What is Plasma and How Will It Strengthen the Ethereum Blockchain?

Ethereum co-founder Vitalik Buterin recently announced Plasma, a scaling infrastructure that will help the Ethereum blockchain handle much larger data sets than is currently possible. For this and other reasons, future cryptocurrency historians will reflect on the second half of 2017 and understand how important this period was for pushing the technology forward. So what problems does Plasma address?

The Crucial Scaling Issue

Cryptocurrency’s future real-world application and feasibility rely on the technology’s scalability. While anyone can connect with Bitcoin and begin a transaction, it may take up to several hours for the network to verify and send the coin. This is not a problem with the current uses cryptocurrencies have, but competing with major payment processors is still impractical. Major competitor VISA’s credit card processing network can handle 2,000 transactions per second.

This delayed transaction time became a sticking point earlier in 2017. Several influential miners and coin-holders gathered to debate a blockchain “edit” called SEGWIT—short for Segregated Witness. The group successfully voted to alter the blockchain with no major chaos or third-party manipulation. The result is a faster Bitcoin, although it still lags compared to other transaction solutions without a clear fix in sight.

As a result, other solutions are widening the gap between themselves and the major cryptocurrency, much like Ethereum did with its most recent announcement.

Enter Ethereum

Ethereum is an entirely different creature than Bitcoin. It uses similar technology but the coin’s real value is not its currency strength, but its status as an application platform. Ethereum’s ability to create smart contracts will likely be an immense part of the software industry, and new developments are being published daily. (Related: "Understanding Smart Contracts.")

While Ethereum is great for creating smart contracts and using the system to enforce and incentivize them, it needs a boost similar to Bitcoin’s SEGWIT. Instead of making incremental changes, Ethereum’s team knows it will require additional on-chain infrastructure like Plasma to keep up with enterprise feasibility. Also, they can make broad-strokes changes to implement these features.

This is where Plasma comes in. Plasma will get rid of unnecessary data in the root chain. It will handle smart contracts much like its foundation, but will only broadcast completed transactions to the public Ethereum chain. This saves an enormous amount of processing power and memory for the chain’s participants, making it more inexpensive to interact with the system’s other participants. It will also speed up transactions enough to let decentralized apps run without worrying about backlog.

Implications for Ethereum

The introduction of Plasma could be a momentous occasion, and a catalyst for a price rally. Speculation has dominated crypto markets in recent months and years, but the differences in individual coin algorithms is now a big informer of price.

Bitcoin was originally lauded for its fool-proof digital currency solution, but so far, there are few places to spend Bitcoin. The most liquid of all currencies is surprisingly illiquid. Moreover, the recent arrival of thousands of “altcoins”—alternative coins—devalues the whole concept. Ethereum might pose a challenge to bitcoin in terms of smart contracts. While ether has potential it's still worth less than 10% of one Bitcoin in dollars today.

ETH gains outpaced BTC until late June, when BTC gained over $1,200 in a matter of weeks

Is Bitcoin’s scarcity enough to justify this boom? Not likely. While Ethereum by design is less scarce than Bitcoin, its other properties carry much more relative value. Bitcoin’s only real advantage was that it was first to market.

As the curtain falls, people might see Ethereum offering perhaps a more realistic look at the future. The slow process of decentralized voting on chain improvements is replaced with a crack team that knows the real use for the technology is not as a tool for speculation. In a twist of irony, this could push prices higher.

The steady increase of ETH in the last week, in contrast with BTC’s spikes, is a positive sign for sustainability

In the coming years, the market will watch as businesses implement smart contract solutions, built on Ethereum, into their systems.

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