Rootstock merges Bitcoin and Ethereum to help the World Bank drive financial inclusion

Unlike most blockchain 2.0 startups which are quietly courting banks and other corporate entities, Rootstock is very vocal about its interactions with The World Bank Group, for instance, with which it aims to drive financial inclusion. Perhaps this goes with the territory – Rootstock runs on the Bitcoin blockchain.

Rootstock draws together the capabilities of Ethereum with the security and transparency offered by the Bitcoin network, using sidechain technology and bitcoin as the fuel to run its smart contracts. The project has been publicly backed by smart contracts expert Nick Szabo who said it combines the best of both worlds – Bitcoin and Ethereum.

Diego Gutierrez Zaldivar, co-founder of Rootstock said using Bitcoin, which has had some time to mature as a technology, allowed Rootstock to focus on actual use cases such as micro lending programmes.

He told IBTimes: "Our idea is to target specific needs that we detected in Latin America in different areas and also launch Rootstock with some real use cases; companies and organisations that want to start working on smart contract execution."

Zaldivar said Rootstock has been in talks with The World Bank and Banco Ciudad de Buenos Aires and other development banks such as BNDES, the Brazilian development bank. He also mentioned a Latin American Bitcoin NGO called SystemaD, working specifically on financial inclusion, testing the technology with groups in the slums of Buenos Aires and Sao Paulo.

To this end, Rootstock is designing the tools to run these micro-lending programmes for unbanked people, cost efficiently and with a transparency never seen before.

"We think it's key that you have a smart contracts platform that is neutral and is secure enough to run that kind of programme."

He pointed out that these projects are medium term and will not be done in the next six months. "It's more than a technological solution - there is a cultural side to it. You need to explain at a bank how to run a loan from a smart contract. Then you have to have the network that will provide liquidity and will exchange the crypto-tokens for the actual currency of each country.

He said developing the platform with NGOs to the point where anybody with a smart phone will be able to use it may take somewhere between two to three years. "But for us Rootstock is part of a bigger project - turning the promises of cryptocurrencies into a reality."

Crypto roots

The Rootstock concept is to combine an Ethereum compatible virtual machine that relies on the Bitcoin network to secure its operations, using sidechain technology and a merged mining approach. The current state has evolved out of previous projects carried out by Rootstock co-founder Sergio Lerner, like NimbleCoin and the Turing complete cryptocurrency released in 2013 QixCoin.

"So I would say Rootstock is not new in terms that it inherits intellectual work from previous projects. But what is new, is the way we create economic incentives and the way we leverage on top of the bitcoin security model," said Zaldivar.

Merged mining / federation hybrid

"Our blockchain is secured through merged mining and also has a federation. We have a security model that uses merged mining and a federation altogether - so it's the first hybrid model. Until now you had security models that used a federation, a mining network (PoW) or proof of stake."

Merged mining is the process where miners use the hashing power they already use to secure the Bitcoin blockchain to create blocks in a different blockchain. Using the same calculations to secure both blockchains at the same time means you don't need added power and you can use the same hardware, provided you can convince miners to merge mine your blockchain as well as Bitcoin's.

"We made a lot of improvements to our software in order to avoid any loss in profitability by the miners when they merge mine Rootstock. That's a very important thing because in the past some coins like Namecoin, for example, were dropped from merged mining because they were having a negative impact on the profitability of bitcoin miners," Zaldivar said.

"We give the miners and the bitcoin industry a way to profit from smart contact execution and its uses, instead of taking the smart contracts revolution somewhere else."

Rootcoins and sidechains

Zaldivar explained that Rootstock's smart contracts execution is fuelled by bitcoins that are locked in a bitcoin address, and are turned into rootcoins, the currency used in the Rootstock blockchain.

"The sidechain is a two-way mechanism, so when the miners receive the rootcoins in payment for contract execution, they can turn them back into bitcoin right away. So you have a one to one conversion rate. It's actually bitcoins - we call them rootcoins in order to explain that those bitcoins are living in the Rootstock blockchain and not in the Bitcoin blockchain. It's more a conceptual thing."

Zaldivar said the federation is needed in the beginning because trustless two-way sidechains are not fully implemented in Bitcoin yet. On the Rootstock side, the pegging mechanism that goes from bitcoin to rootcoins will be fully automated and trustless. The process that goes back to bitcoin will be managed by the federation.

"The federation is in charge of turning rootcoins into bitcoins. So it's a necessary element of the network now and until Bitcoin implements the OpCodes required to have a fully trustless two-way peg. It's a semi-trust in terms of, it's not proof of work, but it's also automated. We think it's good enough for the early stages of the platform."

Gavin Wood, chief technical officer, Ethereum said his development team had a look at the technical feasibility of placing Ethereum as a sidechain and came to the conclusion, based on the Blockstream white paper, that it wasn't going to be possible to secure the sidechain to a sufficient degree.

He said in a recent interview: "Unless you can persuade the bitcoin miners to merge mine it, it wouldn't be possible to incentivise a sufficient amount of miners on the sidechain to prevent an attack, whereby someone essentially gave an invalid block that would release bitcoin on the main chain and sort of mine it themselves, with a sufficient amount of mining power to out-mine the rest of the network who are trying to say that it's invalid."

Zaldivar said Rootstock's federation will be formed from exchanges and wallets, while its merged mining provides the miners with an opportunity to profit from smart contract execution with the infrastructure they already have in place. The net effect will be to make bitcoin more valuable, he added.

"The Rootstock server can be deployed in any mining operation and it connects directly to the pool software. We will set up some servers ourselves in the beginning to ensure there's sufficient nodes servicing queries.

"Adding Rootstock to a mining operation requires a marginal cost and we think we might surpass the profits that miners are getting from transaction fees at this point. I think we can surpass that in a year or two with smart contracts execution. It's a good addition to their current revenue model."

Counterparty

Rootstock has been compared to Counterparty, which also makes use of the Bitcoin network and a native token, XCP, to do smart contracts. Counterparty was founded by Adam Krellenstein, Robby Dermody and Evan Wagner.

IBTimes contacted Adam Krellenstein for his opinion on Rootstock and he sent this emailed reply: "Our team is in the unique position of having worked closely not just with both Bitcoin and the Ethereum virtual machine, but also with integrating them together directly a year ago. From experience, we can say that while the Ethereum project is very interesting, its codebase is a long way from being production ready. In addition, the economic incentives of merged-mining are such that the miners of the parent chain can attack the sidechain effectively for free."

The Rootstock team believes its technology has several advantages over Counterparty. Rootstock co-founder Sergio Lerner told IBTimes: "From a technical perspective, Rootstock's Virtual Machine offers JIT (just-in-time) compiling for improved contract execution of up to 100 times; Web3 support to enable easy integration with DApps (Distributed Apps) that have a rich user interfaces and higher rate of user interaction as blocks are validated every 20 seconds versus the standard 10 minutes Counterparty requires.

"On top of this due to Counterparty being an overlay protocol on top of Bitcoin it's impossible to have lightweight wallets that don't rely on third party services. In other words the only way to have a trust-less (secure) wallet for Counterparty is downloading the full Bitcoin blockchain.

"From an economic perspective, Counterparty offers few if any incentives to Bitcoin miners as contract execution is paid through XCP transactions that are obscure to them letting miners to profit only from regular Bitcoin transaction fees.

"Also using a proprietary token poses the challenge to create new markets and user adoption in order to provide liquidity and price stability. Rootstock solves all these issues by using the most successful cryptocurrency to date: bitcoin (called rootcoins on the Rootstock blockchain) as fuel for contract execution," said Lerner.

Private chains, or "Legacy 2.0"

In view of the direction Rootstock has taken, IBTimes asked Zaldivar what he thinks of private blockchains of the type most banks are backing at this time.

"I like to call that Legacy 2.0," said Zaldivar. "Basically when you talk about permission-based blockchains what you are doing is having an internal database, a shared database among many entities. You lose transparency to the outer world."

"You have a better level of transparency internally within the group of organisations that brand the private blockchain. And in that sense that is some innovation, I would agree on that."

"But still it doesn't carry the neutrality value and the level of security that a proof of work network, an open network like Bitcoin has."

"So it's ok, I think it's an improvement. Maybe a permission based blockchain will replace Swift, but that won't enable the financial inclusion of the unbanked of the world."

"It's two different beasts. They can live side by side but that [private] won't replace permissionless or the Bitcoin blockchain."

Ethereum

Zaldivar said: "Ethereum is a great project. We just want to offer an alternative in terms of the security model and economic incentives, because Ethereum still is in its infancy in terms of developing the network that secures the coin and creating network effect around their own token."

"They have still to test the switch to Proof of Stake, many things are unknown yet and that might take some years to settle."

"With bitcoin it took six years to get to the level of maturity it has today, so assuming things go faster I think Ethereum will need maybe two / three years to stabilise their network and to make it as reliable as bitcoin. We value everything Ethereum does and want them to thrive."

Nick Szabo

Zaldivar said the involvement of Szabo was not planned and followed an informal meeting they had in Palo Alto last year. "We were discussing that we needed to bring real use cases with transparency, and I was sharing with him my experiences in Latin America and the things we might do. We felt bad about Ethereum departing from bitcoin and not using its network effect."

The conversation with Szabo continued on email including Sergio Lerner, around how to provide an alternative smart contracts solution that would run on top of bitcoin and leverage from its network effect. Later Szabo was sent the Rootstock white paper – he is one of just five people to have read it.

That paper will become public along with the official launch of Rootstock at LaBitconf in Mexico City on December 4th and 5th this year. Zaldivar was sanguine about the fact the project is out in the open, perhaps more than had been expected at this time.

"Yes, we have a lot going on – we just have to keep the focus on creating code."