Bitcoin, arguably the best known if not the best performing cryptocurrency, relies on blockchain technology. But a blockchain is just one of many distributed ledger technology (DLT) models. In fact, comparing a blockchain to a DLT “is like comparing an apple to a fruit,” says Shawn Dexter, at Mango Research. “An apple is a fruit. Similarly, a Blockchain is a DLT.”
A DLT is just a database spread across several sites, and the way data is distributed, structured and agreed upon determines the type of DLT, Dexter adds. Most of the better known cryptocurrencies, such as Bitcoin and Ethereum, use blockchain-styled DLTs. But other cryptocurrencies, such as IOTA, are DLTs that are not blockchains.
Now that we know the distinction, how do we go about choosing the best DLT model? This post will explore Bitcoin’s blockchain, Ripple and IOTA Tangle — three important DLT models behind cryptocurrencies — assessing their pros and cons. The aim will be for investors to feel more confident with their choices.
Let’s begin with the blockchain that Bitcoin is built on.
A Chain of Blocks?
Think about a blockchain, Dexter suggests, as data in a chain of blocks. “Each block encompasses a bunch of data that is verified and validated and then chained to the next block. This data – in the form of chained ‘blocks’ – is distributed to everyone in the network.”
While Bitcoin is dealing with detractors, the blockchain technology behind it is growing in value. The Atlantic’s Derek Thompson called Bitcoin a “frankly terrible currency built on top of a potential transformative technology.”
The power of blockchain extends beyond trading currencies: to validating contracts as well as ensuring the integrity of electoral voting processes. But its most identifiable trait is that it could change the way people think about money and transactions.
Three Main Types of Blockchain
Febin John James at Hacknernoon says there are three main types of blockchain:
- Permissionless Blockchain — there is no authority sanctioning a transaction (used by Bitcoin and Ethereum).
- Public Permissioned Blockchain — has designated people or authority (such as a senior employee or government institution) to sanction a transaction, with data viewable by the public.
- Private Permissioned Blockchain — works with designated people empowered to sanction transactions, but data is not available for public view.
Searching For A Definition
While many talk about the blockchain, fintech expert Sebastien Meunier says there is “no consensus” when defining it. Some say it’s only for Bitcoin, while others argue that it is any DLT with chained blocks.
Meunier takes the maximalist approach to blockchain technology to include any DLT or “cryptographically enabled distributed database management system (DDBMS).” A DDBMS has storage devices spread across a network, so they are not all attached to a common processing unit.
Distributed ledgers, he argues, are DDBMS that “leverage cryptography to provide a decentralized multi-version concurrency control mechanism and to maintain consensus about the existence and status of shared facts in trustless environments.”
It’s a mouthful, but what Meunier is saying is DLTs make transactions safer because there is no single controlling authority and a shared body of evidence against which to verify any trade.
Peer to Peer
The blockchain behind Bitcoin was created to enable peer-to-peer bitcoin payments. The chained blocks of data showed the work or mining behind the transaction.
Meunier says this makes the blockchain behind Bitcoin censorship-resistant, byzantine-fault tolerant, pseudo-anonymous, public, immutable, accountable and safe against repudiation at transaction level.
To Mine or Not To Mine
Picking up on the distinction of work required to produce a Bitcoin or verify a transaction, security researcher Ncrypter at Medium says Bitcoin uses a proof-of-work (POW) algorithm with new coins being generated through a mining process.
IOTA Tangle and Ripple are non-mineable and can only be bought. Rather than POW, these are PoS (proof-of-stake) algorithms that don’t “reward participants for solving complex crypto puzzles to validate transactions and build new blocks through mining.”
What’s Ripple Used For?
Used primarily for connecting payment providers, banks, digital asset corporates through RippleNet — its core payment network — Ripple relies on PoS.
And it’s catching on among banks as a worldwide payment system because it more than just a currency, Laignee Barron at Fortune writes. Ripple is a “system through which any currency can be transferred or traded” and can be thought of as “Western Union without the heavy fees,” Barron explains.
Ncrypter says Ripple is considered by some the “black sheep of the crypto world because it works with financial institutions that are the reason why the blockchain emerged in the first place.” However, with frictionless money transfers at global level and every transaction recorded on the XRP (Ripple token) Ledger,” Ncrypter writes that Ripple has great potential from an investor’s perspective.
While Ripple’s native cryptocurrency, XRP, doesn’t have any value of its own, Tarun Mittal at Your Story writes that it acts as a “token to protect the network, called RippleNet, against spam. Ripple is essentially a real-time global settlement network that offers instant, fail-safe, cross-border payments with maximum transparency and minimum costs.”
Ripple’s Consensus Ledger
Ripple uses a consensus ledger to confirm transactions. As this does not require mining, less computer power is needed resulting in minimum network latency.
XRP tokens are created and distributed at will by Ripple itself, Mittal says, making it a downside for many in the cryptocurrency community who value decentralization of currencies. However, for financial institutions, pre-mined coins are not an issue, as they are using them to enhance payment infrastructures.
Joe Liebkind at Investopedia says blockchain technology has been valuable in the emergence of the IoT as it allows “rapid and transparent verification of data” from interconnected devices. There is a concern, however, which is with the rigid architecture of blockchain: It remains a robust means of storing small amounts of data, but does not work well when it comes to big data scalability.
This is where IOTA Tangle comes in, which offers a twist on the traditional blockchain plus:
- Zero-fee transactions
- Verification by having the transactor authenticate two other random transactions, creating a tangled ledger
- Allows micro and nano-transactions to be processed.
Tangle’s verification method removes transacting costs as well as the centralization problems traditional mining creates. “Because there is no need for miners to process blocks of transactions, there is no motivation to centralize the verification process,” Liebkind writes.
With Tangle, Devices Communicate
Colin Harper at Coin Central explains that Tangle has each user confirm the transactions of other users. So, if you approve a transaction to be sent, “that transaction uses a selected algorithm to process two other unprocessed transactions,” he explains.
Once these two random transactions are confirmed, yours is added to the tangle without the need for a third party. With Tangle, the validator and the user is the same person.
Bennett Garner, also at Coin Central, writes that “IOTA stands for Internet of Things Application” and by getting rid of the block and chain, makes fees and scalability issues non-issues.
Verification happens at the level of devices connected through the network that randomly verify each other’s transactions. “They build consensus through the web of connections between transactions,” Garner writes.
Ripple vs. IOTA Tangle
Pitting these two DLTs against each other is not easy, according to DC Forecasts Marketing Manager Michael Benveniste.
The two serve very different purposes. IOTA Tangle was created for B2B models while Ripple simplifies settlement between every financial institution with faster transactions and lower fees.
Benveniste argues: “Ripple is not even considered as a cryptocurrency because of the banking industry regulating it.” IOTA, on the other hand, is regulated and controlled by different governments of different countries.
A better way of looking at the two DLTs may be by comparing what one does which the other can’t, as outlined by Kavita Soni at Groww.
What IOTA Has Over Ripple
- Zero transaction fees — All other cryptocurrencies have fees.
- More robust technology platform with no limit to how many people can use the Tangle simultaneously.
- IOTA is future-proof, as it is compatible with emerging quantum computing while Ripple will be more vulnerable to decryption.
What Ripple Has Over IOTA Tangle
- Awareness — Ripple cryptocurrency was introduced before IOTA and more users know about it, making it more likely to be used and, therefore, more reliable.
- Credibility — Ripple is being used by major financial institutions around the world.
- Availability — Ripple is available in simpler forms and is more convenient for users to buy.
The DLT model that suits investors best will depend on what they want from their cryptocurrency. There are perks to the various options, but those seeking more credible or ‘institutionalized’ offering will choose Ripple. It’s been around for longer and removes the peer-to-peer focus (and perhaps limitations) of Bitcoin’s blockchain.
For the bolder investor with a focus on the future, and one who requires a robust DLT, IOTA Tangle may provide the better option. As always, we advise researching before you invest to make wise decisions with your money.