Ethereum

Ethereum’s serenity

Vitalik Buterin

Recently Vitalik Buterin gave this incredibly detailed talk about Ethereum-2.0 which is Casper + EWASM + PoS + Sharding.
The following video briefly overviews some of the key challenges that the Ethereum cryptosystem has faced. The protocol economics, the cross-contract logic, proof of stake and scalability.

 

 

Decentralized Insurance – Etherisc

Etherisc

Etherisc  is a decentralized insurance platform and protocol. It addresses issues for expanding the scope of smart contracts in real-world applications.

The role of smart contracts in Insurance

Etherisc is a protocol for building smart contracts for risk monitoring, modeling and decentralized applications (Dapps) for insurance products. A Dapp is formally defined as a piece of software, which includes a user interface and a decentralized back end that makes use of the Ethereum blockchain and smart contracts An Etherisc insurance application, for example Flight Delay, runs on the EVM blockchain and can be used without human interface to automatically, reliably, and securely trade, issue, and settle payouts for flight delay insurance contracts over the internet.

The Etherisc protocol standardizes the syntax for creating insurance products from smart contract-based infrastructure. A necessary external component of such contracts is the use of 3rd party data sources for triggering contracts via APIs, which are called ‚Äúoracles‚ÄĚ.¬† Etherisc applies smart contracts to encode an entire insurance workflow from policy pricing, to issuance, to claims, and settlement.

Decentralized blockchain-based approach to insurance is to decrease the conflict of interests embedded in ordinary insurance contracts, in which insurance firms are profit-maximizing and design overly restrictive contracts because of a financial interest to not pay out claims. The incentive derived from utility for each party in a contractor (i.e. insurance provider) and the insured are completely different. By using the blockchain to automate insurance transactions and record critical data on the blockchain.

Current products built on the Etherisc platform

Flight Delay, HurricaneGuard, Collateral Protection, Crop Insurance, and Social Insurance. Each product uses modified smart contracts with a backend of the Etherisc protocol, Ethereum blockchain and 3rd-party APIs to price, underwrite, monitor, trigger, and payout.

Smart contract platforms – Part 1

Smart Contract

This past year i.e. 2017 saw the nobel prize in economics go to Hart and Holmstrom for their work on contract theory. An old pre-print version of their thesis on the Theory of contracts is found here.

Their theory argues that contracts improve efficiency in transactions by setting rules for transactions, and, mechanisms by which rules are enforced. This basic understanding spawned several debates including ones about the boundaries of firms, and, saw entire industries such as software outsourcing, etc. being created.

Smart contracts build upon this theory by  automating exchanges of value, by validating rules, between two intervening parties for any transaction. Ethereum & Solidity programming have been predominant mechanisms by which contracts are written on software applications.

A unique token mechanism that provides for a global validation of the contract on the Blockchain has created a very unique set of applications. For example Augur is a smart contract based token that rewards participation in prediction markets.

Similarly, GNT is a smart contract based token that rewards individuals who lend their spare computing cycles. There are many more such contracts for automated payment based businesses, media platforms such as TRON, Block-chain software based EOS, Exchange token BNB used for transferring standalone value, etc…

A recent study found that off the top 100 most valuable coins by marketcapitalization, about 90% of them are smart contract based tokens built atop Ethereum.

Ethereum itself supports many forms of contractized tokens:
1.ERC-20 the most popular value holding token.

2.ERC223- a standardized token that validates and corrects problems with ERC 20.

3. ERC721- Digital asset standards on ethereum.

4. ERC827- A modification of ERC20 that allows transfer of value in-conjunction with Data.

A comparison of these different contracting mechanisms can be found here.

In the next few parts of this post we will look at the Waves platform, the Tron Platform and the NEO paltform all of which advance the smart contracts business.

Mechanisms of Design for Casper

Casper

Casper is the first in the many steps for the roll-out of a new eco-friendly block mining approach, which promises to incentivize mining for Ethereum. On one hand, his approach is very  powerful  because of the net positive utility to all participants in the ecosystem namely

  1. Miners with little or no effort earn an interest
  2. The eco-system is well off now that everyone has an incentive to participate in the network
  3. The environment because very little power is consumed, and mining is no more an ASIC play
  4. Application developers because they now have high-speed and fractional transaction support
  5. Token exchanges because they can significantly leverage large deposits of users to participate on networks.
  6. Speculators because new supply of tokens will be limited, and fewer tokens will be available to trade in the market. A complete rollout should immediately, remove 10-12% of the supply in this market.

On the other hand, this approach is susceptible to all the effects in an economic system that provides returns; e.g. no stake based supports to hard forks, collusion, erroneous voting, etc… Click here to link to the economic model and the whitepaper of Casper¬† Therefore, the designers of Casper have created incentive mechanisms¬† for the adopters that would significantly penalize bad behavior and incentivize good behavior for the miners. The above talk delves into the details of each of the design mechanisms put in place, to prevent different forms of attacks; Though it looks simple, the consequences¬†could have far-ranging¬†impacts, since these mechanisms directly impact behaviors of all participants in the ecosystem.

Proof of Work Alternatives (and irrelevance to the future of cryptocurrencies)

Hashing

Proof of work

Most cryptocurrencies today employ proof-of-work mechanisms; that evolved from Bitcoin’s original mechanism, solving complex hashing problems and consuming a lot of energy.¬† The current Bitcoin implementation uses SHA-256 .¬†This approach to confirming transactions, after validation (on the nodes) is extremely wasteful for many reasons. Crypto-currency designers and blockchain designers¬†such as Dash have created¬†incentive mechanisms, wherein¬†“node” maintainers¬†who validate transactions also¬†get rewarded, in addition to the miners.¬† Some¬†economists and a few bitcoin champions have argued that¬†this¬†conversion of energy to “bits and bytes” through hashing is what provides the fungible value to Bitcoin as an asset.

The Bitcoin core-dev team led by luke-jr (one of the highest contributors) to the Bitcoin core code, have proposed algorithms to update the current Proof of work system. This system hasn’t as yet gained approval of the core – team, miners, etc. however, at some time in the critical future, this might take shape.

Issues with Hashing

a) Firstly, solving the hashing problem consumes significant energy, and this consumption increases as the difficulty of the solution¬†increase at regular intervals. By some estimates, the¬†largest miners combinedly surpass¬†power consumption in some of the world’s nation states.

b) Despite spending the energy there is a possibility that all transactions included in the newly mined block can be abandoned for many reasons, one of which includes the race to include only the longest block with the most number of transactions for reward. In Bitcoin this leads to orphaned blocks. In Ethereum, this leads to blocks called uncle-blocks that are not entirely abandoned but are connected with the main blockchain.

c) Thirdly, the rewards for mining reduces over a period of time, and halves every few months. The next day for halving rewards for the bitcoin blockchain. The assumption of most miners is that this reduction in rewards will be offset by the positive growth in USD valuation of the cryptocurrency.

d) Lastly, as the difficulty levels increase, and the rewards from mining reduce,  equipment used for mining would become obsolete.  This creates a marketplace for mining wherein a few specialists with the ability to keep up with the technology changes needed to mine would dominate.

e) To top it all, there are incentive alignment challenges in these markets, wherein the few miners who dominate the mining market would wield enough controlling power (as in network hash rate) to block any new development initiatives by the core development team. These handfuls of miners can pretty much block or allow any change to the protocol layer.

Lastly, this process of earning disproportionate rewards has led to significant investment in the ASIC technology, and the over-demand for GPUs that are used for mining. Almost the entire of GPU inventory sometimes get bought out by miners, leaving very few of them for the gamers.

To solve this problem of extreme wastefulness, and making crypto-currencies more efficient, there is this massive initiative of the ethereum network towards proof of stake. More on this approach later.

 

Marketplace for computations

Computer

Distributed computing affordable.

In my senior year as a Computer Science undergrad, ¬†I asked the guest speaker about “why it was not yet possible to access sizeable computing power and resources on the internet at very low costs. This given that there were more idle computers on the internet that used computers.” Professor V Rajaraman considered the founding father of computer science education in India was the chief guest, and he gave me an amazing answer – about how if one were to lift a large object say 100 times one’s weight, it would need lock-step coordination. He gave the example of ants and the swarm of ants being able to – in lockstep, carry an object many times their weight because they were able to coordinate¬†perfectly.

 

Computation Power for hire

Later, as generations of computers were built, there was the whole mainframe revolution, then a distributed cluster revolution, and, more recently in the past decade a cloud revolution that started offering such clustered-coordinated-computations as a marketplace. Pay-as-you use models, became possible, though the price of computation seemed exorbitant for students, and firms with very low budgets.  obviously, as with any large infrastructure based marketplace a few top players dominate.

Golem

Golem, a distributed app, running on the ethereum network is one such solution. It allows a pay-per-use model for renting as many nodes as needed to run applications. Both the service providers i.e. individuals who are willing to let other people use idle computing time on their systems, and, customers of the service are bound by an ethereum smart contract. Though Golem is in its very early stages with a Beta being released on the Ethereum Main-net, this distributed app is extremely promising if it succeeds in accomplishing what it has set out for. The kinds of distributed apps, that need high-end computing ranges from developing 3-dimensional graphical applications for games, to, enabling deep learning through massively parallel analytical tools. Today, such infrastructure is accessible only at research universities, large firms or governments. Renting such infrastructure say 10 nodes on the cloud would set one back by a few 100 dollars per day of usage, based on the usage. Golem’s fee-based revenue model will hopefully cost much less for computational usage, and, will possibly democratize and make computation pervasive.

The baby steps were made this past week, but, over the next few years, the possibilities of this are immense. If price parity and network scaling for smart contracts do not bottle neck the growth of this app, a few years down the line, this could truly challenge the dominance of large cloud based infrastructure players, who will either have to switch to a similar model or alter the focus of their businesses. This application is decentralization at work.

The role of crypto-tokens

btc

Crypto-tokens

Crypto-tokens are very important for the crypto-ecosystem. In addition to embodying an equity-like function, crypto-tokens also embody the following for the underlying business:
1) governance model – the model which dictates how many tokens are issued, and who decides the rules for business other than the founding team.
2) security model – the issuance of securities (or shares) of the underlying business based on rules for holding/selling/divesting/etc.
3) the revenue model  Рthe underlying mechanism by which the firm issuing the token earns revenues.
4) reward model – wherein participants on the network rewarded commensurate to their participation on the network

However, crypto-tokens are treated by many technologists and regulators as pure securities or financial instruments, that are akin to shares or bonds. Recently Facebook and Google decided to ban advertising for any new crypto-tokens that were issued, on account of too many tokens promising only “security” related functionality, without any functional revenue or governance model.

The fundamental difference between crypto-tokens and securities is that, though shares/bonds and other financial instruments can be encoded (or embodied) in a crypto-token, through smart contracts written atop ethereum (or other platforms), crypto-tokens can also embody a lot more. For example, they can indicate the true worth of the network as measured by storage available from all users ( e.g. as in FileCoin).

Initial Coin Offers

Whenever a new token is created, firms that create these tokens have to start seeding the network so as to generate a critical mass for the adoption of the token. Once the critical mass of adopters is reached, any token will automatically see increased subscriptions from regular retail users or other stake holders. All of this adoption process has been modeled according to the Bass model of diffusion of technology. What is new here is the process of creating the early adopters on token-based networks.

Airdropping is the new smart contract mechanism wherein networks of users are acquired by any new business. Fundamentally, users who subscribe to airdropping disclose their wallet addresses (bitcoin or ethereum) on a cloud-based exchange to the firm. In exchange for this wallet address, firms gift (airdrop) the new token into the user’s corresponding cloud exchange¬†wallet address. Air-dropping has many functionalities:
1) Firstly, ensuring that the subscriber is aware of the coin technology and risks associated with it, and are genuine users and not bots.

2) Ensuring that subscribers are on particular cloud exchanges – This brings increased adoption to that particular cloud exchange.

3) Seeding the network for usage so as to kickstart the initial governance model for the underlying platform.

Smart contract and explosive growth

Smart Contract

Smart contracts

Etherscan.io is a site that lists smart contract statistics, code and other interesting features of the ethereum blockchain network. It mostly lists applications running on the main-net.

As of date, there are about 17500 verified smart contract with source code listed. An example is here. As can be seen the source code written in the solidity programming language is complex and has logic that consists of loops and other constructs. Most of these smart contracts are for new token offers (ICOs). A few of them, however, are for unique applications – like that of Cryptokitties or game related apps.

That being said, it is not entirely surprising that the ICO market raised 4.5 Billion dollars last year compared to 1.5 billion dollars in VC, seed and angel financing for blockchain and smart contract related companies during 2017.

Smart Contracts – 1 Million+ and counting

However, not to discount the whole smart contract space, The 17000+ listed smart contracts in Solidity are not the only smart contracts that exist on the Ethereum Blockchain. Several of these smart contracts exist on the ethereum blockchain as byte-codes or executable versions of solidity code, that the authors chose not to release as open source. Since the ethereum blockchain is public and can be downloaded scholars have studied them in detail looking for vulnerabilities.

There are more than 1 million smart contracts that have been studied for vulnerabilities, and this number according to this paper has grown 100 fold in just 2017. The distribution of ether – i.e. 1% of the smart contracts locking in 99% of ether makes this network’s distribution very skewed.

Even if 1 smart contract were to be vulnerable Рas is possible this would be a huge risk to the ecosystem. The team at NUS- computer science has created a tool, that can scan the bytecode of smart contracts from the ethereum blockchain, and test it for vulnerabilities. So far they have found about 34000 smart contracts to be vulnerable according to this paper.

CryptoKitties, Price irrationality and scaling

Cryptokitties
Cryptokitties mother and board (owned by an early crypto-kitty enthusiast and collector)

 

CryptoKitties is the first game created on the Blockchain.  The game works when individuals purchase a digital cat by spending ethereum. Individual cat owners can combine one or more cats to produce a third cat that shares physical features of  it’s parent cats. Additionally, there is a marketplace where one cat owner could trade in digital cats. During the initial stages of the game, each digital cat, that released onto the network sold for 1$ worth of ethereum.

Irrationality in Prices of Cats.
Over a short period of time (past 2 weeks) the marketplace exploded with millions of dollars worth kitties trading hands. More recently, cats that were sold during the early stages of the game were being sold at prices more than 100000 USD. The processes of breeding, selling, and buying were all configured as smart contracts wherein trade was autimated when suitable buyers and sellers were matched. An exponential increase in trade of kitties was responsible for almost 15% of the most recent transactions (1500 blocks) on the ethereum network as per the ETH Gas station.

This backlog of transactions resulted in excessive delays on the Ethereum network, even holding up some ICO offers.

Price Irrationality

Off late,¬† crypto coins¬†(bitcoin,¬†litecoin, ethereum, etc..) and crypto assets¬†(e.g. crypto kitties, ICOs, etc.) have seen extreme price irrationality combined with volatility.¬†This has caused significant press and attention to these assets. In this case of crypto kitties, linking the ownership of a digital asset (crypto kittie) through a smart contract and allowing this contract to reside permanently on a globally distributed Blockchain is the main feature.¬† The same functionality can be accomplished for other types of assets, e.g. titles of cars, titles of houses, or titles of land, birth certificates of individuals, etc… and is much more potent at changing real-world product markets. With crypto kitties, price irrationalities are potentially related to the scarcity of supply, since, the rate of production of new kitties is significantly lower than the demand from blockchain enthusiasts.

Advantages

That being said, these technology demonstrator distributed apps and their problems have larger engineering and economic impacts.

  1. The large adoptions of the dapps surfaces infrastructure and engineering problems related to scalability that cannot be unearthed through any form of distributed software testing.  In the short term, the core engineering teams will have to increase their scalability efforts so as to support scale. Just a single successful app, can hold up transactions for hours from other applications on the network at the current rate. If the original goal of becoming a world computer that can theoretically execute any type of contract, has to be achieved, this scalability is imperative.
  2. This explosion of dapps, increases monetary gains for all segments of the crypto-ecosystem e.g. dapp writers, traders, and,  other owners of ether. Such a sudden increase in valuations for a tradeable digital asset has physical limitations, and is going to be corrected Рhopefully by market conditions and not by regulation.