VeriBlock deep dive
VeriBlock (VBK) has made waves not only within the altcoin speculator / investor communities — it has also made waves within the Bitcoin community through its specific use case for the Bitcoin block space and OP_RETURN functionality.
So far we have not seen many deep analyses of the implications the new cryptocurrency poses.
Reason for existence
The 2017 surge within the crypto asset scene facilitated major growth in the hardware infrastructure behind the projects that have their own Proof of Work blockchains. The subsequent price drop in 2018 weakened the networks, as it stopped being economically viable to secure them using own hardware.
This has caused several effects:
- large amounts of cheap hashpower
- lower blockchain security
- exploitation of any weakness using the cheap hashpower
That is the cause behind mounting 51% attacks in 2018 and 2019.
There are two main ways to 51% attack a blockchain and try to reap profits from it:
- Send two conflicting transactions in rapid succession into the network. This is called a race attack.
- Pre-mine one transaction into a block and spend the same coins before releasing the block to invalidate that transaction. This is called a Finney attack. => This is how exchanges are usually attacked.
VeriBlock exists to not only protect itself from these attacks, but also protect other altcoins and exchanges.
I will also try and reason why VeriBlock itself needs a coin.
According to VeriBlock LinkedIn page, the first founders have started working on it in January 2015. The co-founders include Justin Fisher and Maxwell Sanchez. This was the quiet launch. Maxwell Sanchez has been developing Curecoin since 2013.
The most interesting investors/advisors (to me) are
- Bo Shen, partner in FenBuShi Capital
- Bill Shihara, CEO of Bittrex
- Anthony Di Iorio, CEO of Jaxx
- Jeff Garzik, CEO of Bloq
Full list of investors and advisors is posted on the official web.
Bill Shihara has a good long term reputation in the scene. Bittrex was launched in 2014 and hasn’t been (publicly) hacked so far.
FenBuShi has been one of the most prolific investors in the cryptoasset scene, with 52 projects in the selected portfolio on their website.
Anthony Di Iorio is one of the co-founders of Ethereum and CEO of Jaxx.
The main controversy comes with Jeff Garzik, a Bitcoin Core contributor throughout 2013/2014. His long term inactivity culminated in getting expelled from contributing to the Bitcoin Core repository. This was due to collaboration with Segwit2X, one of the 2017 Bitcoin hard fork hijack attempts.
Overall though, VeriBlock is backed by personas with fairly positive impact on the scene. They have been building products with real traction for years now.
The first public mention of VeriBlock was a thread on Bitcointalk, announcing a series of testnets over 2018. The testnets were to reflect mined balances into mainnet, to incentivize miners to stress test the ecosystem.
After the announcement, there were two public testnets. The first one under the name Sunrise mined Proof of Proof (PoP) blocks onto Bitcoin testnet, which launched on July 11 2018. The second testnet under the name High Noon then moved Proof of Proof mining to Bitcoin mainnet on September 14 2018. We will go more into depth on what that entails later into the article. The main takeaway is that VeriBlock PoP miners started PoPing real Bitcoin transactions in late Q3 2018. This is when PoP miners started incurring real costs on their mining, instead of using “free” testnet Bitcoins.
The VeriBlock network has moved to mainnet on March 25 2019. Transactions are turned off until April 5th. Until then, it is only possible to mine new coins.
VeriBlock runs on a mixed Proof of Work / Proof of Proof consensus algorithm.
The Proof of Work part is straightforward — the algorithm is called VBlake, a custom implementation of Blake algorithm, which has been used in many cryptocurrencies to date. Blake algos are ASIC friendly. Blake14r, Blake2b and other versions already have ASICs. The first FPGA for VBK has been released on March 29 2019. This is a stepping stone to ASICs.
This implies classic miner economics — (GPU) miners switching to and from VBK as the profitability changes. VBlake is a fairly stable algorithm that does not wreck cards. At the time of writing, it isn’t possible to rent out mining rigs through miningrigrentals or nicehash.
You can find current difficulty and hashrate on the explorer page here.
Please note the change of PoP bitcoin PCT. The first snapshot was taken on a Monday morning. The percent was much higher due to less bitcoin transactions over the weekend. As the regular Bitcoin utility picks up on weekdays, PoP transactions become less competitive.
Proof of Proof (PoP) is explored deeply in the whitepaper, which was released in the bitcointalk thread mentioned above.
In it’s most basic form, PoP is a 51% attack prevention mechanism. It allows VeriBlock to stay safe from potential double spend and race attacks.
It does this through saving the latest VeriBlock blockchain states onto the Bitcoin blockchain using the OP_RETURN function in Bitcoin.
PoP miners are incentivized to post these snapshots by a part of the VeriBlock block reward (officially 82.5 VBK per block, in reality the rewards are a bit lower, around 80–81 VBK).
The proof of this state is ca. 80 bytes in a bitcoin transaction. PoP miners send empty transactions with these proofs, which are then saved to the Bitcoin network. One entire Proof of Proof therefore costs a miner one Bitcoin tx fee.
The PoP rewards are unevenly split among the miners. The sooner one posts a PoP into a BTC block, the higher the reward. The lower the bitcoin fee they use, the lower the costs. In the end it’s a balance — PoP miners can overpay for endorsing blocks and have higher breakevens, but if they undershoot the fee, they don’t get in the next BTC block and don’t receive the best possible rewards.
The miners currently explore their options.
Is it better to FOMO PoP with the highest rewards and highest fees?
Is it better to scan the VBK blockchain for blocks which lack proper PoP coverage and PoP backwards?
Is it interesting to save your PoPs for lulls in Bitcoin network activity?
Or does one want to PoP 24/7 and disregard the fluctuating transaction costs?
Why did VeriBlock latch onto Bitcoin as the blockchain of choice to use for protection? Since Jeff Garzik, one of the investors has been identified as a proponent of big blocks in Bitcoin and supported Segwit2x and other efforts, one would expect VeriBlock to maybe think about using Bitcoin Cash for its Proof of Proof.
In reality, Bitcoin Cash hashrate is laughable in comparison to Bitcoin. If VeriBlock becomes a sufficiently successful project, it becomes a target. Attacking Bitcoin Cash is not probable due to the sheer hashrate it commands, but it is not impossible.
As seen in the picture above, only between 2–3% of Bitcoin hashrate would be necessary to take over 51% of the Bitcoin Cash hashrate. That is completely plausible for short term duration.
VeriBlock simply cannot risk being protected by an inferior network using the same infrastructure (both BTC, BCH and BSV use the same hardware).
Protection using a different network with different hardware is another question. One can easily imagine versions of VeriBlock PoPing onto Litecoin, DASH or even multiple strong blockchains at the same time, without losing its major security proposition.
The absolute numbers in hashrate are not as important as the raw amount of hardware used to secure the network.
Quick back of the napkin calculations with NotSoFast gave us the figures or about 1.5 million physical units protecting Bitcoin, 0.6 million units protecting Litecoin and 0.1 million units protecting DASH, as the biggest ASIC based Proof of Work networks. These are all mutually exclusive machines that cannot be used for any other algorithms.
These figures point to Litecoin being about 40% as secure and DASH about 10% as secure as Bitcoin. DASH does have ChainLocks active, which limit 51% attacks using its Hypernode system, however. More on that deeper into the article.
Proof of Proof on altcoins
VeriBlock PoPing its own blockchain onto Bitcoin is only one part of the puzzle. The main premise behind Proof of Proof is to protect other altcoins from 51% attacks using VeriBlockas a proxy to Bitcoin.
An altcoin would implement PoP and latch onto the VBK chain, where it posts PoPs of its own blockchain state.
To submit altcoin PoP’s onto the VeriBlock blockchain, it will be naturally necessary to pay VBK transaction fees, bringing utility to the coin itself.
To facilitate this, PoP transactions take up less space (64 bytes instead of 80) on the VeriBlock blockchain.
51% attacks are a significant threat for any project with its own blockchain. Ethereum Classic has been the largest chain by marketcap to have been attacked so far. Dozens of coins get attacked every week, with protection solutions scarce. Main competitors in the segment of 51% attack protection as-a-service are:
- Komodo DPoW, which is a centralized solution, qualitatively very similar to PoP.
- PIRL PIRLGUARD, which has not been tested on other algorithms than ethash. It has a history of successfully stopping 51% attacks. Does not address race attacks.
Individual projects have come up with different solutions to the problem. DASH implemented ChainLocks (quorum of masternodes agrees on block states), Horizen implemented Penalty System (hidden mined blocks are penalized, similar to PIRLGUARD).
Exchange Early Attack Detection Mechanism
Bittrex plans to use VeriBlock as a prevention tool against potential rollbacks. We have been told there have been quite a few of them historically. They were all quietly resolved in the background without harming the users, but costing the exchange significant amounts of money.
It is easy to spend medium amounts of Bitcoin PoPing. At the time of writing, around 9 bitcoins a day are spent on PoP mining. The transactions go directly into the mempool and sign messages, therefore there is no counterparty to the transaction.
The PoP miner receives “clean” VBK coins.
Since the VeriBlock PoP transaction carries the return address for the eventual VBK rewards, it should be possible to track back the tainted VeriBlock coins in time. Exchanges or users wary of tainted VBK will have to monitor for these tainted coins.
The implications are unclear for now, but VeriBlock PoP mining might become an interesting avenue to launder dirty bitcoins for a short period of time.
Bitcoin tx fee floor
VeriBlock creates a constant stream of demand for the Bitcoin block space, making it more valuable. This demand does not stop over the weekends or holidays, making use of the 24/7 uptime of Bitcoin. Stretching this argument, could argue that VeriBlock gives Bitcoin a fee floor, which means “constant” revenue for miners in the long run. By 2024, the annual inflation of Bitcoin will be below 1% per annum. This means Bitcoin miners will expect a significant part of their revenue stream to come from transaction fees. VeriBlock enables this to an extent.
Economics of Proof of Proof
VeriBlock PoP mining is a commodity market, where the commodity is the limited Bitcoin block space and the margin is defined by VBK coin price.
The amount of PoP “spam” on Bitcoin is defined by several variables:
- the need of the other users to transact their BTC elsewhere
- the VBK coin price
- the PoP miner efficiency and sophistication
Put differently, the amount of block space used by VeriBlock is a function of two things: sat/VBK price and sat/B estimated transaction fee on BTC.
As seen in the screenshot above, PoP miners currently take up 5–30% Bitcoin transactions.
At current rates, the average price of one VBK is therefore around 4000 satoshi for these miners to break even. Based on individual users’ efficiency, this can be higher or lower. The above calculation forgoes failed PoP transactions, which do not net any reward. Based on discussions with PoP miners, these costs are around 20% on top of the regular PoP costs.
As shown in the graph below, the costs of VeriBlock Proof of Proof have been steadily growing since High Noon testnet launch.
Why does the VBK coin exist?
VBK as a reward for PoP mining is an incentive to decentralize the Proof of Proof system.
In Komodo, which is a system very similar to Delegated Proof of Stake, the Notary nodes automatically put their OP_RETURN proofs into the Bitcoin blockchain just by the virtue of existing. These nodes get their rewards by securing the DPoS system. New coins can join DPoW only by requesting the developers, who then add the coin to the protection umbrella. Interestingly, the Notary nodes (users) have no say in this.
This is not viable in a Proof of Work system, which is decentralized. The users need an incentive to put VBK blocks into the Bitcoin blockchain. Thus, PoP rewards exist.
Similarly, one would expect altcoin implementations of PoP to either incentivize their users to PoP onto VeriBlock (by a part of the altcoin block reward?), or they come up with their own centralized solutions.
Impact of PoP on Bitcoin
Average Bitcoin transaction fees were slowly drooping over 2018. It was already possible to send 1 sat/byte transactions in March 2018 by being patient and waiting for lulls in the mempool (such as weekends and early European mornings). Those times are gone. Transaction fees have been settling in double digit satoshis during EU/US daytime.
Bitcoin is mostly used for traditional transactions on weekdays. The fees are generally lower on weekends. We will continue to see an influx of cheap PoP transactions on weekends, when the higher number of cheaper tx’s is more efficient.
We can see a clear trend upwards in the Bitcoin mempool size since VBK has launched. In 2018, PoP transactions were quietly filling up Bitcoin blocks with low fee transactions. The users PoPing right now are overpaying in comparison to both testnet prices and Initial Exchange Offering (IEO) prices, however, that is natural due to higher confidence. The confidence comes from the developers specifying the terms of the IEO and the underlying coinomics.
The VeriBlock Wikipedia has fairly good resources that we can use to break down the emission and distribution of VBK coins.
The specific reasoning for the surge in Bitcoin network activity through PoP came with the release of the coinomics on March 25th. Similarly, the VBK PoW difficulty is hovering above 5x the top difficulty of testnet mining. This might also be cause by the development of FPGAs, nevertheless the market is betting much higher stakes on the price of VBK coins than previously.
In the pictures above, we see the specifics of the distribution. Let’s break it down.
The testnet miners
The first distribution of coins to the public happened with the mainnet snapshot. Users who mined coins during testnets had their addresses snapshotted and received a mirrored amount of coins to them. The total amount of coins these testnet speculators will receive is doubled, however. After a lockup period of one years, the second half of the coins is to be released once a month for three years to the same addresses, in 1/36 tranches.
The mainnet miners
Right now, the miners receive their coins directly to their wallets and are unable to move them until 5th April. Current breakevens for miners are way above Bittrex Initial Exchange Offering (IEO) prices. PoP prices are fairly easy to evaluate — the costs to mine 1 VBK coin hover around 3000–4000 satoshi, about 2x from IEO price. PoW prices are opaque as usual — they depend on electricity prices and the underlying hardware, however the difficulty compared to testnet is much higher, pushing costs at least to IEO prices.
The company and Founders
The VeriBlock Coin Distribution shows that the company currently holds 137.5 million active coins ready to sell/move/use. They sold 70 million in the Bittrex IEO and 40 million have been sold in OTC through the Bittrex International OTC desk. This leaves them with about 27.5 million coins in their war chest ready to sell.
The team has raised 7 million dollars in Bitcoin during the sale, plus an undisclosed amount in the OTC sale. The team has disclosed that they sold a 40 million coins at half the IEO price (5 cents). That comes up to 2 million dollars.
The rest of their coins will be released starting April 2020 in slow, small tranches, same as the Founders/Advisors (consider that at least some of the advisors are also investors).
Overall, the team’s money is intelligently distributed and they should not run into financial issues any time soon thanks to their vesting scheme.
This is a so called “community pile” by the developers. The coins will be used for bounties, grants and community rewards. All bounties rewarded for testnet contribution (such as setting up pools, community development, etc.) have been presumably paid from this section of the funds.
Marketcap is slowly, very slowly, becoming an obsolete metric, however, it’s still the most utilized approximation of market size for cryptoassets.
It’s also the simplest metric to use, so we will stick to it for now.
At IEO valuation, the VeriBlock is currently worth 28 million dollars based on the circulating, liquid supply. 9 million dollars were collected in IEO and OTC sales from the Company war chest. This implies the distribution of 110 million coins to fresh holders.
Testnet miners hold another 56 million liquid coins.
Mainnet miners have mined ca. 6 million coins so far, with about 475 000 coins emitted every 24 hours.
The Future initiatives fund (89 million coins) is liquid, however, it should be funding community efforts over a long period of time. I do not expect it to be liquidated quickly. All testnet bounties have been paid out from the “Community” section.
In reality, at most 170 million coins are liquid and all of them are in the hands of community. All the coins the team has planned to sell have been sold. Any price discovery after the transactions are unlocked is purely in the hands of the market.
This puts the effective marketcap:
- official OTC prices — 8.5 million dollars (daily inflation 24,000$)
- IEO prices — 17 million dollars (daily inflation 48,000$)
- PoP breakeven prices — 34 million dollars (daily inflation 95,000$)
- PoP breakeven prices + 20% failure overhead — 41 million dollars (daily inflation 114,000$)
- PoP + overhead * 100% margin — 82 million dollars (daily inflation 228,000$)
VeriBlock currently offers the best prospective 51% attack protection mechanism in the cryptoasset scene, while retaining the positive free market incentives we all know and love from Bitcoin. The system has been designed to stay decentralized and healthy, while rewarding users more for playing by the rules than by trying to break them.
The company is sitting on a sizable war chest, while retaining enough coins to create bounty and grant programs.
Meanwhile, the market is not oversaturated with coins and the inflation is not prohibitive.
For an even deeper dive, I suggest joining the VeriBlock Discord server. The team is always online and encourages every type of discussion.
The rules are simple.