How blockchain will change the world
Blockchain is still in its infancy, and even though many current projects are implementing the technology, they are still in the early stages of development. Cryptocurrencies like bitcoin currently do not have many productive applications and yet, development is remarkable and every day startups come to market with new and promising ideas.
Cryptocurrencies, such as bitcoin, have been moving into the mainstream media. With this recent trend also come warnings about making investments in this space. Reports of hacker attacks on stock exchanges, exploding costs for graphic cards, as well as energy costs due to mining are spreading through the media. However, what many do not take into consideration is what is really going on behind it all – a revolution that will change our world.
Bitcoin – the nostalgic coin for collectors
When paying close attention to discussions in the media or during conferences, the subject of bitcoin – or something connected to it – is everywhere. For many, bitcoin automatically equals blockchain. To be perfectly honest, I also use the term “bitcoin“ if I am attempting to explain the blockchain technique to someone. This is understandable, since bitcoin is the first solution based on blockchain and is therefore currently the largest cryptocurrency. What bothers me is missing the focus on the important issues, the focus on blockchain as a whole. The blockchain technique has more to offer than just bitcoin. In my opinion, bitcoin will one day become nothing more than an a nostalgic coin collectors cling to because it reminds them of how bitcoin got the ball rolling and started the blockchain revolution.
What the Gold Rush, Internet, and blockchain have in common
In the beginning, nobody paid close attention to San Francisco, a small and unassuming hilly city filled with fog. But when the gold rush started in 1848, history was made in San Francisco and its face was changed forever. A similar scenario took place in 1851, when the gold rush began in Australia. The continent was mainly a red desert, and suddenly became home to thousands of immigrants and companies who wanted to participate in the gold rush boom. The same occurred in 1995 with the arrival of the Internet. Thousands of startups were created around this time and achieved their gold rush peak via the dotcom bubble. This is being repeated with the blockchain technique, where there is currently a gold rush movement for companies based on blockchain that are popping up like mushrooms due to their financing via ICOs (Initial Coin Offerings).
The parallels between the real world, the Internet world, and the blockchain world
With the arrival of the Internet, companies started adapting the real world to the Internet world: turning supermarkets into online shops, and insurance reps into insurance comparison portals. This transfer also takes place in the blockchain world, where things that work in the real world or in the Internet world are now adapted into the blockchain world. A good example here would be that physical money was replaced by credit cards or payment solutions, like PayPal, in the Internet world. Now, we see these being replaced by cryptocurrencies in the blockchain world. There are already decentralized autonomous organizations (DAOs) that exist in the blockchain and function without people and are an adaptation of classic organizations.
Can blockchain revolutionize the world the way the Internet did?
Many experts consider the Internet as one of the largest innovations since the invention of print. A technique with enormous impact on our daily lives that changed the way we process information, communicate and – last but not least – how we live. The development of Web 2.0 made way for Internet giants like Facebook, YouTube, and others that created a digital exchange revolution. However, this revolution has its price, namely our personal data which is collected by vendors and suppliers who process this information as big data.
The blockchain technology, on the other hand, is a decentralization revolution where data is stored in transparent blocks and distributed networks which, in some cases, are completely anonymous instead of being processed centrally via the Internet. Blockchain, therefore, solves fundamental issues. Banks may be eliminated and transactions centrally controlled, meaning increased power. Another feature of the blockchain is Smart Contracts. These are contracts that are bound to certain transactions by code, meaning these transaction can be controlled according to certain rules and if certain events take place, predetermined actions will follow. For instance, if a customer does not make his or her car payment on time, access to their vehicle may be automatically denied via a Smart Contract. This eliminates a central agent, and the source of human error can be ruled out. Blockchain hereby shifts the balance of power – central positions lose power and, in turn, create trust.
Blockchain = Future?
Blockchain is still in its infancy, and even though many current projects are implementing the technology, they are still in the early stages of development. Cryptocurrencies like bitcoin currently do not have many productive applications and yet, development is remarkable and every day startups come to market with new and promising ideas. It will, however, take some time until the blockchain technique is as functional as the Internet. When the Internet first got started, one had to be a technical expert just to be able to get into the Internet via a modem. These days, we no longer concern ourselves with this, as technology has enabled us to get into the Internet via a WLAN password or via our data tariffs on our smartphones. It is also no longer necessary to know how the Internet itself functions. A similar development is in store for us with blockchain. It is currently a subject for technical experts, but with continuing development, one will simply use this technique at some point in time without really having to understand it. Whether blockchain has a future will be decided by the advancement of this technique and the government regulations surrounding its legal framework and international standards. If we are able to simplify the technology for everyday use and the government doesn’t put a stop to blockchain, I am convinced that the blockchain will change the world and have a huge impact on everyday life – much like the Internet.
Martin Wos, Co-Founder, Co-CEO and CVO of Block Stocks
The views expressed are of the author.
Cointelligence invites global Blockchain and crypto professionals to share their opinions and expertise with our readers. If you would like to share your point of view, please contact us at info@Cointelligence.com.
Featured Image Credit: dencg / Shutterstock.
The road more travelled
“When you arrive at a fork in the road, take it.” Now to me that is funny – from the sayings of the great Yogi Berra, American baseball player. All of us have to face decisions at some point: the blue pill or the red pill; yes or no; the soft fork or the hard fork…
Speaking of the way religions begin with one belief, and then splinter into different groups of ‘true believers,’ the religious scholar Huston Smith observed, “All -isms end up in schisms.” Today we have proof of his point with: Catholic, Protestant, Eastern Orthodox, Oriental Orthodox, Independent Catholicism, Baptists, Adventists, and Evangelicals making up the various Christian schisms; Sunni, Shi’a, Ibadi, Ahmaddiyya, and Sufism for Islam; and the Jewish groupings of Reform, Conservative, and Orthodox. It’s enough to make anyone’s head spin, and now we also have the Hard Fork of Bitcoin Cash, recently celebrating its first birthday.
The Bitcoin Jesus?
Investor and crypto activist Roger Ver, known in some areas of the press as the ‘Bitcoin Jesus,’ used the language of belief from early on in the struggle for the soul of Bitcoin, saying that Bitcoin Cash is, “The legitimate continuation of the Bitcoin project as peer-to-peer digital cash.” Note that use of the word legitimate to show that this is the real deal. If anything we should be viewing Ver as the ‘Bitcoin Saint Paul’ – the first Pope of the Christian church – if we really want to get our analogies straight. What Satoshi Nakamoto preached is now spread around the world by disciples, and at each waypoint the word will be adapted (and some would say corrupted).
“This is the true message!”
“No this is the true message!”
Terrorist organizations do schisms too. The Irish Republican Army, formed in 1919, fought the Irish War of Independence as Freedom Fighters, but by 1997 were viewed as being not hard enough on their oppressors. And so the Real IRA was created, as being truer to the origins of the organization.
Schisms are inevitable
It seems that schisms will always happen, and now we have the schism which occurred at block 478,559, when there was a permanent divergence from the previous version of the blockchain, and nodes running previous versions ceased to be accepted by the newest version. Welcome to the world, Bitcoin Cash! Whether Bcash is an abomination or a continuation of the ‘one true message’ is pretty much the deciding question these days, and few people are neutral. Ten years ago Satoshi Nakamoto wrote that the blockchain would be subject to Moore’s law, and was no different to any other technological innovation. Moore’s law predicts the doubling of processing power every two years, and has proved true over time, so from this viewpoint it would seem that Bitcoin and the blockchain were always going to mutate. Study Darwin to very quickly see how essential and important mutation (aka ‘adaption’) is to a species.
So we have reached the fork in the road, the Hard Fork, and unlike Yogi Berra, it’s not possible to view it as a single choice. Was the splitting apart at block 478,559 for the benefit of the cryptoworld at large, or for other interests? I’ll leave the last word now to the 17th century Dutch philosopher Baruch Spinoza: “Schisms do not originate in a love of truth, which is a source of courtesy and gentleness, but rather in an inordinate desire for supremacy.”
Terra stablecoin and Luna unstable reservecoin review
Terra has secured 32M$ funding to implement their stable coin. Let’s review Terra’s 19-page whitepaper, which is very technical from an economic and scientific point of view. However, this level of technicality ends at economics, as both technical implementation and blockchain logic is missing from the paper entirely.
The document that we are working on can be considered a scientific whitepaper, as opposed to a general overview whitepaper. It is possible that Terra may later provide more documents that detail the technical blockchain issues that are missing. Consider the following an exploration of the questions that we would like to see answered in the future.
Introduction to Terra and Luna
Terra is a stablecoin of unlimited supply and is being expanded and contracted through multiple stabilizations schemes.
- Variable taxation fees adjust depending on Terra’s price. If Terra’s price is falling due to oversupply, transaction fees will rise. Iterative DMMD, similar to TCP’s AIMD network balancing algorithm, is used for throttling the variation.
- LUNA token is a fixed supply variable price token, which has the utility of being staked to the stabilization fund called the Stability Reserve. Stakeholders are also entitled to participate in the democratic process of governance at the protocol level. Taxes collected from Terra transaction fees end up as rewards, in the likely form of dividends.
- In case of market extremes:
- Market shocks will be handled with the liquid fiat/crypto reserve including the Luna token reserve (the value of which is always maintained to be above the circulating Terra supply) is used to buy back Terra and burn it. The reserve is resupplied during oversupply when it collects higher tax rates.
- Extreme undersupply will be solved by minting new Terra and selling it to exchanges, where received funds will be used to reinforce the reserve, and the surplus distributed through a method so-called Decentralized Fiscal Spending.
- Market volatility is governed by oracles, collecting data about price relationships of Terra and related fiat and cryptocurrencies.
Blockchain logic is completely omitted
In the whitepaper, terra.money is declared to be a protocol and an infrastructure for both Terra and Luna coins, plus 3rd party decentralized applications. However, nothing is written about the infrastructural capabilities or implementation solutions of the protocol, and governance of the blockchain is also left out. Nowhere is it even mentioned that the infrastructure will be blockchain-based, but it can be derived from the mentions of blocks and block sizes. Many questions are left unanswered. For example:
- What is the consensus algorithm of the blockchain itself? Will it be proof of stake or proof of work?
- Who is going to run the infrastructure and who or what decides who gets the privilege of producing block at a specific point in time?
- What is the block timing and size? Is it fixed, or is it dynamic – and what factors determine these?
The trouble with the price estimation via deposit holder vote
This brings us to the 3.2 section of the whitepaper mentioning price estimation via deposit holder vote, which acts like an oracle. In this case, “deposit holder” refers to a Luna token holder. Staking a large sum of Luna to cold storage (which freezes the Luna token for 100 calendar days) is required to participate in the democratic voting process and become so-called stability provider. In another section it was mentioned that 1000 Luna is enough to become voting-enabled delegate, although the total supply of Luna is not mentioned anywhere, except that it will be decided in the genesis block. As there is no glossary of terms, we might assume that stability provider and voting-enabled delegate are the same person, as their requirements are pretty similar in wording. Except at one point it was mentioned that delegate must run a node, so owning tokens in a wallet and staking them might be not enough. The problem is in the statement, quote:
Every n blocks, stability providers cast their vote on what they think the exchange rate for Terra was. These votes are all cast on the same block, and the votes that exceed the block size are disregarded.
The writer of this statement was not aware that 1) that there is no valid mechanism described in the whitepaper that decides who is the block producer, and 2) that anything broadcast to the network, at any point of time, is already public information accessible to all the nodes of the network regardless of the block being produced or not. So if voting delegates are required to be running the nodes, they will be aware of each other’s decisions before the block will ever be produced. Or if the block producer for that specific block would be known in advance, and block production would be held before votes are collected, network spoofing could be applied to collect the information.
Also, such a block producing node would need to be publicly known and could be attacked as at that point in time, it would be the weak point of the network. Furthermore, waiting for a real world dependent physical action like voting to resume block production might freeze the chain indefinitely. In case of such a block being decided for the specified future block and votes to be collected or prepared in advance, the block could be compromised because there would be no secure way to guarantee it to be Byzantine fault tolerant. As such, the voting result might be severely compromised, as the structure of voting would be clear, the encrypted message would be known, and it might be enough time to break it, or the node might get broken into before voting for the message to be tempered with. Also, there is a weak point for attacking such a known block in advance by clogging it with transactions before a single vote could be cast, preventing the voting process from happening for eternity if orchestrated correctly by the attacker(s).
Expansion by decentralized fiscal spending is executed through Ethereum, instead of using Terra or Luna, is most likely centralized
While the reserve fund is guaranteed by Luna stake, which is held at the reserve in case of recession Terra-burning for economic contraction to be achieved, ethereum is employed in the process of expansion to compensate the reserve debt and to fund the decentralized fiscal spending. One thing wrong here is that instead of crediting, ethereum would significantly hinder the expansion process as if the pool of reserve stakeholders is truly decentralized, the distribution of ethereum to cover the debt would be dependent on the technical performance of the Ethereum network.
Besides the risk of running into a clogged Ethereum network, the price of such payback distribution might be very expensive and makes no sense when comparing it to the tokens used internally on the infrastructure like Luna or Terra itself. Also, if Terra/Luna protocol is not an Ethereum fork or is not made compliant, there will be issues with the implementation of such procedure, as an external oracle on both infrastructures will be necessary to oversee the process, which is not described in the whitepaper. And assuming Terra/Luna is not the protocol running on Ethereum, which it most likely might not be, executing the exchange of freshly minted Terra through a decentralized exchange will be impossible and doing so will impose a centralized risk factor and a new single point of failure. Nevermind the centralized management factor of a delegate who will need to be trusted for operating the deposit of new Terra tokens and withdrawal of ethereum from the centralized exchange.
The grand scenario: centralized over-dump of stolen Terra meant for economic growth
Now imagine that a hacker managed to compromise the centralized exchange which sells newly-minted Terra for ethereum and goes undetected for some time. Even better – the cartel of centralized exchanges who trade both ethereum and Terra decides to force Terra token out of stability as they hold a pretty sizable number of ethereum relative to Terra emission capability. As the new Terra emission is stolen, the market is still undersupplied, the price is rising at competing exchanges (which, still unknowingly, will be participating in the affair) and new, even larger batch of emission is issued due to the progressive algorithm described in the whitepaper. As Terra’s price skyrockets, newly-minted Terra tokens are flooding the hacker’s accounts. And then, when the hacker is comfortable enough, he dumps them, not only countering the market shortage but greatly oversupplying the market with Terra.
A cherry on the top
Code-level specifications and implementation details of the platform are outside of the scope of the Terra whitepaper, as mentioned in section 6. Unless significant improvements are to be introduced to the whitepaper, Terra at this moment is a magic stablecoin created for mass adoption, doomed to be limited by dependency on the $28Bn market-capped, 100% over-utilized-for-years Ethereum. Infrastructure and operational costs are never considered in the whitepaper. When claiming relatively low fees, even if dynamic, it is assumed that the network would be sustained by Luna token holders financing and running the entire infrastructure of which a consensus algorithm is yet to be decided on. Economically the stabilization of this stable coin sounds pretty solid, however, I see no way of implementing it on the blockchain or in any other decentralized way.
Communication with Terra
We reached out to the Terra team. After our initial questions were not answered to our satisfaction, we shared this analysis with them and invited them to provide a rebuttal. This was their response:
I think you got way ahead of yourself with assumptions about the business model and protocol. This leads to errant conclusions and speculation about how Terra will work, when in fact your analysis does not sync with what we are currently implementing. I would simplify and streamline your analysis to include only facts, or wait until we share more information publicly. Not publishing might be the best option at this stage. There’s no point in putting out information that is not true, outdated, or speculative. You’ll really like what we are doing to solve the problem of creating a decentralized stablecoin. Think of our white paper as a starting point, there is much more to the protocol than what is outlined at a high level in the white paper.
While we appreciate Terra’s concern with the optics of us sharing speculative information, we stand by our analysis so far. We can only speculate based off of the information that has been provided to the general public so far. Terra may yet impress us when they release more technical information.
Terra is within their rights to be tight-lipped about this information. They have no obligation to tell us any more than what they’ve shared publicly. However, when limited details are provided, people are going to speculate on what the lack of more concrete information means.
We maintain our opinion that when you are raising funds for a blockchain-based project, it’s important to provide details on how the blockchain will be implemented. We reserve final judgment on the quality of this project until Terra is ready to provide us, and the general public, with those details.
What’s the cost of a 51% attack?
On the 3rd of June, ZenCash suffered from a 51% attack where more than $500,000 in double spend transactions was lost. The attacker managed to manipulate blocks which allowed him to double spend on two massive transactions of respectively 13,000 and 6,600 ZEN. According to estimates via the website 51Crypto.app, the attacker only had to spend $30,000 to pull off the 51% attack.
TLDR; A 51% attack refers to a double-spend attack on a blockchain where an entity or group of persons controls more than 50% of the network’s mining hashrate. This gives the attackers massive control over the network and the transactions happening on it. It basically means they can manipulate transactions, revert them, or change the destination, enabling them to spend them twice.
ZenCash is not the only victim of recent a 51% attack – MonaCoin, Bitcoin Gold, Verge, and Litecoin have been attacked as well recently. It’s clear that the cost of a 51% attack isn’t that high for many smaller – and less popular among miners – Proof of Work (PoW) coins. This article discusses the following topics:
- Costs of a 51% attack
- Legal aspects of a 51% attack
- Risks of mining as a service
Costs of a 51% attack
Crypto51.app is a website that wants to bring awareness among smaller cryptocurrencies to show them how easy it is to complete a 51% attack on their network. The cost is calculated using NiceHash prices, a website that offers hashrate (mining) power on various cryptocurrencies as a service. The price is based on matching the hashrate of a specific Proof of Work network for one hour. The price does not include the block rewards the attacker may receive, according to Crypto51.app, “this can be quite significant, and reduce the attack cost by up to 80%.”
Shockingly, several smaller cryptocurrencies have plenty of hashrate for sale on NiceHash, making themselves vulnerable for a 51% attack. In the introduction we mentioned MonaCoin; Crypto51 shows us that they have almost 5 times the amount of hashing power needed to perform a 51% attack for sale via NiceHash. Here’s an extract of the list, mind Bitcoin Private and Bytecoin.
Robert Viglione, co-founder of Horizen, puts Crypto51.app into perspective, ”Proof of Work is the most battle-tested consensus mechanism and so it’s something we shouldn’t abandon lightly. Hijacking networks is now too easy, though still much more difficult than sites like crypto51.app present.”
“One still needs to buy a large amount of the target coin—these funds are at risk as the attacker is performing actions that directly undermine its value—and then gamble real money on stochastic outcomes. It involves good timing, luck, and nontrivial resources to pull off.”
A 51% attack involves good timing, luck, and nontrivial resources to pull off – Robert Viglione.
Legal aspects of a 51% attack
Would performing a successful double spend be considered illegal?
It’s a tough discussion about whether a successful double-spend is considered illegal. On the one hand, you are stealing money as people won’t receive the funds they should have received. On the other hand, there’s not really a law that recognizes international alternative currencies. Bitcoin and most other cryptocurrencies have no terms and conditions that promise to give you something in return for the currency, and no central authority to form an agreement with.
According to Chris on StackExchange, “A double-spend would be blackletter law illegal as fraud and theft include a wide variety of intentional deception wrongfully depriving someone of property – use of a government-minted currency is not, and never was a required element. Look at any larceny or fraud statute – it will refer to loss of or damage to a person and property, not monetary dollars.”
If you are in the US, the law is very broad. The Computer Fraud and Abuse Act (18 U.S.C 1030) protects companies and persons against any digital attack or theft, and so, can be applied to almost any digital crime.
Should new projects use other mining algorithms as they put themselves at risk using PoW?
PoW is challenging for a new project that doesn’t start immediately with strong mining support. However, what’s also true is that the economic incentives to attack small networks just aren’t there. Why risk real funds for no reward? This is why small networks rarely get attacked. Proof of Stake (PoS) and other consensus variants have also proven to be promising thus far, so new projects ought to consider them, but there are always tradeoffs.
Risks of renting mining power
For sure, these marketplaces which rent mining power as a service add a centralizing element to what were intended to be more decentralized mining environments. Robert Viglione thinks we just need to be more creative on the entrepreneurial side to continue decentralizing when and where it makes sense.
Horizen’s approach to mining centralization—whether it’s ASICs, pools, or marketplaces—is to explore innovative blockDAG technologies that can collapse mining difficulty and, ideally, make solo GPU mining profitable again, attracting more miners and adding more decentralization to the network.
According to Cornell professor Emin Gün Sirer, “Mining marketplaces can easily be abused, as the people who offer their hashing services often lack the ability to tell if their hashing power is being used responsibly or to launch attacks. It is very difficult, sometimes technically impossible, for the participants to know if their hashing power is being used for censorship or selfish mining or 51% attacks.”
Clearly, mining marketplaces make 51% attacks more likely, so the first defense is for marketplace operators to structure things responsibly; for instance, don’t allow a majority of hashrate to point to any one network, cut it off once it passes some threshold. Longer term, consensus rules are needed to end this threat vector. However, if things don’t change, Gün Sirer expects to see more of these kinds of attacks.
It’s not an easy challenge to stop mining marketplaces as they help to remove the knowledge gap for beginners to actually start mining like building your own mining rig and completing all the configuration and tweaking. Marketplaces like NiceHash help you to start mining in less than 30 minutes. In addition, people don’t have to worry about long-term risks like failing hardware, electricity costs, or strong price fluctuations.
Some networks like Robert’s Horizen platform try to protect themselves from 51% attacks by innovating the longest chain rule within their consensus protocol. They’re upgrading their protocol to make these kinds of attacks unfeasibly costly by introducing a delayed block penalty. Basically, 51% attacks happen by nefarious miners solving a sequence of blocks in parallel privately, then injecting them all at once to the network. Horizen penalizes such delayed block reporting, making it virtually impossible to pull off the same type of attack.
The bottom line
It’s clear that mining marketplaces which rent out hashing power can harm smaller cryptocurrency projects. It’s certainly not an easy task to protect us from such attacks. On the one hand, we can start improving our Proof of Work consensus algorithms to make them more resistant to 51% attacks, on the other hand, we can start working together with mining marketplaces to provide them with technology that can detect where their mining power is going, set thresholds for each crypto, and alert the marketplace owners when the hashing power is being abused.
StackExchange Bitcoin – Legal discussion on 51% attacks