There’s been a lot of talk about blockchain interoperability recently with the launch of Cosmos and the potential threat to the Ethereum ecosystem. This piece is going to be a deep dive on the technicalities of Cosmos and Polkadot, but will also give you the prerequisite knowledge you need to understand these protocols at a technical level (with pictures to help understand).
Firstly, it’s important to know why interoperability matters. In the existing internet, we can access and modify numerous data sets through APIs (application specific interfaces). However with blockchains, data is siloed by the chain that it exists on. So what does it mean to have interoperability?
- Trustlessly transfer assets between different chains
- Cross-chain smart contracts that can interact with each other
- Specialised chains that can be used by other blockchains
Before we get into the details of any particular interoperability approach, I’d like to spend some time outlining some of the basics of distributed systems in order to help us understand concepts later on. Keep in mind that blockchains are simply a set of machines all over the world coming to an agreement about what a collection of data should look like.
Distributed systems are, as the name implies, a group of computers working together to accomplish a very specific goal. An example of this goal might be to serve the same content around the world to lots of people (like keeping your Twitter newsfeed up to date). In trying to achieve this goal they have to overcome the following problems:
- Timing. Each computer/system will execute the same task at it’s own pace and time.
- Ordering. Trying to solve what happened and when with time is still very hard since clocks start “drifting” after a period of time. This makes order a complicated challenge since each system has its own account of what happened and when.
- Failure. Coordination between systems can fail due to a system crashing, not receiving/sending messages to other systems correctly or choosing to act maliciously (Byzantine)
Like humans, the way to solve most problems is through good communication. With computers though, this is a bit more complicated since they can communicate asynchronously or synchronously.
What does that mean?
- Synchronous = each system has a certain amount of time allocated to them to communicate and they take turns. Think of it in-real conversations for humans.
- Asynchronous = each system can communicate whenever they want and there’s no assumptions about when they’ll speak. Think of it as Slack for humans.
All said and done, at the end of the day a blockchain should have safety (agreement on the same output) and liveliness (chain keeps growing and functioning). If your chain has safety but not liveliness it’ll stop producing blocks. If it has liveliness but no safety it’ll produce many forks and you won’t know which one is the correct blockchain unless you have a rule (eg longest chain in Bitcoin)!
Practical Byzantine Fault Tolerance is an implementation developed by Barbara Liskov and Miguel Castro and introduced in 1999. Proof of Stake chains like Cosmos and Polkadot have elements in their design inspired from PBFT so it’s worth outlining what it is and how it works.
- A party will listen to numerous transactions until it can form a block of these transactions. We’ll refer to this party as a proposer, since they propose a block.
- Once a block has been proposed, everyone participates in a pre-vote to confirm that they heard the same block. It’s important to note that a block could be incorrect/malicious but still be valid in the pre-vote stage since everyone’s simply trying to come to consensus that they received the same data/block.
- Once more than ⅔ of the participants agree that they received the same block, they move to the pre-commit step. A pre-commit vote is then cast to determine whether this is a valid block and nothing malicious is going on.
- If more than ⅔ of the participants vote that the block is indeed valid and correct then we can successfully commit this block to the blockchain.
- The height of the blockchain is increased and steps 1–5 are repeated.
From what we’ve learned above, we can see that the following steps ensures that the order of blocks is known (by the height of the blockchain increasing once a commit happens), each computer can take it’s time to come to its own conclusion then communicate what result it came to (timing) and can handle failure (malicious node proposing a block or a node not being able to vote).
Enter Cosmos, founded in 2016 by Jae Kwon and Ethan Buchman and raised over $17M+ in their ICO for ATOMs. The Cosmos Hub is it’s own blockchain that connects to other zones (blockchains) and therefore allows communication between different zones. Any proof-of-work blockchain such as Bitcoin, Ethereum, ZCash or an application specific blockchain would have to be connected to a bridge-zone via the Inter Blockchain Communication framework.
Getting into the architectural details, Cosmos Hub uses Tendermint as it’s consensus algorithm (inspired by PBFT) created by Jae Kwon in 2014. What this means is that each voting stage (pre-vote & pre-commit) has a fixed amount of time for everyone to vote before it moves on to the next stage. After a block has been finalised, there’s no going back. This means you can have instant mobile & internet-of-things payments since as soon as the transaction is in a block it’s finalised. Since no confirmations are required this is called having “fast finality”.
ATOMs held by users can be used to become validators in the system or to delegate ATOMs to a validator instead. The Cosmos blockchain will have 100 validators to begin with and plan to increase the limit via a governance parameter in the future. Only those with reasonable power in the network will be able to participate in the security of the network.
To make all of this less theoretical, I’ll outline a set of steps to possibly to convert ETH to BTC. — everyone’s favourite example.
- A trusted intermediary zone will be created for Ethereum and there will be set of validators who will be responsible for relaying messages from the Ethereum bridge-zone to the Cosmos Hub.
- Since both Ethereum and Bitcoin are probabilistic (there is a chance the current chain isn’t the correct one), the validators need to wait for a certain number of confirmations to ensure the transaction actually went through.
- Once the validators are certain the transaction is final they’ll initiate a transaction from their zone to the Cosmos Hub that they did indeed receive the Ether. The hub will then create a form of Wrapped Cosmos Ether that it’ll hold. Every other Cosmos zone will now be aware there’s new Wrapped Cosmos Ether in the system.
- Assuming an exchange rate was determined beforehand, the Wrapped Cosmos Ether will be exchanged for Wrapped Cosmos Bitcoin. This Wrapped Cosmos Bitcoin is then sent to the trusted intermediary Bitcoin zone and sent to the specified address on the actual Bitcoin chain.
There’s a few assumptions/things to be aware of with this model:
- The Cosmos Hub needs to ensure the balances of the Wrapped Cosmos assets are correctly incremented and decremented. While this is a potential downside, the Cosmos team has designed the system in a way that anyone can create their own hub. Essentially Cosmos will be a network of Hubs and Zones run by different groups.
- Each Zone has to be trusted that they’re relaying the correct messages about assets being sent/received. Senders also need to trust the validators set will correctly relay their messages and not steal their assets.
Polkadot is founded by Gavin Wood, a cofounder and former CTO of Ethereum and president of the Web3 Foundation. Polkadot raised over 145M+ late 2017 selling the native currency DOT during a crowdsale. If Cosmos resembles an open network of hubs and zones, Polkadot is a single “relay chain” which offers numerous benefits to chains, called “parachains” (short for parallelizable chains), that join it.
A couple key aspects Polkadot aims to innovate are:
- Each parachain gain pooled security from the validator set of the relay chain. Once a chain has connected to the Polkadot network by becoming a parachain it is secured with the same level of security as the whole Polkadot network. In Cosmos, each new chain needs its own validator set and has to bootstrap its own security.
- Parachains can interact with other parachains using trust-fee interchain communication. Users who want to communicate across chains do not need to trust every chain they transmit messages to, but just the singular security of the whole Polkadot network. Again, this is different from how Cosmos works where a user would need to trust the source chain, the routing chains, and the destination chain with each of their separate validator sets.
Polkadot’s consensus mechanism consists of two components: GRANDPA and BABE. GRANDPA is a finality gadget which draws on some ideas behind the GHOST fork choice rule (like Ethereum’s Casper) and BABE is a block production mechanism similar to Cardano’s Ouroboros. The introduction of a finality gadget allows for portions of the chain to be “finalized” and provably never be reverted. Separating the finality gadget from the block production allows for the slower finality gadget to work in a different process from the generation of new blocks in the chain. This means that the actual production of blocks can scale unlike in the PBFT-bound Cosmos Tendermint algorithm.
In the Polkadot ecosystem, you have the following parties:
- Collators — Produce the blocks for parachains and pass the information to the validators to verify.
- Nominator — Allocates their capital to validators to participate in the staking mechanism.
- Validator — Require a high bond requirement because they are responsible for actually sealing the new blocks of the relay chain. Their crucial roles include:
- Authoring new blocks.
- Finalizing the relay chain through participation in GRANDPA.
- Validating parachain blocks by ensuring the transactions which occurred are correct and that the cross-chain messages have been processed.
- Fishermen — Bounty hunters who “go fishing” for malicious actors by watching the other nodes of the network.
A good way to think about Polkadot is as an interconnected system that will connect to other chains it will want to communicate with through bridges. All parachains and the relay chain operate as one, unified system. A parachain can incorporate custom logic and will be responsible for handling its own state transitions while receiving and posting messages to other chains. Parachains will be able to communicate with other parachains by listening to each other, unlike Cosmos where everything must be routed through the Hub.
Polkadot’s architecture is elegant for the core design assumptions it had made. This starts off with the fact that parachain passively read information from bridge-contracts, rather than relying on bridge-contracts sending messages to other parachains. Each parachain is treated no different to any other parachain. This means Polkadot’s interchain communication framework is truly trustless, since parachains are acting in the interest of the relay chain rather than any specific parachain they’re validating. Furthermore, validators are re-assigned to another parachain at intervals and at random.
Let’s take an example that might be more relatable, how would it work if you wanted to convert currencies from one parachain to another? Let’s take the popular example of converting ETH to BTC.
Collators for the Ethereum parachain would pass block headers to validators in their parachain. The validators would then sign and publish the relevant transactions in the Ethereum bridge smart contract in a format that can be recognised and communicated with the parachain zone. Any ETH sent would be held by a Polkadot validator set, which would also provide DOTs as collateral for invalid transactions. The Ethereum parachain would in turn communicate with the Bitcoin parachain, which would release BTC to the specified address through the validator set governing that particular parachain. Design decisions are still being finalised, but the idea around their cross chain communication is that it’ll be trustless.
One thing to be aware of is that Polkadot’s parachain mechanism will allocate parachain slots via permissionless on-chain auctions. These auctions would involve locking up DOTs for some amount of time to keep the parachain connected to the Polkadot network. Governance will be able to step in and fix the situation in the case of urgent situations where the parachains contains a critical bug or serves some malicious purpose. Polkadot will be governed by an on-chain governance mechanism as it believes it’s the best way to govern crypto-networks.
As Gavin Wood stated for this article, “I believe any blockchains that do not introduce on-chain governance, including providing a viable mechanism to issue upgrades, will ultimately poison themselves through toxic populism. I do not believe “off-chain processes”, “on-chain signalling” and “rough consensus” provide a sufficient means to allow the real stakeholders in chain’s ecosystem to effectively govern and drive a chain to long term success. I also believe that it’s essentially impossible to retrofit governance.”
A lot of the core problems for interoperability seem to be solved at a high level, however the execution is still far behind. Cosmos launched in March 2019, but has only got the Cosmos Hub up and running. Their next steps are to finalise how the Inter-Blockchain Communication framework will work. Polkadot is set to launch end of 2019 with just the relay chain being live.
Overall, I’m extremely excited for both Cosmos and Polkadot to launch. What’ll be interesting to see is the developer adoption and the political struggles of each chain and how they play out. Application specific chains are a pipe dream at this point in time since not only is the basic infrastructure far from being completed, but developers will need to think about the resources and people they’ll need behind them to be connected and have sufficient security.
Will it even be a relevant trade-off? It’s hard to say. Maybe Ethereum’s off-chain governance is the very thing that allows it to thrive despite it’s slower roadmap execution since it allows true permissionless innovation with the guarantees of a highly secured chain.
The flip side to this argument is that all crypto networks will bootstrap their security on another chain, such as Ethereum, and then graduate to their own chain once they can guarantee the security of it through its existing community. A good example would be MakerDAO, they’d have enough resources to create their own chain and get enough political backing to be part of Polkadot’s para-chain. If for some reason it can’t get enough backing to be a part of the para-chain, it could establish a bridge zone on Cosmos and bootstrap their own security. Polkadot plans to provide bridge-slots for chains that are unable to provide pooled security but still give message passing down the line.
I think these are the kinds of nuanced questions that we as a community need to be asking rather than looking at chains as a zero-sum game. I’m personally excited for where all this leads us to and am receptive to your feedback on this piece. Reach out to me on Twitter @kermankohli.
Special thanks to Gavin Wood (Web3 Foundation), Logan Saether (Web3 Foundation), Billy Rennekamp (Cosmos), Chjango Unchained (Cosmos) for their contributions with ensuring the technical accuracy of the article.
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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