DeFi Open Lending Protocols, Bringing Financial Inclusion To Everyone

When it comes to the significance of the blockchain, most would think about its decentralized organization which is not controlled by anyone and it is open to all. When applied to finance you could come up with a “killer app” for DeFi (Decentralized Finance). The implementations of DeFi are providing ways to offer traditional financial services like lending using the techniques from blockchain architectures. It cuts out the intermediary and lets anyone become their own financial service provider.

This is made possible using smart contracts that run on top of the Ethereum public network. This is yet the best implementation of Blockchain 2.0 with the innovations that introduce Blockchain 3.0 features (e.g. staking, digital governance). The blockchain provides a layer of trust between two parties, so that transactions are transparent. There is also no arbiter or middle man who can obscure details from a transaction. Everything is executed by the smart contract, containing the business logic and conditions.

This has led to the Open Lending protocols, providing ways for anyone to make money from interest lent out. It is based on cryptocurrency and other digital assets, which can be collateralized debt to gain credit. There are no background checks or personal information needed, just a form of collateral to secure a loan. This would be considered risky in the traditional finance sense, but an over collateralized debt position can mitigate risk along with conditions that will allow lenders to leverage digital assets to their advantage. Thus, if a lendee defaults on their loan, the lender will become the owner of the collateralized digital asset.

While most lenders need to be registered as a financial service provider due to compliance with regulators, that is not the case with DeFi products. Open Lending provides an API for DApp developers to create an interface that allows them to interact with a smart contract. The smart contract is created by the lender, who enters into the transaction based on a condition that is specified in the business logic’s code. There is no need for credit checks, employer endorsement or references to secure a loan. It is all based on trust in the blockchain, through the smart contract.

Open Lending can help a large sector of the underserved members of the community, particularly the unbanked. It provides everyone a path to capital resources they would otherwise never have a chance to obtain. People who don’t have access to micro-loans because of lack of documentation will have the opportunity for financial inclusion perhaps for the first time in their lives. People with poor credit scores will get a chance to access financial services they otherwise would not be able to enroll in with traditional banks. Since these protocols run over the Internet, anyone from around the world can be a lender for anybody that needs financing through digital assets. The money can be converted into a stablecoin to avoid the volatility of the cryptocurrency market, but most will just convert to fiat through digital exchanges. At times, the smart contract may also be a DeX (Decentralized Exchange) and allow the person to get their loan in their currency of choice.

The ecosystems for DeFi applications using Open Lending protocols can be a problem for first time users. They are not easily available, and requires some understanding of how cryptocurrency works. Developers are working to make the UI/UX easier and more convenient for users by integrating the DApp with smartphones or mobile devices. It will be hard to regulate this since it is not a particular company offering the services and the smart contracts are merely running on top of an open source platform. It would be hard for regulators to shutdown the Ethereum network since it is not a single entity, but rather a set of nodes that encompass the world. As DeFi becomes more mature, so will the applications. Then more users can enter the ecosystem and realize there is an alternative to banks and creditors when it comes to financial services.

Privacy Coins – Protecting Your Right To How You Spend Your Money

If you were given a bag of cryptocurrency assets, what would it include?

Many would probably say coins that have the ability to cut the middle man out and use direct peer-to-peer (P2P) payments. That is the main point, but there is another one that is just as important … PRIVACY.

The right to spend your money the way you choose without being asked questions. How you spend your money is your right, and no one can decide what you can and cannot use it for. This is not to encourage illicit activity, which is usually the message regulators get. Instead it is about protecting a citizen’s right to privacy. Why should anyone track what a person buys? Should the government know who you donate your money to? If for example the current administration in your country is against the political ideology of the person you donate money to, they could use that information to cut you off. Another example which many would want to consider private is the purchase of adult content. Now there is a legitimate reason to go after criminal activities, but for non-illegal transactions that deserve the right to be anonymous should be allowed.

The type of cryptocurrency that should be in that bag of assets should include Privacy Coins. These provide a layer of protection for users to confidentiality and anonymity in their transactions. Someone can use these tokens to spend their money on things that they would otherwise be embarrassed to disclose. I won’t get into details, but people should be able to use digital payment systems that are like cash in the real world. It is what financial freedom should be all about.

When you use cash, it is a final transaction. There is no ledger that tracks what you spent your money on. It is the most anonymous and private way to transact. This is not how it is like with digital electronic payments today, even with most cryptocurrency like Bitcoin. Visa and Mastercard, both debit and credit, keep records of your transactions in a database. This is necessary for accounting, but it also reveals what you spent your money on. Bitcoin is not fully anonymous, it is pseudonymous. It is still possible to track a person down to the digital exchange where they convert BTC for fiat currency. Bitcoin provides plenty of transparency, and that is important for certain transactions.

Privacy Coins can provide anonymity using techniques that obfuscate transactions. They can also hide the user’s identity in a transaction. This is referred to as a double blind, in which the system does not know what you spent your money on and anyone outside the system as well. Only you and the other party you dealt with will have knowledge of the transaction. It can also be triple blind, in which case no one will know your identity, even the person you transacted with. Only you know about the transaction. This does pose a problem to regulators who want to be able to track down transactions or the movement of money. This is to check for AML (Anti-Money Laundering) purposes for financial rules and regulations in the banking and finance industry.

This is not to say that everyone will use Privacy Coins for purposes of laundering money, but the question is why do those laws exist in the first place? They are jurisdiction mandated to control the flow of money outside of the country. It is in fact necessary to keep track of the flow of money to prevent funding of terrorism and illegal financing. Privacy Coins can circumvent these laws, so it is not popular with regulators.

Monero (XMR), Dash (DASH) and ZCash (ZeC) are three of the top Privacy Coins. Each one has its main feature that provides privacy for its users. Monero provides untraceable source and destination of transactions using the CryptoNight PoW protocol. Dash uses PrivateSend, which mixes up data in a transaction to hide it from prying eyes. ZCash uses its Zero Knowledge Proof technique called Zk-SNARKS (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) which does not reveal the information in a transaction.

Privacy features are also being incorporated into other blockchain projects using cryptocurrency. It is becoming an important consideration despite the legal hurdles they could face. Privacy focused projects have significance when it comes to protecting identity and anonymity in transactions. Whether or not that is allowed is a subjective question depending on which perspective you are looking at it from. For the individual citizen it is a right to be able to choose how you spend your money, and Privacy Coins offer a way to do so without being tracked.

For regulators, it is not a good look because of the potential to provide criminals with a way to hide their illicit activities. This will certainly not be allowed in restrictive governments that are highly centralized, but it could find some leeway in less restrictive governments. In the US constitution there is an amendment that guarantees privacy, but under the rule of law:

“No State shall… deprive any person of life, liberty, or property,
without due process of law.” – Liberty Clause of the 14th Amendment

As technology evolves, so to will the interpretation of due process since there is no specific law that guarantees the right to an individual’s privacy with their money. The best way to do this is for regulators to come up with a list of what are transactions that can be permitted for privacy (e.g. novelty items, direct P2P sales, etc.) and which ones certainly need to be regulated (e.g. cross border money transfers). Ultimately it will be decided by the courts. Banning them however will not be easy due to their decentralized nature, and that could be what keep Privacy Coins alive.

Electronic Payments Are Safer In Times Of Pandemics, But Does That Lead To More Value For Cryptocurrency?

The spread of the novel coronavirus (COVID-19) has ravaged the global economy significantly. Lockdowns and restrictions on air travel will affect many industries, and that has led to a tanking economy. The virus has now been declared a pandemic by the WHO, so it has had some serious effects on the policies of the world’s major nations to take drastic measures to curb the increase in cases. The hashtag #StayHome has been trending on both mainstream and social media, to encourage people to social distancing in order to prevent the further spread of the virus via community transfer.

The issue of containing the virus seems no longer possible, especially in countries like Italy, Iran and Spain were the virus quickly spread. It is overwhelming their healthcare systems and led to declarations of national emergency. Experts agree that the main way the virus is spread is through social contact. An infected person can potentially spread the virus to three other persons they come in contact with. The virus is not the same as the flu, it is a different strain of the coronavirus that is related to SARS. It can spread like the common cold and the flu, but the symptoms can turn from mild to severe. The most severe cases require ventilators to help patients breathe. Scientists are discovering more about the virus, and this can help researchers find a solution or way to mitigate the problem.

One way the virus can be spread is through cash i.e. paper currency. This has been the case in China, where authorities there have been either disinfecting or destroying paper currency. The amount of time the virus can survive on surfaces also depends, but if it can last more than a day (24 hours) on the surface of paper currency, that it is a cause for concern. It can happen quickly enough that there won’t be time to disinfect it. It is not like every store that accepts cash will suddenly take the time to disinfect the money they accept or give back as change.

In a typical scenario of virus transmittal by paper currency, an infected person who handles the money makes a payment at the store. The clerk at the register takes the money and the virus transfers to the clerks hand. Now the transmission to the clerk can be the moment the clerk touches their face and the virus finds a way in through the eyes or nose. Once the virus gets into the clerk’s body they may not immediately show symptoms. In fact, some infected persons appear asymptomatic or show no signs of the virus until much later (14 days according to most medical experts). The virus is further spread by the clerk when handing back change to the store’s customers. It then begins to spread through the rest of the community as someone comes home from the store. You can catch it from shaking hands too, the reason for elbow bumps.

The WHO is now advising us to use forms of electronic digital payments as a precautionary measure. It is contactless, meaning there is no physical contact involved that could lead to virus infection. Paying with a credit or debit card at the store is an example. Other ways to pay are online, via an app. Some stores and restaurants will accept electronic payments and then allow customers to pick up their order. It is still risky to even go out and have items handled at the stores, but electronic payments can help as another way to avoid contact with the virus. Self checkout of items at a supermarket using a card payment method appears to be the most ideal way. The important thing to remember though is for everyone to wash or sanitize their hands after any transaction. Once the virus gets on your hands it can easily spread. It is also important to not touch the face, rub eyes and avoid habits like biting finger nails.

It is still wise to be careful though. This is because you still have to be alert since this gives hackers an opportunity to victimize more people. Make sure that you connect to a secure link that always uses HTTPS. Sites like Amazon provide this by default, but make sure that you are connected to the correct site. You can check to see if there is a padlock icon next to the website name. It should show HTTPS in the web address as well. If your browser does not support this protocol, your connection is vulnerable because it leaves your data exposed (e.g. credit card number, etc.). Check that the app you installed from your merchant is also legit. This can be verified by the vendor’s website. If you are already using Apple or Samsung Pay, you have biometric authentication for more security.

Now it leads to the question, will cryptocurrency become more valuable during times like pandemics?

As we have seen in the news, once the virus was declared a pandemic and seems beyond containment, the market crashed on Wall Street and other financial markets around the world. This led to dumping of stocks for money. The lockdowns have also had a major impact on the economy, leading to loss of livelihood for many workers in the entertainment, restaurant, service and retail industry. Generally any job that requires social interaction, as social distancing has been encouraged by authorities to stem the possible worst case scenario projections. Panic from the mainstream media reports have led to more fear, uncertainty and doubt i.e. FUD.

The cryptocurrency market did not do any better, but even worse. Bitcoin (BTC) and the altcoins crashed as well, with the value of Bitcoin dipping to a low of $4,106.98 on March 13, 2020 with previous highs from $9,937.40 back on February 23, 2020. It is not just about the weak hands pulling back or whales dumping, the sentiment was due more to the bleak outlook on the economy. People dumped their cryptocurrency back to fiat currency. In times of crisis, people don’t buy cryptocurrency. Instead it is the opposite. It followed the Dow Jones fall and stock market crash in this case. If you have ever heard any cryptocurrency trader or influencer say that things are going to get worse before they get better, that is a fair assumption.

There is another viewpoint though that with crisis comes opportunity. While everyone else you know maybe dumping their stocks or cryptocurrency, there are others who are buying at the dip (as traders call it). It becomes a buying opportunity, like a sale on something that was once expensive to buy. When Bitcoin fell from $9,000+ to < $5,000, some traders viewed this as the time to buy and accumulate more coins. This gives some traders a chance to finally have 1 BTC in anticipation of greater value in the future (much like investing in a stock but without dividends).

It seems apparent though that cryptocurrency is not valued as a medium of exchange. In times of crisis more people were selling their cryptocurrency and not using it for electronic payments. The use of cryptocurrency in making payments is still not mainstream. In fact, cryptocurrency is more important as a store of value than for making payments. Imagine if the banks suddenly suspend your funds during a pandemic and there was no way for you to take it out. In this case having cryptocurrency would be ideal by exchanging it for fiat currency or making transactions. You also have some of your assets in digital form and thus you have value that can be exchanged later.

At this moment it is more a question of what is practical. If you had to buy toilet paper right now, would you be willing to spend it in BTC or ETH? Another question is, will the store accept your payment in cryptocurrency? The answer to both questions is usually no. Electronic payments using fiat currency stored in a bank account is still the preferred method, not from a digital wallet that holds the value of cryptocurrency. What seems obvious thus far is that in crisis mode, people will stick to what is familiar in order to get by.

The Ethereum ERC-20 Token Specification

The Ethereum Request For Comment ERC are defined technical protocols from an EIP (Ethereum Improvement Proposal) request to the Ethereum development community. Once the EIP has been approved, it becomes an ERC, and can be implemented on the blockchain. The ERC-20 token was a specification that allowed projects to use the Ethereum blockchain as a source for funding. It became very significant when ICOs (Initial Coin Offering) became popular between 2015 and 2017. That was until financial and trading compliance issues affected the continuation of ICOs due to lack of regulatory clarity. Certain projects will be under scrutiny to participating in ICO if they have not passed the statutes of limitation for the issuance of an unregistered “security”. This falls under the SEC (Securities and Exchange Commission) for most jurisdictions and have since discouraged new projects from issuing an ICO.

Since many projects are already using this as a standard on the Ethereum blockchain, the number of ERC-20 token contracts has grown. By mid-2017, there were around 5,500 ERC-20 smart contracts on the Ethereum network. It grew past 40,000 in 2018 and are further increasing. ERC-20 is not just a technical specification for creating tokens, but it also provides a guideline for how to interact with other wallets, smart contracts and digital marketplaces within the Ethereum ecosystem.

The ERC-20 became a standard on the Ethereum platform not only for funding, but for the issuance of tokens. Several cryptocurrency projects started out as ICO with tokens (e.g. EOS, Tron, OmiseGo). These projects used the Ethereum blockchain to fund their own coins as issued tokens which can later be exchanged for the native cryptocurrency asset once the main network is running. The ERC-20 tokens were temporarily locked into smart contracts that hold a certain amount of Ether. Once the projects were able to build their blockchain, the ERC-20 tokens from the smart contract could be exchanged for the native asset for that blockchain.

As a standard, ERC-20 provides uniformity of technical and protocol standard. This allows developers to follow a procedure, much like how developers create API for their application to communicate with other applications. This reduces complexity of understanding each type of token implementation. A tremendous benefit it brings to the Ethereum blockchain is enhanced liquidity, since Ether or ETH is required to purchase the tokens. That can affect the price of ETH in terms of market cap.

The structure of an ERC-20 token contains 6 functions, 2 events, and 3 token information functions. These functions are invoked and can be be called within a smart contract. From the ERC-20 specification, the following are the 6 functions:

1. totalSupply(): Total supply of Token.

2. balanceOf(address _owner): The balance in the _owner address.

3. Transfer(address _to, uint256 _value): Sends a token of _value to address_to, triggering the Transfer event.

4. transferFrom(address _from, address _to, uint256 _value): Sends a pass from the address_from _value to address_to, triggering the Transfer event.

5. Approve (address _spender, uint256 _value): Approve _spender to extract a certain amount of money.

6. Allowance(address _owner, address _spender): Returns the amount that _spender extracted from _owner.

Decentralized Apps or DApps also support ERC-20. These apps run on top of the Ethereum blockchain. The DApp can be used to query information or even to execute a smart contract. Developers can use the functions when dealing with digital tokens created on the Ethereum blockchain.

The following are the 2 events that are triggered by the functions:

1. Transfer(address indexed _from, address indexed _to, uint256 _value): Triggered when the token is transferred.

2. Approval(address indexed _owner, addressindexed _spender, uint256 _value): Triggered when the approve method is successfully called.

The token also needs to be set with any of these 3 types of token information:

1. Name: Name of the issued Token.

2. Symbol: The name of the Token issued. For example, EtherCent token or ECT on https://rinkeby.etherscan.io/token/0x8caca3dbb57ecb058a82209effde5bf647459771

3. Decimals: Set how many digits this token can reach after the small digits. Generally, the set value is 18, which means that it can reach 18 digits after the decimal point.

The following is an example ERC-20 token created on the Rinkeby test network.

Since Ether (ETH) was released prior to the ERC-20 standard, it does not actually comply with the specification. As a result, this led to the creation of Wrapped Ether (WETH). This is an ERC-20 token that represents Ether at a 1:1 ratio (1 WETH = 1 ETH) which can be exchanged for other ERC-20 tokens.

Since the popularity of ICOs have waned in 2020, ERC-20 tokens are not as common. They are still in use mainly by projects that have not yet released their own native tokens or by new projects that are testing token development (usually on a test network). By keeping their ERC-20 tokens locked with ETH, they are providing a sort of promise to their holders that they can convert it for more value in the future. The converted tokens can then be used within those blockchain projects as a medium of exchange or store of value.

Nodes, Masternodes and Supernodes

I am going to explain the purpose of nodes in the context of the blockchain and digital governance. Nodes are basically an instance of a device that participates in the consensus on a blockchain. Nodes behave according to protocols that determine the exchange of data and functions that contribute to the operations of the network. The nodes also form the digital governance within a blockchain ecosystem to enable policies and rules that serve the interest of the majority. There are three types of nodes to describe, the basic node, masternode and supernode. These are concepts that feature in Third Generation blockchains which aim to bring more efficiency to maintain its operations.

A blockchain can have its own system of government or governance. This is the concept behind digital governance, in which nodes participate in voting to elect delegates who can then become masternodes or supernodes, which we shall explain. In order for a fair system to exist, it must revolve around a token and protocol which can be built in code for a network. The token is used to count as a vote. When voting for a masternode or supernode, voters (which can be any type of node) who have more tokens that are frozen or held, have more votes that are counted. Therefore those nodes that get the most votes become masternodes or supernodes. Each blockchain has its own type of governance with consensus (e.g. EOS, Tron, NEO, Cardano).

A basic node can be any device that performs a function to help verify transactions and validate blocks. This activity is the consensus feedback mechanism algorithms that secures and validates a blockchain. Nodes can either mine (Proof-of-Work) by contributing raw computing power as their resource or they can stake (Proof-of-Stake) by holding funds which is used to provide a proof of how much validating power they own. When a node mines, they must compete with other nodes to solve a cryptographic puzzle and discover its value called the nonce. This is a compute intensive process that requires massive computations that require hash power measured in hash rate (measured in hashes per second). It expends a lot of energy since the nodes’ compute intensive task consume plenty of electricity. A more efficient method is for nodes to stake. In staking, the node will validate their power on the network by the amount of funds they hold. A node that holds the most funds has the greatest amount of validation power on the network.

Above the node, is the masternode. These are more resource intensive devices that can perform more functions than a typical node. The masternode can be assigned specific tasks that not only participates in consensus, but also involved in network operations. This can be anything from routing to simple payment verification (SPV). Although nodes can perform the same task, it will depend on the network’s protocols and policies. For example, in some networks a node only performs simple tasks like payment processing. The masternodes are then responsible for handling the verification of transactions that are then packaged into blocks for validation.

There is an even more resource intensive device above the masternode, the supernode. The supernode performs the validation of blocks. This requires more computing resources in the network since blocks can contain many transactions, and in volume this will require the most processing power on the network. Supernodes are the like the most powerful servers in the data center. You give them the most work to do and they will be able to handle it. However, in the context of a public blockchain which is trustless and permissionless, there has to be an incentive to do work. Therefore, the supernodes are incentivized by payment in the network’s native token. These are also called rewards, and they are given on many blockchains for their contribution to providing compute resources to the network. Masternodes and nodes are also incentivized for their work, so the ecosystem runs on incentives to process transactions and add them to cryptographically secured blocks.

A hierarchy exists on the network in which supernodes are at the top, followed by masternodes and nodes. While blockchains were designed to be decentralized, there are critics who point to how masternodes and supernodes make the system more centralized. The reason being the issue of scalability. When you concentrate validation of blocks only to a few nodes, it centralizes power. That is actually the purpose for Third Generation blockchains like EOS (which uses dPOS or delegated Proof-of-Stake). A blockchain by design is not inherently scalable, but secure. In order to meet scaling, it must be centralized to a certain extent in order to allow more transactions to be processed (the blockchain trilemma). When you have too many nodes trying to validate a block at the same time, it becomes inefficient when applied to an enterprise type of solution for business. By dedicating certain nodes for validating blocks, it becomes more efficient and faster when processing transactions. This does require supernodes to have a tremendous amount of resources. Becoming a supernode is thus a motivating factor in a blockchain because they collect the most rewards. In blockchains like EOS which call their supernodes as block producers, you need nodes that run in data centers that will be able to process transactions by volume. A simple PC or smartphone will obviously not be allowed to do this because it lacks the computing resources.

Supernodes must still follow the consensus mechanism. In this case, they must stake plenty of funds to prove they have the resources to become a validator. They actually first become a candidate by proving their staked funds. They are the largest holders of the blockchain’s native tokens, so there is a lot they have at stake to become a validator. They can also lose it all if they try to become a bad actor. The protocol could have a consequence which can ban the node and take their staked funds. Once voted as a supernode, that is the only time they can produce blocks on the network to add to the blockchain.

Once there are supernodes on the blockchain, they can begin producing blocks. However, supernodes do not need to compete with each other like in mining to validate a block. They are given a round each for validating blocks. On EOS, there are 21 supernodes or block producers only. Each block producer is given a round for producing 6 blocks with a time of 0.5 sec per block. If we do the math, that is 6.3 minutes per round and a total of 126 blocks produced. The consensus among all producers takes place after a block is produced. They try to maintain a 2/3 rule for validation. It means all it takes is 14 block producers to validate a block following byzantine conditions.

Supernodes have the most at stake, followed by masternodes and then basic nodes. The basic nodes do not have to stake anything if they are just accessing wallets or querying the blockchain. Nodes which do participate, may do so for incentives. Since Supernodes have the most at stake, they also have the most to lose. That is why the protocols encourage incentives so that attacks and spam on the network can be minimized. In a sense, if Supernodes collude they can control the network through a 51% attack. However, if the protocol has built in checks and balances to prevent this, the Supernodes could all be replaced and lose all their staked funds.

Separation of tasks among nodes allows a network to operate more efficiently. Less resource intensive nodes can perform the simplest tasks on the network. More resource intensive tasks require processing power. For a fair system to exist, a token is also used for incentives and digital governance. That provides rewards to nodes for their contribution and participation on the network. It also brings digital democracy to an ecosystem, allowing them to elect the nodes they want to become verifiers and validators on the network. While it is more centralized in nature, it still remains decentralized since there is a digital governance process that is open to all nodes. This limits the power of any node that attempts to control the network. Depending on the protocols and policies of a blockchain, there can be consequences to bad actors who attempt to attack or cheat the network. With this system in place, it encourages honest participation in securing and operating a blockchain.

The Cardano Principles For Scalability, Interoperability and Sustainability

Cardano is a unique cryptocurrency project that is based on sound principles rooted in science and engineering. Its application goes beyond financial systems, but implements a blockchain that covers a wider variety of applications. While it is available as a coin on digital exchanges, it does not yet have an actual use case (as of this posting). It is a development in progress that aims to nail the foundations for a well designed blockchain.

We can consider Cardano a Third Generation Blockchain. The First Generation uses Bitcoin’s Proof-of-Work (PoW) consensus mechanism and the UTXO model. Ethereum forms the basis for the Second Generation, which implements Turing complete Smart Contracts or EDCC (Executable Distributed Code Contracts). The Third Generation, which include other cryptocurrency like EOS and Tron, were based on Ethereum but innovate on consensus mechanisms. Like other Third Gen blockchains, it was also issued using an ICO that raised $62 Million.

Cardano, like Ethereum, uses a smart contract based system. The token or digital asset used on the network is called Ada. Ada provides balances to users with the Daedalus digital wallet. Cardano is also a platform for technological innovation and development. It will provide an operating system layer for DApp (Decentralized Applications) that run on the Cardano network. These DApp provide an interface to smart contracts that execute code to transfer value (e.g. payments, transfers, change of ownership, etc.). Cardano will facilitate these transactions and record it on its own blockchain for immutability and transparency purposes.

Cardano has 3 main features in its blockchain.

Scalability – The network must be able to scale to meet the demands for high volume transaction processing. The developers address the issue of scaling by adopting a different consensus protocol mechanism that is based on Proof-of-Stake (PoS). Scalable systems are faster and more efficient, which is what a blockchain needs in order to handle production level processing of transactions. The network architecture for Cardano proposes using RINA (Recursive Internetwork Architecture).
Interoperability – Many blockchains cannot directly interoperate with one another. There are solutions now that allow for “atomic swaps”, which essentially provides a way for two blockchains to transfer value between each other. Prior to that, digital exchanges were the only way to go. That creates an intermediary which is something a blockchain using direct P2P transfers can remove. With a third party, the cost of transactions increases and it can be tampered, censored or rejected.
Sustainability – Many critics have called Bitcoin inefficient and unsustainable in the long run due to the way it consumes resources. A sustainable system is always more ideal in terms of efficiency and reliability. Sustainable systems have a way to last thus ensuring some degree of surviving into the future. Many blockchain projects lack this feature and have to end for a variety of reasons.

PHILOSOPHY

The following are Cardano’s philosophical principles taken from their website.

Separation of accounting and computation into different layers
Implementation of core components in highly modular functional code
Small groups of academics and developers competing with peer-reviewed research
Heavy use of interdisciplinary teams including early use of InfoSec experts
Fast iteration between white papers, implementation and new research required to correct issues discovered during review
Building in the ability to upgrade post-deployed systems without destroying the network
Development of a decentralized funding mechanism for future work
A long-term view on improving the design of cryptocurrencies so they can work on mobile devices with a reasonable and secure user experience
Bringing stakeholders closer to the operations and maintenance of their cryptocurrency
Acknowledging the need to account for multiple assets in the same ledger
Abstracting transactions to include optional metadata in order to better conform to the needs of legacy systems
Learning from the nearly 1,000 altcoins by embracing features that make sense
Adopt a standards-driven process inspired by the Internet Engineering Task Force using a dedicated foundation to lock down the final protocol design
Explore the social elements of commerce
Find a healthy middle ground for regulators to interact with commerce without compromising some core principles inherited from Bitcoin

OUROBOROS

Cardano’s consensus algorithm uses PoS and is called Ouroboros. This determines how participating computers called nodes come to a consensus on the network. Instead of miners like in PoW consensus algorithms (used by Bitcoin), PoS requires staking funds to qualify or participate as a validator node. These “stakeholders” must contribute to secure and process blocks of transactions on the network and in return they will be incentivized in Ada. If a “stakeholder” is dishonest or attempts to attack the network, they can lose the funds they staked so there is a consequence. This aims to make “stakeholders” good faith actors rather than become bad actors. Once “stakeholders” validate a block it is added to the main network’s blockchain.

What makes Cardano different from other PoS-based networks is according to their own website:

“For a blockchain to be secure, the means of selecting a stakeholder to make a block must be truly random. An innovation of Ouroboros to produce the randomness for the leader election process is to do this by way of a secure, multiparty implementation of a coin-flipping protocol.”

DEVELOPMENT COMMUNITY

Cardano also fosters a development community since it is an open source project. There are no barriers to entry for those who want to contribute, but is mostly on a voluntary basis. Developers are rewarded in Ada for their efforts. Cardano’s code is available for others to use in order to develop applications for the platform.

At the moment, Cardano is being managed by the IOHK (Input Output Hong Kong). They will be a part of the project until 2020 according to their contract.

FUNCTIONAL PROGRAMMING

The main programming language used in Cardano is Haskell which is functional, strong and static typed. One of the reasons it was used is due to its reliability in mission critical systems. They provide a solid and secure foundation for back end systems that handle massive workloads. This means the code and logic is stable enough to be able to scale and provide reliability with little room for failures.

In functional programming if there is a function f(x) that we want to use to calculate a function g(x) to get the results of yet another function h(x). Rather than solving in sequence, it can be simplified to a single function:

h(g(f(x)))

This provides a mathematically simpler way of computing. These form the foundations for Cardano Smart Contracts. It aids in Formal Verification to prove how a program acts and what its results will be. This gives Cardano a “High Assurance Code” property.

THE PROJECT ROAD MAP

Cardano follows a road map for its development. It is divided into 5 phases called eras: Byron, Shelley, Goguen, Basho and Voltaire. It is now in the Voltaire era in 2020, which will decide the digital governance used on the network.

For more on the road map, click here.

THOUGHTS

Like any cryptocurrency project, I don’t suggest buying their token just because the project looks good on paper. This is how Cardano is like. While it is based on a sound foundation, it has not yet been applied to solving real world problems. It offers a theoretical solution that is yet to be proven. If it does deliver on its goals, Cardano’s prices may not really go up either, since it depends on the asset’s liquidity and volume. The project looks promising and that can spur certain expectations.

Note: This is not financial advice. DYOR always to verify facts.

The Different Types Of Cryptocurrency Assets

Not all cryptocurrency are the same. They have different purposes, from utility tokens that provide a service to tokens that transfer value. Tokenizing a certain industry (e.g. cannabis, music, entertainment) is also possible using digital transformations with the use of a cryptocurrency with a blockchain or distributed ledger. Although they were based on the foundations of decentralization, some are more decentralized than others. It is because of the problems of scalability. In order to become more scalable, many assets have become more centralized in order to handle more transaction volumes.

Platform Cryptographic Assets

Ethereum, NEO and EOS are examples of application development platforms. Developers can use these platforms like an operating system to build applications called DApps (Distributed Applications). They are based on the concept of gas as unit of cost for computation. The logic is encapsulated in smart contracts, which contain conditions for executing code that can perform transactions. Gas costs, measured in units called gwei, are smaller denominations of the main token like ether that are spent on processing the transaction (much like a transaction fee). Many proponents do not classify these assets as securities, but a platform token needed for operations on the network.

Payment Cryptographic Assets

Bitcoin is the classic example of a P2P digital currency or payment cryptographic asset. This asset class is used as a medium of exchange for payments on goods and services. The use of these asset tokens provide a fast and efficient way to transfer value for cross-border payments and direct payment transfers without requiring a third party like banks. This circumvents jurisdiction regulations, so there are plenty of legal implications regarding these assets. There are many of them based on the original Bitcoin architecture. Although Bitcoin’s token BTC was meant for payments, it is fast becoming a store of value.

Side Chains

These complement the main network of a blockchain. This enables BTC and other payment assets and other ledger assets to be transferred between multiple blockchains. These implement an off-chain solution and are primarily used for the purpose of scaling the network. It removes the burdens of transaction processing from the main network. However, settlements are still made on the main network to record the state of the transaction. Side chains merely facilitate the transfer of value while the main network records it. The Lightning Network is an example of this.

Application Token

There are many ways cryptocurrency can be applied to real world business and financial solutions. It has also found its way to certain industries with interesting applications. Stablecoins are an example with the Tether project. This allows pegging fiat to a cryptocurrency asset for the purpose of trading in a volatile market. These allows traders to store the value of their fiat currency without losing from the speculative cryptocurrency market. Golem and Veritaseum are other examples of how tokens can be used for computing distribution and capital market connections. It is related to protocols, because applications run mostly on top of a protocol built for a platform.

Protocol Token

Protocols refers to rules of a particular ecosystem. It can be in the finance or energy market. These tokens were designed with incentivization as a purpose. This allows more value to enter blockchain based cryptocurrency. Protocols provide a supporting layer for applications built to run on platforms. They are mutually beneficial to each other. For example the Ethereum protocol can be used to support smart contract development running DApps. In order to run the DApp it will use a protocol token like ether. The DApp itself can generate its own value using an application token as an incentive.

Ethereum’s Istanbul Updates

The second largest cryptocurrency project after Bitcoin, Ethereum, will be releasing an upgrade to its blockchain. It is a hard fork codenamed Istanbul, is set for release this December 2019 and aims to bring a series of improvements and updated features. Ethereum is better known as a decentralized and distributed platform for application development using smart contracts. It uses a native token called ether, which is the unit of cost for gas. Gas is the cost of computation to perform a task on the Ethereum blockchain’s network. This cost is associated with the compute resources that forms a part of the blockchain’s consensus mechanism that verifies transactions and validates blocks.

Istanbul is the successor upgrade to Constantinople, which was released earlier in 2019. According to the Ethereum blog:

“If you use an exchange (such as Coinbase, Kraken, or Binance), a web wallet service (such as Metamask, MyCrypto, or MyEtherWallet), a mobile wallet service (such as Coinbase Wallet, Status.im, or Trust Wallet), or a hardware wallet (such as Ledger, Trezor, or KeepKey) you do not need to do anything unless you are informed to take additional steps by your exchange or wallet service.”

The upgrades in Istanbul are detailed in EIP (Ethereum Improvement Proposals). More information is provided in EIP-1679.

This list is a summary of the upgrade features to expect from Istanbul:

Ongoing work on post-quantum cryptography: both hash-based as well as based on post-quantum-secure ‘structured’ mathematical objects, eg. elliptic curve isogenies, lattices…
Anti-collusion infrastructure: ongoing work and refinement of https://ethresear.ch/t/minimal-anti-collusion-infrastructure/5413, including adding privacy against the operator, adding multi-party computation in a maximally practical way, etc…
Homomorphic encryption and multi-party computation: ongoing improvements are still required for practicality
Decentralized governance mechanisms: DAOs are cool, but current DAOs are still very primitive; we can do better
Fully formalizing responses to PoS 51% attacks: ongoing work and refinement of https://ethresear.ch/t/responding-to-51-attacks-in-casper-ffg/6363
More sources of public goods funding: the ideal is to charge for congestible resources inside of systems that have network effects (eg. transaction fees), but doing so in decentralized systems requires public legitimacy; hence this is a social problem along with the technical one of finding possible source…

“In general, base-layer problems are slowly but surely decreasing, but application-layer problems are only just getting started.”

The upgrade is expected to take place (unless any new issues come up) at block number 9,069,000, which is expected on Saturday, December 7, 2019.

The Benefits Of The Blockchain To The Cannabis Industry

The cannabis industry can stand to benefit from the features of blockchain technology. This may have some people scratching their heads “How is smoking weed going on a blockchain?” It is not about the activity itself but the business of cannabis supply and transactions. When it comes to verifying the supply chain, the blockchain can provide a service to cannabis dealers that they are getting their supply from legal and authorized sources. This can help reduce discrepancies like fraud while increasing the efficiency of delivery and production.

The legalization of marijuana for medicinal or recreational use in states like California, Colorado and Nevada have led to the rise in retail outlets that sell cannabis derived products. It is no longer just dispensaries that can distribute marijuana legally, but licensed outlets as well. To obtain licenses there are basic legal requirements that must be met and these records could benefit from a DLT (Distributed Ledger Technology). That is not exactly a blockchain, unless it is a system that also issues a digital coin or token. This will allow transactions to be audited from a DLT that incentivizes nodes or computers that participate in consensus to verify transactions and validate blocks in the blockchain.

States where marijuana is legal. (As of June 2019, Source Business Insider)

The idea is unconventional but there are already some businesses in the cannabis industry that are looking into the blockchain. The main benefit the blockchain can provide besides verifying licenses is verifying the supply chain. Things can be obscure when dealing with the supply of marijuana. In the US, most of the supply of marijuana comes from illegal sources that are smuggled into the country. This involves activity which evades law enforcement and keeps a black market thriving. Often times the supply chain is affected by fraud, theft and even unauthorized sources. It can also be tampered with by corrupt businesses to make more money, which is essentially cheating. The solution to stopping this is not up to the blockchain, but it can help verify where the sources are coming from in order to confirm their authenticity.

Marijuana is not just about recreational use. It also has medical benefits which is another market segment that the cannabis industry can tap into. If the supply comes from verified sources, like legal cannabis farms, it helps the industry. At the same time it can help government regulators monitor and audit the supply knowing that there is an immutable and transparent record of its origin and sale from legal businesses. Growers, distributors, retailers and marketers of cannabis products are verified at every step of the “seed-to-shelf” process by a blockchain solution.

The process begins with the growers. These are the businesses that grow the marijuana plants. The growers must meet certain requirements for compliance and are listed in a DLT for retailers who make the purchases at bulk before distribution using what are called smart contracts. The smart contract is a programmable code that states the conditions and logic of the transactions which can execute autonomously. The retailers themselves are held accountable for the sale, and there will be a record of their transaction. The retailers can then sell the cannabis which marketers can promote. We have seen products like brownies, cookies and even beer derived from cannabis. This also creates an industry for paraphernalia, publications and lifestyle products that are centered around cannabis. Those who do the marketing will know who to promote based on verified sources confirmed on the blockchain. This would remove ambiguity as to the legality of the business.

Involving cryptocurrency is essential in a blockchain, but for the cannabis industry while it may be a solution for the producers, perhaps not for the customers. The issue here is that identity is not hidden but pseudonymous in nature since transactions can still be traced back to someone. Some private citizens who use marijuana may not feel comfortable about this. A cannabis coin that is used as a token for purchasing marijuana (medical or recreational) sets up more auditability for regulators to find who and for what reason marijuana is being used. This token is fungible in nature just like fiat cash so it doesn’t have to be tied to any particular identity. It can also be spent in direct peer-to-peer transactions that can be used to exchange items and services other than marijuana products. The transaction will still be recorded on a digital ledger as a digital proof.

With greater visibility due to transparency and higher efficiency due to traceability, businesses in the cannabis industry can benefit from the blockchain. At the moment there are various projects that are exploring this implementation. Startup TruTrace has partnered with Deloitte, the professional services giant. They are working on building a tracking system using a blockchain for “seed-to-sale” of cannabis. Other ways blockchains can help the cannabis industry besides tracking the supply chain includes documenting public information regarding authentic marijuana strains (types of cannabis), verify the amounts of cannabis in edible products sold in grocery or specialty stores with certified labels and also certification of cannabis products as approved by the FDA. Worst case without certified products are fake or dangerous products that could affect the health of customers. There are more issues that one can use blockchains to explore, but a verification system is one way to expand and legitimize the industry.

Facebook Libra Is Realizing The Difficulty Of Regulatory Compliance

Facebook’s Libra is not looking good. Paypal, Mastercard, Visa and even E-Bay have pulled out of the Libra Association. This comes after the hurdles Facebook needs to overcome in order to meet regulatory compliance. This tells us just how difficult it is to build blockchain-based solutions that offer cryptocurrency as payments. It seems easy on paper to draft a proposal to gather some of the world’s leading companies to form a system for digital and cryptographically secure payments.

The following have been some of the criticisms thrown at Facebook from members of the US Senate (Senators Sherrod Schatz and Brian Brown) in a letter sent to CEOs of Visa, Mastercard and Stripe.

“We are concerned because key questions remain unanswered about the risks the project poses to consumers, regulated financial institutions, and the global financial system. We urge you to carefully consider how your companies will manage these risks before proceeding.”

The senators continue with this warning:

“Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination, and fraud, and it has not demonstrated an ability to bring those failures under control. You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate.

All this seems to have influenced the decisions of Libra Association members from dropping out of the project. Facebook is not exactly trustworthy when it comes to data privacy and security after revelations of their involvement with Cambridge Analytica and selling user data to third party without full consent. This makes the situation even more difficult with so much opposition from within the US government.

Libra aims to serve the unbanked and provide a fast and reliable way to make electronic payments using Facebook’s ecosystem. This is actually a major undertaking because of its potential to open up the cryptocurrency market to mass adoption. What is at stake here are Facebook’s 2+ billion users along with its social media platform Instagram and messaging application WhatsApp. Those who joined the Libra Association were viewing this as a major business opportunity to tap the market which this creates with Facebook’s users. Users would use the Libra token which they can access from the Calibra digital wallet to make payments, using WhatsApp.

The opposition seems to stem from the impact this would have not just on the US economic and financial system, but the world as well. This is because other countries also do not have a favorable look on Libra. In essence, Facebook would become a bank that would not be regulated by jurisdiction like the US SEC if it were allowed to operate. That can also threaten major banks around the world who could lose their customers to Facebook. With the ease of payments and money transfers, Facebook could definitely facilitate the unbanked all over the world. All they will need is their smartphone or computer to open Facebook and they have access to their digital money.

That would be unfair to other financial institutions, who are regulated and follow jurisdiction compliance. Why should Libra have no regulation when it is doing the same type of business as banks and financial service companies. What Facebook probably didn’t realize is the reason cryptocurrency are better off decentralized without any central authority. Bitcoin has been around for more than 10 years now because it has no owner or actual structural organization. It is truly decentralized in its governance. Despite being associated with Satoshi Nakamoto, no one can come after him because he remains anonymous. Perhaps Facebook is too late in realizing this is how you build a cryptocurrency.

The cryptocurrency community is also not that favorable of Libra, though some are open minded to the idea. Those who look in favor like the idea because it could open up the cryptosphere to more people. Libra would be the on-ramp to other cryptocurrency so it is a gateway so to speak. The more die hard cryptocurrency supporters don’t even consider Libra as a true cryptocurrency running on a real blockchain. It is basically just another form of electronic cash pegged to fiat that uses a digital ledger technology (DLT) that is highly centralized. The purpose of a true blockchain with a cryptocurrency is to be a trustless and permissionless decentralized system.

The odds seem stacked up against Facebook and their Libra Association. The good thing about this is that Facebook is realizing the potential of cryptocurrency and blockchain technology. They must meet regulatory compliance in order to proceed. The Libra Association is still intact, but they will need Facebook to meet compliance in order to get approval. The stakes are high, and there is big money to be made behind this. What is clear here is that the US SEC is making it clear that in order to play you have to follow the rules. It is now up to Facebook if they can meet those requirements.