Author: Marcin Zduniak

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Blockchain Software Technology

What is a DAO, or a decentralized organization?

A Distributed Autonomous Organization (DAO) is a combination of software and social connections. It’s able to act as a decentralized company for the benefits of its members – but no member has a controlling stake in it. My analysis of this phenomenon will be split into two parts. In the first part, we’ll focus on the benefits and risks of a decentralized organization.

What is a DAO?

In short, a decentralized organization relies on hard-coding certain important company rules, so that specific actions can be automatically carried out. A DAO relies on smart contracts to enforce those rules digitally.

Benefits of a DAO

  1. Shareholders/members of the DAO can have a very direct and immediate impact on key company operations.
  2. Cheap distribution of shares. What is a DAO benefit is that there’s no middleman. We have peer-to-peer communication between members who want to sell/buy DAO shares.
  3. Cheap distribution of dividends (directly from the decentralized organization to members).
  4. You can code many standard corporation activities in the algorithm. So, they can be executed automatically without any human intervention. Accounting, auditing, tax payment, payroll – you name it. It adds transparency to the operation, removes the risk of human error and lowers employment costs.
  5. You can also code integration with suppliers (exposed as other DAOs) in the algorithm. So, execution can work based on that interactive algorithm. If not disputed, cooperation between parties can be much smoother and cheaper.
  6. No single person (like a CEO) exists who represents the DAO. All members, even minor,  represent it collectively.

Risks of participating in a decentralized organization

  1. If you lose the cryptographic private key, or someone steals it, you also lose access to the DAO and voting rights in it.
  2. The programming code of the DAO can have bugs which might be impossible to correct. As we know, the smart contract code is immutable (read more about blockchain immutability). These bugs can result in anything, from money loss to unexpected liability incurment.
  3. Public blockchain networks (like Ethereum or Bitcoin) aren’t controlled by any single party. Their evolution can go into an unexpected direction, resulting in DAO disruption. In extreme cases, a DAO might become unusable.
  4. Most useful decentralized organizations need access to data outside of the blockchain. These data can be provided by automatic or semiautomatic centralized oracle mechanisms. To disrupt the operation of that DAO, it’s easiest to target the oracles it depends on.
  5. The algorithm can’t go beyond what it was programmed for. Hence, it can make biased or plainly bad decisions if you don’t account for every reasonable fact and circumstance. A DAO should be structured so that there’s always a human factor involved that can take back or stop automatic decisions.
  6. Parties (cooperating decentralized organizations) might not be explicitly defined in the smart contract. In case of a dispute not covered by the code (and without an automatic arbitrator) it might be difficult to resolve it in traditional legal system.

What is a DAO capable of? Stay tuned for the second part. In the coming weeks I’ll take a look at DAOs from a legal perspective. And if you’re considering blockchain for your company, but you’re still stuck on terms and crypto jargon – it may be time for blockchain training.

Categories
Blockchain Financial Services Technology

Blockchain immutability: Behind smart contracts

The Ethereum smart contract has taken the world by storm, with its wide adoption for ICOs. Smart contracts are, in essence, computer programs executed in a sandboxed environment, so one that restricts them. That restriction provides special functions and properties: the famous blockchain immutability is one of them. Let’s dive into those.

Blockchain immutability

As I wrote, one of the defining properties of smart contracts like the Ethereum smart contract is that their code is immutable . Blockchain immutability means that parties agree to the terms or “code” of the contract, that code can’t be changed by any party unilaterally.

The result of the execution of the smart contract is similarly unchangeable. Of course, that happens once the agreed-on code is executed and produces a result. The result should be objectively verified by the other party to that contract, or even by an external party. For example, this could be a regulator or observer. Only then you can be 100% certain it’s valid.

Free from external factors

The immutability of the results of the executed smart contracts stems from what I’ve mentioned at the beginning. What’s important is the context in which the smart contract is executed: sandboxes . That means the contract is free from the influence of any external factors. An environment like that guarantees the determinism of computational results.

T he only factors that influence the result are the input data to the smart contract, and the data stored within the smart contract environment . By the latter, I’m referring to the data that was stored there when smart contract was instantiated for the first time. Or, by the previous execution iterations of the same contract. In some smart contract environments (like Ethereum) smart contracts can also communicate with each other and influence the execution of one another. However, this is still done in controlled and deterministic way.

The Ethereum smart contract’s not the only one. Other implementations

Various implementations of smart contracts seek to leverage their benefits. Bitcoin’s smart contract language (script) is intentionally limited in complexity. The logic that can be expressed in it is very restricted. On the other hand, we have the Ethereum smart contract. The set of the operations that can be executed within the Ethereum Virtual Machine is much broader. Almost any reasonable algorithm or logic could be expressed in it, though there are still limitations on the number of operations per invocation.

Going even further, Hyperledger Fabric has no restriction on the complexity of the smart contract logic or the number of operations. That means it’s very powerful. However, it it also greatly increases the risk of node consensus divergence if that power isn’t used properly. Generally speaking, the level of expressiveness is a feature of a particular implementation. It can vary, providing different levels of security and strength for particular use cases.
It’s worth knowing the consensus doesn’t have to be immediate. Depending on the implementation, it might take around 1 hour (Bitcoin) to reach the semi-final consensus, or be almost immediate (Hyperledger Fabric). That’s despite the fact that once the consensus is reached, the smart contract execution result is provable and immutable.

Controlled access

Some smart contracts need to have access to structured data from the outside of their environment . In most implementations, controlled access to that data can be provided by privileged actors. They’re able to fetch the data needed at the specified time. Then, they can provably transform the data to a format that can be processed by the smart contract. Actors like that are called Oracles. They’re an inherent part of the productive smart contract ecosystem. They don’t change the other properties of the smart contracts. Oracles also work in the same sandboxed environment as the other smart contracts. Once the data is provided, it can’t be modified and is ‘provable’ forever.

Can smart contracts function without a blockchain?

If we want to execute smart contracts with the listed properties, they need to have access to some form of history inalterability. At the least, we’d need a way to prove that the history was changed and the observed results can’t be trusted any longer.

Blockchain is one technique that gives that particular feature but there’s research being done on other techniques. One of them is DAG (directed acyclic graph) where the smart contract transactions form a graph of relations (not being part of the chain of blocks). Yet another approach was undertaken by the Corda platform. There are no blocks in Corda, and transactions are exchanged directly between interested parties in the form of cryptographically signed sets of data.

Blockchain immutability brings many advantages to various industries, and is one of the features that inspire our clients to get on the blockchain. So, the Ethereum smart contract and the blockchain platform are what we deal with every day at Espeo Blockchain. That, and much more. If you’d like to leverage blockchain immutability in your project, we’re interested! Let us know in the box below.

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Uncategorized

6 ways to stay ahead of blockchain competition

It’s not enough to throw in blockchain as a buzzword to get ahead. To be competitive, crypto-based organizations constantly have to innovate. An ‘edge’ or competitive advantage leading from just an innovative product is usually short-lived. Why? In a reasonable amount of time, it’s easy for other market participants to imitate the product or even improve on it. To be sustainable, innovation should be coupled with some sort of protection, done in a form that’s not easily visible to the consumers and competitors. I’ll demonstrate on how existing cryptocurrency market participants utilize innovation. Hopefully, this will serve as inspiration to stay ahead of blockchain competition.

Be the first

Novelty in product offering is an edge given to the first market participant that offers a product that their blockchain competition hasn’t released before. Or they won’t be able to for some time. A blockchain example of this strategy is BitGo . BitGo built its brand on the association with secure cryptocurrency storage and fund processing for enterprises. In the early days of Bitcoin, it utilized 2-of-3 multisig wallet technology and secured its label as the first company to offer it to professional customers. Later on, driven by that association, they offered other custodial services for financial clients ( crypto exchanges , but not only that). They covered support of other cryptocurrencies and offered easy to use APIs on top of their platform, extending their offering to products for the retail market. Examples include Secure Wallets or Instant Payments to circumvent Bitcoin’s requirements for 10-minute block confirmation time.

Address regulation

Another part of BitGo’s business – still highly connected to their initial offering – is regulatory compliance . National regulators are demanding more and more from financial institutions and from startups interested in using cryptocurrencies. Therefore, those ventures need to invest more resources into becoming fully compliant with regulations. Being able to outsource those obligations and associated processes (as well as paying for it in a pay-as-you-go model) is a big advantage for new market shakers. Not to mention a steady stream of income for BitGo. Nicely done!

Implement sustainable processes

Another way to implement a sustainable level of innovation in blockchain is to focus on handling processes in a new and improved way . By processes I mean both internal – visible only within the company – and external, related to the way customers or external resources are handled. A company that’s a good blockchain example of mastering process innovation is ShapeShift . On the surface, it looks like a plain, straightforward exchange for all possible combinations of cryptocurrencies . The difference is that users don’t deposit their funds on the platform and then try to bid against each other, as is the case with other crypto exchanges. The ShapeShift platform offers spot rates for all the pairs it supports. The user can only accept the rate and exchange one asset for another one.

Under the hood, ShapeShift uses a complex matching engine to integrate with many other cryptocurrency exchanges (both distributed and traditional centralized exchanges). It can shift funds from one exchange to the other, to internal wallets and to distributed p2p transaction engines. At the same time, it tries to squeeze as much as it can from the market spread to make a profit for itself (arbitration) . The internal optimization of these processes increases ShapeShift’s profitability and a risks profile it’s willing to accept. To the end user, the whole process is very smooth.

Have a tech combination that’s hard to copy

The complexity of your product gives you an edge in a very particular sense – it’s difficult to copy you. The blockchain example is actually a great one. Bitcoin or, generally speaking, blockchain technologies are highly complex technical combinations of cryptographic techniques, distributed computing, efficient data storage and clever algorithms. If you combine all the experts in those blockchain technologies under one roof, you’ll get a truly remarkable combination . This is exactly what Blockstream did – they hired quite a few Bitcoin Core Developers with unique skills and enthusiasm to work on complex technical problems. Then they started to work on difficult problems no one has worked on earlier, but in an organized fashion. Lightning, Sidechains, Segregated Witness, Confidential Transactions, Satellite to broadcast Bitcoin blockchain from space, and so on.

Unique blockchain example? Patent it!

Companies can also seek protection from blockchain competition by patenting their technologies and other intellectual properties. One of the companies headed down this route is Accenture , one of the biggest accounting and consulting firms in the world. Together with Dr. Giuseppe Ateniese, they’ve patented technology that could allow them to offer blockchain technologies with an exceptional feature: editable blockchains . It appears to go against blockchain common sense – it’s advertised as an immutable ledger where the data that is already stored can’t be amended. Yet, in many business scenarios mistakes can happen. Having an ability to edit the data in a way that’s still fully controllable by the consortium (yet the previous data won’t be accessible after the edit) might be a feature that draws the attention of enterprises. Having that feature protected by a patent certainly gives Accenture a head start.

Adapt to fix problems

Many different blockchain technologies and companies/organizations behind them compete against each other. They all try to innovate and by doing it, they’re amending the rules of their blockchain technology . If the community around a particular technology is small, it’s not that difficult. They simply agree on the change and the date when all community members should upgrade the software. The problems start when the project is really successful, with a big community gathered around it. Then, changing its internal rules of operation is not that easy. Not all the community members agree with the change, or simply not all of them are ready to upgrade.

Solving this particular problem is a foundation upon which Tezos works . They created a blockchain technology with an on-chain governance model embedded into the protocol . All of the changes to the internal operations of the protocol can be voted on . If sufficient backing is found, the changes can be implemented and will be automatically accepted. This stands in stark contrast to the governance model of Ethereum or Bitcoin. As we know, a disagreement between the involved group of developers resulted in them forking to respectively Ethereum Classic and Bitcoin Cash. This innovation could still potentially give Tezos an advantage against their blockchain competition (their legal issues are another matter), as they can be very flexible in their approach toward future developments and challenges.

Blockchain competition – conclusions

The blockchain ecosystem is a fertile ground for experimentation and innovation. At Espeo Blockchain, we’re often amazed at the novel ways our clients try to utilize blockchain. It goes without saying that the truly innovative projects are a joy to work on. That’s why we’re always looking for more! To be able to compete against constant innovation in a long term perspective, companies have to think wider . Innovate fast, or try to protect your innovations from the competitors by hiding them in internal processes or protect your knowledge using patents. If you’re not sure how to innovate using blockchain, custom blockchain training might be a good idea.

You can read more about crypto payments and blockchain challenges on our blog. And if you have an innovative blockchain example of yours, let us know below.