We’ve always known cryptocurrency has to be faster. Disruptive innovation is usually faster, cheaper or better than what preceded it. Blockchain is often better and more inexpensive than centralized solutions; now Raiden adds the dimension of speed that’s been lacking thus far with blockchain transactions.

For all of Bitcoin’s trailblazing, transactions are still interminably slow by Internet standards – where we are used to the instantaneousness of instant messaging and app’s that refresh data in real-time.  The seven day moving average for time to confirm a Bitcoin transaction, per Blockchain.info, is about 150 minutes.  Ethereum is faster than Bitcoin, with blocks being approved every 15 seconds, instead of every 10 minutes with Bitcoin. But your transaction (TX) may not be approved in that block, and may have to wait for the next one.  Or the one after that.  It is far from real-time.

In addition to speed, for Ethereum to enter the big leagues of transactions, it needs to increase its capacity; in other words, it needs to scale.  By an order of magnitude.  Ethereum maxes out at 10 transactions per second.  As the number of Ethereum transactions grow, it’s not clear the Ethereum blockchain can keep pace.  Vitalik Buterin, founder of Ethereum, has said that Ethereum will scale to handle Visa’s volume of transactions.  Visa handles 2,000 transactions per second; 200 times what Ethereum can handle.

Long-time blockchain experts like Fred Ehrsam (co-founder of Coinbase) have zeroed in on scalability as the most significant obstacle related to blockchain’s growth. Ehrsam described how “off-chain” solutions are vital to the future of blockchain, given the practical limitations of on-chain processing.  Blockchains are designed to build trust in an otherwise trustless system; this emphasizes universal or global consensus, agreement by all the nodes on the system – which serves its purpose but is necessarily slow.

Into this void, steps Raiden, an off-chain solution  conceived of by a physics major and former Ethereum Core developer, Heiko Hees.  The Raiden team features a brain-trust of computer science experts, other physics majors, and veterans from Bitcoin Armory, Oracle; it also features developers, in addition to Hees, who contributed to Ethereum core (the reason for all this IQ will become clear when I explain the tech behind “state channels” which Raiden implements).

Polkadot, the most recent ICO whose ambitions compare (in size of opportunity) with Raiden, was described by cryptocurrency reviewer Ian Balina (@DiaryofaMadeMan) as a “whitepaper ICO” due to their lack of product.  In contrast, Raiden has had an active GitHub for over two years  (since September 2015) .  It has a working product in uRaiden, a unidirectional payment network (a slimmed down version of Raiden Network), which is available on testnet.  After a security audit, it will be available on Ethereum mainnet. (Update: It was announced at Devcon 3 that uRaiden will be available on Ethereum mainnet by end of November).   The source code and documentation is public.

Raiden recently completed its ICO on November 1 at $0.66/coin and $66M market cap.  The tokens will be distributed to investors November 8-11 and trading may begin shortly thereafter.  There might be an opportunity for a few days in that timeframe to purchase the coin on EtherDelta before it trades on major exchanges.

But back to the Raiden story….

The Raiden Controversy: Vitalik vs. Brainbot

Almost as soon as Brainbot (the company behind Raiden) announced its ICO, there was immediate controversy.  Vitalik Buterin, founder of Ethereum, took to Twitter to decry Brainbot’s method of fundraising.  Buterin posted on Twitter, promising to invest his own money into ‘open source infrastructure’ (he confirmed on the Twitter thread this post was in regards to Raiden announcing its intentions to offer an ICO):

“I’m announcing that 100% of my @omise_go + @kybernetwork *advisor shares* will be either (i) donated to charity (AMF, GiveD, SENS etc) or…(ii) used to privately fund Ethereum second-layer infrastructure (state channels, multisig wallets etc), or some combination of the two…Rules for (ii): must be 100% open source, no baked-in profit scheme (incl ICO token), must be good….Open source infrastructure projects currently are struggling to get funding without the ICO+token route; hopefully this can help” – Vitalik Buterin

Ethereum traders immediately followed Vitalik’s lead and lambasted Brainbot for shameless greed in exploiting ICO fundraising for personal gain.  Sentiment turned against Raiden as people perceived some kind of betrayal; that Raiden ought to be incorporated into the Ethereum core instead of “money-grubbing” through the “sleazy” and “exploitative” mechanism of the ICO.   The criticism is unusual for a few reasons.  For one thing, Ethereum had an ICO of its own which raised millions (and made a lot of people quite a lot of money).  Second, Raiden is, in fact, open-source with its code publicly available on GitHub.  Last, Brainbot never claimed Raiden would be part of Ethereum, the same way the Lightning Network is part of Bitcoin.

Bear in mind, Bitcoin has been talking about scalability via Lightning for four years, and reportedly has four different teams working on it, but few results to-date.  This is one of the perils of Core development (meaning the engineering teams who build the core protocols of blockchains, whether that be Ethereum, Bitcoin, etc.): key projects stall due to under-funding, being under-resourced, and finding difficulty handling large, complex side projects given existing priorities.

Perhaps this is the reason Raiden elected to fundraise to build what will be a sophisticated solution involving multi-hop payment channels which require routing optimization dependent on complex mathematical formulas.  In short, it will need a sizable team of some of the best people.

Nonetheless, the damage was done as far as initial sentiment towards Raiden.  Ethereum traders make up a reasonable portion of ICO traders, as many ICOs are based on ERC-20 tokens built on Ethereum; the currency to participate in them is usually Ethereum.  A good fraction of these traders followed Vitalik’s lead and characterized Raiden as a betrayal and against the spirit of the blockchain community.

Stumbling Out the Gates

I’ll add that long-run, the last thing we want is a replay of Microsoft circa the 1990’s where promising technologies had to get on bended knee and “kiss the ring” of Bill Gates and Microsoft to get his benediction.  If they didn’t or if they refused to be acquired by Microsoft’s acquisition offer, inevitably lowballed, Microsoft would immediately begin to attack the reputation of that company, and fund rivals to overtake them, or simply build it into Windows themselves.

As the blockchain ecosystem evolves, it will face many challenges to its founding spirit, particularly by those who have the best shot of being the effective “operating system” for blockchain applications, and especially related to a kind of centralization where one organization or one person has undue influence on the entire ecosystem.

The controversy badly impaired Raiden’s ICO performance.  It was as though Brainbot, stung by the criticism of ‘greed’, went to the opposite extreme not to market Raiden’s ICO at all.  The crypto-investing community, so dependent on buzz and ‘social proof’, due to a lack of valuation-method-by-way-of-fundamentals, saw very little signs of life in the ICO, and mostly stayed away.  Seemingly the only people speaking volubly on it were ETH traders who had an axe to grind regarding Raiden, furthering negative sentiment.

I’ll explain a few other reasons why Raiden’s ICO (and therefore valuation) were so low, compared to Polkadot, for example.  But first…

What is Raiden?

Raiden is ultimately about faster, cheaper, more scalable transactions on Ethereum and for other ERC20 tokens.  This is meant to enable real-time transactions like micropayments as well as transactions (TX) between devices (Internet of Things).  Raiden is a proprietary technology (though open-source) developed by a private company (Brainbot); development began in September 2015.  It is not the only attempt to improve latency on blockchain TX.  Lightning Network seeks to do the same with Bitcoin.

There are several other private solutions being developed, often that technology is built by app developers who’ve built some micropayments channel technology on their own because no reliable system exists yet (ie: Althea Mesh – Universal Payments Channel)

What Is Off-Chain Technology?

Currently, the main cryptocurrencies reliably process transactions but do so at a speed that is too slow for some use-cases.   For Ethereum to become a means of exchange for real-time transactions, or it to be used in micro-transactions (such as paying a writer a small sum for every minute that a website visitor spends on his article), or for the emerging machine-to-machine economy (or ‘Internet of Things’), Ethereum needs faster transaction times.  Raiden proposes “off-chain” TX processing that seeks to make Ethereum transactions faster, significantly cheaper, and more private.

Off-Chain transactions would begin on the Raiden network (not on Ethereum).  It would happen apart from the primary blockchain processing.  Two parties would agree to transact and they would communicate off the chain, via Raiden.  This is called a “state channel” (or “payment channel”) – it is a private exchange between two parties, setting terms and digitally signing them, and exchanging funds (that are deposited ahead of time).  Only when the exchange is complete, does Raiden go back to the ETH blockchain to finally record the completion of the TX (“settlement”).  Worth noting- only the final transaction is recorded, not the details of the exchange or contract – which remain off-chain (hence, the privacy advantage).

According to Stephan Tual, Founder of Slock.it: “Because their practical implementation is left to the developer, State Channels can be closed at any predetermined point: after 5 hours, or once the total of transactions has reached 20 dollars, etc. The total amount is then settled, for example by a blockchain-based smart contract. If the transaction chain is contested, the evidence can be sent to a blockchain smart contract ‘judge’ which will be able to automatically validate whether or not the signature of the transactions are valid.”

The reason off-chain is faster than on-chain is based on the structure of blockchains like ETH which require global consensus.  This means all the nodes on ETH have to validate a transaction; this global consensus is necessarily slow.  In contrast, off-chain requires only local consensus- two parties digitally signing (“balance proofs”), requiring global consensus only at the end (but the parties can exchange goods/services, money before this happens).

A lack of speed is the cost of ‘global consensus’ in blockchains. Local consensus is achieved by Raiden by establishing a network between different users within the network.  To reiterate, “Balance proofs” (or hashlocked transfers) are digitally signed private transaction messages. They require pre-deposit of payment/tokens. Raiden balance proofs are binding agreements enforced by the Ethereum blockchain.

A simple bidirectional exchange on Raiden is straightforward; both parties deposit tokens; then in real-time they can exchange the tokens based on the terms of the contract they sign with each other.  For cases where people want to exchange tokens, but do not have an open payment channel, they can use Raiden to find an indirect channel through their peers (“multi-hop”).

There are many potential needs for instant payments and micropayments.  You can imagine someone sharing their Wifi connection and charging others per minute or per MB downloaded.  Traditional payment methods aren’t useful because of minimum charges.  On-chain has similar problems.

In the “Internet of Things”, we can envision devices making instant micropayments automatically with one another based on a predefined set of rules.

Direct Transactions

Raiden facilitates payments between parties.  When person A uses the service of person B, they are charged a micro-payment.  Now, forgetting about Raiden for a moment, if you simply think of what happens when one person renders service to another (ie: Person A uses the service of person B), a debt is created.  Person A now owes person B.  In real life, we settle this debt ahead of time (such as paying a movie ticket before you watch it); or afterwards (such as paying the bill after eating at a restaurant).  Online, with micropayments, we can pay at the same time when service is rendered.

When a Raiden payment channel is created, Party A would upload some number of tokens that are “locked” to cover the debts he will incur when he uses the services of Party B.  Perhaps Party A is a consumer and Party B is an online newspaper.  The newspaper charges $0.02 per article and every time the consumer turns a page, he is charged.  On Raiden, the consumer would have to upload some number of tokens ahead of time so that this amount can be deducted as he spends them.  In this scenario payment is unidirectional- with the consumer paying the newspaper but not vice-versa.  Each micro-transaction is considered a “certified check” and the sum of all exchanges between the two parties is the “balance proof”.

In “Direct” transactions, the two parties pay each other directly, and not through others (which is the case with “multi-hop” transactions, explained next)

uRaiden is Brainbot’s first launched product and it facilitates direct transactions.  uRaiden is a slimmed down version of the coming Raiden Network; uRaiden is running on Ethereum testnet and is meant for sending unidirectional payments to predetermined receivers (such as customer -> service provider).  Unlike the coming Raiden Network, it does not support bidirectional or multi-hop transactions.

Multi-Hop

Multiple peer-peer relationships are grouped in a ‘state channel network’. So if Alice wants to transact with Bob but has no open channel with him; but she is connected to Phil who is also connected to Bob, she can transact with Bob through Phil.

Raiden finds the optimal connection between two parties who want to transact. Opening a channel requires locking tokens on the network and so understandably you wouldn’t want to have open channels with everybody. According to Raiden:

“For every payment channel, tokens have to be deposited and are subsequently locked for the lifetime of the channel. It is easy to see that this makes opening payment channels with everyone infeasible: A huge amount of tokens would be required.”

It elaborates on multi-hop: “Raiden creates a network connecting all participants transitively through routes of payment channels. As long as there exists a route connecting payer and payee, the Raiden Network will enable token transfers just as if they were directly connected. This way, every participant only has to open a few channels, but will still able to transfer to any other peer.”

 

Multi-hop transactions, where Party A transacts with Party E, through peers they both have (B,C,D), are needed because every time you close a payment channel, which is time-limited, that has to be recorded on the blockchain, which takes time and is costly.

Let’s say you go to that online newspaper and read one article.  You’d have to deposit tokens, open the channel, close the channel, and submit balance proofs to Ethereum.  Just for $0.02.  So either it’s cumbersome or you’d have to deposit enough tokens with each person you want to pay.  This would be inconvenient and in some ways, would defeat the advantage of micro-transactions which don’t require you to make deposits ahead of time.

Also, ahead of time, you may not know exactly how you want to allocate your RDN tokens; you may not know which micropayments you intend to make.  So you don’t want to have to keep shifting around your token deposits as your needs change.  That’s why intermediaries help; they maintain payment channels with many parties already.  Using them means you pay a small fee, but can keep your tokens unlocked and usable when and where you see fit.

 

 

Other Aspects Of The Raiden Network

There are no required fees for making micropayments (payment channel transfers) on the Raiden Network.  The only fee is an Ethereum gas fee incurred at the end when the total transaction details are sent to the Ethereum blockchain.  However, if you elect to use an intermediary to make payments (for reasons explained above), fees are paid to intermediaries for lending their tokens for such payments.  Raiden states: “Intermediaries within the greater network… will want to charge fees on a low percentage basis for providing their own channels to the network”.  There will be many intermediaries competing on price.

Raiden also addresses scalability.  We’ve all tried to transfer Ethereum when the network is flooded with other transactions, for example during an ICO.  The time waiting for your TX to go through can seem to take forever.  On Raiden, no global consensus is needed and the TX flies through.

Raiden offers privacy because multi-hop transactions happen across multiple intermediaries.  It is therefore difficult to trace where money entered the system and through what account it exited the system.  Onion routing may be used for pre-computed routes so even the intermediaries don’t know who the parties are at both ends of the transaction.

Raiden is not ideal for large transactions because you need to “lock” your tokens for the duration of the payment channel.  The intermediaries who bridge different members on Raiden likely have many channels open- and so their token pool is divided a number of ways.  Therefore, they likely do not have large volumes of tokens dedicated to anyone recipient.

5 Reasons Why the Raiden ICO Raised Less than Expected

 Raiden could have raised significantly more than they did in their ICO.  Because they raised less, the valuation was lower.  This is a result of how the Dutch auction works.  The Raiden auction would end when it received ETH worth 50% of the total token supply (as 50% of total tokens were reserved for the ICO sale); if that threshold was not met, the price would drop further until it was.  Raiden raised $32-33M, so its market capitalization was $64-65M. ((Editor’s note: exact numbers depend on exchanges used to calculate these figures.)

Had Raiden raised significantly more, the valuation would have been more (double what it raised).   There were several reasons for the lower than expected fundraising:

1. Zero Marketing

Brainbot, stung by the accusation of “greed” for having an ICO rather than being part of core (despite the fact that this was never the case), decided to not market the ICO.  After being criticized by Vitalik, they overcompensated to show they were not “greedy ICO promoters” by doing no promotion at all.

I’ve lost track of how many investors told me they heard about Raiden’s ICO for the first time after it ended.  Crypto investors are used to being on the receiving end of full marketing campaign announcing the event.  But Raiden did none of it: no advertising, no press releases, no fancy video with solid production values featuring team members talking about the idea’s potential, no Telegram group, not even a BitcoinTalk announcement thread.

In fact, in Raiden’s own material, they seemed to want to combat the perception of greediness (in raising as much as they could at as high a price as they could), saying that if investors wanted a low price, it was best not to tell anyone about Raiden’s ICO.  In my view, Raiden bent over backwards a little too much in this way, even engaging in anti-marketing.

2. Investors Motivated to Keep Quiet

The Dutch Auction works this way: the price keeps dropping until the contributions are such that all tokens are sold.  Practically for Raiden’s auction, this means that as the price drops, investors must contribute in Ethereum 50% of the total worth of the Total Supply of Tokens.  For example, if the market cap on Day 3 was $800 million, investors would need a cumulative contribution of $400M.  If not, the price would keep dropping.  The longer the 50% mark is not reached, the more the price drops.  Ultimately, when the 50% threshold is reached, it is that price which is given to everyone.  The threshold was met on November 1 when $32-33M was contributed and the market cap of the Total Supply of RDN had fallen all the way to $64-65M.

Perhaps you can see why investors who discovered Raiden’s ICO, had done the research, and knew its potential, weren’t as voluble about it as they are about other ICO’s.  Had more investors heard about it and contributed, the auction would have ended sooner at a higher price, potentially a much higher price (see Polkadot).

Crypto investing is very much based on word-of-mouth… but in this case, Raiden ICO investors kept a low profile.  Investors sometimes become inclined to invest if they hear five or six other people talking about a certain ICO deal, even if they don’t read the white paper.  The lack of buzz w/Raiden ensured investor interest would be soft.  Despite this, there are ample reasons why picking up RDN on the exchanges may still be a solid idea.

3. Pricing Mechanism Discouraged FOMO

If experience shows anything, crypto-investors are impulsive.  If they feel time is of the essence, they will throw money at an ICO at breakneck speeds.  Perhaps you’ve been in one of these race-model ICO’s where the earliest investor gets in and the others get shut out.  Or sometimes the earliest simply get bonuses.

Raiden had no pre-sale, no bonuses and most significantly, they started the bidding with an outrageous valuation – intentionally – to discourage FOMO.  The bidding for Raiden began at ~$30 billion, or equivalent to all the ETH in existence.  Again, this was by design to stop crypto-investors from investing purely out of fear and greed.  To my amazement, it worked; there was actually some methodology to arrest the all-powerful force of FOMO.  I could scarcely believe it.  I applaud the Brainbot team for this feat of “psychological engineering” and hope other ICOs adopt this practice (though they won’t because it will likely reduce their amount raised).  This technique led to a slow pace of investing with approximately $2M being invested every day, as the price dropped gradually.

No one invested right away because they knew they had days if not weeks to invest.  So there was no explosion of investor desperation as there was with Polkadot where $130M was raised right away.  Brainbot did not want to be accused of exploiting greed; it motivated them to structure the ICO in a manner that would lead to sober investing.  It succeeded but at the expense of total ETH volume raised, which in turn resulted in a lower market capitalization and price per coin.

In contrast, ICOs which have an element of competition and scarcity create a higher perceived value; the amounts and clip at which they raise are higher.

4. Overall Investment in ICOs is Down

In September 2017, the amount invested in ICOs was a record – $800 million.  The next month, October 2017, the amount invested dropped by over 50% to $380M.  (note: the chart below shows October data through mid-October).

 

 

In September, a coin which has turned out to be a disappointment, Kin, raised over $90 million.  A coin called PeerBanks raised over $40M.   And FileCoin closed its ICO fundraising in September with over $250M raised.  What a difference one month makes.   Investors wary of lower performance from ICOs shied away from October ICOs, even promising ones.

5. Everything Else

Raiden featured no bonuses.  No pre-sale that would engender hype from early investors leading up to the ICO.  Raiden usually had no one even answering questions in their community on Riot; so arm’s-length they seemed to want to stay away from the ICO.  ETH Traders refused to participate, convinced of Vitalik’s insinuation that Raiden had done the wrong thing by raising money.  There was also a fair amount of FUD thrown around.  Such as:

• The RDN token will have no value as it’s not necessary for Raiden: The primary token used in micropayments on Raiden will be RDN. So you require RDN to make micropayments and will receive payment in RDN.  Further, making micropayments requires locking one’s tokens.  If you will be paying more than one service provider or will expect a reasonable amount of transaction volume, you won’t want to lock up all your tokens; you will use intermediaries (who supply the tokens and lock theirs)- and there will be a fee paid in RDN for that.
• Other Solutions do What Raiden Does: There is no solution at-scale that does off-chain processing. There are roadmaps and plans to improve speed and scalability, but Core (of either Ethereum and Bitcoin) have a poor track record of delivering on those objectives.  Truebit is perhaps the closest but do not appear to emphasize state channel technology.

Where Could Raiden Go From Here?

An ICO with similar ambitions, Polkadot, managed to raise ~$140M with ‘some’ marketing, commanding a valuation of $280M (Raiden had a valuation of $66M following its ICO).  Yes, Polkadot addresses a different market but the scale of the problem they’re solving is comparable to Raiden.  Raiden may well be a sleeper performer as a token, rising after its ICO, whereas Polkadot has already been priced fairly.

Crush Crypto, known for the accuracy of its predictions, described Raiden this way:

“This project has received a lot of criticism because of their decision to go the ICO route. Most people were expecting to be able to use Raiden for free. However, let’s say Raiden was a stealth project instead of a publicized (and highly anticipated) one, and one day the team announces that they can help fix the Ethereum scaling issue by charging a small fee, we believe most people would gladly pay the fee and enjoy the scaling solution…..In the long-term, we are not surprised to see RDN tokens being a top-10 most valuable token because of the expected heavy usage…..We believe RDN tokens can offer ICO participants enough long-term upside potential when the fund raised is below $75 million, giving the project a fully-diluted market cap of $150 million.”

The fully-diluted market cap of Raiden was $66M, well under the $150M specified as necessary for Raiden to make investors a profit.  Many investors on the Raiden Riot chat were surprised the auction went on long enough to get to that lower market-cap/price.

Some of the best investments came when demand was delayed through ‘late recognition’ of a coin’s value.  The controversy over Raiden and initial negative sentiment due to it going the ICO route, may present an opportunity to investors to own the coin before the company and its investors have an opportunity to rebuild Raiden’s image.

Raiden would seem to have a great deal to offer.  It has many use cases, such as: Retail payments, micropayments, instant token swaps (fast decentralized exchanges), machine-to-machine (Internet of Things) transactions.  And recently, Brainbot announced at the DevCon 3 it will launch uRaiden end of November, bringing more attention and interest to the token.

Vitalik Buterin of Ethereum recently announced support of another state channel project; one that he has financial control over, unlike Raiden.  But ultimately users and service providers will decide what’s the optimal solution.

There are so many markets addressable by instant payments and micropayments, it is likely there will be many market entrants and various niches each may specialize in.  Buterin’s decision seems to convey what many already knew – that core alone is unsuited to address the issue of scalability, as it is already dealing with endless maintenance issues and iterative development of other more incremental features to Ethereum.  His support of an external operation seems to reflect his recognition of that.

Raiden has had 10+ people working on their state channel solution for two years; a new company would have to cover a lot ground to catch up.  As time goes on, Ethereum will likely recognize that core doesn’t need to provide the solution for every blockchain problem, and it’s perfectly appropriate for third parties to contribute to the evolution of the overall ecosystem.  In fact, that development will signify the maturity of the Ethereum platform.

How to Exchange-Buy Raiden?

The Raiden ICO ended on November 1, 2017.  The fixed price for all was $0.66 valuing Raiden at $66M.

Brainbot has said they will issue tokens 7-10 days afterwards, so that puts us between Nov 8 and Nov 11.  As soon as people have tokens, they may elect to sell them, most likely on EtherDelta.

EtherDelta has been the go-to for first chance at ERC20 tokens, which Raiden is, of course.  ED does not require official listing by the company.  Instead, investors can upload their tokens to sell them.  So this often happens right after investors get their ICO tokens.  The price on ED may be similar to the ICO price, at least at the outset.

Will exchange-buying provide a discount to the $0.66 price?  Maybe, maybe not.  While there were no bonuses or pre-sales in Raiden’s ICO, several factors could lead to selling pressure, and therefore a drop in price.

First, Bitcoin Segwit 2x fork takes place Nov 16.  Leading up to it, money will move out of alt coins, including ICO coins, and into Bitcoin – which may cause RDN to drop initially (leading to a buy opportunity).

Second, we sometimes see a price increase on listing, followed by rapid selling that drops the price below the ICO price.

Third, token distribution to Brainbot and its employees do not have a vesting schedule.  They have the right to sell immediately, and the company and some employees may want fiat currency after bootstrapping Raiden themselves for a few years.  So several factors may lead to a better price.

But the main benefit is to buy the Raiden token before it hits the main exchanges.  Raiden may have been undervalued for reasons mentioned and there could be  ‘late recognition’ by the crypto-investor market of what Raiden represents.

 

When: Likely November 8-11

Where: EtherDelta

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