to grow. Augur, a decentralized prediction market, announced that it had raised $5.1 million in a crowdsale. Ethereum, the smart contract and publishing platform, raised $18.4 million in its own crowdsale. It is expected that OpenBazaar, the completely decentralized peer-to-peer ecommerce site will launch in the coming months.

In the graphic below, many of the top Bitcoin leaders talk about the growth of bitcoin and where it is going. Bitcoin is not just in the fringes anymore; it is everywhere. Whether it’s miners or payment processors, wallets or developer tools, the reality is simple: Bitcoin is growing up. And its ambitions are as vast as the many great technologies that came before it.

Jacob Donnelly is a full-time product manager and freelance journalist covering stocks, business and bitcoin. He runs a weekly digital currency and blockchain newsletter called Crypto Brief.

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