When chains and blocks serve no useful purpose
About 18 months have passed since the finance sector woke up, en masse, to the possibilities of permissioned blockchains, or to use the more general term, “distributed ledgers”. The period since has seen a tsunami of activity, including research reports, strategic investments, pilot projects, and the formation of many consortia. No one can accuse the banking world of not taking the potential of this technology seriously.
Naturally, the explosive growth in blockchain projects has driven the development of permissioned blockchain platforms, on which those projects are built. For example, our product MultiChain has tripled in usage over the past year, whether we measure web traffic, monthly downloads or commercial inquiries. And of course, there are many other platforms, such as BigChainDB, Chain, Corda, Credits, Elements, Eris, Fabric, Ethereum (deployed in a closed network), HydraChain and Openchain. Not to mention still more startups who have developed some kind of blockchain platform but have not made it publicly available.
For companies wishing to explore and understand a new technology, an abundance of choice is generally a good thing. However, in the case of blockchains, which still remain loosely defined and poorly understood, this cornucopia comes with a significant downside: many of the available “blockchain” platforms don’t actually address the core problem they are meant to solve. And what is that problem? Allow me to quote the succinct video definition by Richard Gendal Brown, CTO of R3, in full:
A distributed ledger is a system that allows parties who don’t fully trust each other to come to consensus about the existence, nature and evolution of a set of shared facts without having to rely on a fully trusted centralized third party.
To take an extreme example, consider a bunch of Lego bricks tied together with string. If we use the term “block chain” to describe this fashion item, who’s to say that we’re not describing it accurately? And yet, that particular chain of blocks will not help multiple parties to safely and directly share a database without a central intermediary. Similarly, many “blockchain” platforms do something related to chains of blocks, but also lack the necessary properties to serve as the basis for a peer-to-peer database.
Another chain of blocks that does not help with database sharing – source.
Minimum viable blockchain
In order to understand the basic requirements of a distributed ledger, it helps to clarify how these systems differ from regular databases, which are controlled by a single entity. For example, let’s consider a simple system for tracking who owns a particular company’s shares. The ledger, as implemented in a database, has one row for each owner containing two columns: the owner’s identifier, such as their name, and the corresponding quantity of shares.
Here are six crucial ways in which this system could fail its users:
- Forgery: Transferring shares from one person to another without the sender’s permission.
- Censorship: Refusing to fulfill someone’s request to transfer some shares elsewhere.
- Reversal: Undoing a transfer that took place at some point in the past.
- Illegitimacy: Changing the total quantity of shares in the system without a corresponding action by the issuer.
- Inconsistency: Giving different responses to inquiries from different users.
- Downtime: Not responding to incoming requests for information at all.
Because of all these possibilities, the shareholders must maintain a high level of trust in whoever is managing this ledger on their behalf. Building and running an organization worthy of that trust comes with substantial hassle and cost.
Blockchains or distributed ledgers remove the need for this kind of central database operator, by allowing the users of a database to interact directly with each other on a peer-to-peer basis. In our example, the stockholders could safely hold their shares on a blockchain which they collectively manage, and make transfers to each other instantly over that chain. (The disadvantage is a significant loss of confidentiality between the chain’s users, which we won’t address here but I’ve previously discussed at length.)
All this brings us back to the question of blockchain platforms. In order to serve as a viable basis for peer-to-peer database sharing, a blockchain has to protect its participants against all six types of database failure – forgery, censorship, reversal, illegitimate transactions, inconsistency and downtime. While many products in the market fulfill these requirements, quite a few of them come up short. I call these blockchains “half-baked” because they may address some of these risks, but not all. In some respects at least, the database’s users remain dependent on the good behavior of a single participant, which is precisely the scenario we want to avoid.
These half-baked blockchains come in any number of varieties, but three archetypes stand out as the most common or obvious. I’m not going to name individual products because, well, I don’t want to offend. The blockchain startup community is small enough that most of us know each other through conferences and other meetings, and the interactions tend to be positive. Nevertheless, if blockchains (in the sense of useful peer-to-peer databases) are ever going to emerge as a coherent product category, it’s important to distinguish between half-baked and real solutions.
The one validator blockchain
One pattern we’ve seen a few times is a blockchain in which only one participant can generate the blocks in which transactions are confirmed. Transactions are sent to this one node instead of being broadcast to the network as a whole, so their acceptance is subject to this party’s whims rather than some kind of majority consensus. Still, once a block has been built by this central party, it is broadcast to the other nodes in the network, who can independently confirm the validity of the transactions within, and record the new block locally and permanently.
To return to our six forms of database malfunction, this type of blockchain is far from useless. Transactions must be digitally signed by the entity whose funds they move, so they cannot be forged by the central party. They cannot be reversed because each node maintains its own copy of the chain. And transactions cannot perform illegal operations like creating assets out of thin air, because every node independently validates each transaction for correctness. Finally, each node maintains its own copy of the database, so its content is always available for reading.
Unfortunately, four out of six is not enough. The validating node can easily censor individual transactions, by refusing to include them in the blocks it creates. Even if the operators of this node are honest, a system or communications failure can render it unavailable, causing all transaction processing to come to a halt. In addition, depending on the setup, the validating node may be able to transmit different versions of the blockchain to different participants. In terms of censorship and consistency, the database still contains a single point of failure, on which all the other nodes rely.
One platform offers a twist on this scheme, in which blocks are centrally generated by a single node, but a quorum of other designated nodes signs them to indicate consensus. In terms of the risk of inconsistency, this certainly helps. The nodes in the quorum will only lend their signatures to a single version of the blockchain, which can therefore be considered as authoritative. Nonetheless, the quorum nodes cannot help if the block generator censors transactions, or loses its connection to the Internet. Ultimately, this type of blockchain still uses a hub-and-spoke architecture, rather than a peer-to-peer network.
The shared state blockchain
Technically speaking, there are many similarities between blockchains and more traditional distributed databases such as Cassandra and MongoDB. In both cases, transactions can be initiated by any node in the network, and must reach all the other nodes as part of a consensus about the database’s developing state. Both blockchains and distributed databases have to cope with latency (communication delays which stem from the distance between nodes) and the possibility of some nodes and/or communication links intermittently failing.
Distributed databases have been around for a while, so any blockchain platform developer would do well to understand their consensus algorithms and the strategies they use to globally order transactions and resolve conflicts. Nonetheless, it’s important not to take the comparison too far, because blockchains must contend with a crucial additional challenge – an absence of trust between the database’s nodes. Whereas distributed databases focus on providing scalability, robustness and high performance within a single organization’s boundaries, blockchains must be redesigned in order to safely traverse those boundaries.
To return to our six types of database risk, a node in a distributed database need only worry about downtime, i.e. the possibility of other nodes becoming unavailable. Nodes can safely assume that every transaction and message on the network is valid, and are not concerned with forgery, censorship, reversal, illegitimacy or inconsistency. Their worst problem is dealing with two simultaneous but valid transactions, initiated on different nodes, which affect the same piece of data. Solving these conflicts is by no means trivial, but it’s still a lot easier than worrying about “Byzantine faults“, in which some nodes deliberately act to disrupt the functioning of others.
A database can only be shared safely across trust boundaries if nodes treat all activity on the network with a certain degree of suspicion. For example, every transaction which modifies the database must be individually digitally signed since, in a peer-to-peer architecture, there is no other way to know its true point of origin. Similarly, every incoming message, such as the announcement of a new block, has to be critically assessed for its content and context. Unlike in distributed databases, nodes must not be able to immediately and directly modify another node’s state.
Some “blockchain” platforms have been developed by starting with a distributed database, and sprinkling some features on top to make them more blockchainy. For example, by grouping transactions into blocks and storing hashes (digital fingerprints) of those blocks in the database, they aim to add a form of immutability. But unless each node can be sure that its list of hashes cannot be modified by another node, this type of immutability is easily gamed. The standard response to these criticisms is that every security problem can be solved with sufficient time and coding. But this is rather like holding some prisoners in an open field, and trying to stop them escaping with tripwires and ditches. It’s far safer to use a purpose-built concrete structure, whose doors are locked and whose windows are barred.
The one cloud blockchain
By far the strangest phenomenon I’ve seen is blockchain platforms which can only be accessed through their developer’s cloud-based platform-as-a-service. To be clear, we’re not talking about some of a blockchain’s participants choosing to host their nodes on their cloud provider of choice, such as Microsoft Azure or Amazon Web Services. Rather, this is a blockchain which can only be accessed through APIs exposed by the servers of a company “hosting” it.
Let us grant, for argument’s sake, that a centralized blockchain provider genuinely has a group of nodes running under its control. What difference does this make to the users of the system who are sending API requests and receiving responses? The participants have no way of assessing if everyone’s transactions have been processed without omission or error. Perhaps the central service is malfunctioning, or perhaps it is censoring or reversing some transactions deliberately. And if you believe the blockchain provider has no reason to do this, why not use them to host a regular centralized database instead? You’ll get a more mature product with better performance, and suffer none of the risks of working with new technologies. In short, centralized blockchains are about as useful as Lego on a string.
Solving the mystery
We’ve now seen three types of platform which market themselves as “blockchains”, and indeed make some use of a chain of blocks, but which don’t solve the fundamental problem for which these systems are designed. To recap, this is to enable a single database to be safely and directly shared across trust boundaries, without a central intermediary.
Apart from pointing at this peculiar phenomenon, I believe it’s instructive to consider what might underlie it. Why are so many blockchain startups building products which don’t fulfill the promise of this technology, often achieving no more than traditional centralized or distributed databases? Why are so many talented people wasting so much of their time?
I can see two main classes of explanation – technical and commercial. To start with the technical, it is rather tricky to create distributed consensus systems which can tolerate one or more nodes behaving maliciously in unpredictable ways. In the case of MultiChain, we somewhat cheated, by using bitcoin’s battle-hardened reference implementation as a starting point, and then replacing proof of work by a structurally similar consensus algorithm called “mining diversity”. Teams developing a blockchain node from scratch have to think deeply about asynchronous and adversarial processes – a combination which few programmers have experience of. I can certainly understand the temptation to take a shortcut, such as using a single node to generate blocks, or piggybacking on an existing distributed database, or only running nodes in a trusted environment. Choosing any of these undoubtedly makes life easier for developers, even if this undermines the entire point.
As for commercial reasons, every startup seems to be approaching the blockchain opportunity from a different angle. Here at Coin Sciences, we’re focused on becoming a (database) software vendor, so we’re distributing MultiChain for free while developing a premium node with additional features. Other startups want to sell subscription services, so they will naturally build a platform which customers cannot host themselves. Some are hoping to centrally control a blockchain or help their partners to do so (an odd ambition for a disintermediation technology!) and are naturally drawn to consensus algorithms that rely on a single node. And finally, there are companies whose primary goal is to sell consulting services, in which case their platform need not function at all, so long as its website brings in some large customers.
Perhaps another issue is that some blockchain companies are being run by people who are undoubtedly bursting with talent, but lack a deep understanding of the technology itself. In startups carving out a new field, it’s probably vital for strategic decisions to be taken by people who understand the nature of that field and how it differs from what came before. Not a few blockchain startups appear to have painted themselves into a corner by pursuing a product vision which is attractive to their customers, but cannot actually be built.
As a user of blockchains, how can you avoid being caught by these fallacies? When evaluating a particular blockchain platform, be sure to ask whether it fulfills the six requirements of safe peer-to-peer database sharing: prevention of downtime and inconsistency, as well as transaction forgery, censorship, reversal and illegitimacy. And beware of explanations that consist of too much mumbling or hand waving – they probably mean that the answer is no.
Please post any comments on LinkedIn.
PayPal in Talks To Buy Crypto Storage Startup Curv for Around $500 Million, Reports
PayPal could be in talks to buy a cryptocurrency startup focused on providing security solutions for cryptocurrency custody.
According to diferent reports, PayPal is interested in acquiring Curv, and the talks between the two companies’ teams are an open secret in the global tech scene – though perhaps no longer a secret considering how quickly it is spreading despite the cautious stance taken by both companies.
Local sources argue that the cost of the deal would be in the range of $500 million. This amount would exceed the expectations of Curv’s development team, which hoped to rake in between $200 million and $300 million from the company’s sale.
What is Curv and Why Does it Matter?
Curv has developed an encryption technology based on multi-party computation that secures digital assets and enables the secure transfer Store and any digital asset management on any blockchain. Its platform makes it possible for a Wallet to generate private keys at different points simultaneously, distributing them between the cloud and the client, eliminating possibilities of single points of failure.
Considering the services Curv provides, it stands to reason that an acquisition would be beneficial to PayPal. It would allow it to evolve and likely increase security and user confidence in its crypto services.
It could even allow PayPal to have a native cryptocurrency custody solution, reducing costs in the long run.
So far, no company has given public statements acknowledging or rejecting the news.
Paypal’s Interest in Crypto Grows Every day
PayPal’s interest in cryptocurrencies has only grown as institutional investment, regulatory clarity, and, of course, the price of digital assets increase.
Months after the March 2020 crash, PayPal announced a partnership with Paxos to provide its customers with exposure to the price of Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
The idea was to enable some cryptocurrency operations in a secure, easy, and legal way. The initiative was a massive success for PayPal, and the price of Bitcoin rose to new all-time highs. A study conducted by Mizuho Securities found that by the en of 2020, one fifth of all PayPal users had some exposure to Bitcoin and 65% of PayPal users were interested in crypto.
Bitcoin ripping in part because PayPal and Square are buying loads of it to facilitate customer trading.
Analyst jacks $PYPL stock-price target 35% above current quote based on Bitcoin excitement.
Quit waiting for the fun part to start folks, you’re in it… pic.twitter.com/mGRpDvApsZ
— Michael Santoli (@michaelsantoli) December 1, 2020
Dan Schulman, CEO of Paypal said on an official press release, that the use of digital currencies was inevitable, and governments need to hit the gas pedal and adapt their policies to the innovations of the modern era:
“The shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access; efficiency, speed and resilience of the payments system; and the ability for governments to disburse funds to citizens quickly”
Subsequently, reports leaked that PayPal was attempting to acquire BitGo; however, the talks never came to fruition.
If PayPal buys Curv, the quality of cryptocurrency-related services could increase considerably, not only helping to appreciate the value of the company’s stock but proving the validity of PayPal’s strategy of investing in cryptocurrency goods and services rather than buying cryptocurrencies for speculation or storing value.
Polygon-based QuickSwap’s TVL grows by $75M in two weeks
Polygon-based DEX QuickSwap hasattracted more than $105 million in worth of liquidity since the start of 2021.
The Uniswap clone began the year with only $300,000 worth of assets locked in its protocol, with more than three quarters of the exchange’s total value locked being added in the past fortnight.
QuickSwap is currently the leading second-layer decentralized exchange by daily volume with $38.5 million worth of trades over the past 24 hours. The second-largest L2 DEX by volume is Loopring with $8.4 million, followed by ZKSwap with $2.5 million.
L2 DEX trading volume in the last 24hrs:
1 @QuickswapDEX $38,503,800 (>30% own token❗)
2 @loopringorg $8,429,098
3 @ZKSwapOfficial $2,530,652 (>50% own token❗)
4 @Leverj_io $1,339,688
5 @nashsocial $913,475
6 @deversifi $805,710
Powered by @coingecko API
— L2_Dex_Wars (@L2Wars) March 2, 2021
QuickSwap’s governance token, QUICK, surged from under $1 per token to $557 in three months, and currently represents nearly 20% of the protocol’s total liquidity. Other popular tokens on the exchange include Wrapped Ether, USD Coin, maUSDC, and Wrapped Matic.
Speaking to Cointelegraph, QuickSwap founder Nick Mudge attributed the exchange’s recent success to the user’s that Aavegotchi brought to Polygon after launching its NFT staking game on Jan. 21.
With more than 80 tokens driving more than $23 million in daily trade volume, Mudge believes QuickSwap is a cornerstone of Polygon’s nascent DeFi ecosystem, predicting the two will grow symbiotically:
“QuickSwap is the center of the Polygon DeFi ecosystem and will grow as the ecosystem grows. QuickSwap and its liquidity mining incentives were a solution to move the users to Polygon and give them a Uniswap experience with very low gas fees.”
Polygon, a scaling solution allowing projects to create Ethereum-compatible blockchains, has benefited from the crippling gas fees that have recently made many Ethereum-powered DeFi protocols too expensive for casual users.
MATIC, the native crypto of Polygon, has posted meteoric gains this year, rising 1,135% from $0.0182 to $0.2249 over 2021 so far.
TA: Bitcoin Turns Attractive Above $50K, Why BTC Could Rally To $55K
Bitcoin price extended its rise and cleared the $50,000 resistance against the US Dollar. BTC is now consolidating gains and it is likely to climb further above $52,000.
- Bitcoin is trading in a positive zone above the $50,000 and $50,500 support levels.
- The price is now trading well above $51,000 and the 100 hourly simple moving average.
- There is a major bullish trend line forming with support near $49,800 on the hourly chart of the BTC/USD pair (data feed from Kraken).
- The pair could extend its rally once it clears $52,000 and $52,500 in the near term.
Bitcoin Price is Gaining Momentum
After a close above the $48,000 resistance, bitcoin was able to gain strength above the main $50,000 resistance. BTC even cleared the $51,500 level and spiked above the $52,000 level.
It traded to a new monthly high near $52,650 and settled well above the 100 hourly simple moving average. It is now trading in a positive zone above the $50,000 and $50,500 support levels. There was a minor correction recently below the $51,000 level.
The price traded below the 23.6% Fib retracement level of the upward move from the $47,102 swing low to $52,648 high. However, the bulls were active near the $50,000 and $49,500 levels.
Source: BTCUSD on TradingView.com
There is also a major bullish trend line forming with support near $49,800 on the hourly chart of the BTC/USD pair. Bitcoin also remained well above the 50% Fib retracement level of the upward move from the $47,102 swing low to $52,648 high.
It is now trading above $51,000 and testing a connecting bearish trend line at $51,500. A clear break above the trend line resistance could open the doors for a move towards the $52,500 and $53,200 levels. The next key resistance sits near the $55,000 level.
Fresh Dip in BTC?
If bitcoin fails to continue higher above the $52,000 and $52,500 resistance levels, there could be a minor decline. The first key support on the downside is near the $50,500 level.
The next major support is near the $50,000 level and the trend line. If there is a downside break below the trend line support, the price could test the $48,000 support and the 100 hourly SMA.
Hourly MACD – The MACD is now gaining momentum in the bullish zone.
Hourly RSI (Relative Strength Index) – The RSI for BTC/USD is now well above the 50 level.
Major Support Levels – $50,500, followed by $50,000.
Major Resistance Levels – $51,500, $52,000 and $53,200.
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