Proof-of-Stake Consensus Mechanism

The power of cryptocurrency is not just security and decentralization. It is also due to what is called the consensus mechanism, which allows participants called nodes in a decentralized system to come to an agreement to validate the truth on a blockchain. The most popular is the consensus used in Bitcoin, called PoW (Proof-of-Work) which requires mining to create coins on the network. Although it has been tried, tested and proven true, it has issues with scalability and sustainability. Although mining is reliable, it can be energy intensive to participant nodes because it requires plenty of computing resources (hash rate) to solve cryptographic puzzles to add a block to the blockchain. That translates to larger electric bills and thus will not be ideal for payment systems that require mass volume transactions that need to be processed daily 24/7/365. It is also slow because in a blockchain, the data is sent to all nodes rather than just one server processing the transactions. It had its limitations called out by developers, thus leading to other consensus mechanisms that used more efficient algorithms that also increase the transaction velocity on the network.

This is why a new type of consensus mechanism was developed called PoS (Proof-of-Stake).

What is PoS?

This is not the same as Point-of-Sale, that is a totally different system for payments. Proof-of-Stake is a consensus mechanism algorithm that requires no mining to validate transactions and create blocks. Instead it requires to stake a certain amount of funds to become validators on the network. These funds are a % of the total coins that exist on the network.

Let f = fund staked as %, Ts = total supply of coins, Ta = total amount staked

f = (Ta / Ts) x 100

PoS and variations of it are being used in cryptocurrency like EOS, Tron, Tezos and soon it will be implemented on the Ethereum network.

When you are mining for blocks using PoW, like in Bitcoin, you must compete with other nodes called miners in order to validate blocks. This is done by trying to solve what is called the nonce which is a value (based on a difficulty target) that contains a hash of numbers. The value is either less than or equal to the nonce, and must be discovered by miners within an average time of 10 minutes. The miner who is able to compute the nonce first becomes the block validator who creates the blocks and in return receives Bitcoins as a reward.

On PoS, there is no need to compete with other nodes to solve a cryptographic puzzle. Instead, there are a set number of nodes called stakers who will help validate transactions. In some systems, like in a delegated PoS network, token holders can vote for block validators (called producers in EOS) who have staked a large investment into capital resources (e.g. data center, servers, etc.). The code than provides a time when block validators will create blocks and in return they will receive their reward in the cryptocurrency’s tokens.

If we have two staking nodes called f1 and f2:

If f1 = (Ta / Ts) x 100 > f2 = (Ta / Ts) x 100

This means f1 will be the block validator based on what was staked or weight of their % of coins.

Here is one example of PoS. According to Ethereum founder Vitalik Buterin from his blog:

The simplest formula for this (PoS) is:

SHA256(prevhash + address + timestamp) <= 2^256 * balance / diff

prevhash is the hash of the previous block
address is the address of the stake-miner
timestamp is the current Unix time in seconds
balance is the account balance of the stack-miner
diff is an adjustable global difficulty parameter

“If a given account satisfies this equation at any particular second, it may produce a valid block, giving that account some block reward.”

The idea behind PoS is to encourage honest participation among trustless participants using game theory. You cannot know for sure who is acting on good faith or who is the bad actor. Thus, the idea of putting your own funds as a stake to being a validator is what shows your willingness to help in the network. Otherwise, that participant will lose their staked funds if they become dishonest or try to attack the network. The consensus among all nodes can deny the participant’s block if they attempt to cheat. They either lose their stake or get rejected from the network and even blacklisted. It all comes down to the protocols of the digital governance on the network, something that is a feature of PoS systems.

Another thing to note is that PoS is also based on the weight or amount a node has put at stake. Therefore, the more funds you stake the better your chances are for becoming a block validator. The validators can be chosen by random selection or voted by the token holders as mentioned earlier. This process is much faster to resolve than the 10 minute block propagation time in Bitcoin’s PoW because it requires no mining to solve for the nonce. It can actually be more instantaneous since the selected block validator can process the transactions and create the block which then updates all nodes on the blockchain. Much faster than having all nodes try to validate the block at the same time by discovering a nonce. This allows for faster transactions speeds that are more suitable for micropayments and retail transactions i.e. buying a cup of coffee with cryptocurrency.

This consensus mechanism is also more energy efficient. Producing a block on the network doesn’t require expending a lot of electricity like in Bitcoin. This saves not just costs, but also time. This has been the main argument for PoS among its proponents.

Despite its more refined algorithm, there are also issues with PoS. The following will discuss some of the well known issues.

Stake Inequality

If you are to look at the algorithm, it favors wealth. Critics argue that in a PoS system, those with more at stake or resources available will surely always come out as the validators. This is not exactly fair, and can lead to a sort of network oligarchy which can control the blockchain. If this is the case, what have PoS developers done about such issue?

To make sure that things are fair, code was written to randomize block validator selection that is still based on the amount at stake. This means that anyone who is staking is likely to get selected based on how much they have staked. When the load of transactions is even greater to process, a node that has staked more will likely become the validator because their stake can prove that they have the resources available to create the block. Now the argument against this is that it still shows that it will be favorable only to those with higher incomes. They can even collude to become block validators based on their stakes and collect all the fees from transactions. This creates a barrier to entry that limits decentralization. This then can lead to centralization, which is what blockchains are not supposed to be.

Centralized Validators

Centralization is indeed counter to the ideology of a blockchain. In order to prevent only a few validators from ever gaining control of the network, different methods have been developed.

Here are some of those methods:

Randomized Selection – This will ensure that validators who have validated before will not be the only validators. Instead the algorithm will randomly select a new validator each time. A validator who has validated before will get their chance again in the future. Some networks will actually allow for x number of validators only, while others can allow for unlimited numbers of potential validators.
Elections – Other cryptocurrency use digital elections or delegated PoS (e.g. EOS and Tron) to determine who the block validators will be. In EOS they are called Block Producers, while in Tron they are Super Representatives. The network allows all token holders with voting rights to ‘freeze’ funds for candidates to become validators. In EOS 21 are elected while in Tron it is 27. This appears to be a smaller number of nodes, but the logic behind this is that although it is less decentralized, it helps to scale up processing for faster transaction processing. The network can then call for a new round of elections to select new validators to make sure that it is not too centralized.
Time Allotment – In this scheme, anyone who has staked joins a queue to become a block validator. It will be a fixed amount, and so the system is not based on who has staked the most. The node will then wait for their turn to become a block validator. The problem with this type of scheme is if anyone can validate, how can we be sure they have the resources to do so? What if they are using only a low end PC or just their smartphone? Will that be enough compute power to create blocks? In this case, such a system can work for nanopayments or even non-compute intensive micropayments that use smaller block sizes. All the node needs to do is add the block after the consensus has determined it is valid. In return the node receives their fees.
Validation By Delegation – In Tezos this is the PoS scheme, called Liquid PoS. In this system, a validator can delegate their validation rights to other validators on the network. This is done using a process called baking. The node called a baker has block producing rights based on their stake. This model is more or less a way of sharing the rewards. This is because by process of validation by delegation, the baker can delegate production to another baker without transferring their ownership of stake. Instead they keep the stake and get rewards which they then share with the delegated baker. This works well if the baker has a good reputation and integrity on the network.

Network Attacks

The problem with centralization is that a rogue node can accumulate a majority of the cryptocurrency’s tokens. If they were to gain 51% of the coins and stake them on the network, that can lead to attacks. Now the question is, does that even make sense? It definitely requires a lot of investing into the cryptocurrency to have a majority hold on its coins. This is also called the 51% Attack and it can also be possible of PoW systems.

f = (Ta / Ts) x 100 = 51

In a post made on the Qtum blog:

“In PoS, after a rollback, the attacker address can be blacklisted and those coins simply ‘deleted’. This would make the remaining coins in the system go up in value and the attacker would have to repurchase the coins in an effort to relaunch the attack. This is especially risky for them if they were shorting the coins, as they no longer have access to them and have to pay back the lender.”

In this case it would make things more expensive to attack the network so it discourages bad actors. As of this writing (September 2019), there has never been a successful attack on a PoS blockchain that demonstrates this example.

Nothing At Stake

The Nothing At Stake theory is a problem that arises on the blockchain due to its distributed nature. This type of attack can delay and complicate transactions on the network. Staking is a process that adds value to the network. What is being staked is actually the % of coins that a user has of the total supply. It is thus in their best interest to make sure that the network is secured, otherwise they will lose their value. This incentivizes the node that stakes to behave honestly or else risk devaluing their network.

This problem can occur when there is a fork or series of forks on the network. A fork is another chain that forms from the main network during a contentious moment in which the network becomes split. One network supports one block while the other half refuses to go along with it. This also occurs when there are simultaneously two block validators trying to produce a block for the network. During a fork, a node can put their stake on both chains because they have nothing to lose from it. This type of behavior is not exactly approved by consensus.

The node can get away with it though. This is because the node will get their reward no matter which chain wins. This can lead to what is called a double spend. The node that has put a stake on both chains loses nothing because they will get their reward from the chain that wins. Now imagine if all nodes followed this lead. It makes two chains exist at once, which means there is really no main network. The node has nothing at stake because they don’t incur any costs to doing this.

This makes the network less secure and prone to more discrepancies. One of the chains can overtake the other, and any bad transaction on one chain is considered good on the other chain. Thus, a node has nothing to lose since the eventual chain that wins will reverse any bad transactions they had on the failed chain. The node collects fees no matter which chain they are on, and this can lead to many inconsistencies on the blockchain.

To address this issue, developers have come up with mechanisms that prevent or discourage this. To explain in simple terms, when the network detects a node attempting a nothing at stake attack, they will be reprimanded. The consequence is that the node will lose their stake, which is something to lose. This encourages honesty among the nodes because of the penalty of malicious intent to the network.

Critical Factors

A great feature of PoS is to allow more participation among token holders and involve the community when it comes to consensus. However a cryptocurrency chooses to implement their PoS protocols, the thing to remember is that this is an alternative option to PoW. The benefits are clear, but there are also issues that need to be addressed. Some have tried to implement a hybrid PoS and PoW system to reap the benefits of both consensus mechanisms. Overall, these systems will eventually mature and develop over time, so there is plenty to observe once they have been in production.

Stablecoins – Stability In A Sea Of Volatility

The cryptocurrency market is highly volatile. That is the main risk involved due to the speculative nature for cryptocurrency. Price changes can suddenly shift in a matter of seconds. A typical phenomenon observed in the market is called “pump and dump”, and involves a large injection of capital followed by a large outflow of it as well. This is an example of market manipulation, often carried out by investors called “whales”, who have large funds that can influence the market.

Since there is little regulation and lack of clarity in this space, it is really hard to control how money moves in and out of the market. Price valuation depends on the market cap that is the total capital of the cryptocurrency asset. The idea here for most investors is a future return of value, which is typical of a security. However, cryptocurrency are meant to be a form of payment or medium of exchange which has utility. It is supposed to be a currency like the US Dollar or the Euro, but speculators are treating it as a valuable asset. In other words, most cryptocurrency especially Bitcoin, are being treated as a store of value. Investors are “HODling” or holding on to them with the expectation of higher values in the future.

The problem with holding is the price volatility of cryptocurrency assets. The market shifts and swings, with 100% gains getting wiped out in seconds. Those who continue to hold are using a long term strategy but traders who go short will often lose more money than they expect. There is actually a solution to avoid the price volatility in the market for traders. Enter stablecoins, a cryptocurrency that is pegged to the value of fiat currency.

The best and oldest example of a stablecoin is Tether. The token is named USDT and is pegged to fiat currency like the US Dollar, Euro and Japanese Yen. This provides price stability for traders who want to keep their funds in the cryptocurrency market without the volatility of price swings. It makes sense to keep USDT as a trading pair with the top cryptocurrency in the market. Traders who hold USDT, don’t have to undergo any conversion at exchanges from fiat to cryptocurrency any longer. This will cost traders more money because of the associated fees with exchanging between fiat and cryptocurrency. With USDT, traders can conveniently hold their cryptocurrency assets without being affected by price swings since the USDT token is always pegged one to one to the US Dollar, etc. Since USDT has existing trading pairs with many cryptocurrency it is much simpler to trade on digital exchanges.

The complexity of moving large amounts of money from a bank to a digital exchange and vice versa, is in itself a hassle. Not to mention the scrutiny and the fees involved. Traders who have to convert fiat from their bank back to cryptocurrency to trade on exchanges are also incurring a loss because they could miss the moment to trade because of the process involved. A trader will be able to trade faster by just holding a stablecoin like USDT which they can convert and pump back into the market with an order book on digital exchanges.

According to Wikipedia, a stablecoin is:

“… designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets.”

The basket of assets can include precious metals or even other types of cryptocurrency. In the case of Tether, 1 US Dollar is supposed to back each USDT token issued. Maintaining that price point requires auditable proofs, which stablecoins must be able to provide to regulators.

Stablecoins even have a practical business application not just for traders, but for businessmen and financiers. Moving money across borders with cryptocurrency is actually faster and much simpler than using a bank of money transfer service. It does however, circumvent jurisdiction laws and that is the issue with transactions like this. There have also been criticisms that stablecoins may not actually have the fiat reserves to back their cryptocurrency. This has been the controversy with Tether. It is more a lack of transparency in their financial information that has regulators investigating.

Another issue that seems to beg scrutiny are how centralized stablecoins are under their respective companies. Most all stablecoins – Tether, Paxos, Gemini, TrueUSD – were developed by a company. Though they use a blockchain-based digital ledger technology, their governance and business process is not truly decentralized. They still make money from fees, but what if the government or a certain jurisdiction shuts down the company for non-compliance to regulations? What happens to the stablecoin holders? Digital exchanges can choose to blacklist the stablecoin token, and this would be disastrous for holders who have plenty of them to exchange. Stablecoins may also lead to an increase in the supply of money leading to inflation that is pegged to a national currency. That is another possible problem that stablecoins could introduce or exacerbate.

There are hurdles and many regulatory clarity questions regarding stablecoins. They can eventually lead to greater adoption with further cooperation with jurisdictions and regulators. Even Facebook and Walmart are planning to release their own cryptocurrency that uses a stablecoin. This can impact the mainstream since those are two of the world’s biggest companies. The potential is there, so it is just a matter of how they will be regulated and how companies who issue them will be able to comply. Stablecoins are beneficial to the cryptocurrency market as a whole. Whenever USDT trading volumes are high, it usually correlates to more trading activity of cryptocurrency assets like Bitcoin. Digital exchanges like Huobi and Binance reported 40-80% of transactions use USDT. It is also originating from China, where traders are using stablecoins like USDT to avoid banking restrictions (From article “Why Tether Volume Is At All-Time High” on Coindesk).

A Cointelegraph article “Stablecoins to Play Key Role in Crypto Adoption, Says New Report” states that stablecoins will have a key role in cryptocurrency adoption. This is optimistic news for stablecoins as they aim to address market volatility in cryptocurrency and hyperinflation with fiat currency. Countries with a high inflation rate can adopt stablecoins to stabilize their funds as a sort of safe haven, though this has not yet been seen on a proven scale. There are plenty of new projects being mentioned now that have the use for stablecoins. It could possibly draw the attention of institutional investors. The stability it can bring to a volatile market is what makes it an attractive solution for trading and perhaps even investing.

Facebook, Ready To Become A Global Bank?

What advantage do social media giants have to offering financial services?

A large user base. Facebook is set to provide electronic payment services using their own digital currency called the Libra coin. This story was huge when it first came out because of the hype around it as a cryptocurrency that would compete against Bitcoin and Ethereum. Perhaps that is not quite correct. The Libra coin is being offered as a token that provides ways for users on Facebook’s platform to make payments to each other. The tokens are provided with the Calibra wallet and a network validates transactions via a group known as the Libra Association.

Facebook’s cryptocurrency is not using an actual blockchain, but more a digital ledger. While it also uses cryptography to secure transactions and make them immutable and provide transparency, the set number of validators on the network make it more permissioned and centralized than a public blockchain. That is counter to the ideology behind cryptocurrency which are supposed to be permissionless and decentralized. Facebook will not be the sole validator on the network though, that is because it will be the duty of the Libra Association.

The Libra token is also not exactly going to be a competitor against Bitcoin. Libra’s value will not be based on market speculation or demand, but will be pegged to fiat currency. It is not exactly the type of digital asset to acquire as a store of value, unless the purpose of the token changes. Otherwise it is just like another version of an electronic payment system that is already quite common. Pegging it into fiat removes the volatility that is typical of cryptocurrency. No matter how many Libra coins you have, its value will remain the same as the amount of fiat you exchanged it for. The use of the Libra token for payments is to provide easier ways to pay with less friction and for accountability purposes.

The list of Libra alliance members is what is impressive. The idea that Facebook was able to unite companies like PayPal, Uber, Lyft, Visa and Mastercard gives the notion that this must really be on to something. That is because it has such huge potential, it has already attracted scrutiny from mainstream finance and regulators. However, it is not exactly a good thing because rather than approve it, critics want to either stop the whole thing from happening or regulate it with the full extent of the law.

What we have to realize is that Facebook has over 2+ billion users. The impact such undertaking has can influence people’s lives. That means that billions of users will be able to use Facebook to not only make payments, but as an on ramp to trading cryptocurrency as well. That can be good news for Bitcoin and Ethereum holders. Rather than compete, it can foster cryptocurrency growth. Facebook wants to reach out to the greater part of the population that is unbanked. Now that is a significantly large proportion of the world’s population. With more people having access to the Internet through their smartphones (4G technology), the impact this can have is really huge.

For regulators, the concern is Facebook’s reputation. Since the data privacy issues and Facebook’s appearance before the Senate, why would anyone trust Facebook? Other concerns include whether Facebook will censor those on their platform from using Libra. The overall power that Facebook will have in this field makes it hard for anyone else to compete against because of how large the user base is. Facebook is an ecosystem that includes Instagram, WhatsApp and Messenger. It will become so easy and convenient to use these apps to make payments, it is a great business plan.

For banks the biggest concern here is Facebook as a competitor. Libra coins can be bought using the Libra Association’s payment processors. It does not require banks, and this raises more scrutiny. Does this mean “Facebook will become their own bank?”, because they can very well do that. If people and businesses can start taking out loans from the Facebook, that will disrupt the banking industry. The amount of fiat reserves that Facebook and their Libra Association will hold from selling the coins will be held as not for profit. However, they can use the funds to continue to develop the Libra ecosystem and it will still benefit the members of the alliance and Facebook. Despite being not for profit, they still make money from accrued interest and the amount of money is huge. This is actually from a second token called the Libra Investment Token, and this is the financial reward for members of the Libra Association. Just like any cryptocurrency, there is an incentivized reward system for those who participate in its consensus.

Without further regulatory clarity and the amount of requirements, Facebook will have a mountain to climb until they get Libra to the public. Since the Libra Association has registered in Switzerland, they will also need to meet compliance with the authorities there. In the US, it will have to meet both federal and then state regulation before it can be approved. Other countries like China, may have a conflict of interest with Libra and may not ever see its use there.

What Libra coin can also provide is an on-ramp to on-board more people to an electronic payment system. Depending on how you look at it, the system can also be a gateway to cryptocurrency. Thus it will not directly compete with cryptocurrency like Bitcoin, but can actually make it easier for people to buy them. This is because Libra can be listed on digital exchanges where they have a pairing to other cryptocurrency. While Libra can be used for payments, they can also be traded for other cryptocurrency on digital exchanges.

A global bank will have plenty of power, but also require more responsibility. Facebook has already violated trust among its users by selling their data to third party. There are now also issues with privacy after Facebook admitted that it listens in to conversations in order to improve the service. Will consumers also be comfortable knowing that all their transactions are tracked on digital ledger that is controlled by a sort of oligarchy i.e. The Libra Association. The problem is that there is so much lack of transparency, users would not have been aware of what is happening. The Libra Association claims they will move to a more permissionless and decentralized system by moving to the PoS (Proof-of-State) consensus. They also want to guarantee that there is transparency and immutability like in any other blockchain. Libra may be good for users in general, but earning trust is the issue. Whether or not Facebook is up to the task remains to be seen.

Litecoin Halving – Do Less Rewards Mean More Value To Miners?

The Litecoin blockchain halving was succesful at the block height of 1,680,000 at 10:16 UTC (Monday August 5, 2019). The halving reduces the Litecoin reward in half, from 25 LTC to 12.5 LTC per block mined. There was no immediate dramatic rise in the price of LTC, but it showed plenty of optimism in the market. Litecoin, like Bitcoin, has a limited supply which caps at 84 million LTC. The halving is an event that occurs on the Litecoin network every 840,000 blocks or approximately every 4 years. As the name implies, it is a 50% reduction of the miner’s rewards for every block they validate on the network. This is part of the Litecoin consensus mechanism called PoW (Proof-of-Work) which is also used in the Bitcoin blockchain.

The halving creates digital scarcity, and to some analysts this means the digital asset becomes more valuable. Whether it is due to the lower supply of LTC or the hype surrounding the event, prices have not increased at the levels some may have expected. Perhaps this is due to the halving being priced in with investors already having accumulated the digital asset ahead of time. If these transactions were done over the counter style, then it will not really affect the market prices on digital exchanges. Some analysts believe there should be more to expect in terms of the utility of the token rather than just anticipate the digital scarcity will increase prices. Perhaps the law of supply and demand doesn’t exactly equate to expectations in a volatile cryptocurrency market.

LTC is used mainly in making direct P2P online electronic payments. It functions like any other cryptocurrency, where the transactions are made transparent and immutable, allowing for greater accountability. In terms of speed, it isn’t any faster than traditional payment systems like VISA or Mastercard. However, LTC can instantly transfer value across any border because of its P2P feature. The transactions also have lower fees than money transfer agents or bank charges. When you don’t have intermediaries in the payment network, you can pretty much transfer value easily in a frictionless manner. All that is needed is an exchange that supports LTC that converts the cryptocurrency to fiat.

The problem is that regulatory clarity has not fully accepted cryptocurrency like LTC. Although it is being used by some people to make payments or transfer value, it is not happening on a large scale yet. Not all exchanges are available in all countries that support a fiat to LTC pairing. If any exchange has a Litecoin pairing then it would be easier to transact. This would be like how using the USD becomes viable because of currency exchanges that support it. Therefore it makes it accessible to everyone and it is the legal medium for exchange. LTC on the other hand is not readily available to be used to purchase items, unless the business supports it. So far there are very few establishments that will accept LTC as a payment for let us say a cup of coffee or breakfast sandwich. How easy it is to use fiat to pay for those items.

There is more concern among the mining community though. Since block rewards have been cut in half, operations will be affected due to decrease in profitability among miners. It would be fine if the price of LTC greatly increases, but if not then the miners will have to absorb net losses. The issue here is related to the electricity costs to cover producing LTC from mining blocks. What this can result to is an exit among miners who cannot absorb the costs, while established miners will continue mining and making profit. The bigger mining pools can survive because they have the resources to do so. The hash rate of the overall network could also decrease, making the difficulty target easier and block mining just as profitable for the miners who remain in the game.

Let’s look at how blocks are mined on Litecoin’s blockchain. The block production time, on average, is 1 block every 2.5 minutes, which is 576 blocks are produced every 24 hours. Due to the halving, each block mined now rewards miners 12.5 LTC. That means that every day or every 24 hour period 7,200 LTC is created. This will go on for the next 840,000 blocks which will be the next halving. With a total supply cap of 84 million LTC, the halving leads to less and less rewards for miners. The incentive here is to produce blocks, but with less rewards there may be less miners providing hash power to the network. The idea is that demand will exceed supply, so miners will still be incentivized to validate and mine blocks so the value of LTC will increase. The point here is that the lower amount of LTC is not going to stop miners if the price of LTC increases due to the demand. Fees should also be reasonable enough that people will use LTC to make payments. So far it seems current fees are low enough in terms of LTC/KB with 3 priority levels (the highest level costing more than the rest). This is what the Litecoin team refers to as “near-zero cost payments” i.e. cheap fees.

The only thing that has not been determined is whether LTC will continue. The LTC is only valuable if it is being used, but if it is just speculation fueling the prices then there is really no utility behind it. The developments in Litecoin need to catch up to the demand which is what is creating it in the first place. There has been encouraging news about new ways to bring privacy to transactions on the Litecoin blockchain. Developers will need to make sure that the value of LTC doesn’t rely on pure hype and speculation alone. Instead it must demonstrate that the technology is capable of providing the features of a decentralized instant electronic payment system for the world.

Did Vitalik Buterin propose Bitcoin Cash As A Scaling Solution to Ethereum?

For those who have been in the cryptocurrency space for a long time now, you know how tribal things are. Schisms like the Bitcoin and Bitcoin Cash hard fork due to ideology is common. There have also been splits due to consensus disagreements like the resulting Ethereum and Ethereum Classic split to the DAO hack. The tribalism in the cryptosphere does not really foster much collaboration, though there are now proposals for inter-blockchain communications. It is going to be inevitable with the thousands of blockchain projects out there. The best way for cryptocurrency to be utilized is through some form of interconnectivity that would allow atomic swaps and quick conversions.

It seems that the development community and token holders don’t exactly approve of other blockchains they don’t support. Recently, Ethereum’s founder Vitalik Buterin proposed a way to use another blockchain to provide a scaling solution to the current Ethereum blockchain. The benefits are an increase in transaction velocity that can deliver faster speeds than the current Ethereum blockchain (currently between 15 and 30 transactions per second). There was plenty of shock and disapproval of Vitalik’s proposal, even among those who work in the Ethereum development community. You can check on Twitter since that is too long to discuss about in this article.

It does sound crazy though coming from the founder of Ethereum. He could have framed it in a way to not make it sound like Ethereum’s blockchain is useless. It sounded like he was saying another blockchain should be used to scale Ethereum. In other words it seemed like he was going to replace Ethereum’s own blockchain. If that were the case, why even use Ethereum? It was taken out of context, I felt. What Vitalik actually meant is that the Ethereum blockchain can use another blockchain to help scale only as a temporary solution. Eventually Ethereum 2.0 will resolve the scaling issue by gradually shifting from PoW to PoS as the consensus mechanism on the network.

What made Vitalik’s statement more unpopular was the proposed blockchain he had mentioned which was Bitcoin Cash. According to Vitalik, the proposal was meant to be a sort of fix for Ethereum until its developers have finished working on Ethereum 2.0. He wrote about this in a post on the Ethereum Research Forum you can read more about from this link. The author is without a doubt Vitalik Buterin himself. Does it really make sense? Let me discuss what the explanation for using Bitcoin Cash was from Vitalik’s own research.

The benefit of using Bitcoin Cash’s blockchain are its larger block size. Larger blocks can hold more transactions and thus the potential to increase the transaction rate per seconds. What Vitalik likes about the Bitcoin Cash blockchain is the higher data throughput it produces at 53.3 KB/sec compared to Ethereum’s 8 KB/sec. According to Vitalik, the Ethereum blockchain will be used as the computation layer while Bitcoin Cash provides the data layer.

Another thing about Bitcoin Cash that Vitalik likes is the lower transaction fees per byte. One reason for using Bitcoin Cash is that it has lower transaction fees since they have larger block sizes to process more transaction volumes. That makes more efficient use of bandwidth since you can process more transaction per unit of time or seconds. At the moment, transaction fees may have stabilized for many cryptocurrency but they can still be high. It would make sense for Ethereum to use a lower transaction fee for their blocks in order to save users on gas.

One problem with Bitcoin Cash though is since it is a fork based on Bitcoin, it requires the same 10 minute block propagation time. This is where the community really criticized Vitalik for proposing Bitcoin Cash. Aside from that, some also pointed out that there are inherent flaws with the Bitcoin Cash blockchain that would make Ethereum susceptible to these vulnerabilities. Vitalik actually suggested that using the Avalanche pre-consensus algorithm could improve block propagation times on the Bitcoin Cash blockchain. With that in place, Vitalik then explains:

“If these techniques become robust for the use case of preventing double-spends, we could piggy back off of them to achieve shorter finality times …..”

It also seems that Vitalik had no problem with the 10 minute block time propagation since Avalanche pre-consensus is complicated to implement.

“Though this technique may be too complex to implement in practice, and we may want to just settle for being okay with 10-minute block times for a full general-purpose VM until eth2 comes out.”

It is true that Vitalik proposed Bitcoin Cash as a temporary solution to Ethereum scaling. Bitcoin Cash is not replacing Ethereum, this was just a proposal to address current limitations in their blockchain. The Ethereum 2.0 blockchain will eventually implement PoS using the Casper protocols and sharding.

BTT: Tokenized and Decentralized File Sharing

Do you remember back in the 2000’s there was a file sharing program called Napster? Actually it was for music but it allowed us to share files of different types, from movies to images. It was the start of mainstream peer-to-peer or P2P file sharing, allowing anyone to share files and download them as well. Basically, everyone who has Napster installed connected to a centralized location where the communication is established with the network. Napster’s server’s then control the data that allows users to share their files. It did not last however, it was shut down by the government because of complaints of copyright violations and the risk of sharing of intellectual property protected information. This would be a stab at file sharing on the Internet, but it would be replaced by something else.

That something else would allow users to continue to share files but without a central server like Napster. It would be decentralized, but also direct P2P using a different protocol. The protocol has become synonymous with the name of the application itself, BitTorrent. It is the most commonly used file sharing application on the Internet and it was purchased by the cryptocurrency project called the Tron Foundation. It now delivers a tokenized decentralized file sharing network that runs on the BTT token. So it seems that file sharing and cryptocurrency is a match.

The principles of the BitTorrent network is based on a “Tit-for-Tat” algorithm. That means that to download files or to “leech”, you must also contribute files to the network or “seed”. Therefore, it is an ecosystem of “leechers” (downloaders) and “seeders” (uploaders). This is to make sure that there is fairness in the amount of contribution made to the network from all users. The network also becomes faster with more “peers” aka computers or users. Another feature users get on BitTorrent’s network is anonymity. In no manner is a user required to provide their ID or personal information for other users. There is more privacy in using BitTorrent than let’s say Google Drive when it comes to sharing files. With Google Drive, the owner of the shared file can be tracked to their Google account and g-mail which has an identity often attached to it. In order to understand the concept of BitTorrent, we must take a look at how their network functions.

When a file is uploaded to the network, it is not stored in one place. It is actually broken into fragments called “pieces” and identified by their cryptographic hash. The pieces are stored across the network on different computers. A cryptographic hash function is used to verify the authenticity of the pieces for security purposes as well. That means that no one can just tamper with the pieces, they are protected with cryptographic technology. Pieces of files are then distributed across the network and as more seeders join, the faster and more reliable the network becomes. BitTorrent also does not let the user download the file immediately. It must go through a process first which involves having the torrent file to point users to the location of other peers who have the pieces to the file.

A torrent file is accessed by users when they want to download a file. The BitTorrent client gets a list of file locations for torrents that users download. The communications protocol is beyond explaining in this article, but in simpler terms it allows information to propagate across the network. The torrent file does not actually contain the content. It just contains information about the location of the file’s pieces which the user’s client will download from. The content’s pieces can be downloaded as .torrent files. Once the pieces have been downloaded, the client then puts the pieces together to reconstruct the content. Thus downloading a large movie file becomes more efficient and reliable by breaking it into pieces rather than one large file. This is because when the connection times out, you don’t have to download everything again if you already have pieces of the file.

BitTorrent has been controversial because of the way it circumvents the law regarding file sharing. Music companies are against the sharing of music on various platforms unless there is paid royalty to the musician and recording studio. Copyright laws also protect intellectual property as well as published content. BitTorrent makes pirated movies easier to share and there is a market for leaked Hollywood films that make use of P2P technology. It also allows the sharing of games, music, software and photos. Just about anything digital can be shared using BitTorrent’s network. There is not much the government can do however because of the decentralized nature of BitTorrent. Another complaint comes from users who were infected by malware since some files can be disguised to appear legit, but the truth is as a leecher you have no right to make a claim since you are using the software somewhat at your own risk. Despite these claims of piracy, patent infringement, viruses/malware and illegal file sharing, BitTorrent was able to continue unlike Napster. Besides its distributed and decentralized nature, BitTorrent is more a software or protocol rather than a company, so that is another issue for the legal sector.

The slippery slope is that in some jurisdictions, or nations, what is legal may not be legal and vice versa. BitTorrent gets around this argument since the peers are decentralized and BitTorrent itself is not the one providing the data. Through the years since it started in 2001, BitTorrent has faced lawsuits and has had to meet compliance to regulations on certain occasions. It was too decentralized to stop since there are millions of users worldwide, not just in one country or geographic location. When BitTorrent does comply, it does so by removing links to content which creators requested.

The protocol or software itself is legal, you are not violating the law by having it installed. Other controversy involves BitTorrent trackers, which provide the links to the content that may or may not be copyright protected. In the US alone, there are over 200,000 lawsuits against BitTorrent since 2010. Because of this outrage, it would only be a matter of time before more BitTorrent protocols are blocked by ISPs on the request of regulators and legal departments. If that is the case, then it would not have a good future and will likely thrive more underground rather than finding mainstream use.

This is where Tron steps into the picture. It seems that the BitTorrent network would be an ideal platform to add to the Tron network’s ecosystem and blockchain. To get this started, Tron would issue a token for the BitTorrent network called the BTT coin. What Tron aims to do is use the network as a platform for DApps based on BitTorrent’s decentralized file sharing. Tron can utilize this for its entertainment and media based content sharing platform. BitTorrent would remain distributed and decentralized and with Tron’s vision of censorship resistant, open source and incentivized communities. In a nutshell, the BTT coin allows Tron to tokenize the BitTorrent network. This is in order to connect creators to users and in return get paid in BTT coins for their content. It will actually be more compliant to copyright laws and intellectual property for the platform to remain clear of violations.

The platform sounds good for creators, but the overhaul to the system may not resonate well with users. Instead of a truly decentralized system, it seems Tron’s BTT coin as a token has put more regulation to the platform. Users of BitTorrent do not have to use BTT as a token to get content. Tron is supporting users who want to continue using the software like before. They will not be able to collect BTT coins though, so there are incentives to using the tokens. The incentive here is to keep users to continue sharing on the network, only this time around they will get rewarded for it. Seeders will tremendously benefit from this ecosystem because the more files they upload for sharing, the more BTT coins they can get. The BTT coin as a token can also be exchanged for goods and services on the platform besides just converting into fiat currency.

The benefits it seems are still yet to be explored for the new BitTorrent and BTT. The vision of a truly decentralized file sharing network continues, only this time there will be rewards for everyone. It encourages more file sharing and that way the availability of content can become sustainable (that’s the idea in theory). What remains to be seen are the legality of the content and whether the Tron Foundation will work closely with regulators to make sure that content is not being illegally shared by users unless there is consent from or incentives for the creators as well.

Your Basic Attention, Please … The BAT Token

The Internet is one big advertisement platform led by Facebook and Google. Brands want to get your attention while social media wants to increase your engagement. This is how users are targeted for advertising. In the process, while a user is engaged, their data is collected for analytics. This is not exactly with your full consent, but nonetheless the data you are providing makes you a product to marketers so they can sell you their products much better.

It has become a market for more and more attention. The problem is that it is becoming dominated by middlemen and other intermediaries. When you view a post that is for targeted advertising, there can be so many layers underneath that gather your data for their intents and purposes. Sometimes bad actors are also involved and this leads to massive fraud. Cambridge Analytica is just one example of using analytics to try to influence users on Facebook. Social media is a more common ground for bad actors to not only gather data but influence users to make decisions to not only buy products but to do things based on their politic and beliefs.

The system is full of “malvertisement” and both affiliated and unaffiliated links that can lead to malware and viruses. Yet there is no service actively protecting users from these dangers. For advertisers and publishers, the middlemen involved can also be costing them money. Ad spends are thus not being used efficiently. The Internet is full of bots that automate clicks, likes and comments, it is becoming more difficult to gain organic engagement. This is when a new platform for digital advertising is needed.

The BAT cryptocurrency token is a solution that addresses the problem with digital advertising and browsing on the Internet. It is an open sourced, decentralized ad exchange platform. It aims to remove the middle man by directly linking advertisers and publishers to the users. It is called the BAT triad or triangle. The BAT platform comes with its own web browser called Brave that comes with an integrated digital wallet for BAT tokens.

The idea behind BAT is to have advertisers and publishers target you directly with your consent to get your attention. In return, the user is incentivized in BAT tokens for engaging the content. This also saves advertisers and publishers money because they are not going through a layer of intermediaries or middlemen. According to the Basic Attention Metrics (BAM) “To improve the efficiency of digital advertising requires a new platform and unit of exchange.” BAT is the token used to connect the marketplace of users with advertisers and publishers. It is based on Ethereum technology so it makes use of smart contracts stored on a blockchain.

According to the white paper “Attention is measured as viewed for content and ads only in the browser’s active tab in real time. The Attention Value for the ad will be calculated based on incremental duration and pixels in view in proportion to relevant content, prior to any direct engagement with the ad.” In return for attention, according to the BAT website “Users viewing ads will be rewarded with BATs. BATs can be used for premium content or services on the BAT platform.“

The BAT metric is based on the following formula:

Where a = 13000, b = 11000 and duration is measured in milliseconds. This is the score that determines how long a publisher gets the attention of the user. This is based on what is called the concave score. The scores reward publishers and advertisers for the user time spent on the website, with diminishing returns for longer views. The minimum threshold is 25 seconds duration for a score of 1. These metrics were determined by the BAT project team, so they are not a standard metric for attention so to speak.

The good thing about BAT is that it provides more privacy to users through a feature called the “Anonymity Shield”. This is unlike what browsers like Chrome are allowing with extensions that collect user data. For advertisers and publishers it minimizes fraud and useless ad spends. They can minimize costs and better use their resources for directed marketing. It also provides better tracking because of the blockchain. With the problems in data privacy becoming a more important issue, the significance for BAT is that this is a good option for those that would require these features.

Predictions Market On The Blockchain

One use case for the blockchain with cryptocurrency is in the predictions market. Speculating the outcome of an event can bring rewards if you either guessed correctly or made an accurate prediction. It is very much a form of online betting, but you are using a decentralized platform that no one can manipulate or control. There are many types of markets for prediction, including social events like elections, sports and even the next American Idol. Bets are made against anyone who counters a prediction. It can be anything as simple as whether it will rain tomorrow or not, to more complex events like electoral results.

Platforms like Augur are allowing anyone to place their bets on any type of event. Augur uses the Ethereum blockchain to implement predictions. What you need is a DApp (Decentralized Application) that runs on top of the blockchain and a valid Ethereum wallet to collect funds in the likelihood you predicted correctly. The DApp is basically a decentralized app which is installed on a mobile device e.g. smartphone. Through this DApp, a user can interact with the platform and place their bet on the blockchain using what is called a Smart Contract.

The Smart Contract is a programmable logic code that executes the conditions you set forth for your prediction. Without going too deep into it, the basic function of the Smart Contract is to honor the prediction a user places on the blockchain. It will be tamper resistant and at the same time transparent so that all can see. It enforces honesty in the betting process where countless people are involved, yet they don’t know each other at all. Sometimes cheating can occur in such settings, so the blockchain is there to enforce trust in a trustless system.

The predictions market platforms on the blockchain were meant to be decentralized. This means that in no way during the whole process are a user’s funds in the custody of the platform. It is always in their control. Decentralized means that no third party mediates between users who have placed a bet or made a prediction on the platform.

For example let’s talk about betting in sports. When using this in a prediction market, a user locks their funds or bets in a Smart Contract which the platform then prepares. Once finalized, the platform will execute code that will make it immutable. Once on the blockchain, it can no longer be changed, something that must be honored in betting systems. Oracles, or external information sources, will update the platform using an API (Application Programming Interface) that keeps the results up to date on the prediction. These sources can include online sports betting websites, news agencies and trading platforms as well. If the prediction for a winning team were correct, then the value is set to “1” which indicates that the Smart Contract will collect the winnings and it can now be deposited to the user’s wallet.

The user can also sell off their winnings in the prediction market in exchange for cryptocurrency or fiat using the Smart Contract. Since it is programmable, the user can specify to the Smart Contract what exactly it should do. The payout goes to the user’s wallet and from there they can exchange it for fiat or send it to another digital wallet. The predictions market is an ideal way to forecast events, hedge against uncertainty and even for settling bets directly without a third party involved.

How 2FA Can Secure Your Cryptocurrency Assets

In the Crypto-economy, we need to implement security to safeguard our digital assets. Wallets are primarily just an interface to access the blockchain where the assets are stored. The wallet just provides the balance to the user, as well as allow users to send and receive tokens. It does not actually store the cryptocurrency. Instead, the wallet stores the private key which is what proves the user’s ownership of the assets. This must definitely be kept secured because if someone else were to gain access to the private key they can take ownership of your assets. This is why wallets, whether online or offline, use various authentication schemes.

Passwords are the most common way to access a wallet. The problem with this is that once a password is guessed or cracked, there is no other layer of security. This is why users are recommended to store their private key in hardware wallets e.g. Ledger Nano or Trezor. This stores the private key offline so only the user will have physical access. It cannot be hacked from the Internet or anywhere else since the hardware wallet uses cold offline storage. For everybody else, how can security be increased or improved?

A solution to this is called MFA or Multi-Factor Authentication. MFA uses multiple types of authentication to verify a user. In MFA you can use 3 methods to secure your authentication.

What You Know – This involves the password, the most common form of authentication. Only the user should know this. The problem here is password sharing among users. Some family members openly share their password and that can lead others to learn this thru eavesdropping and more nefarious ways like password cracking.
What You Own – Most users have a smartphone, and this can be included for verification. In this method an app is installed on the smartphone that generates a code that syncs with a server over the network. It will only work from this smartphone and not any other device.
Who You Are – Your biometric information, like fingerprints, retina scan or face can be used to further confirm your identity for verification. This is something that physically verifies who you are. This is actually a very effective method that Apple uses for authentication on iPhones using Face ID. The possibility of 2 or more people having the same exact biometric traits is zero to extremely rare.

2FA or Two-Factor Authentication is one of the most common implementations of MFA using just 2 of the 3 methods mentioned. In the cryptocurrency world, digital exchanges implement 2FA to gain access to your cryptocurrency portfolio. Coinbase, Binance and Blockchain.Info require 2FA as a stronger authentication method compared to a simple password. 2FA can be enabled on many apps. Just check to make sure that the app login you are using allows 2FA support. If it is available, enable it to give you more security.

One example of using 2FA is when you login to your Binance account. Binance uses a combination of password and security codes. You create your password during the account creation process. With 2FA enabled, you now need to add a security code to further authenticate your access to your account. By installing Google Authenticator, you can add this additional security layer. With Google Authenticator, you scan the QR code from Binance when enabling 2FA. Once that code is scanned, Google Authenticator creates a profile for you. The next time you login to Binance, you will now need to check Google Authenticator app which is installed on your smartphone. Binance will request the code in order to continue your login.

2FA and other MFA implementations help to increase security, which allows you to better protect your cryptocurrency assets. Even if a hacker is able to intercept your password, if they don’t have what you own (e.g. smartphone) or what you are (e.g. face or fingerprint), they will be denied from the system.

Blockchain Interoperability – Cross-Chain Compatibility Among Dissimilar Blockchains

It seems inevitable that there will be many different tokens running on dissimilar systems. Unfortunately, these tokens will have their own blockchains. The good news is that they all run over the same IP based network. This allows a protocol layer to provide interoperability services to bridge various blockchains. This means a direct exchange of value from one cryptocurrency to another. As a result, atomic swaps will become possible across borders and payments can be instantaneous among tokens.

There are many different types of blockchains today and they are very much silos of their own ecosystem. There is no universal way to interoperate other than thru digital exchanges. The currency is often paired with a stablecoin to try and peg the value as close to fiat or with major cryptocurrency like BTC. The problem is that some pairings just don’t exist. The inconvenience here is the user will have to exchange their token to a supported pairing on their exchange first in order to make it useful. For example suppose there is no direct conversion between MyCoin and ANewCoin. Most of you know the drill. You have to buy into an exchange with fiat a supported cryptocurrency, and in most cases it will be BTC or ETH. It is only after you have bought that can you convert to MyCoin to get ANewCoin. Imagine all that happening with just a few finger swipes on screen or mouse clicks and all behind the scenes.

There are projects like Wanchain and Cosmos that focus on blockchain interoperability. They have an Application Layer (DApps, website, smart contract, etc.) that can interact with their software at the Interoperability Layer. This provides an API into the Blockchain Layer itself ubiquitously without the users doing anything else. It is simplified for a more pleasant user experience. Making it more user friendly leads to greater adoption of technology due to ease of use.

A good way to envision this is let’s say you are an ETH holder. You are interested in buying a luxury watch directly from a seller that is valued in BTC. Instead of exchanging ETH for BTC at a digital exchange and then pay for the item, interoperability will allow you to pay directly using an app with ETH at BTC valuation. The conversion process takes place automatically thru the interoperability layer, quickly transferring value from the ETH blockchain to the BTC blockchain. The seller gets paid and the item is delivered to the buyer. Certain programming interfaces can also create smart contracts for these type of transactions to release the item for delivery upon receipt of payment.

All that is required is software that can understand the different protocols. While it would appear to be a centralized settlement layer, it is actually not. It remains decentralized because the processing is done by not one organization, but different trustless nodes that run the software. These nodes are computers that belong to people who don’t know each other. All they have in common is that they are running the same software over the same network. Transactions are then processed by these nodes and incentivized for it.

Critics might quickly say that these systems are not scalable because blockchains are slow and cumbersome databases. You can argue that, but it still provides cryptographic security which is very important in value based transactions. There are new ways to settle payments that provide both on-chain and off-chain solutions to address scaling issues. An example of this are Bitcoin’s Lighting Network and Ethereum’s Raiden Network. By moving micro transactions like instant payments off-chain, the idea is to scale to larger volumes since the payments can be handled without going through a tedious consensus process like Proof-of-Work. Interoperability will have support for these types of systems as well.

Interoperability among the major public blockchains, will allow seamless, reliable and more efficient transactions for users. It is similar to how we communicate today. English provides a bridge among many countries because it is widely spoken and understood. The English language would be like the protocol for communications used on blockchains for interoperability. This is the ideal vision of a digital economy where transfer of value is frictionless and not complicated, regardless of cryptocurrency.