Rootstock Merges Bitcoin and Ethereum to Help with Micro-Lending

Rootstock, a P2P platform based on the block chain that implements smart contracts using the capabilities of Ethereum with the transparency and security of the bitcoin network, is negotiating with the World Bank and some Latin American banks to provide microlending for the unbanked, according to the International Business Times. Rootstock hopes to give banks the means to issue loans from smart contracts.

Rootstock combines the capabilities of Ethereum with the bitcoin network’s transparency and security by using sidechain technology. Bitcoin serves as the fuel that runs the smart contract. Nick Szabo, an expert on smart contracts, has said Rootstock joins the best of bitcoin and Ethereum.

Rootstock’s official launch is scheduled for Dec. 4 and 5, 2015 at LaBitconf in Mexico City .

Rootstock Focus: Microlending

Because bitcoin has matured as a technology, it has allowed Rootstock to focus on use cases like microlending, according to Diego Gutierrez Zaldivar, Rootstock co-founder. He said Rootstock wants to target Latin American needs and launch Rootstock with real use cases with companies seeking to execute smart contracts.

Rootstock has been speaking with The World Bank, Banco Ciudad de Buenos Aires and other banks such as the Brazilian development bank, BNDES, he noted. There is also a group called SystemaD within the Latin American Bitcoin NGO that is working on financial inclusion. This group is testing the technology in Sao Paulo and Buenos Aires slums.

Zaldivar said Rootstock is designing tools to operate micro lending programs for the unbanked with a higher level of transparency. He said a smart contract platform that is neutral and secure enough to run such a platform are key components.

Developing the platform with NGOs so that anyone with a smart phone can use it will take between two and three years, he said. The project is not strictly a technological solution as there is a cultural aspect involved. It is necessary to explain at a bank how to run a loan from a smart contract. In addition, it is necessary to be able to exchange crypto tokens for each country’s actual currency.

The concept is to join an Ethereum-compatible virtual machine that relays on the bitcoin network to secure operations using sidechain technology and merged mining. The project has evolved from earlier projects by Sergio Lerner, Rootstock co-founder, such as NimbleCoin and QixDoin, the Turing complete currency released in 2013.

Economic Incentives For Miners

What is new about Rootstock is that it creates economic incentives in addition to the way it leverages the bitcoin security model.

Zaldivar said the block chain is secured using merged mining and a federation, which he called a hybrid model. Previously, security models used a federation, a mining network or a proof of stake.
This is the first time federated and proof of work security models have merged.

Merged mining refers to miners using the hashing power used to secure the block chain to create blocks in a different block chain. By using the same calculations to secure both block chains simultaneously, it is not necessary to have added power and the same hardware can be used. It is necessary to convince miners to merge mining the different block chain as well as bitcoin’s.

Improvements have been made to the software to prevent any loss in profitability for miners when they merge mine Rootstock, Zaldivar said. Previously, coins like Namecoin fell from merged mining since they had a negative impact on bitcoin miners’ profitability.

Bitcoins locked in a bitcoin address turned into “rootcoins,” the currency in the Rootstock block chain, fuel Rootstock’s smart contract execution, Zaldivar said.

He noted the sidechain is a two-way mechanism. When miners receive the rootcoins as payment for executing a contract, they can convert them into bitcoins immediately. There is a one-to-one conversion rate.

The bitcoins in the Rootstock block chain are called rootcoins to indicate they exist in the Rootstock block chain and not in bitcoin’s.

The federation is needed in the beginning since trustless, two-way sidechains have not been fully implemented in bitcoin yet, he said. The pegging mechanism going from bitcoin to rootcoins will be trustless and automated on the Rootstock side. The federation will manage the process that returns to bitcoin.

Sidechain Must Be Secure

Ethereum’s development team examined the technical feasibility of placing Ethereum as a sidechain and reached the same conclusion based on the Blockstream white paper. Gavin Wood, Ethereum’s chief technical officer, said it was not going to be possible to sufficiently secure the sidechain.

Unless the bitcoin miners are persuaded to merge mine, it would not be possible to incentivize enough miners on the sidechain to prevent an attack in which someone gives an invalid block that releases bitcoin on the main chain and mine it themselves with sufficient mining power to outmine the remainder of the network that is attempting to say it is invalid, Wood said in an interview.

Rootstock’s federation will form from exchanges and wallets, while merged mining gives the miners a chance to profit from the execution of smart contracts with the new infrastructure they already have, Zaldivar said.

He said the effect will be to make bitcoin more valuable.

The Rootstock server connects directly to the pool software and can deploy in any mining operation, he said.

Rootstock will set up some servers at the start to ensure there are sufficient nodes servicing the queries.
To add Rootstock to a mining operation will require marginal cost, he said, and the profits might surpass that which miners receive from transaction fees currently. He said Rootstock can surpass this in one or two years with the execution of smart contracts.

Comparisons To Counterparty

Some have compared Rootstock to Counterparty, which uses the bitcoin network and a native token called XCP to perform smart contacts.

Adam Krellenstein, who co-founded Counterparty with Robby Dermody and Evan Wagner, said in an email to International Business Times that while the Ethereum project is interesting, its codebase is “a long way” from being ready for production. He added that merged mining’s economic incentives are such that miners of the parent chain can freely attack the sidechain.

Zaldivar said Rootstock has advantages over Counterparty. He said its Virtual machine offers just-in-time compiling with up to 100 times improved contract execution. It also has Web3 support to allow easy integration with Distributed Apps that possess rich user interfaces and higher user interaction rate since blocks validate every 20 seconds as opposed to the standard 10 minutes that Counterparty requires.

Asked what he thinks of private block chains that banks are backing, Zaldivar said he calls it “Legacy 2.0.” A permission-based block chain has an internal database, a shared database among many entities that loses transparency to the outside world.

There is better transparency within a group of organizations branding the private block chain, he said. However, it does not carry the neutrality and security of a proof of work network, an open network, which bitcoin has.

Zaldivar said Ethereum is a great project, but Rootstock is offering an alternative in its security model and economic incentives. He noted that Ethereum remains in its infancy in developing a network that secures the coin and creates a network effect around its own token.

It took six years to get bitcoin to its present maturity level, he said, noting that if things go faster with Ethereum, its network will need two to three years to stabilize and be as reliable as bitcoin. He said he values everything Ethereum does and wants it to thrive.

Zaldivar said Rootcoin met with Szabo last year in Palo Alto and discussed the need to bring real use cases with transparency. He said the conversation with Szabo continued, along with Sergio Lerner, on providing an alternate smart contracts solution that would run on top of bitcoin and leverage based on its network effect.

Rootstock’s white paper will become public with Rootstock’s official launch at LaBitconf in Mexico City on Dec. 4 and 5, 2015.