Blockchain

Why Delegated Proof of Stake is Not Proof of Stake?

Why Delegated Proof of Stake is Not Proof of Stake Text with back ground computer.

What is DPOS?

Delegated Proof of Stake Mining was one of the earliest mechanisms of validating and confirming transactions and generating blocks. In this process, a fixed set of Witnesses who are voted by the stakeholders are given the authority to confirm transactions and create blocks for the blockchain in exchange for a small reward. In the case of the Steemit platform 30 witnesses, who were voted on by the Steemit community i.e., all those Steemit users who had Steem Power in their wallets. These 20 witnesses were the all-in-all decision makers for the platform, and it was assumed that these 30 witnesses could theoretically decide on which transactions were valid, which protocol enhancement features could be implemented and rolled out in the blockchain, etc. As per the original design there was a likelihood that at anytime any of the users could vote up or vote down a Witness.¬† ¬†This delegated proof of stake is similar to today’s democratic systems of governance adopted worldwide where the population of citizens vote up their representatives; and if any individual manages to wratch up enough support to control the votes they would then control the entire ecosystem and government.

¬†Here’s a quote from a steemit post on the importance of witnesses.

Witnesses are responsible for finding blocks, seeding the blockchain and setting pricing feeds and interest rates. They are for the most part silent and you never really hear much about them. But they represent a major investment in the steem economy in terms of money and manpower. With steem, the witnesses take turns finding blocks. But your priority as a witness is determined by how many votes as witness you get and the relative stake power behind those votes.You as an end user can vote for up to 30 witnesses and you can change your witness vote at any time for any reason.
Voting for a witness is a way of saying¬†“I support your work. I like what you’re doing and I want you to continue doing it.”
Conversely, removing your vote from a witness is a good way to let them know that you no longer agree with them or their policies.”

Hijacking the Steemit¬† Blockchain –

The past week saw a tremendous new kind of attack in which wallet addresses of large centralized exchanges such as Huobi, Poloniex and Binance were used in an attack by Justin Sun’s Tron foundation to in one stroke replace the entire set of 30 witnesses with their own proxies. The sad part of this is that these exchange based accounts that were used for voting were all owned by exchanges which accepted deposits from 1000’s of users around the world. So if one were to keep their private keys in the hands of exchanges this would likely be the case. The Exchanges could take control and could be co-erced or bribed to do actions such as this to take control of the entire blockchain.¬†

Here is a larger Youtube Video post of the same.

https://www.youtube.com/watch?time_continue=6&v=8oh6Uw_ZH2A&feature=emb_logo

Everyone is waiting to see how this plan plays out and it is interesting to see how and when these changes would echo in other systems that are Proof of Stake based.

The Staking Business

money, finance, business

Traditional Financial Models

While we have written quite a few articles about Defi, the risks they pose, the challenges it poses, and such – we have never really written about Defi in terms of deep linking with the blockchain protocol. Traditional financial institutions use forms of money to loan out, and in the process earns interest. However, this is not necessarily because the lender is truely earning value for the money – through an investment that returns a positive outcome. Very often the borrower can be taking a loss on the borrowed investment, and might inturn be returning the interest because of the contract involved. There is often no ascertainable way in traditional financial modes of earning interest to be sure that the borrower is making positive returns on the borrowed capital.

The Staking Financial Model

Staking is a financial model wherein a participant (who operates as a lender) can make a deterministically positive return on his investment. For example, a staker on a network can earn a positive interest determined by the network protocol. Stakers on the blockchain network are assured of deterministic returns when they submit their deposits to intermediary platforms or directly participate in staking pools for the sake of confirming and mining blockchains. On the overall, staking is a low risk positive return and cash flow business, where one can deterministically determine the returns on ones own investments. Staking for proof-of-stake derived algorithms is a positive step since it reduces the carbon footprint on networks, and enables a steady supply or limits supply to the means.

Staking platform support

While staking is slowly becoming a competitive business, with smart contracts written by many wallet-based platforms such as Coinbase, there are entire businesses such as staked.us that are dedicated to staking one’s crypto holdings for mining. As time goes by and as staking becomes increasingly profitable, more and more crpto-exchanges and wallets will support it. Very often on platforms such as staked.us, users can earn anywhere between 10% and 4% for just staking their cryptotokens. This is a low risk/medium return business dependent entirely on the price of the cryptocurrency so involved.v st.

Decentralized Finance hacks and the problem of non-regulation of exchanges.

Computer image with dots and Decentralized finance hacks text

As much as decentralized finance (deFi) is seemingly an attractive “alternative” but a highly “risky” mode of investment, deFi has its pitfalls. Most recently this was discovered in an extremely complex single transaction smart contract.

Several experts agree that a combination of oracles for price feeds (that are seemingly blindly trusted), an admin key with a coordinator, a pooled group of accounts and trusted keys – handling real-world fiat currencies are subject to 24/7 forms of attacks. Combine this with a significant lack of regulation of exchanges, smart contract API expositing exchanges or deFiservices, these become a nightmare.

One of the most recent such “attacks” happened on the bZx market using leveraged borrowing. A detail of this attack is given in the following link. The attacker borrowed close to a million dollars – in ether, – converted it to a stablecoin on a Defi exchange, within a flash second he sold it on another exchange, causing prices to drop across markets. Then the same individual uses the capital to repurchase at the new lower price, and then he repaid the loan and took the profits.

Algorand’s solution to the blockchain trilemma

Triangle image with text blockchain trilemma

The Blockchain Trilemma

Most blockchains suffer from a trilemma when decentralization, scalability and security cannot be ensured on the blockchain at the same time.

Firstly, decentralization is defined as that property of the blockchain where all stake holders have access to the same amount of resources.
Secondly, scalability where the blockchain is able to process an ever increasing number of transactions within the smallest acceptable “deterministic” time.
Thirdly, any security transaction wherein the blockchain network is able to process the transaction without the possibility of any form of attack.
Most blockchains in today’s world suffers from one if not two of these issues. For example, bitcoin’s blockchain mining is highly concentrated. It is well known that scaling is also a significant problem with bitcoin’s blockchain – since the maximum number of transactions per second processable by the network has been limited by the block-size, and mining algorithm combined.

Algorand – a Blockchain that supports transactions of all types, including smart contracts, promises to be a solution for all three, through a unique and clever “true proof of stake” algorithm. Silvio Micali, the ACM Turing award winner and MIT Computer Science professor and his students are behind this phenomenal idea that accomplishes all three together.

Algorand accomplishes a proof of stake through a three stage process – which¬† doesn’t depend only on how much stake a miner has on the network. The protocol that Algorand uses is called the Byzantine Agreement protocol. BA not only satisfies some additional properties, but is very fast. Roughly said, its binary-input consists of 3 steps in which one of the participants sends a message ot all other players. The network is complete and synchronous,¬† where only those who are online at any given instant of time can participate.

In the paper the describes Algorand, Chen and Micali describe a unique mechanism for describing how blocks are generated.  More on this in a future post.

Smart Contracts and Web Assembly

Recent developments in the Ethereum development community have contributed to a multitude of competing programming languages to write smart contracts that run on the Ethereum virtual machine. What if the Virtual Machine itself were to be changed? and the programming language¬† used to write smart contracts were to change from solidity to other commonly used languages such as C/C++ or even the most secure programming language of Rust, which¬†One of the arguments for supporting this change is the need to support different kinds of hardware (from small devices that run on micro-controllers, to the largest quantum computer), software operating systems and browsers.¬† WebAssembly (abbreviated Wasm), is a binary instruction format for a stack-based Virtual Machine that runs within the javascript virtual machine supported by most of today’s browsers. Wasm is significantly developed and has a seemingly large list of tools that will enable users to build all kinds of apps. A detailed documentation of wasm and all tools supported is provided at this link. https://github.com/mbasso/awesome-wasm

EWasm ArchitectureFigure 2. Depicts the Ethereum Web Assembly and Ethereum Virtual Machine interface and how they inter-operate.

While Wasm apps are slowly gaining ground for different device based applications, the Ethereum foundation is promoting the development of Ethereum Wasm (https://ewasm.readthedocs.io/en/mkdocs/). E-Wasm is a full stack virtual machine layer on top the Ethereum Virtual Machine, that brings all the benefits of WASM i.e., security, portability, speed, and low memory footprint. This layer supports writing of smart contracts in other programming languages such as C/C++/Rust thereby . E-Wasm is designed as a portable target for compilation of high-level languages like C/C++/Rust, enabling deployment on the web for client and server applications in the most commonly used programming languages. The design and specification of EWasm will make development and deployment of Smart contracts atop Ethereum secure and accessible to the common masses without needing the complex syntax of the Solidity programming language. 

Web3 Infrastructure and their effects on today’s cloud-based services

turned-onsilver iMac

Web3

Web3 is the name given to the decentralized web where applications, services and infrastructure are all hosted decentrally. Some of the protocols that drive the web3 are IPFS and Smart Contract platforms and networks such as Ethereum. The infrastructure side will definitely see significant amount of decentralization at every layer.
For example, financial services are already being decentralized through services such as  Celsius.io, nexo.io, compound.finance, etc. Ethereum based smart contracts already operate these markets in ways that were not possible. For example, savings interest rates on crypto holdings (even stable coins) in these markets are way higher than what banks can afford.

Infrastructure

Another interesting area where this is happening is on the infrastructure side – both hardware, computing power, and on software services and support. the protocol that is seeing a resurgence in applications is that of ipFS. It may be a decade away as yet, but using cryptographic means, it might be possible in the near future to get significantly large storage at a fraction of the cost that it would otherwise.¬† Many crypto-platforms such as Filecoin and already releasing their early prototypes onto the market. Similarly,¬† firms such as infura.io support Ethereum smartcontracts with¬† IPFS protocols enabling infrastructure support for a lot of backend software such as for decentralized exchanges for creating financial products, testing them, etc… Sia – is another platform that resembles FileCoin.

Applications

There are more than 3 million smart contracts on ethereum alone, and many more on other platforms such as EoS, Tron and a host of other applications. These applications are on their way to decentralize everything from insurance, to banking , to holding assets. With the ZeroX protocol it is possible to exchange any type of securitized asset and exchange it for anything else in the world.

The web3 – as we are seeing it, will be a tectonic shift in the overall internet industry, that will see a new set of business models that will transform the way we work and live, with a lot more decentralization in the wealth and power created and shared.

DEFI ANALYTICS AND APPLICATIONS

Analytics in computer

The GROWTH OF PRODUCTS

Among the 100+ products (and growing)- a list of products and services running decentralized finance applications we have these sets of projects that provide deep Analytics for decentralized finance. Defi Pulse is one of them ( https://defipulse.com/). A clear aspect of this market is how the Maker platform that we have blogged about repeatedly has dominated the discourse both in terms of decentralized governance, ecosystem participation and value locked up and distributed among their users. As of date, approximately $700 million has been locked up on five categories i.e., lending, decentralized exchanges, derivatives, payments and assets.

Among the different forms of Defi applications we see evolving and documented on Defi pulse are the categories of lending markets (Cash loans or crypto-loans which can collateralize against the borrower’s own crypto-currency holdings), decentralized exchanges where users exchange crypto-tokens with each other, derivatives (both first order and second order ones), payment systems such as Lightning network, etc. and asset securitization mechanisms.

ASSET SECURITIZATION

The asset securitization platforms though have higher potential for growth, if legal blockades against cryptocurrency based smart contracts are entirely  removed and the legal mechanisms to enforce these (probably through other layers of smart contracts) are figured out by these audiences.  As an example, if someone were to securitize a 1 acre land holding, and were to sell 10% of the corresponding tokens to a particular individual in exchange for either another asset (token or cash or an equivalent), then would such a token sale be legally valid. There are already several attempts do this both from a legal and from a technology standpoint – though a successful implementation could possibly mean a shift in many areas.

Here is an example :- https://consensys.net/blockchain-use-cases/real-estate/

Insights from Ethereum Analytics

What is truly amazing about Ethereum Analytics on ethinfo.com is that it provides data backed evidence of all aspects of the blockchain ecosystem. As we’re ending 2019 – here are some insights:

  1. The network transaction fees has remained mostly constant for all of 2019 except for occasional spikes indicating that there is no surge in the number of transactions happening on the network.
Network fees

2. The total ethereum network utilization chart shows that the ether network utilization has been between 80 and 100 for almost all of this year, with some instances where the network utilization has been upto 98%.

The above image shows how much of the ethereum network is spread around the world. What is interesting to note is that despite the severe ban on “Cryptocurrencies” and other allied technologies in mainland china, there seems to be more than 1073 ethereum nodes active at this point. However, it is likely that these nodes are being run out of Hong Kong’s datacenters and not on mainland china. Similarly, India has about 160 ethereum nodes active at this point – despite the legal ambiguity.

The above graph shows that the overall network difficulty as measured in TeraHashes has continuously increased over the past year.

In conclusion – we have a network that supports cryptocurrencies that is sufficiently decentralized and is bursting at its seams in terms of network throughput with the utilization of about 90% with near-constant/predictable transaction fees. If this network moves toward Proof of Stake and some of the changes such as sharding were to play out on schedule, we will see a significant number of apps being deployed on the global platform.

Maker DAO’s decentralized Governance model

Maker Token Holder

Often, two detrimental factors affect open source software development.

1. COST OF OPEN SOURCE DEVELOPMENT – COMPENSATION AND OPERATING COSTS

One, the team that builds and later maintains the open-source software is often under-compensated or have to look out to organizations for funding. More often than that the extremely talented software developers and leaders have to engage in other professions or freelance for corporations so as to sustain their own lifestyles which allows them to contribute to open source. Later these organizations themselves impose rules/restrictions and such on these teams of developers leading them to lose track. The fallacies and problems of development are outlined in the Eric S Raymond essay on “The Cathedral and The Bazaar”. Quoting from the essay —- Brooks (the author of The Mythical Man-Month) even made an off-hand observation related to this: “The total cost of maintaining a widely used program is typically 40 percent or more of the cost of developing it. Surprisingly this cost is strongly affected by the number of users. More users find more bugs.” [emphasis added].

2. GOVERNANCE, MANAGEMENT AND OVERALL ENHANCEMENT OF THE SOFTWARE

While governance, management and enhancement of software has had its own perils, very often open-source software development projects have no particular structure. Very often leaders emerge from within and are strongly supported by sets of developers in their direction of development and vision. However, these single team led projects or leadership-driven approaches have shortfalls – they often do not incentivize the crowd or the public to contribute to the software’s development direction. They also are limited by the leader’s vision, the team’s bandwidth, and limitations. It’s almost like planetary exploration. Those who got there first and created the universe control everything therein. Those who come later or who want to improve the planet have only so much say, and if they want to are free to fork the code base and recreate the entire network – which is almost impossible.

MAKER DAO elegantly solves both these problems through an innovative governance protocol. Firstly, Maker allows for public financial innovation wherein individual teams are allowed to propose enhancements to the Maker platform. Each proposal submitted as a smart contract is voted on by the holders of the Maker Token. Each proposal is submitted as a smart contract and has two parts :

  1. The actual proposal to be implemented on the Maker platform and the details of the implementation. An example proposal is given here: https://vote.makerdao.com/executive-proposal/adjust-debt-ceilings-sai-stability-fee-and-the-dsr
  2. The fee that the team demands in order for the proposal to be implemented and released to the public is attached as part of the proposal.
  3. Later those who hold the Maker tokens vote for or against the proposal (http://vote.makerdao.com). Once they vote for change and this change reaches a majority count, the proposal becomes “Active”
  4. The Maker Platform generates the fee demanded by the team in order to execute the corresponding proposal improvement, and the proposal goes live after execution. Once the proposal goes live, the team is compensated with the corresponding tokens.
  5. ¬†However, problems persist with this mode of governance. Often, voting is proportional to the number of maker tokens held by the voter. This is currently not yet centralized, however, given that the distribution of tokens as seen from etherscan.io¬† ¬†is as follows: i.e,¬†https://etherscan.io/token/tokenholderchart/0x9f8f72aa9304c8b593d555f12ef6589cc3a579a2¬† ¬†– A total of 884,824.48 tokens held by the top 100 accounts from the total supply of 1,000,000.00 tokens. Secondly, such forms of voting- accomplished via a smart contract often suffer from the same problems as other cryptocurrency-related problems i.e, anonymity, collusion, multiple-accounts for the same individual, lack of identity, etc…. These problems are definitely extremely difficult to solve and need potentially different types of smart contracts and multiple layers of incentives and punishments to prevent a systemic breakdown of governance. Interesting problems to solve….for those interested in computing and in-game theory.
Maker Top 100 Token Holders

Earning interest while you HODL

currency and coin image

Cryptocurrencies and primarily Ethereum backed ones create new modes of earning interest. What was once an ICO backed increased adoption of cryptocurrencies – after being hyper-regulated, and banned by countries, has now transformed into an economy of regulated less riskier Decentralized Finance.

The premise for earning interest in cryptocurrency markets is simple, and below I list a few means to do so* . As a disclaimer, users who choose one of these means do so at their own risk.

  • Crypto-Exchanges and Margin Trading
    • Writing a crypto-exchange allowing traders to trade coins in exchange of small commissions per trade. There are more than 100+ decentralized exchanges which use smart contracts to swap one cryptocurrency to another. This approach needs deep expertise in a variety of areas including cybersecurity. The list of known ones is here (State of Decentralized Exchanges)
    • Margin Trading – On exchanges such as Poloneix.com users can lend their HODL-coins to others who trade on their behalf.
  • DeFI interest earning applications
    • With applications such as compound.finance, nexo.io, celsius.network and a host of others, users can invest their HODL -coins and earn interest off those coins based on rates determined by the network. These applications provide extremely high liquidity and enable users to withdraw the very same day.
  • Staking networks
    • Cryptocurrencies such as Tezos enable users to delegate their Tezos to bakers, who pay them interests. In fact, staked.us provides support to stake more than 10 different cryptocurrencies.
  • Collateralized Debt Bonds using Maker Platform
    • The Maker Network and crypto-platform enable users to set collaterals in their own bonds such that their existing crypto-currencies (e.g., ethereum, augur, etc) can be baked from the maker platform. The smart contract which locks the users’ cryptocurrency then issues a stablecoin known as DAI based on the existing governance rates of exchange. This DAI can either be invested in other DeFI platforms or can be locked into a savings platform through a Dai Savings Rate contract thus enabling them to earn interest on existing Dai holdings.