Mina: The World's Lightest Blockchain

It’s almost impossible for developers to create a protocol with these three important ingredients – security, scalability, and decentralization. These three ingredients, however, exist in ideal cases. Their existence is termed the blockchain trilemma, and this name was given by Vitalik Buterin, the founder of Ethereum.

Since blockchains protocols don’t exist in the real sense but the blockchain trilemma, most blockchains exist as having only two of these three ingredients? That is security and scalability without decentralization or decentralization and security without scalability.

Most blockchains are highly decentralized, but they often face the challenge of overcoming scalability or security.

Bitcoin, for instance, faces a problem of scalability.

However, one blockchain protocol called Mina protocol is promising to solve the problems mentioned above. 

The Mina protocol is a lightweight blockchain that helps to improve the decentralization of codes on the network. Asides from this, the Mina protocol has so many to offer.

In this article, we will be looking at the Mina protocol, its architecture, and the risks associated with the Mina protocol.

Mina Protocol: Architecture and Procedures

Mina protocol is a rebrand from the Coda protocol. It changed its name from Coda protocol to Mina protocol in October 2020.

The Mina protocol is said to be brief, cutting down the numerous requirements for running Dapps effectively. Because Mina Protocol doesn’t require much space, it’s often referred to as the “succinct blockchain”.

Here is a significant problem that the Mina protocol has solved.

Blockchains are developed with high-security measures that protect information locked on the blockchain. These security codes protect transactions on the blockchain too.

Seeing the strong tide of technological advancement, more people have moved to storing and transacting on blockchains.

The sudden influx of users on blockchains has caused a lag in this blockchain technology. This lap is due to the shortening of blockchains sizes due to the high number of users in a blockchain.  

For blockchains like the bitcoin blockchain, larger bandwidth (storage) has been used to accommodate many users on the platform. So, it explains the reason for the large bitcoin blockchain size – 320 GB.

On the other hand, the Mina protocol has a size of 22kb, which is way lower than a bitcoin and other networks. This constant low size of the Mina protocol is attributed to the protocol’s ability to condense its blockchain using zero-knowledge proofs.

Moving on, Mina protocol aims to enhance payment options by advancing its payment system for easy distribution on the platform and the ease of verification of its users. 

On its white paper, you may see this termed as “succinct blockchain”.

Mina Protocol Architecture

A protocol’s architecture will refer to certain rules that the protocol abides by to function. It is these rules that determine the decentralization activity and security efficiency of a blockchain. Just like every other protocol, the Mina protocol has its architecture.

Block Producers

A Mina block producer produces new blocks for the blockchain. In producing new blocks, it validates the current state of the blockchain. 

A Mina block producer aims to provide security and achieve consensus on the blockchain.

On the Mina protocol, blockchain producers are not limited to certain people. Instead, any with the current state of the block can produce a block.

To produce a block ultimately, one must have enough computing power to reduce a blockchain SNARK within the slot time and connect to peers to broadcast the generated block. The developed connection to peers must be within an acceptable time, as the network consensus parameters state.

Stake Delegation

On Mina protocol, it’s possible to delegate funds and undelegated funds. Delegated funds can’t be spent. To undelegate funds, one must re-delegate them to their original account.

The Life Cycle of Payment

Payment is a transaction that transfers value from accounts to accounts with a transaction fee inclusive. The transaction fee is the charge to be paid by the sender to transfer his value to the recipient’s account.

Payment on the Mina protocol passes through various steps before they’re verified. Here are the payment verification steps on the Mina protocol.

Members of the Mina Protocol can create a payment then share it within the network. The Mina network then stamps it with a cryptographic key that validates the transaction from the sender.

The transaction is then sent to the network for processing by peers on the network. On receiving the payment, each peer gets a copy of the transaction in the local transaction pool. The local transaction pool is a memory store that stores all transactions a peer network has processed.

A block producer’s note is picked for a given time slot, with the active block producer choosing an in-flight payment depending on the payment fees. The active block producer then places the transaction fees on a transition block, also a list.

Also, the block producer defines the structure of a transition by generating a SNARK. The producer then transmits this new information for processing by the SNARK workers.

It’s important to note that block producers earn Mina as rewards when they build blocks.

To prove transactions, worker nodes perform SNARK calculations on each transition block.

These proofs emerge as individual proofs and neighboring proofs of payment. In the end, all payments are verified.

By generating proofs, SNARK workers earn currencies from the paid block producers. They then transmit the evidence over the network.

After verifying, the block producer sends out verification to all members of the block. The members then apply the required changes to their accounts before it reflects.

Proof of Stake Mechanism

The Mina protocol proof of stake functions majorly on the Ouroboros protocol. The Ouroboros protocol extends and modifies the Mina protocol blockchain.

Before now, the Ouroboros protocol was an extension of Praos, but now, it is the Ouroboros genesis.

Being a newer extension of Praos, Ouroboros protocol fixes any vulnerability that involves forks long fork attacks.

Scan State

Scan state refers to a data structure that permits transaction SNARKs production to decouple the output from block producers to snark workers. Also, due to the scan state’s data structure, SNARK proof generalization transactions can be completed and parallelized by several snark workers in a competition.  

Furthermore, because block producers don’t need to produce transaction SNARKs, there isn’t a change in the production time of the block. Also, irrespective of the transaction throughput, there is a constant time for block production. 

Scan state is replete with several full-binary trees, with each node present in a tree being worked on by snark workers. Periodically, single proofs from atop a full-binary tree are returned by the scan state. The proof affirms that transactions done at the tree’s base are correct.

Tokens 

Tokens are an avenue for users to issue and create their unique tokens. However, they require users to open a particular token account. 

Mina protocol allows users to mint their tokens which they can send using specialized token accounts. Mina’s command-line interface, also referred to as CLI, is the major way users interact on Mina’s Blockchain with tokens.

CLI offers an interface that encourages the functional creation of a new token account, new tokens, and minting of non-default tokens. Additionally, CLI features advanced daemon and client commands.

Snapps

Being the lightest blockchain in the world, Mina has a new applications category known as Snapps: Snarkified Applications. 

Similar to Ethereum Dapps, snapps are at a higher level due to their unique and specific properties. These properties,

Typically, snapps can be explained as Snapps = Dapps + Privacy + Off-Chain Data + Scalability. It is important to note that Mina’s snapps are way more efficient than Ethereum Dapps. Mina’s snapps benefit from Mina’s Blockchain scalability potential owing to Mina’s succinct nature.

How Mina Works

The Mina protocol runs on two major components - SNARK and Ouroboros Samasika. It is these two components that give the protocol its uniqueness. 

SNARK, for example, allows the protocol to maintain its small size despite the addition of some blocks to the blockchain. 

SNARK is a type of succinct cryptographic proof, and it validates each block after addition to a blockchain. Through this, it’s easy for nodes to store tiny proofs rather than the entire blockchain. 

On the other hand, the Mina protocol uses a unique Pos mechanism known as the Ouroboros Samasika. The Ouroboros Samasika provides bootstrapping via a genesis block. 

Succinct blockchains carry two significant functions; updating and verification.

In verifying, the succinct blockchain verifies blockchain, verifies consensus, and verifies blocks.

On the other hand, the succinct blockchain updates consensus and chain summary.

Asides from all these, the Mina blockchain also optimizes the storing of transactions. This is done by joining unproven blocks and submitting the process to a parallel prover. All of these it does by using a side-by-side scan. 

Risks Associated With Mina Protocol and Their Complications

More often than not, crashing nodes are due to configuration problems. The problem could be incorrect permission on the private key, incorrect characters, and incorrect peering.

To solve this, you can add your current user to the docker group. You can also add a prefix command, but this is not always recommended.

Keys directory has about 700 permissions, with private keys having 600 key files. All of these commands help to update your keys directory in your home directory.

This clearly indicates the absence of a message for twenty-four hours. That is, you have not received any message from your peers in the last 24 hours.

When writing this article, the current network is 128, including a coin base transaction and other fee transfers.

Often, the transaction was stuck and would indicate pending. Afterwards, the transaction will leave the transaction pool. You may try sending it again.

Payments can be canceled before syncing only if the funds are in the ledger.

To Wrap It Up

Mina protocol has stood the test of time, working efficiently, combining ingredients to allow you to transact easily on a blockchain. When writing this article, the current network is 128, including a coin base transaction and other fee transfers.

Mina protocol has solved lagging problems that arise due to the overcrowdedness of users on a blockchain. It was able to do this while still maintaining the decentralization of nodes.

On Mina protocol, transactions are secured on blockchains, and several blockchains can be added. Anyone can create a block; creating a partnership on Mina protocol is not restricted to a set of people.

Looking at the architecture, Mina Protocol has a bright future in blockchain technology.

Also read: Iron Fish: The Private Cryptocurrency

Casper: The Future-Proof Blockchain

The Casper Network is a layer 1 Proof-of-Stake blockchain that improves how businesses upgrade new services and products on the blockchain. Unlike other networks, it has peculiar features that make it unique. It's for these features that the Casper Network is becoming the best choice for programming and blockchain transmission.

One of these unique features includes its Highway protocol consensus. It's with this Highway protocol consensus that Casper blockchains can finalize the addition of new blocks to the chain. Aside from this, there are other unique features of the Casper Network. 

In this article, we extensively discuss the unique features of the Casper Network and how they aid blockchain transmission. Enjoy!

Casper Network: History, Protocol and CSPR Token 

The Casper Network is a permissionless blockchain network supported by the PoS consensus algorithm and WebAssembly (WASM). It was created to solve global blockchain challenges by effectively solving a trilemma:

Before we fully delve into the benefits, here is a brief on how the Casper Network came into existence and its operations.

The History of Casper Network

In 2018, two people founded the Casper Network - Mrinal Manohar and Medha Parlikar. In its creation, the creators aimed to create a network that promotes DApps, blockchain technology, and smart contracts globally. Hence, based on the Casper CBC specification, they created the first real-time Proof-of-stake (PoS) blockchain.

Casper as a platform aims to continuously adapt to the needs of its users and developers from different spheres. Because of this, it is regarded as the gateway to a developed era for Web3 to match the increasing demand for connected services globally.

Highway Protocol 

The Highway protocol is a consensus protocol created with the Casper Network to attain a very high threshold required for finalizing blocks to be added to a blockchain. In essence, it enables quick agreement among validates for block addition on the Casper Network.

The Highway protocol is peculiar to the Casper Network giving it an edge over other networks. Asides from enabling quick agreement among validators, the Highway protocol allows for flexibility during the finalization of blocks. 

CSPR Token 

After completing on-chain transactions on Casper Network through Casper PoS consensus, network validators are rewarded with native cryptocurrencies. This reward is peculiar to the Casper Network system and is known as the CSPR token.

It was first introduced through the Coin list in a public sale. In the first supply, about 800million tokens were supplied but this was followed by a slight decrease in demand afterward. Although CSPR tokens were first sold on the Coin list, they're currently available on several crypto exchange platforms. 

Clean Energy Blockchain

According to research by the University of Cambridge, the bitcoin global consumption index is 0.6%. This is very high relative to other systems. In fact, Elon Musk announced a few months ago that it'll no longer accept bitcoin as a payment option. 

The reason for this high energy to power blockchains is due to the validation, computing, and securing activities of the blockchain network system. To solve this, the Casper blockchain has already incorporated a PoS, and a Highway protocol.

Unlike other platforms, the Casper blockchain network provides an environmentally-friendly blockchain network. Clearly, Casper produces clean energy blockchains.

Having known much about Casper Network, you must understand the benefits of this system. Below, we extensively discuss the benefits of the Casper Network.

The Benefits of the Casper Network 

As a Layer 1 Proof-of-Stake blockchain system, Casper Network makes it easy to add new blocks. This especially is a major difficulty that other systems haven't been able to solve. Asides from this, there are other advantages of the Casper Network. 

Developer-Friendly Features 

Commonly, developers use block-chain programming languages for their services. A typical example of a blockchain programming language is Solidity. Solidity makes it easier for developers to code for different locks. 

Unlike Solidity, the Casper Network has an advanced programming language known as WebAssemly(WASM) and Rust. Both of these programming languages make coding easy for developers. With the Rust and WebAssemly(WASM), businesses can efficiently future-proof their organizations. 

Now, here is some good news, Casper has a transpiler that converts solidity codes into Rust. This tool, known as Caspiler, helps developers convert decentralized applications such as Ethereum onto the Casper Network. 

Upgradeable Smart Contracts

The Casper Network has a very distinct characteristic that supports the upgrade of smart contacts already on the on-chain. In fact, the smart contract rate on Casper is less costly and less complex than with other platforms. 

Besides this, during upgrades, the Casper system checks for vulnerabilities too. With this, smart contracts cannot be edited by anyone, not even by the original developers once deployed. With upgradeability, businesses can now offer resilient and adaptable block-chain products and services.

Lower Gas Costs

Another very intriguing benefit of the Casper Network is its capacity to moderate gas costs. During large volume transactions, gas volumes can get high and customers can get services at ridiculously high prices. But with the Casper Network, we reduce network congestion when competing with other Layer 1 blockchain projects.

Caper even has a future gas costs plan to help businesses prepare for the future. They hope to develop a predictive gas future to allow businesses to save gas ahead of time. With this, businesses better plan for the future.

Weighted Keys

Often, blockchains come with binary(on and off) smart contracts which is a disadvantage for large teams. Large teams manage complex systems and applications which the binary smart contract cannot accommodate. This becomes a challenge for large teams as they cannot effectively work together and manage these complex systems. 

To properly manage complex systems, the Casper Network has weighted keys that allow for multi-level system access permission. These weighted keys organize the security and quantity of businesses' assets. All of these above are the advantages of the Casper Network.

Casper's New Solution for Defi

Seeing the rapid changes that are occurring to the digital world and the cryptocurrency world, it's critical that their systems adapt to these changes too. One of these facets is the Defi system. Meanwhile, Casper is leading in the Defi revolution quite well. 

Unlike other blockchains, the Casper Network doesn't contain high security, energy, and decentralization costs. From this, it's clear the Casper Network is leading in the Defi revolution. 

Flexible Protocol

Casper Network incorporates a new consensus protocol known as the Highway protocol. The highway protocol allows the easy finalization of additional blocks to be added to the blockchain. To do this, the highway protocol presents varying thresholds for finalization. 

Energy Efficient and High Finality Defi

Unlike other blockchains that depend heavily on miners to achieve a consensus, the Casper Network introduces validators to achieve consensus. And Casper can only achieve this through its advanced PoS protocol. 

Deterministic Protocol

A major pitfall in Defi is its probabilistic network fees. Several people say the EIP 1559 makes the ethereum fee deterministic but not both. However, the Casper Network provides both a probabilistic and deterministic network pricing model.

User-Developer Friendly Platform

With the Casper protocol, Developers can choose either a private or public and set their permission levels and privacy. In a way, this is paving the way for mass adoption for developers. 

The Casper Network features a WebAssembly for developers to create a user-friendly platform. Also, it features an SDK that offers developers the flexibility of deployment without learning new languages.

Upgradeable Smart Contract 

The Casper Network can upgrade smart contracts on-chain directly without technical difficulties. This is due to its advanced protocol design and governance procedures.

Sharding Layer 1 Solution

Commonly, users opt-in for Layer 2 solutions to base blockchains for scalability sales. However, this comprises security and decentralization. To solve this, Casper has Sharded Layer 1 configuration. 

How Casper Works

Casper functions basically by validating transactions with group validators then continuing with the network. This is quite different from other validation mechanisms like the Proof-of-Work network. For economical reasons, the Proof-of-Work networks centralized validators. However, Casper presents better options like decentralized dependence on validators.

Also, Casper presents stacked tokens that enhance the verification of transactions with validators. In the same way, they're able to receive CSPR rewards because of their PoS consensus protocol. Finally, just like other networks, the Casper Network has tokens for their transactions too.

The Mechanism of How The Casper Network Communicates

There exist networks of nodes that make it easier for peers to reach a consensus on a blockchain. But these nodes are not physical machines. Just like every digital machine, nodes some to network traffic, by presenting ID and addresses.

The Identity 

Since Casper ensures the effective security of data it must have high-quality security measures. To do this, Casper registered the fingerprint of members of a blockchain which serves as their identity. 

It's worthy of mention that each node has distinct identity features. Each of these features is generated once a new node is activated.

A typical node has an IP and a pair of ports that successfully access the nodes. Also, importantly, a node has an address.

Internodal Connections

Internodal connections refer to the connections that exist between nodes. Before a node successfully creates a connection between nodes it opens a TLS connection that ends on the receiving node.

The node that generates the TLS connection is often referred to as the Client node. On the other hand, the node that receives the TLS connection is the server node. This is important during connection creation as the client node must verify with the client node before generating any signal.

To further explain, TLS connections must contain the same digest and password to prevent connection attacks. The activity of the connection created is dependent on the route of the connection. Connections can be one way or two ways. If one way, connects reconnects with the server but if two ways, the entire connection is discarded. Two ways connections are used to send one-way messages.

Network 

It takes at least two nodes to establish a network. Before connecting to a node, the client node will attempt connecting with another node to form a full connection network. The essence of forming a connection is for efficient data transmission. 

There are two types of data transmission: 

Broadcast 

A broadcast allows you to transmit messages once without any accuracy that every node connected will receive the message.

Gossip

Just as you'll expect, gossip is just the distribution of value through a network without directly sending it to each node. It means that only some part nodes connect to the server before the distribution occurs. Some examples of values being gossiped about are endpoints, implementations, and blocks. 

It's very critical to note that only consensus messages sent by validators are broadcast. Anything outside of this is gossip.

Node Discovery 

When nodes constantly talk about their addresses, it can lead to node discovery. After gossip, each node ensures to establish a connection and records the endpoint. Failure to achieve this is node discovery.

To Wrap It Up 

The Casper Network has so much to offer to the digital world. Most especially, in the world of blockchains and developers. With Casper, developers can easily code using Rust or WebAssemly(WASM) programming languages present on Casper. 

The Casper Network does not only advance the world of developers, it advances other worlds too. In this article, we discuss the benefits and advancements that the Casper Network presents to the present and the future. 

Also read Iron Fish: The Private Cryptocurrency

Golem: A Decentralized Cloud Computing Network

This article will discuss the Golem Network and how it operates intensively.

Introduction

Blockchain technology has exposed the world to a realm of beautiful creation that we would have thought to be impossible years ago. From a technology built mainly for peer-to-peer transactions in 2009 (bitcoin blockchain), the blockchain has become the technology of choice for many applications such as healthcare, gaming, real-estate, etc. 

Blockchain technology not only allows for creating wealth or enforcing a contract without a third party but also for building supercomputers. The first decentralized supercomputer to be built on the Ethereum network using blockchain technology is the Golem Network.

History of the Golem Network

Golem was co-founded by Piotr Janiuk, Aleksandra Skrzpczak, Julian Zawistowski and Andrzej Regulski in 2016 in Switzerland. After launch, Golem sold 82% of its supply and raised about 820,000 Eth, which amounted to about 8.6 million dollars at that time.

What is Golem Network?

Golem is a decentralized application (dApp) built on the Ethereum network. It is a decentralized supercomputer that connects computers in a peer-to-peer network, thus creating a global market where application developers and users can rent resources (idle computational power) of other user's machines. Users can rent their hardware and be paid in Golem tokens. Those who need computational resources to complete a more complicated task such as CGI rendering, artificial intelligence, etc., can get it and pay for it through the Golem marketplace. The beauty of the Golem Network is that anyone can access it, and its constituents are the combined power of users' machines from personal computers to the whole data centers.

The computational resources supplied by centralized cloud service providers such as Amazon, Google, etc., have limitations such as hard-coded provisioning operations, closed networks, and proprietary payment systems. Golem provided a decentralized marketplace where users can share the computational resources that other users require to carry out their tasks to address these limitations. The users who share their resources to the Golem Network get rewarded in Golem tokens (the native token of Golem).  

Golem functions as the backbone of a decentralized marketplace focused on computing power. Anyone who wants to create and deploy software to the Golem Network can publish the software to the application registry. Developers can use the application registry and transaction framework to extend and customize the payment mechanism, which gives rise to a unique way of monetizing software.

Application Registry and Transaction Framework

The Golem Network has various features that make it unique, but the application registry and transaction framework are essential. The application registry and transaction framework empower developers and create a secure, transparent, and efficient platform. 

What is an Application Registry?

The application registry is simply a register of the basic information of applications and their developers. A smart contract built on the Ethereum blockchain allows developers to integrate their applications into the Golem Network. Anyone can confirm the authenticity of an application by checking the registry; the registry holds information about a trusted application and a non-trusted application. Developers can publish their integrated applications and help users locate the required tools for their needs.

 What is a Transaction Framework?

Picture Credit: Golem Whitepaper

The transactional framework allows developers and providers to decide the payment mechanism and set the price they want for their applications. The transaction mechanism is entered into the application registry and must use an open-source or Ethereum Virtual Machine (EVM) as a deterministic environment. The mechanism also uses GNT (the native token of the Golem Network) and receives community approval. Examples of transaction frameworks are off-chain payment channels, custom receipts, Nano payments, per-unit use of software, payout schemes, etc.

The Working Principle of Golem

Golem provides a platform where providers, software developers, and others share computing power and network resources. The transaction initiates when a requestor (a user who accesses Golem Network to ask for resources) demands computational resources from a provider (a user who sells computing power) through the task template. For instance, instead of paying a centralized cloud-based platform such as Google Cloud for artificial intelligence, which is a computer-intensive process and slow on some occasions, the user can request computation power from a provider in the Golem's peer-to-peer network.

Steps involved in carrying out a task through the Golem Network include the following:

The Architecture of the Task Template and Reputation System

The Golem Network requires the task template (which has the complete computational logic) to execute the request made by the requestor. The computational logic needed to execute the request are:

  1. The source code to be run
  2. Splitting of the task into subtasks and sending it into different nodes
  3. Verification of final results

As soon as a task is completed, Golem immediately grades the requestors and providers that use its marketplace through the reputation system. The network detects malicious nodes and provides an evaluation metric for scoring tasks correctly.

The reputation system monitors the task of the requestors to ensure that it does not contain errors when the provider computes it and monitors the timeline of the requestor's payments.

The reputation system grades a provider because they have computed their task correctly, and the task passed a verification check upon return.

Golem's Use-case

Golem cryptocurrency (GNT) use-case is in the Golem Network. The value of GNT is attached to its use in the Golem Network because it is the coin of choice. Requestors need a GNT token to rent computational resources from a provider who computes the computations. Hence, the requestor will always have to buy GNT to access the Golem Network.

Summary

The Golem Network was created to solve the problems associated with renting computing power from centralized cloud-based providers. It achieved this by allowing users to supply and lease providers' computational resources using a peer-to-peer approach. The network rewards providers of the hardware the requestor rent with GNT. Golem prides itself as the first open-sourced decentralized supercomputer powered by the Ethereum blockchain.

Also read Augur: Your Global, No-Limit Betting Platform

Augur: Your Global, No-Limit Betting Platform

Introduction

Have you ever thought about the possibility of having a platform on the blockchain that predicts the future? Well, whether you have thought about it or not, the Augur platform is here to give you a chance at predicting the future and rewards you if your prediction is correct. This article has been written to introduce you to Augur v2 and its operations. However, it will start with the general features between the two versions. 

A Brief History of Augur

Augur protocol was launched in 2014 by Forecast Foundation owned by Jack Peterson, Jeremy Gardner, and Joey Krug as one of the first generation protocols built on the Ethereum platform. Augur raised more than 2,000 BTC and 100,000 ETH on its first day of the crowd sale. 

The platform has a native token known as reputation (REP). With a market capitalization of approximately $308 million, reputation ranks at number 154 and has a total supply of 11 million tokens. After years of operation, it launched a version 2 where it re-enforces the development since its launch. 

What is Augur?

Augur v1 was developed when Ehereum was barely two years old; since then, Ethereum, its parent blockchain, has evolved. Augur is a decentralized peer-to-peer software that uses the Ethereum blockchain to enable its users to predict the market. Augur verifies that an event happens and rewards those that made the correct prediction because it acts as a decentralized oracle. With Augur, anyone can predict the outcome of a future event such as the UEFA champions league winner, an election winner, the day of the next iPhone launch, etc.

The Augur concept is based on incentivizing correct predictions - users that correctly predict the future outcome of an event get Ether (ETH) as a reward while those with false predictions, experience losses. The higher the chance an event will happen, the lower the reward you get for predicting right. The lower the probability of an event, the higher the incentive you get for predicting correctly. 

How Augur Works

Augur is a market prediction protocol. This means that it is pretty different from the way exchanges work. While exchanges allow users to trade assets, the market prediction platform users depend on the events' outcomes. 

Augur has four stages for its market prediction protocol. The stages are:

Market Creation

It is easy for anyone to create a prediction market on the Augur platform. Augur provides a template for anyone who wants to use their platform to access, and for situations where templates are not available, there is a custom setting.

A user has to get funds for a validity bond to create a market. A validity bond is an Ethereum fund paid for making a call. The fund is returned once it is established that your market is not invalid. The user also needs a no-show bond (this fund is returned if your designated reporter shows up to give their report within 24 hours after the market ends, and it is deposited in REP). If the user reports in 24 hours but the reported outcomes are not in final agreement upon the outcome, it is still forfeited. The fund is returned only when the outcome is correct and within 24 hours.

Also, the market creator sets a creator fee (a fee paid by traders to reward the market creator after the market contract has been settled(usually in Ethereum). The creator fee is set to encourage users to create a market.

Market Trading

This is the stage where people participate by buying shares in the outcome of the betting topic (events) and get rewards for their contribution on the Augur platform.

The more shares people buy, the higher the prices of the shares. Hence, the people who invested in the shares earlier get it at a lower price than those who got in late.

Reporting

This stage allows people (reporters) to report on the market to Augur oracle, which determines the event's outcome. If the report is consistently correct, it becomes part of the consensus outcome, and reporters get their reward. But if the report is not among the consensus, the report is false, and the reporters lose their reward. 

Although all reporters require reputation (the native token of Augur) to participate in reporting on the Augur protocol nevertheless, reputation is not needed to place a bet on the platform.

Settlement

In this stage, the traders close out their trades and receive their payment. 

Major Augur v2 Improvement

Augur v2 is an entirely new deployment of the previous Augur Version because the v1 has no upgradeability, escape hatch or, method of halting trading activity on the protocol or the REP token.

Augur v2 incorporates or integrates the following;

0x Mesh Off-Chain Ordering

Using 0x Mesh for off-chain order books is one of the most significant changes to Augur in version 2. It allows for no-fee 'maker' orders and enables the capacity to transfer the onus of Ethereum transaction fees on to order 'takers'. The 0x utilization serves as a boon for liquidity formation and allows Augur service providers and market makers to operate with more attractive margins.  

Dai Stable Betting Unit

Unlike Augur v1 that allows users to bet with ETH, the new version introduced a stablecoin DAI for betting. Introducing a stablecoin diminishes the volatility of the original betting asset, ETH, which further improves the experience for users. 

Uniswap Price Feed Oracle

Before Uniswap v2, Augur relied on a semi-centralized price feed oracle to inform the REP's market capitalization system. Upon its launch, the Augur v2 integrates Uniswap's newly incorporated pricing signal to dynamically adjust reporting fees based on the target REP valuation peg of 5x open interest. 

More Seamless User Experience Using Portis, Formatic, and Torus Wallets 

Unlike its version 1, Augur v2 interoperates and is compatible with web3 concepts. It is designed to natively support signing up for a wallet from either Portis, Formatic, or Torus and abstract away key management and provide authentication flow easily. For instance, users can sign up with familiar login details with Portis and support login with either a phone number or email address and Google account using  Fortmatic and Torus, respectively. 

Conclusion

Augur is a platform that utilizes the Ethereum smart contracts to execute its operations and ensures that users who made the right predictions are rewarded. The recently launched v2 incorporates several user experiences, interoperable, new settlement using DAI instead of Ethereum, market-making tools, and the ability for a market to be settled as invalid.

Also read Digital Identification on the Blockchain with Microsoft’s ION

DeFi Lending: A Primer

Introduction


Today, lending is one of the most important financial activities in society. It fuels economic growth and facilitates commercial activities. The size of the world’s debt markets as of 2020 was estimated to be more than $281 trillion, more than three times the world’s annual output.  This paper focuses on DeFi lending markets being created through the use of blockchain technology.


Traditional Lending and its Problems


Credit, offered by a lender to a borrower, is one of the most common forms of lending. Credit fundamentally enables a borrower to purchase goods or services while effectively paying later. Once a loan is granted, the borrower starts to accrue interest at the borrowing rate that both parties agree on in advance.

When the loan is due, the borrower is required to repay the loan plus the accrued interests. The lender bears the risk that a borrower may fail to repay a loan on time (i.e., the borrower defaults on the debt). To mitigate such risk, a lender, for example, a bank, typically decides whether to grant a loan to a borrower based on the creditworthiness of this borrower, or mitigates this risk through taking collateral - shares, assets, or other forms of recourse to assets with tangible value. Creditworthiness is a measurement or estimate of the repaying capability of a borrower . It is generally calculated from, for example, the repayment history and earning income, if it is a personal loan. 

The current mainstream lending market, led by banking institutions, is fraught with issues as highlighted below.


Financial Exclusion 


Individuals or entities with thin credit files face financial exclusion from present lending institutions, which have  stringent lending rules and underwriting models to reduce default risk. The International Finance Corporation estimates that 65 million firms have unmet financing needs of $5.2 trillion each year.


Liquidity inefficiency


The supply and demand side of lending is fragmented based on lending period, interest rate, credit rating etc.  in the present markets. This results in sub optimal liquidity.  Further, the oversupply of liquidity in one submarket cannot be promptly transferred to serve the demand of another submarket.


Subprime problems 


The financial exclusion in current systems has given rise to alternative lending entities, including peer-to-peer lending markets. These lending entities typically charge borrowers a premium for securing funding, understanding that the borrowers  are left with no other options to source funds. Because these markets are non-regulated, fraudulent activities and high default rates permeate these less strict lending markets. 

During 2007 financial crises, institutions were left holding trillions of dollars worth of near-worthless investments in subprime mortgages. 


Legacy infrastructure 


The dated information technology infrastructure used by mainstream lending entities is a crucial impediment to efficiency and speed. There is limited data exchange between financial institutions. Credit history and other related information is fragmented and opaque.


Key Concepts in DeFi Lending 


Despite their respective distinctions, most DeFi lending protocols share two features; they have replaced centralised credit assessment to codified collateral evaluation,  and they employ smart contracts to manage the system functionalities. Some key concepts being used by most DeFi protocols are highlighted below. 


Value locked 


Value locked represents the total  users’ deposits in a protocol’s smart contracts. The locked value serves as a collateral or reserve to back the system.


IOU token


Lending protocols issue users IOU (I Owe You) tokens against their collateral  deposits. These IOU tokens  redeem deposits at a later stage, and they are also transferable and usually tradeable in exchanges. 


Collateral


A loan’s collateral represents the entirety or part of the borrower’s deposit against the loan. The  collateral ratio determines how much loan a user is allowed to borrow. 


Liquidation


The liquidation of a loan is triggered automatically by a smart contract. When a loan’s collateral ratio drops below a critical threshold due to interest accrued or market movements, any network participant can trigger the function to liquidate the collateral. 


Interest Rates


Borrowing and lending interest rates are computed and adjusted by smart contracts according to the supply-borrow dynamics, based on protocol-specific interest rate models.


Yield


The total amount of profit or income produced from a business or investment is referred to as yield. In DeFi, it is often measured in terms of Annual Percentage Yield (APY). Yield is relevant to the suppliers of loans, and is largely dependent on borrowing demand.


Key Architecture Elements


Oracles


The market price information of locked and borrowed assets are supplied to smart contracts through external data feeds providers called “price oracles”.  An oracle imports  off-chain data into the blockchain so that it is readable by smart contracts.  There are different kinds of oracles that the lending borrowing protocols use. Such as, chainlink or any custom made DEX oracles such as uniswap’s TWAP. 


Lending pools 


Liquidity pools are  markets of loans for crypto-assets. Users called liquidity providers (LP), act as lenders and supply an asset to the protocol. In return, they receive a claim to the supplied asset represented as minted tokens (IOU). In return for liquidity provision or supplying assets, lenders are given incentive in the form of interest. At any time, lenders can redeem their IOUs by transferring minted IOU tokens to the protocol, which then pays back the original tokens (with accrued interest) to the redeemer, simultaneously burning the minted tokens (IOUs).  This can be seen by a simple representation of providing liquidity on Compound protocol shown below. A user supplies ETH as an asset and gets cETH as an IOU token, which can be redeemed back for the underlying ETH plus interest paid in the units of supplied asset, in this case ETH.



Borrowers can initiate a loan by borrowing tokens deposited in a pool. This can be seen by a simple representation of borrowing on Compound protocol shown below in which a user deposits ETH as collateral and gets cETH as an IOU token representing the collateral plus the borrowed DAI. The collateral can be redeemed by paying back the borrowed amount plus the interest. The interest rates paid and received by borrowers and lenders are determined by the supply and demand of each crypto asset. Interest rates are generated with every block mined.



To ensure that borrowers eventually repay the loan, they are required to provide a collateral (usually in the form of ETH).  An unpaid loan of  person A can be liquidated by person B, who pays (part of) A’s loan in return for a discounted amount of A’s collateral. For this to be possible, the value of the collateral must be greater than that of the loan. To illustrate this, let's say a borrower has taken out a loan of 100 DAI by depositing $150 worth of ETH as collateral, given that the required collateralization ratio is 150%. If ETH falls in value and if the borrower’s collateral is now worth less than $150, then anyone can pay for the loan by paying 100 DAI for the loan, and in return can get the ETH deposited by the borrower as collateral at a discounted rate set by the protocol.


Tokens


In DeFi, tokens can represent a user’s share in a liquidity pool or serve the purpose of keeping the markets in equilibrium and to ensure that all actors behave honestly. Protocols also distribute governance tokens that allow holders to propose and vote on protocol changes, such as modification of interest rate models. Governance tokens are often given as a reward to incentivise participation, from both borrowing and lending sides, in a protocol. One more usage of governance tokens from the perspective of a protocol is to pay debt in the scenario of a black swan event. 


Key Participants 


Lender  and Borrowers 


They are the main users of the protocol. Lenders supply assets for loans in order to earn yield or interest income from their holdings. Borrowers on the other hand, take loans to get liquidity by providing collateral. They do this because they expect appreciation in the price of their collateral and don’t want to sell it to access liquidity. The loan can be used for consumption, allowing the person to overcome a temporary liquidity squeeze or to acquire additional crypto assets for leverage exposure.


Keepers 


Protocols may require that the on-chain state is continually updated to maintain certain standards such as collateral ratio.  To trigger state updates, certain protocols rely on external entities called Keepers. Keepers are generally financially incentivized to trigger such state updates. For instance, if a protocol requires a user’s collateral to be automatically liquidated under certain conditions, the protocol will incentivize Keepers to call transactions to trigger such liquidation and in return the Keeper will receive the liquidated collateral at a discounted price. The network of Keepers can be based on pure P2P execution or a consortium based on some consensus protocol such as PoA, or PoS.


Governance 


Governance, in DeFi, is the process through which a protocol is able to make changes to the parameters which establish the terms of interaction among participants. Such changes can be performed either algorithmically or by agents.  Presently, a common approach to  governance is for a protocol to be initiated with a foundation. The foundation has control over governance parameters, with a promise  to eventually decentralize its governance process in future. Such decentralization of the governance process is instantiated through the issuance of a governance token, an ERC-20 token which entitles token holders to participate in protocol relative to their share of total supply. Governance can be both full on-chain, off-chain or a hybrid combination of both.

Basic coin voting can empower large whales to vote on the system and virtually hijack it. But this can be mitigated through Quadratic voting. Detailed information on the topic of DeGov can be found here.  


Types of DeFi Lending Approaches 


Protocols in DeFi follow different approaches for lending: Collateralized debt positions, P2P collateralized debt markets, Under collateralized borrowing and Flash loans.


Collateralized Debt Positions


Contrary to the traditional lending markets, the lack of a creditworthiness system and enforcement tools on defaults leads to the necessity of overcollateralization in most lending and borrowing protocols (e.g. Compound, Aave). Over-collateralization means that a borrower is required to provide collateral that is higher in value compared to the debt being taken out. To maintain the over-collateralization status of all the borrowing positions, lending pools need to fetch the prices of cryptocurrencies from price oracles.

Once a borrowing position has insufficient collateral to secure its debts, liquidators are allowed to secure this position through liquidations. Liquidation is the process of a liquidator repaying outstanding debts of a position and, in return, receiving the collateral of the position at a discounted price. At the time of writing, there are two dominant DeFi liquidation mechanisms. One is the fixed spread liquidation, which can be completed in one blockchain transaction, while the other one is based on auctions that require interactions within multiple transactions.

To illustrate the concept, let's take the example of Compound protocol. Users of  Compound can lend and borrow ETH and other ERC-20 tokens. Users who lend their token receive IOUs in the form of cToken (e.g. cETH, cDAI) of an equivalent value in return. The IOUs  can be used to redeem the supplied asset by the lender and accrue the interest. The deposits of all lenders are pooled together and they start earning interest right when they deposit their funds in the smart contract based pool. However, the interest rates are dependent on the pool’s utilization rate.  When liquidity supply is high loans will be cheap as interest rates will be lower. When loans are in demand, borrowing will become more expensive with interest rates becoming higher.  

Lending pools have the additional advantage that they can maintain relatively high liquidity for the individual lender in case of redemption. The role of the keepers comes into play in the CDPs liquidation process.


P2P collateralized debt markets  


This approach works by matching lenders with borrowers. In other words, for someone to be able to borrow ETH,  there must be another person willing to lend ETH. Loans are collateralized in this approach too in order to mitigate counterparty risk and to protect the lender, the collateral is locked in a smart contract.  Under this approach, the lenders  do not automatically start earning interest, but only once there is a match with a borrower. The advantage of this approach is that the lenders and borrowers can specify terms of loan such as time period and fixed interest rates.

From a technical perspective, a state channel can be opened between both parties with the signature verification done on the base chain. And the channel will be closed only if both parties agree that settlement has been done correctly.


Under-collateralized 


Under-collateralized borrowing also exists in DeFi (e.g. AlphaHomora), however in a limited and restricted manner. A borrower is allowed to borrow assets exceeding the collateral in value, however, the loan remains in control of the lending pool and can only be put in restricted usages (normally through the smart contracts deployed upfront by the lending pool). For example, the lending pool can deposit the borrowed funds into a profit generating platform (e.g. Curve ) on behalf of the borrower.


Flash Loans


An alternative to over-collateralized loans are flash loans. Flash loans take advantage of the atomicity of blockchain transactions. Atomicity means that multiple actions can be executed within a single transaction. Even if one of the actions is not executed, the whole transaction is reverted. Because flash loans are taken out only for the duration of a single transaction, they allow the borrower to take out loans and repay the full borrowed amount plus fees by the end of a single transaction. Aave is one of the first protocols that supports “flash loans”, later on followed by Uniswap.


DeFi Lending Snapshot


We can see from the chart below that the Total Value Locked (TVL) in DeFi lending has meteorically increased over the last year rising from almost $4B to $39B, posting an increase of almost 10X.

In terms of protocols with highest TVL, Aave tops the list with a current share of approx. 37.5% followed by Compound (25%) and Maker (21.8%). InstaDapp is a lending aggregator, hence we do not account for it here as this could result in double counting the TVL. The combined TVL of the 3 highlighted platforms constitutes approx. 85% of the entire DeFi lending TVL which shows their dominance.

Interest Per Year (IPY) is the speed at which interest is accruing in DeFi. IPY is calculated by multiplying the current borrow rate by the total outstanding debt. The composite IPY of the entire lending space is shown below for the last one year. In general, each asset listed on a lending protocol has its own market and terms for loans. Data from each cryptocurrency / asset listed by a protocol is combined to arrive at its composite IPY. 

We can see from below that the overall IPY in the last year has increased starting from around $70M to currently standing at $885M. Around July the IPY fell considerably possibly due to the crypto market downturn, still it was able to stay above $500M. The IPY since the downturn appears to have rebounded back, though one can infer that borrowing demand is correlated to the overall crypto market cycles.

As far as individual protocol’s IPY is concerned, Aave appears to take the lead on this metric too. It generates almost 2.5 times the IPY of Compound and almost 12 times the IPY of Maker.  This implies that Aave is able to attract much more borrowing demand compared to the other two. It would be worth investigating the reasons for this. One possible reason could be that Aave allows borrowers to select a stable or variable interest rate, while Compound and Maker only have variable interest rate options. This introduces uncertainty in interest payment amounts both for borrowers and lenders. Other possible reasons could be better user experience and newly added features in Aave V2 as highlighted in this article.


Discussion


Users seem to be engaging with DeFi lending protocols for a variety of reasons.  One of the  motivations has been to receive participation rewards e.g. valuable, tradable governance tokens resulting in overall higher APY compared to traditional lending.  By guaranteeing IOU tokens’ redeemability, DeFi lending protocols also ensure full transferability and exchangeability of debt holdings.  

Sophisticated investors as well as institutional investors leverage DeFi lending for trading. For example, an investor bullish on ETH may borrow, say, DAI to buy some ETH. In expectation of a price increase of ETH, investor would swap borrowed DAI for ETH on an exchange, hoping that the purchased ETH can be worth more DAI in the future to such an extent that it exceeds the loan amount and leaves the investor some profit. Similar to the borrow spiral discussed above, an investor can repetitively (i) borrow DAI, (ii) swap DAI for ETH, (iii) re-deposit borrowed ETH as collateral, (iv) borrow more DAI. As such, a “leveraging spiral” is formed to maximize the investor’s long exposure to a crypto-asset that is expected to appreciate. 

Flash loans have opened up a huge space for innovation in arbitrage and to unlock collateralized borrow positions on lending protocols, however they can also be used for malicious actions e.g. in case of governance voting. 

It is important to highlight that competing blockchains and overcollaterization problems may stifle growth of DeFi lending. Several protocols such as Cosmos, Polkadot and Solana are rushing to kickstart DeFi ecosystems on their own platforms, this may pull some developers and liquidity away from Ethereum based DeFi systems. However healthy competition and increased interest just goes on to demonstrate the value in the potential of DeFi. But perhaps the biggest limitation of current DeFi systems is overcollateralization of crypto assets. This causes capital inefficiency. Further, it does not help the unbanked since without a crypto collateral, they cannot access capital. 

Overcollaterization problem can be potentially resolved via a credible reputation/credit system in DeFi. With this approach, based on the credit history and other relevant parameters, loans can be provided to users that meet certain criteria. This would allow for financial inclusion and induce more liquidity in the market to serve user needs.


Conclusion


Decentralized lending has enabled borrowers and lenders to earn yield and maximise their returns on investment on their crypto holdings, without needing to go through any centralised intermediaries. Though the current DeFi lendings’ offer exceptional yields (which are partly there to fuel adoption), it is unlikely these yields will be sustainable. However, billions of dollars worth of value locked,  institutional interest and the increasing network effects make it likely that the DeFi lending platforms will continue to grow and offer acceptable yields to its users.



References:


Xu, J., & Vadgama, N. (2021). Arxiv.org. Retrieved 11 September 2021, from https://arxiv.org/pdf/2104.00970.pdf


Arxiv.org. (2021). Retrieved 11 September 2021, from https://arxiv.org/pdf/2101.08778.pdf


Bloomberg, S. (2021). World's $281 trillion debt pile set to rise again in 2021, says IIF. Business-standard.com. Retrieved 11 September 2021, from https://www.business-standard.com/article/international/world-s-281-trillion-debt-pile-is-set-to-rise-again-in-2021-iif-says-121021800277_1.html#:~:text=Governments%2C%20companies%20and%20househ


Polkadot [IOU] is now available for trading on Poloniex. Medium. (2021). Retrieved 11 September 2021, from https://medium.com/poloniex/polkadot-iou-is-now-available-for-trading-on-poloniex-c18c0e13d180


What is Quadratic Voting? | Hacker Noon. Hackernoon.com. (2021). Retrieved 11 September 2021, from https://hackernoon.com/what-is-quadratic-voting-253zo3xa5


MakerDAO issues warning after a flash loan is used to pass a governance vote. The Block. (2021). Retrieved 11 September 2021, from https://www.theblockcrypto.com/post/82721/makerdao-issues-warning-after-a-flash-loan-is-used-to-pass-a-governance-vote


Ifc.org. (2021). Retrieved 11 September 2021, from https://www.ifc.org/wps/wcm/connect/03522e90-a13d-4a02-87cd-9ee9a297b311/121264-WP-PUBLIC-MSMEReportFINAL.pdf?MOD=AJPERES&CVID=m5SwAQA


Decrypt. (2021). What is Compound? A 3-minute guide to the DeFi lending project - Decrypt. Decrypt. Retrieved 11 September 2021, from https://decrypt.co/resources/compound-defi-ethereum-explained-guide-how-to


Supplying Assets to the Compound Protocol. Medium. (2021). Retrieved 11 September 2021, from https://medium.com/compound-finance/supplying-assets-to-the-compound-protocol-ec2cf5df5aa


Borrowing Assets from the Compound Protocol. Medium. (2021). Retrieved 11 September 2021, from https://medium.com/compound-finance/borrowing-assets-from-compound-quick-start-guide-f5e69af4b8f4


(2021). Retrieved 11 September 2021, from https://medium.com/aave/aave-v2-the-seamless-finance-d52075d97a7



Also Read: Bitcoin Dawn of Innovation

Connext: A Guide To Multichain Ethereum

In this article, we will be exploring the Connext Network and its working mechanism.

Introduction

Since its inception in 2015, Ethereum has become the most sought-after blockchain due to its vast benefits, ranging from developing decentralized applications (dApps) to the ease of building other projects. However, as the popularity of Ethereum increases, it led to the congestion of the network, which resulted in slower transaction time and increased gas fees to carry out a transaction on the blockchain. 

Since these problems have been encountered, various solutions have been proposed to mitigate the issues. One of which is layer 2 - which enables transactions to be carried out outside the Ethereum mainnet but records the data on the Ethereum mainnet. Connext is a layer 2 solution that aims to solve the problem.

What is Connext?

Connext is an Ethereum based interoperable platform that connects Ethereum Virtual Machine (EVM) compatible chains and layer 2 solutions. Connext achieves its function without the use of a new external validator.

How Does Connext Work?

Connext works through the Noncustodial Xchain Transfer Protocol (NXTP) for its cross-chain transfer without depending on any external validator. 

The NXTP model consists of a locking pattern, off-chain routers, and SDK. The locking pattern prepares a transaction and fulfills it; the off-chain router passes call-data between chains, and the SDK prompts an on-chain transaction. 

How NXTP Carries Out Transactions

All transactions on the NXTP follow three stages which are:

i) Route auction: This is the route that users select for their transactions to follow. There are different routes that a transaction can follow. A user places a request on auction for the router to bid, and selects the route they prefer, the system (routers) seals the offer - which means that there is a price range and time limit for the transaction to be done.

ii) Prepare: This is the stage where the transaction is audited before being sent. The prepare stage involves both the sender-side chain and the receiver-side chain. The users send their transactions to a contract on the sender-side chain that manages transactions. The contract now has the router's sealed bid, which prompts the router to submit the same transaction to the transaction manager on the receiver-side chain, after which a specific amount is set aside and locked as liquidity. This stage ensures that there is an incentive for the router to carry out the transaction.

iii) Fulfill: This is the stage where a transaction is executed, or the transaction is returned if it doesn't complete. After the preparation stage on the receiver-side chain, the user sends a signed message to a relayer (it could be the router) which relays the signed message to the transaction manager on the receiver-side chain to complete a transaction and claim the funds locked by the router.

The router also submits the same message to the sender-side chain to complete the transaction and unlock the original amount.

Components of the NXTP System

  1. Contract: It follows the instructions given by the users and routers of the system to either lock or unlock funds.
  2. Subgraph: Caches on-chain data and events to enable scalable querying.
  3. TxService: It tries to submit the transaction to the chain even if it has to be done multiple times.
  4. Messaging: It takes care of anything involving message data over NAT.
  5. Router: It gets information from subgraph and messaging and submits the transaction to TxService for sending to the chain.
  6. SDK: It creates a transaction and gets the necessary information to start a transaction on the user side. 

Importance of the NXTP Model

  1. It only operates on-chain data.
  2. There is no room for double collateralization; hence transaction service becomes easier. 
  3. Data can never get out of sync.
  4. It doesn't give room for browser state data.
  5. Both the receiver-side and sender-side can unlock funds simultaneously, which prevents liquidity from leaking.
  6. Easy accessibility with Automated Market Makers and auctions.
  7. There is the possibility of a fully-stateless router.
  8. There is the presence of great crash tolerance for out of the box event.
  9. The platform is simple to build and easy to use.

Disadvantages of the NXTP Model

  1. It doesn't operate offline data; hence, we can't use it for batched conditional transfers in scalable micropayment.
  2. Though it has a crash tolerance, the router still has to reclaim its fund within a time frame.

NXTP Supported Chains 

Mainnets

  1. Ethereum
  2. Binance Smart Chain
  3. Arbitrum One
  4. Polygon
  5. xDai
  6. Optimism
  7. Fantom Opera

Testnets

  1. Goerli
  2. Rinkeby
  3. Ropsten
  4. Kovan
  5. BSC testnet
  6. Polygon Mumbai
  7. Arbitrum RinkArby
  8. Avalanche Fuji

Learn more about NXTP

Summary

Connext is an Ethereum based interoperability system that is highly capital efficient and truly trust-minimized. No other Ethereum based interoperable system has this advantage that Connext has.

Connext is a protocol that is easy to use on any Ethereum Virtual Machine compatible chain. It also supports non-EVM compatible chains though it requires rewriting the transaction and porting the contract. 

Also read The Cosmos Network: A Comprehensive Guide

Solana: Exploring the Blockchain

Introduction

Are you a developer looking for the next best blockchain to host your project? are you a cryptocurrency trader that wants to try other Blockchains? Or are you a trader or investor in cryptocurrency but the gas fee is not friendly to you? whatever your interest is or wherever your interest lies, this article will present the Solana Blockchain, one of the most exciting Blockchain that answers most of your questions.

What Is Solana Blockchain?

Solana is a decentralized Blockchain that is fast, secure, scalable. It is a platform where anyone can build a decentralized app. It is essential to know that the Solana blockchain can run around 50,000 transactions per second (TPS) and have a block time of approximately 40ms. Astonishing, isn't it?
In 2017, Anatoly Yakovenco created the Solana blockchain. He and his team created the blockchain to make transactions fully trustless and solve scalability problems.
Yakovenco did not just build Solana from the blues; he had a lot of experience while working with Dropbox as a software engineer and lastly Qualcomm before making the Solana blockchain.
Today, top organizations such as Qualcomm, Microsoft, Apple, and Google support the project from their wealth of experience.

How Does Solana Work?

You may be wondering about how Solana could achieve scalability with running 50,000 transactions in a second. If you have been wondering about it, wonder no more as the reason for this stunning performance is tied to the working principle of Solana.

To ensure all these work together for good, Solana developed eight important innovations by which it operates. The eight innovations are discussed below.

Proof Of History

Solana uses a proof of stake consensus that works perfectly with proof of history to determine the transaction time in the protocol.

The proof of history is a record that verifies that an event happened within a specific time frame and keeps track of it. This approach assigns a timestamp for any transaction carried out on the blockchain. It also disallows any involvement either by bots or miners in deciding the order in which blockchain records its transactions. It is different from other blockchains in that it does not wait for other validators to confirm a transaction before it is accepted. Solana allows all validators on its platform to confirm transactions immediately without waiting for another. It can achieve this by making use of SHA-256 - it enables hashing a verifiable delay function sequentially (VDF).

Tower PBFT

Byzantine fault tolerance is an agreement that tolerates failure and defends the computing system against corrupt data and malicious attacks. As a result, all the nodes in the system get the same authentic data all the time.
The tower's practical byzantine fault tolerance ensures that all transactions in the system are verified with the lowest processing power possible. It can do this because it uses the proof of history as a clock - a record of the timestamp of past transactions - before achieving consensus. Hence, Solana becomes faster and more efficient than other blockchains.

Turbine

It is a block propagation protocol that makes transmission to the blockchain node easy.

Gulf Stream

Validators on Solana can now execute transactions faster and reduce confirmation time. All thanks to the gulf stream. The transactions are always at the forefront of the system for execution. 

Gulfstream is the mempool-less transaction platform. We must understand what a mempool is to grasp what the Gulfstream entails fully.

What Is A Mempool?

A mempool contains all transactions that are submitted on the blockchain but has not been processed. What these mean is that a mempool is a transaction awaiting confirmation on the blockchain. With this understanding now, we can safely say a Gulfstream is a platform that does not allow delay in a transaction before it's been processed. Interesting right? We will delve into how the gulf stream works and how it helps the Solana network to make faster transactions.

How Does Gulf Stream Work?

In Solana, there is a concept of leader which is the role of a validator when it is appending entries to the ledger. Validators can easily execute a transaction before the set time, reducing the transaction time. This is possible because all validators are aware of the order of upcoming leaders, so they send the transactions to the expected leader before the set time so the leader can process the transactions.

A block occurs on the Solana platform approximately every 800 milliseconds, and it becomes more time-consuming to unfold as they increase. In a worst-case scenario, a fully confirmed block-hashes contains about 32 blocks. A client signs a transaction that points to a recent block-hash that the network has confirmed. The signed transaction is sent to the validators which immediately forward it to the most senior leader in the network. The client knows that the network confirms a transaction and that the block-hash has an expiry time, so the client signs a transaction knowing that it can execute or fail. Immediately the network is ahead of the rollback point, the referenced block-hash expires, and the client knows that the transactions become invalid, never to be executed on the chain.

Sea Level

The sea level is a parallel smart contract runtime. The sea level helps Solana protocol scale across GPUs and SSDs, enabling efficient runtime. In addition, the sea level gives all Solana transactions the ability to run concurrently on the blockchain.

Pipeline

The pipeline mechanism is a processing unit that enables all transactions to be quickly validated, optimized and recurrent across all the nodes in the Solana network. The pipeline follows the outline below to carry out its function.

Cloudbreak

Cloudbreak allows the Solana network to achieve a high level of scalability. Before defining Cloudbreak, let's understand the Solana blockchain scalability.

Cloudbreak And How It Achieves Scalability

Scalability can be achieved without sharding, but more is needed than scaling computations alone because the memory used to monitor accounts can easily be overwhelmed, affecting the size and speed of the network. The network used to achieve scalability must take advantage of the account's concurrent read and write access. RAM and SSDs can be used to achieve scalability without sharding, but they come with a huge disadvantage. To solve the challenges posed by using RAM or SSDs for scalability purposes, Solana designed software that allows 100% utilization without involving the hardware. It does not use a traditional database to address scalability but uses different combinations to provide solutions. The mechanisms are highlighted and discussed below.

How Solana Achieves Scalability

a) Memory-mapped file leverage: a file that has its byte mapped in a process's address (virtual) space. The kernel may or may not store the cached memory in the RAM. Although the RAM does not limit the amount of physical memory, the size of the disk can. The disk performance determines the reads and writes.

b) Faster sequential transactions: Sequential transactions are faster than random operations across all the virtual memory stacks.

The accounts data structure of faster sequential operations are:

i) The RAM stores all index of accounts and fork.
ii) About 4MB of memory-mapped files stores all the account.
iii) A memory map stores an account from a proposed fork.
Random distribution of maps across numerous SSDs.
iv) Semantics (copy-on-write) are used.
v) Writes are assigned randomly to a memory map for the same fork.
vi) After each writes, the index is updated.

Solana gets the privilege to write and scale concurrent transactions sequentially and horizontally across many SSDs because the account updates are copy-on-write and assigned to a random SSD. It is not only the writes that are horizontally scaled but read. Read achieves this because forks states updates occur across numerous SSDs.

c) Garbage collections: As accounts get updated, and forks are finalized after rollback, every old account is collected as garbage and freed from the memory.


d) State updates for fork: horizontally scaled sequential reads that happen across all SSDs help with computing Merkle root of the state updates for a fork.

With Cloud break, Solana achieves scalability without sharding and also scales much more than computations. You can look at it as an optimal data structure for concurrent reads and writes across the network.

Archiver

As the name implies, the archiver in the Solana network is the node for storing data from validators. Therefore, many checks go on in the background to ensure that only valid data are stored on the archivers.

The Solana Ecosystem

Solana has been attracting many projects that build its tech stack due to its fantastic advantage in the current cryptocurrency world. Today there are more than 200 projects built on the Solana protocol. Some of the projects are highlighted below.

The Solana ecosystem is growing very fast, with about two hundred and eighteen (218) projects built. The project cuts across various categories such as Defi, AMM, Stablecoins, Governance, Dex, and NFTs.

Sol Token

SOL is the native token that is used on the Solana protocol. The Sol token has two crucial use cases, which are:

  1.  It is used to cater for transaction fees and smart contract operations on the protocol.
  2. You can also stake the Sol token to earn a profit on the Solana protocol.

To stake sol token, you should follow the steps below:

  1. Get a wallet such as SolFlare and Exodus that supports Sol staking 
  2. Create your staking account by following the instructions on the wallet.
  3. Follow the instructions on the wallet to choose a validator .
  4. Delegate your stake to your chosen validator.

According to coingecko, Sol has a current circulating supply of 272 million out of its maximum store of 488 million. It had an all-time high of $149.91 in September 2021 and currently trades at a value of $142 per Sol token. The current market cap of Sol is around $41,499,887,443.

Conclusion

The Solana blockchain achieves the fastest cryptocurrency transaction per second compared to Ethereum which takes about 15 seconds per block, and bitcoin of 10 minutes per block. Recently, platforms such as OKEx, MXC, and the Solana foundation became partners to launch two new funds that will increase the growth of projects on the Solana ecosystem. If the ecosystem continues this way, it might just become the leading blockchain soon.

Also, read on Stable Coins.

History Of Ethereum Hard Forks

Introductions

Before the Ethereum Blockchain could reach its potential, it needed several transformations. Such transformations include migrating to Ethereum 2.0 also known as Serenity. ETH 2.0 is the much-awaited Ethereum upgrade that allows a more scalable, cheaper, decentralized, and secure network.

Ethereum has since chanted the course to migrating from the POW to POS consensus for cheaper transaction costs and better decentralization. Accompanying the upgrades are various hard forks promising various Ethereum Implementation Proposals, EIPs.

By the way, what is a fork, and what exactly is a hard fork? The fork is the process of copying and improving on an existing protocol, similar to the traditional software upgrades.

A fork can be soft, hard, accident, and intentional. It is a hard fork when it changes the rules of the blockchain protocol so that the old blockchain and the resulting blockchain are incompatible.

A hard fork is a radical upgrade that can make previous transactions and blocks either valid or invalid and requires all validators in a network to upgrade to a newer version. It’s not backward-compatible. A soft fork is an upgrade to the software that is backward-compatible and has validators in an older version of the chain that sees the new version as valid.

When two or more miners find a block at the same time, an accidental fork occurs but it is intentional when the rules of the network are being modified.

Ethereum Hard Fork And Others

Similar to other blockchain networks with active communities, Ethereum Blockchain has undergone soft and hard forks over time. For a brief, we need to reference other non-Ethereum hard forks before explaining Ethereum hard forks in detail.

So far, Bitcoin, the first implementation of blockchain launched by Satoshi Nakamoto, a pseudo-anonymous entity, has also undergone several hard forks. The most prominent Bitcoin hard forks are; Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited, Segregated Witness (SegWit), Bitcoin Cash, and many others. From records, one common thing about the various hard forks, both Ethereum and Bitcoin hard fork, is that they are geared towards protocol upgrades which are done by network consensus. 

Why Fork Ethereum Blockchain?

Similar to other network and software upgrades, Ethereum concerns birthed the various hard forks. It ranges from security, centralization, fees, scalability, and other Eth 1.0 limitations. For instance, despite having a good run in Q1 and Q2 2021, Ethereum had its highest fees that scare developers. A simple swap on the Uniswap for example is as high as $100 while others could be $16-20. 

While we are set to discuss Ethereum Hard forks fully, it is important to note the Ethereum journey so far and link them to the hard forks accordingly. The journey as referred to here is the Ethereum developmental roadmap. 

Ethereum Developmental Upgrade And Associated Hard Forks

Ethereum has a four-stage development roadmap. They include; frontier, Homestead, Metropolis, and Serenity. Recall that, unlike most POW networks, Ethereum is way beyond currency and has to measure up to accommodate varying use cases and features. Hence, the need for a roadmap. 

Below explains the various journey so far; 

Frontier

The frontier is the first developmental roadmap of the Ethereum blockchain. It went live on July 30, 2015. Although it went live as a beta, it performed better than expectations. Developers began writing smart contracts and decentralized applications to deploy on the Ethereum Blockchain. Shortly after its launch, it experienced a hard fork called Ice Age. 

Ice Age, also known as “Frontier Thawing”, was the first (unplanned) fork of the Ethereum blockchain aimed at providing security and speed updates to the network.

Homestead

While the Frontier phase of Ethereum laid the groundwork for experimenting in Ethereum, the Homestead steps it up to its first production release. Homestead, the second major version of the Ethereum release, comes with several protocol changes and a networking change that provides the ability to do further network upgrades. 

The upgrades changes was activated at Block >= 1,150,000 on Mainnet

Block >= 494,000 on Morden

Block >= 0 on future testnets. The homestead hard forks include:

EIP-2: Main homestead hard fork changes

EIP-7: Hard fork EVM update. DELEGATECALL

EIP-8: devp2p forward compatibility. 

Ethereum Classic Hard Fork

The Ethereum Classic hard fork is a child of necessity after the homestead hard fork. It was in 2016 when hackers exploited DAO, one of the most notable Ethereum projects. As a result, developers initiated the Ethereum Classic hard fork to mitigate the DAO loss. 

The DAO, also called Distributed Autonomous Organization, raised $150m in Ether in a public crowd sale. 

The DAO, in principle, was to operate as a form of decentralized venture capital fund where investors would send Ether to the DAO to receive voting rights, whereafter those who had invested (and voted) would democratically decide on which projects to which the DAO should disperse those funds.

Contrary to the arrangement, the DAO was unable to complete its vision when millions of Ether vanished.

As a response, the Ethereum community moved to recover the funds by voting to change Ethereum’s baseline code to recover the lost funds and reimburse investors. As a result of the majority vote in the favor of this proposal, a hard fork and two separate blockchains were created. 

EtherZero Hard Fork

EtherZero is the second intentional Ethereum hard fork that took place in 2018. The hard fork went live at 4936270 block on 29 Jan 2018. Unlike the Ethereum Classic hard Fork, it was started by a group of tech geeks looking to provide a better platform for creating decentralized applications (dApps) and smart contract deployment. Contrary to other forks, it has no specific interest to speed up transaction rates. Rather, the development team was determined to make transactions completely free.

Metropolis

This is the third phase of the Ethereum upgrade and one of the notable hard forks. It is the forerunner to Serenity in the sense that it lays the background for early proof of stake (POS). Metropolis upgrade includes Byzantium, Constantinople, and early serenity. Byzantium is a backward-compatible upgrade aimed at integrating zero-knowledge protocol and delay of the network difficulty bomb. On the other hand, Constantinople is a non-backward compatible upgrade.

It represents a hard fork deployed to solve a security weakness allowing hackers to access users' funds and integrates a smart contract functionality that enhances the verification process as well as the reduction of gas price. Lastly, as a forerunner to serenity, it made the first attempt of implementing POS and account abstraction.

Serenity

Also known as the Ethereum 2.0, serenity is the latest Ethereum upgrade. It builds and improves on the successes of the previous upgrades and hard forks. The major improvement of the Serenity upgrade is porting from POW to POS fully. 

By implication, serenity increases its transaction capacity, changing gas fees and achieving scalability while achieving more eco-friendly coin generating and validating networks. 

The launch of the Beacon chain is Serenity's first step to revolutionizing the Ethereum network. From the Beacon chain, it pushes through to; Berin hard fork, London hard fork, and the upcoming Shanghai hard fork. 

Berlin Hard Fork

The Berlin hard fork is a forerunner to the London hard fork. It is named after the host city of the inaugural Ethereum Devcon convention. Berlin hard fork incorporates several EIPs which addresses gas price and introduces new transaction types. 

The Berlin hard fork went live at 12,244,000 on April 15 and proposes several EIPs. The EIPs include; EIP 2565, EIP 2718, EIP 2929 and EIP 2930. 

Before the Berlin hard fork went live, several delays were citing possible vulnerabilities and centralization concerns. Some believed the Berlin hard fork will be less impactful in the short term, but will further pave the way for the upcoming London hard fork. 

London Hard Fork

After the Berlin Hard Fork comes London hard fork, scheduled for July before being delayed to August 4. In preparation for the ETH 2.0 launch in 2022, London hard fork makes significant changes to Ethereum’s transaction fee system, which has long been a contentious subject.

Ethereum's London hard fork introduces two new known Ethereum Improvement Proposals (EIP), namely: EIP-1559 and EIP-3238. EIP-1559 is a proposed change to the way users pay gas fees on the Ethereum network. It also proposes a new transaction pricing mechanism that will create a base fee for each block. Usually, users enter a bid to pay their gas fees, but the EIP-1559 allows miners to prioritize transactions based on the fee added and use the fee as a reward for adding it to a block. Now, each block will have a fixed, associated fee instead. The EIP design allows the blockchain to burn the fee, reducing the overall supply of Ether (ETH). Thereby creating deflationary pressure on the cryptocurrency.

Ethereum 1.0 has a difficulty in mining called the difficulty time bomb. As miners reach the difficulty time bomb, it takes longer to mine a new block, and thus reward gets lower as well as slower transaction. To motivate users and encourage them to move to Ethereum 2.0 upon launch, EIP-3238 will delay the time bomb to enable the network to incentivize validators to Ethereum 2.0’s Proof of Stake consensus model at the correct time. It is suspected that if there is no consensus to move to the awaiting Ethereum 2.0, the scenario of Ethereum Classic will happen. Delaying the time bomb will lead to a 30-second block time ice age around Q2 of 2022, therefore, enabling "The merging" of Ethereum 1.0 with Ethereum 2.0.

Shanghai Hard Fork

The upgrade didn't stop at Berlin and London hard Fork. It proceeded to the Shanghai hard fork scheduled for OCTOBER 2021. Shanghai hard fork is promised to include the following EIPs; 

The new opcode BEGINDATA indicates that the remaining bytes of the contract should be regarded as data rather than contract code and cannot be executed.

Conclusion

Ethereum Blockchain so far has been a work in progress. It started from a four developmental roadmap Viz: frontier, homestead, metropolis, and serenity to achieve what we will call ETH 2.0 2022. Every upgrade of Ethereum accompanied an associated hard fork. The major Ethereum hard forks are Ethereum Classic, Shanghai, London, Berlin, Homestead, Constantinople, and Ice Age hard forks. It is expected that the Ethereum network will attain scalability with eco-friendly network fees and better decentralization. The ETH 2.0 is promised to provide a sustainable blockchain network that doesn't compromise any of the above features. 

EIP-1559: An Upgrade To Ethereum Fee Model

The Ethereum 1.0 fee model is a win to miners to the detriment of the users. However, EIP-1559, launched on 5th August 2021, is a core proposal to improve the efficiency of the Ethereum transactions, said to be investor-friendly. In the current Ethereum network, users sometimes overpay to be included in a block while miners profit. Not only that, users overpay, but there are also occasions where the network gets congested, resulting in confirmation delays. Besides that, the network is somewhat volatile and leads to losses and less predictable transactions. For example, fees can be as low as 2gwei. Other times it could be ranging from 20-50gwei, while there are occasions when it hits 200gwei, taken 10^9 =1ETH.

The above limitations of the Ethereum network often turn off users. Hence, they go for faster and cheaper transaction fee networks like Binance Smart Chain and others. To address the issues ahead of the Ethereum 2.0 launch in 2022, the Ethereum community is coming up with some proposals called Ethereum Improvement Proposals, EIP. One of such proposals is EIP-1559.


EIP-1559 is an Ethereum improvement proposal positioned to address confirmation delays and less predictable fees structure and introduce a burning mechanism to Ethereum's native token. This article is necessarily discussing in detail the EIP-1559, the benefits, and the implications to users, miners, and the network. Meanwhile, it is important to start with the current Ethereum fee model before the emergence of EIP-1559.

The Current Ethereum Fee Model

The current transaction fee mechanism of Ethereum 1.0 is the auction fee model. Better preferred is the first price auction fee model. The first price auction model is an unpredictable fee mechanism where users bid to make transactions on the Ethereum network. Sometimes, other users might have bid higher before transactions could be processed, making the user's transaction pending until the network stabilizes or drops to the bidding price.
For instance, user A bid to swap on Uniswap. On The other hand, a new token is launched, or other Ethereum network activity increases, making other users push for aggressive buying to make transactions. For those user's transactions to get processed, they need to bid higher and thus get their transactions confirmed faster. Notice that User A, who bid first but with a lower fee, kept waiting for confirmation while others with higher bids have been processed. To reduce the unpredictability of the auction fee model, wallets and exchanges are currently setting estimated fees that are often overpriced. A close look at the auction fee model shows that miners take up the transaction fees, including block rewards and uncle rewards, without feedback to the network.

However, EIP-1559 is promising to do things differently. Some will ask if other auction fee models aren't efficient enough. For instance, the second price auction, also called truthful or kth price auction, where everyone pays a gas price equal to the lowest gas price included in the block, although efficient in the traditional economic model, often results in collusion flaws in a blockchain or distributed network. 

The EIP-1559 is designed to solve the following problems of the auction fee model: 

To solve the problems above, the Ethereum community has agreed to deploy a complex economic model and real-time blockchain usage, which further provides more transparency to the fees and volatility of the network.

Changing The Game With EIP-1559

EIP-1559, unlike other EIPs, has been debated mainly since Buterin Vitalik announced it in 2019. It brought mixed reactions: miners are against it while users and investors are happy to welcome it. The question lies on why the debate and what is EIP-1559 offering to the Ethereum network?
The bone of contention here is that EIP-1559 changes the way network fee is made on the Ethereum Blockchain and increases the network capacity. Below are how EIP-1559 is changing the game of Ethereum transactions:

Base Fee

This is the algorithmically determined network fee proposed by the EIP-1559. It is also the minimum fee a user pays to include a transaction on the next block. Unlike the auction fee model, it is determined by the network and not the wallets and exchanges. That way, users know the price of the transaction beforehand. However, it does not necessarily make Ethereum network transactions cheaper as they can be adjusted up or down depending on network activities. But it makes the network more user-friendly and more predictable because users will know what they are paying beforehand.
The base fee is charged from users and further burnt, helping to prevent miners from colluding and inflating the network.

Miners Tip

Traditionally, wallets have categories of fees they charge users. Some categorize their estimated network fees as regular, priority, and custom, while others categorize theirs as small, medium, and high. What that means is that users can pay more for faster transactions. The miner's tip, also known as priority tip, is paid to miners to confirm transactions faster. Ideally, miners verify and process transactions in the order of their profitability. This way, miners earn for securing, validating, and processing transactions on the network. However, the EIP-1559 includes a refund mechanism that refunds excesses once they exceed a particular block's maximum fee.

Fee Cap

This is a custom kind of transaction fee that allows users to pay a certain amount of fee they want but is at the mercy of the network activity often. Let's say the network is high and requires over 50% of the gas limit. The transaction takes so long to confirm, waiting for the transaction fee to come close to the capped fee to be included in a block.

Ethereum Capacity

The EIP-1559 comes with a block size improvement. It expands the block size from 12.5M to 25M. With this, the base fee rises and falls depending on the utilization of the block space. The base fee rises when utilization is near 25M and reduces when it nears 12.5M gas demand. By implication, this helps wallets automatically adjust transaction fees, unlike the random estimates of the current network.

Benefits Of EIP-1559

EIP-1559 comes with several benefits to the Ethereum network performance and transactions. It proffers both security, monetary policy and user experience benefits as explained below; 

Increase Security On Ethereum

Through a tweet, Evan Van Ness, author of the week in Ethereum, explained that the EIP-1559 upgrade is an important, long-term step against denial of service (DOS) attacks, an attack that denies legitimate users access to services and computer networks. 

According to him, "Want to spam the chain while shoplifting ETH in hopes of profiting? Well, with the EIP-1559, that's exponentially more expensive."

As the block space increases to almost 200%, the base fee keeps rising, making it costlier for attackers to afford sufficient block space to launch an attack. 

Also, as the block space increases, the base fee rises and is burnt. For that reason, miners, who don't share in the base fee, have weaker incentives to perform near-head reorgs. Find more details about near-reorg and transaction fees effects here. 

Better User Experience

EIP-1559 makes fee estimation more predictable, hence, proffers a better user experience for users, unlike struggling to predict possible fees for transactions, say on Uniswap. The EIP allows users to consider three fee categories -base fee, fee cap, and priority tip to predict the possible transaction fee, unlike the legacy method where users bid and the highest is chosen. With EIP, a maximum fee is set for priority tips, and a base fee is set. The user sets a Fee cap which is compared with the base fee. When the Cap is in excess, the difference is returned to the user. 

Unlike the current fee model, the EIP fee model helps a better estimation and user experience since the above-stated fees are known beforehand. For a better understanding of what EIP-1559 affects user experience in these fee models, refer here. 

Economic Benefits

A term called “preventing economic abstraction of ETH” explains that users should pay with ETH and how healthy it is for the network. Unlike the current fee method, all fees, base, tip, and fee cap, are required to pay using ETH, the native token of the Ethereum network, instead of other assets. Doing that will help to increase the utility of ETH.


Under EIP-1559, all base fees are burnt and thus help reduce Ether's supply, which directly increases the valuation of the token. Hence, people suggest that it will make Ether deflationary.


As stated above that Base fees are burnt for every transaction. It also rises as the block space increases. The increase is thus burnt also, creating deflationary pressure on the supply of ETH. Better explained, more network activity (block space) is equal to more ETH burn equal less ETH supply, invariably more valuation of the native token. By implication, higher block space from 12.5m to 25m creates deflationary pressure.

Implications And Risk

Hard To Debug

The current EIP-1559 code specifications return a user’s maximum FEE CAP value as the gas price before the transaction is mined into a block. After the block has been mined, the gas price field changes to be the base fee. These changes on time and the state of blockchain possess a new challenge for decentralized app developers. Usually, a developer trying to debug their code runs into issues if the behaviour of the blockchain changes. To that effect, the changes associated with EIP-1559 code specifications comes a new debugging challenge.

According to Micah Zoltu, an independent developer, during an All Core Developers meeting said; 

“Any time you’re debugging an issue and the behavior changes based on when you look at it, that becomes a very, very hard bug to debug. I suspect that most users and Dapp developers and library authors and whatnot probably are not watching closely on these things and they will not realize that there’s a change in behavior and the gas price field,” 

Monopoly Pricing And Miners Attack

The base fees are burnt while the miner's tips are sent to miners to include transactions in a block. Miners can sometimes monopolize pricing. This is a case where they set a minimum tip to receive. They can agree to refuse, including transactions with a certain tip on the block. Meanwhile, a good percentage of miners may not be interested in such a strategy.

EIP-1559 And Miners

The EIP-1559 has some effects on miners. Before explaining further, let's understand that, unlike the current Ethereum network where miners receive block rewards and gas fees for every block mined, the EIP-1559 only rewards miners for particular tips. That means that with the current block capacity of 12.5M, the miners will be losing more. Still, when the block space increases to complete 200% and the base fee rises and is burnt, thereby reducing the supply and increasing the value of ETH, the miner's tip will compensate for other losses.

EIP-1559 And Users

One of the prevailing myths about EIP-1559 is that it will reduce transaction fees. The fact is that it may or may not. Still, the primary aim of EIP-1559 is to deploy a complex economic model to solve the unpredictability of the current transaction model. Besides that, it aims to provide a better monetary policy for users and the network. This way, it reduces the supply of ETH, the native token of the protocol, such that it becomes more attractive to investors.
Since the network's capacity is increased from 12.5M to 25M, the network has more block space. The more utilized the block space is, the higher the base fee to be burnt. This goes a long way to help improve monetary policy.
Simply put, EIP-1559 helps make a more predictable transaction fee possible, unlike the current transaction model where users bid. It ensures a refund if the Fee Cap is more than the Maximum fee and gives feedback to the network when the base fee is burnt.

Conclusion

EIP-1559 is a widely debated Ethereum improvement proposal. It comes with so many advancements and improvements to the Ethereum protocol. They include deploying a more complex economic model and real-time blockchain usage to allow DApps and wallets algorithmically determine fees using the base fee, Fee cap, and priority tip benchmarks. It also increases the network capacity and monetary policy because it makes ETH more attractive to investors and positions it for better market competition in the long run.

You may also read on our latest publication Nexus Mutual.


Opyn: DeFi's Options Protocol

What Is Opyn?

Opyn is an Ethereum based decentralized Options trading platform, which allows you to buy, sell and create Options. It is a trustless and permissionless insurance platform that protects user’s decentralized finance (DeFi) assets from risks.  There are three categories of Opyn users which are:

Basic Terms On Options Trading

To understand Opyn and how it works, you must understand some terms associated with DeFi and Options trading. Below is an explanation of the words.

What Are Options?

Options are the contract that gives you the right to buy or sell an underlying asset at a set price within a particular time frame. It is not a must to purchase or sell the underlying asset at the expiration time. You can decide to honor the contract or not.

We have two types of Options which are Call Options and Put Options. Option buyers are known as holders, while Option sellers are known as writers.

Call Options

A Call Option contract gives you the right to buy a specified asset at a set price within a particular time frame. You have a choice to either accept or not, as the contract does not make it compulsory for you to buy at the expiration time. A Call Option could be a Call Option buyer or a Call Option seller.

Call Option Buyers

A Call Option buyer is also known as a “Call Holder”. As a call holder, you can decide to exercise the right to buy an Option contract or not. To have the right to buy, you will pay a fee to the Option seller called the Premium.

Call Option Sellers

A Call Option seller is also known as a “Call Writer”. As a call writer, you must sell an Option contract to the buyer if he or she exercises the right to buy at the strike price. 

Put Option

A Put Option contract gives you the right to sell a specified asset at a set price within a particular time frame. You have a choice to either sell or not, as the contract does not make it compulsory for you to sell at the expiration time. A Put Option could be a Put Option buyer or a Put Option seller.

Put Option Buyer

A Put Option buyer is also known as a “Put Holder”. As a put holder, you have the right to sell an Option contract but are not obligated to do it. You can decide to exercise your right to sell or not. 

Put Option Seller

A Put Option Seller is also known as a “Put Writer”. As a put writer, you do not have an obligation to buy the underlying asset at the strike price. 

Premium 

The money an Option buyer pays to the Option seller to buy a contract is called a Premium. It is the income a seller gets for selling a contract. 

Bid Price

The “Bid price” is when a buyer is willing to pay a specific price to own an Option contract. 

Ask Price

The “Ask Price” is the price at which a seller accepts to sell an Option contract. The money you are willing to pay to buy an option contract is the premium.

Strike Price

When exercised, the price at which a seller can sell an Option contract or buy an Option contract is the strike price.

In The Money (ITM)

This term is different for both the Call Option and the Put Option. For the Call Option, ITM is when the current price of an underlying asset is greater than the strike price. While for the Put Option, ITM is when the current price of an asset is lower than the strike price.

Out Of The Money (OTM)

For a Call Option, OTM refers to the position where the strike price is greater than the current price for an asset. While for a Put Option, OTM is when the strike price is lower than the current price for an underlying asset.

At The Money (ATM) 

ATM is the same for both Put and Call Options. It refers to the position where the price of an underlying asset is the same as the strike price.

Example To Explain Options

Rich wants to sell 1 ETH for 3,000 USDT before 10 am on May 28, 2021. Stone is willing to buy 3,000 USDT for 1 ETH at Rich’s request. Rich pays Stone 5 USDT for having the right but not the obligation to sell his ETH. After the expiry date of May 28, 2021, Stone must buy from Rich if he decides to sell. If Rich doesn’t sell, he only loses 5 USDT and keeps his 1 ETH while Stone keeps his 3,000 USDT plus the 5 USDT. 

In the above example, 

Reasons For Using Option

The reasons for using Options differ for people. People use Options basically for:

  1. Risk management: People use Options to reduce losses that can occur from volatile assets such as ETH. 
  2. Income generation: When an Option expires, it becomes worthless. The worthlessness results in income generation.
  3. Speculation:  A user can predict the future price of an asset. The prediction can help an Option holder not invest a large percentage of their money in the asset but still profit if the Option closes in the money.

Step By Step Guide For Using The Opyn Platform

  1. Download a wallet such as Metamask and register.
  2. You have a phrase seed while registering, ensure you keep it well because that is the only way you can access your wallet during a loss.
  3. After registering, click on dApps in Metamask wallet.
  4. Search for Opyn.co.
  5. Click on the icon at the top right corner.
  6. You should connect your wallet, select Metamask from the Options to allow Opyn to have access to your wallet.
  7. A dropdown menu shows on the top left corner of the screen. Select the Options you want to perform and the expiration date you want for your Options.
  8. For instance, if you selected the Buy Call Option. 
  9. Choose your preferred strike price.
  10. Type your position size in the order box.
  11. Select the approve USDC button and confirm your selection. 
  12. Then, select buy oToken and confirm your selection. 
  13. Select done.
  14. Go to your dashboard to verify your trade.
  15. You just bought a Call Option.
  16. The same steps above apply for buying a Put Option. 

To sell Call Options and sell Put Options, you should follow the steps below:

  1. Follow the steps above from one to seven.
  2. Select a sell Put Option, for instance.
  3. Select your preferred strike price.
  4. Enter your position size in the order box.
  5. Select approve wETH (Wrapped Ethereum) button, and confirm your selection.
  6. The wETH serves as collateral for the trade.
  7. Select the issue oToken button, and confirm your selection.
  8. Then, select the approve oToken button, and confirm your selection. 
  9. Select sell oToken and confirm your selection.
  10. Go to your dashboard to verify your trade.
  11. The same steps above apply for selling a Call Option.

How To Reduce Or Cancel A Trade Before Expiration

  1. Locate your Opyn dashboard.
  2. Select the position you want to close on the active positions tab.
  3. Input the oToken quantity you wish to reduce or cancel.
  4. Click on “Buy Back” and confirm.
  5. In the close position box, input the oToken quantity again.
  6. Click “Burn and Withdraw” and confirm.
  7. Use Etherscan to ensure your transaction.

Conclusion

Opyn is an Ethereum based decentralized, trustless, and permissionless Options trading platform, which allows you to buy, sell and create Options. It is flexible, secured, and easy to use for three categories of users - sellers, buyers, and market makers to ensure against financial and technical risk in a DeFi, and also help users generate income.

With Opyn, you can buy and sell a call option, or buy and sell a put option. To start trading options using Opyn, you can use the guide in the article.

Also, read about Hegic Protocol.