ETHEREUM STAKE POOL DIVISIONS PRE PAPER AUGUST 2018 CONCEPT AUTHOR: TIM SCHOON PROJECT DEVELOPMENT BY BAKSTEEN BLOCKCHAIN B.V.

Transcription

1 ETHEREUM STAKE POOL DIVISIONS PRE PAPER AUGUST 2018 CONCEPT AUTHOR: TIM SCHOON PROJECT DEVELOPMENT BY BAKSTEEN BLOCKCHAIN B.V. BAKSTEEN BLOCKCHAIN B.V. 1

2 CONTENTS 1. INTRODUCTION 3 2. PROOF OF WORK 6 3. PROOF OF STAKE 7 4. DIVISIONS THE INTERFACE DIV TOKENS THE DECENTRALIZED EXCHANGE THE DECENTRALIZED STAKING SYSTEM THE VALIDATOR THE DIVISIONS SENATE & DIFT TOKENS VISUALISATIONS RISK AND RISK MITIGATION 13 7 TEAM 15 QUOTED SOURCES 16 2

3 1. INTRODUCTION * Rise of Blockchain Technology Blockchain technology is on a trajectory to change many aspects of modern day life, including finance, security, identification, social media and supply chains. Transactions, contracts and identification are the backbone of modern day society and blockchain is about to change the way we undertake them entirely. Blockchain projects lack no ambition but do have several challenges to overcome before they can expect mainstream adoption. One of the major challenges is not a problem with the individual projects, but with blockchain technology itself; providing uncompromised scalability. Ethereum Ethereum is currently the most widely adopted blockchain for smart contracts. Considering the current transaction volume, the amount of deployed contracts and the quality of ongoing projects like the Ethereum Alliance, it is highly unlikely that Ethereum would be replaced as the dominant platform for smart contracts by one of its current competitors. Despite the fact that the maximum transaction throughput of Ethereum is currently lower than that of its competitors, Ethereum seems to already have reached the threshold of dominance as the standard smart contract platform, making its competitors lose the battle for domination, comparable to 1 TCP/IP vs OSI. Truly superior technologies developed by competing platforms will be adopted by Ethereum, eliminating the need for these platforms to coexist. 1 Ivo Maathuis & Wim A. Smit (2003) 3

4 Proof of Work Ethereum is currently secured by a Proof of Work (PoW) protocol, similar to Bitcoin. PoW is relatively secure but faces major drawbacks; it is only able to handle a limited amount of transactions per second, an amount insufficient to provide a solid infrastructure for mainstream adoption of ambitious Ethereum based projects. Furthermore, PoW is notorious for consuming large amounts of energy which has a negative effect on the environment. The proposed solutions: 2 Proof of Stake (PoS) and sharding. PoS and Casper FFG The first step towards a secure and scalable Ethereum is the implementation of the Casper Friendly Finality Gadget 3 (Casper FFG) contract. One of the main ways in which Casper FFG improves Proof of Work is that Casper is added as an extra layer on top of Proof of Work as a means to create block finality. Even though Casper FFG is primarily used to create block finality, it is a first step towards Proof of Stake (PoS) as a means to replace PoW. In Casper, nodes that attempt to cheat the system by voting on multiple blocks of transactions are slashed (fined). This motivation to play by the rules makes the system much more secure than PoW, where an attempted 51% attack would only cost a majority use of computing power and electricity. With Proof of Stake by the Casper model, a 51% attack would become practically impossible. In the longer term, after Casper FFG is successfully integrated in the Ethereum ecosystem, Proof of Work can be replaced by a full PoS protocol as proposed in 4 the Mauve paper by Vitalik Buterin. Proof of Stake will implement a high 5 staking threshold of 1500 ETH, which will greatly reduce the amount of active nodes compared to PoW as not all holders of Ether would hold an amount sufficient to participate. A lower number of nodes means a larger transaction throughput, reducing the time to reach consensus. With a high staking threshold, security is increased since the consequences of attempted cheating would become severe. Casper drawbacks Although the Casper model has many advantages compared to PoW, it has its own major drawbacks. To us, the essence of blockchain is decentralization. Decentralization requires that the verification of transactions happens by the community instead of a single party or an appointed authority. With a large staking threshold, only a select group would be able to verify blocks. This mechanism is relatively secure as monetary penalties are in place, but it does centralize the network by the monetary elite who hold the majority of authority. We are set out to prevent the possibility of a monetary elite conglomerate taking over the majority of the transaction validation process, which would make Ethereum in essence a centralized blockchain. 2 ng FAQ 3 Vitalik Buterin & Virgil Griffith (2017) 4 Vitalik Buterin, Danny Ryan, Chih Cheng Liang (2018) 4

5 Divisions To prevent centralization, the community would have to retain the possibility to vote on blocks without meeting the staking threshold set by the Casper contract. Furthermore, increasing the total number of nodes significantly would have to be prevented as reaching consensus between fewer nodes can be done in a shorter amount of time. This would be possible if a large number of smaller Ether holders would unite in large pools. The validators controlled by the pool would meet the threshold set by Casper, giving the participants an entrance to staking and voting. This idea has inspired the inception of the Divisions project. As of June 2018, Divisions has been in development for approximately 8 months. We have come a long way since the first lines of code were written in November Despite the fact that we are very excited to share our creation with the community, we have decided to postpone disclosure of most technical details until a date closer to the introduction of Proof on Stake on Ethereum. We are currently still in development, testing and auditing several aspects of the platform. This is a pre paper, which is basically a brief summary of the functionality of the Divisions platform. This paper will not contain many technical details but a technical whitepaper with detailed specifications will be published in the near future. 5

6 PROOF OF WORK ** In order to fully comprehend Proof of Stake and the need for a decentralized stake pool, one would first have to comprehend the basics of the current consensus mechanism, Proof of Work. Proof of Work is a Byzantine fault tolerant protocol and does not reach 6 block finality. Blockchain scaling A blockchain is essentially a ledger that contains a list of transactions and in some cases like Ethereum, more data like smart contracts. Everyone using this blockchain has an identical copy of this ledger, so anyone involved can verify all of its mutations. A system like this creates a unique environment where everyone can process transactions and indisputably verify that all made transactions are valid. Keeping everyone up to date on the latest mutations, denying impossible mutations and coming to a consensus on which mutations happen in which order, while maintaining security and transaction throughput are challenges most blockchain development teams are trying to solve. Currently, the fastest blockchains face security issues and the most secure blockchains face scalability issues. Miners Ethereum currently operates based on a consensus mechanism based on Proof of Work (PoW), that is similar to the protocol used by Bitcoin, designed by 7 the mysterious Satoshi Nakamoto as explained in detail by Dr. Gavin Wood in 8 the Ethereum Yellow Paper. In PoW, consensus is reached by so called miners. Miners are full nodes that operate in a peer to peer network, similar to how torrents work. Miners 6 P. Franco (2014) 7 Satoshi Nakamoto (2008) 8 Dr. Gavin Wood (2014) continually create blocks of new transactions that they verify as valid, and send them to their peers, the other nodes. If the other nodes receive a block filled with transactions that are (A) valid and (B) not in a block they have already verified, and it s considered likely to become the next block that reaches a state of consensus, the node will accept the block and append it to their version of the blockchain. A miner has to invest mining power in order to become invested in the validity of their decision. Mining power basically contains hardware capacity and electricity. If a miner would mine a block containing invalid transactions, no other nodes would accept that block, causing the block to not be added to the blockchain and the miner spending their mining power to get nothing in return. It would not make sense for a miner to mine invalid blocks, as there would be no chance of earning a reward. This consensus model has a few notorious drawbacks: scalability issues, excessive power usage and no block finality. Throughput Proof of Work is not highly scalable. Bitcoin currently has a maximum transaction throughput varying between approximately 3.3 and 7.0 transactions 9 per second, Ethereum is not far ahead at an estimated tps. Proposed solutions such as increased block sizes will not increase the network capacity by a sufficient amount and would cause decentralization issues. 9 On Scaling Decentralized Blockchains, various authors, National University of Singapore (2017) itcoin scaling.pdf?utm_source=rss&utm_medium= rss 6

7 PROOF OF STAKE *** PoS solutions As a solution to the drawbacks of Proof of Work, a consensus model known as Proof of Stake has been proposed. In Ethereum s version of Proof of Stake, nodes do not invest mining power to empower their block votes, but provide a stake, which is an amount of tokens that act as a warranty for the node s block vote. A node is rewarded for correct block votes by network rewards and/or transaction fees. In case a node produces fraudulent block votes, their warranty gets slashed, meaning that the node receives a penalty on their stake which results in a direct monetary motivation to only vote in compliance with the rules. This concept not only allows a blockchain to function with much lower energy usage, but also function on a smaller amount of nodes while maintaining or even increasing the network s security. Anyone can become a Proof of Stake node, as long as the threshold amount of 32ETH is met. This threshold ensures that the amount of validators in the network does not become too large. A smaller amount of nodes allows a faster state of block consensus. PoS vs. dpos Proof of Stake by itself is not a new concept as it has been successfully applied to several blockchains, The applied concept of Proof of Stake has thus far been almost exclusively dpos models. Competing blockchains such as NEO, EOS and Cardano solve their scalability issues by employing a notary style protocol known as delegated Proof of Stake (dpos), with only a small amount of delegated nodes that verify blocks to reach consensus, increasing the speed of consensus and therefore also the transaction volume. While this appears to be a good solution to the scaling problem at first sight, it is argued to compromise decentralization and security. Where a dpos blockchain can quickly process a large number of transactions as less nodes equals faster consensus, it does mean that the network is not fully decentralized. Nodes are either elected by the community or appointed by a centralized party. Election seems to be a solid way of appointing nodes while keeping decentralization intact but it has major flaws by design; if nodes are largely anonymous parties, there are no criteria to select candidates or screen them for questionable intentions. This has no major effect on a decentralized network where these questionable parties could not reach a majority stake in the network. A dpos network could become compromised much easier as each node has a higher amount of responsibility. On the other hand, if nodes are known and verified parties, centralization occurs as there has to be a central organ selecting and verifying the candidates, regardless whether this happens through a voting process or not. Furthermore, voters would not be able to educate themselves in choosing a candidate as these parties would likely be unknown, making a decision completely uneducated. Ethereum is set out to solve scalability without compromising decentralization by introducing the Casper PoS protocol. Ethereum PoS issues Each Proof of Stake model has its drawbacks. The dpos model has centralization issues and Ethereum faces similar issues because of a high threshold. With a minimum of 32 ETH to stake, the total amount of nodes is kept 7

8 low, assuring a fast network but excluding the majority of users of voting in the consensus mechanism. Another significant problem for stakers is the expected withdrawal delay period of an estimated ~4 months. When a staker decides to stop staking, a withdrawal from the Casper contract can t happen instantly but requires the withdraw to be delayed. This period has been set to 15,000 epochs (75,000 blocks) in previous releases, which comes down to approximately 120 days at the current pace. A lot can happen in 4 months. Not having access to funds for such an elongated period of time can hold off many potential stakers. Solving Ethereum PoS In order to keep the amount of nodes in a non delegated PoS network low, a high staking threshold is a necessity. Smaller investors would only be able to stake by joining forces in order to meet the threshold in a pool, but this creates a new problem. They will have to trust a pool operator. 8

9 DIVISIONS **** In order to combat the drawbacks of Proof of Stake, we have founded Divisions. Divisions has been incepted as a means to make staking accessible to the masses and as a tool to preserve liquidity while doing so. At launch Divisions will be a stake pool for the Casper FFG contract, further down the road we aim for Divisions to become a vital part in the Ethereum network and consensus mechanisms. Divisions consists of 6 major components; 1. The Interface Divisions.com 2. DIV tokens 3. The decentralized Exchange 4. The decentralized staking system 5. The Validator 6. The Senate & DIFT tokens 1. The Interface Divisions.com Even though all aspects of Divisions will be fully operational without a user interface, the interface will be an essential tool for most users to make operating the pool more convenient. The website Divisions.com will be hosting a dashboard that will allow users to do the following things: View and operate the the Exchange contract view ETH/DIV exchange rates, swap ETH for DIV and DIV for ETH. Actions will be all performed securely no private key will be able to be entered through the interface. For now it will operate exclusively through Metamask and hardware wallets like Ledger and Trezor. Calculate projections based on current Casper statistics. View general pool statistics; current stake contracts, block votes, withdrawal delays, exchange balance, etc. View instructions on how to operate the interface. Users can not create accounts, all data presented will be pulled live from the blockchain. Preferred addresses can be stored in cookies on user s machines. Divisions.com will not host any user data. 2. DIV tokens Divisions solves the threshold issue and the withdrawal issue by allowing participants to pool Ether to meet the set staking thresholds through a smart contract issuing an Ether backed staking token (DIV). An Exchange contract collects the participant s ETH and swaps the ETH for DIV tokens. The DIV token is an ERC 20 compatible token with the following characteristics: DIV tokens can only be minted by sending Ether to the Divisions Exchange contract. The rate of minted tokens (P) is always the equivalent of the total amount of Ether held in the contracts (E) and accomplished stake profits (S) minus staking fees paid to the holders of DIFT tokens (F) divided by the amount of existing DIV tokens (D). P = (E + S F) / D DIV tokens can never be backed by less Ether than what they were originally minted for by the 9

10 Divisions Exchange contract at the rate P = (E + S F) / D, unless the pool would be slashed or would suffer from bleeding by going offline for an extended 10 period of time. A DIV token will however become backed by more Ether the longer it is in existence as stake profits will be added to the pool and therefore divided by the same amount of DIV tokens. The price of a DIV token will increase when stake profits are added to the pool. DIV tokens will always be exchangeable to their Ether equivalent through the Divisions Exchange contract as soon as enough Ether is available. The sell exchange rate for DIV tokens is calculated using the same formula as the purchase price, P = (E + S F) / D. DIV tokens can be traded on third party exchanges at any time. 3. The decentralized Exchange A deposit to the Exchange contact results in a return deposit of DIV tokens. The DIV token is always fully backed by the deposited Ether and generated staking profit up to that point in time. The only way to mint DIV tokens is by sending ETH to the Exchange contract, receiving the corresponding amount of DIV tokens in return. The DIV return deposit happens when the staking threshold of 32 ETH is met, or when DIV tokens are deposited into the exchange contract by sellers. DIV tokens can always be sent back to the Exchange contract to collect ETH and staking profits. If the balance on the Exchange contract is too low to instantly return the corresponding amount of ETH for received DIV tokens, the withdrawal is queued and will be fulfilled when sufficient ETH becomes available. This balance can be increased by withdrawals from the Casper contract or new stake deposits from pool participants. The Exchange contract collects ETH until the balance meets the staking threshold of 32 ETH. Once the threshold is met, the funds are sent to the decentralized staking system. Third party exchanges may also list the DIV token. Sellers would be able to quickly sell their DIV tokens on third party exchanges in case the Divisions Exchange faces a large queue of sell orders. This would create an arbitrage opportunity for buyers of DIV tokens on these third party exchanges, who would be able to send those DIV tokens to the Divisions Exchange contract, collecting the corresponding amount of Ether in return. Therefore, the price of DIV/ETH should remain quite stable on third party exchanges. 4. The decentralized staking system The decentralized staking system is the mechanism that takes ETH from the exchange and deposits it into Casper. It also defines when logouts and withdrawals from Casper should be made. The staking system keeps track of all actions of the Validator. This way, any incorrect behaviour of the Validator can be proven and penalized. 10 See Risk page 10 of this paper 10

11 5. The Validator The Validator sends block votes to the Casper contract. Casper requires votes on blocks to be signed by a private key, so fully decentralizing this process poses difficulties. We have solved this issue by making our vote process transparent and by having the Validator governed in a decentralized manner. Whenever the Validator behaves faulty, this behaviour can be proven and penalized by every user. To make its decision on which blocks to vote, the Validator collects data on new blocks from several nodes in the network and calculate the safest block to vote on. These nodes can be run by the Divisions Foundation or by any other holders of DIFT tokens. These nodes collect data from several places within the Ethereum network by being geographically diverse. This way more reliable information on block consensus can be calculated by the Validator. Ultimately, all users will be able to run these nodes and provide information to the Validator. The Validator is not a decentralized element at this point as it is operated by the Divisions Foundation, but will be governed in a decentralized manner. All block votes are made public (live as they occur) on the Divisions dashboard. Holders of DIFT tokens hold the power to vote for a new Validator if the current Validator, operated by the Divisions Foundation, does not perform as desired by the majority. 6. The Divisions Senate & DIFT Tokens The Divisions Stake Pool is governed by the Divisions Senate. The Divisions Senate will enable its members to vote on updates and parameter settings. The Divisions Senate is controlled by the DIFT Token holders. DIFT Tokens are ERC 20 compatible tokens that grant their holder voting power on updates and are paid fees on the staking profits. We have decided not to hold a public sale for DIFT tokens before the platform is fully audited, operational and profitable. This token will likely be considered a security token. Therefore, we will not hold a public sale of DIFT tokens before clear guidelines are set up by governments. Holding an ICO now would pose a risk of being fined by governments, which could potentially be fatal to the platform. In our opinion, too many blockchain startups are holding public sales before meeting these two major milestones, posing unacceptable risk to their investors. We are also considering an airdrop of DIFT tokens to DIV token holders. 11

12 POOL VISUALISATION 12

13 !! *** RISK ***!! Safety is our pool s number one priority and aspired perk. Our smart contracts are designed in a way that nobody should able to touch your Ether, not even us. Staked Ether moves from smart contract to smart contract, no wallets or cold storage is needed in this process. Even though we aim to make as many aspects of this project fully transparent and decentralized as possible, certain risks are unavoidable. We have identified the following 5 major risks that you should know about and seriously consider before taking part in staking through the Divisions platform, or staking in general. 1. All of our smart contracts will be audited, thoroughly tested and hold bug bounties before deployment, but we can t guarantee that there will be absolutely no security flaws or weaknesses. We are a small development team and we like to believe that we are pretty good at what we are doing, but the blunt truth is that smart contracts are a largely uncharted territory and there is not yet sufficient reference material in smart contract security to take adequate lessons from to guarantee that there will be zero chance of exploits or security breaches. Far more experienced development teams like Parity have faced serious security flaws in their code in the recent past Slashing and Bleeding are measures put in place by the Casper contract in order to discourage stakers from fraudulent activity and slacking. Slashing is a burning of a deposit made to the Casper contract when the Validator signs conflicting messages such as voting on several blocks at identical block height. Bleeding causes the deposit to shrink when a Validator goes offline or simply does not vote on any blocks. While our platform is designed to avoid slashing and bleeding as much as possible, bugs or security flaws could theoretically cause for this to happen. 3. Delays can occur in the Divisions Exchange. When an amount of Ether is deposited to the Exchange but the threshold of 32 ETH is not yet met, the depositors would have to wait until (A) the staking threshold is finally met by other aspiring stakers, or (B) sufficient current stakers intend to withdraw their Ether by sending DIV tokens to the Exchange. Until an aspiring staker receives DIV tokens he is simply in queue and not actually staking yet. The queueing can be cancelled by withdrawing Ether from the queue (only by the deposit address) until the orders are filled, once filled the staker would have to send their DIV tokens to the Exchange contract in order to retrieve their Ether. Cancelling these actions would require gas for the necessary transactions, which is charged to the executor of the action. 11 Parity (2017) 13

14 4. Staking profits are not guaranteed. We can make educated guesses by calculating prospected rewards for block votes but can never guarantee a certain profit. Stake profits depend on many factors the amount of blocks voted on, the total amount of Ether staked by the network and the uptime of our Validator and backups. 5. The value of Ether can drop. If our pool would generate a solid profit in Ether, the total amount of Ether held by the pool and therefor by each staker will increase. This amount of Ether could however then represent a lower amount of any other currency as case exchange rates can radically change. Ether has been very volatile in the past and it is highly likely to continue being volatile. Earning more Ether does not always represent an increase in economic value. 14

15 TEAM ***** FOUNDER TIM SCHOON Tim is an entrepreneur and investor at heart. He bootstrapped his personal investment fund from a few hundred dollars at age 17 in 2007 into 7 figures by He currently works on several blockchain related projects. LEAD DEVELOPER HENK DIETER OORDT Henk studied Artificial Intelligence at Groningen University and Software Engineering at Hanze University of Applied Sciences. DEVELOPER HARTGER VEEMAN Hartger holds a bachelor in Software Engineering at Hanze University of Applied Sciences and is currently enrolled in a pre master s programme for Artificial Intelligence. DEVELOPER EELE SIKKES UI / WEB DEVELOPER EL JADDOULI El is co owner of WebsiteAnalist, a web agency that builds and optimizes websites and advertising campaigns. El holds a bachelor in Communication & Multimedia design at NHL University of Applied Sciences. MARKETING YESSER KHALEFA MARKETING ROB HOGENELST Rob is co owner of WebsiteAnalist. Rob has been an entrepreneur in marketing for the past 14 years. LEGAL ADVISOR JAN WILLEM OORDT Jan Willem holds a bachelor degree in Law & IT and a Master s degree in Law & IT from Groningen University. He has over 5 years of experience in software user agreements and currently works as an IT lawyer at Groningen University. LEGAL ADVISOR QUINTIJN ODDING Quintijn holds a bachelor degree in Law & IT from Groningen University. 15

16 QUOTED SOURCES 1. The Battle between Standards: TCP/IP vs OSI. Ivo Maathuis & Wim A. Smit University of Twente (2003) FAQ 3. Casper the Friendly Finality Gadget. Vitalik Buterin & Virgil Griffith (2017) basics/casper_basics.pdf 4. Ethereum 2.0 Mauve Paper. Vitalik Buterin (2016) 5. EIP Danny Ryan, Chih Cheng Liang (2018) md 6. Understanding Bitcoin: Cryptography, Engineering, and Economics. P. Franco (2014) 7. Bitcoin: A Peer to Peer Electronic Cash System. Satoshi Nakamoto (2008) ETHEREUM: A SECURE DECENTRALISED GENERALISED TRANSACTION LEDGER. Dr. Gavin Wood (2014) 9. Page 11 of this document. 10. A Postmortem on the Parity Multi Sig Library Self Destruct unknown author at Parityblog.io (2007) postmortem on the parity multi sig library self destruct/ 16