VEN: An Overview of VEN and Concerns about VeChain’s Proof-of-Authority

On June 24, we published an in-depth analysis of the VeChain network and the VEN digital asset to our client base. VeChain is a project that attempts to use the immutability of blockchains to store supply chain data and is set to launch its mainnet on June 30. The report includes an overview of VeChain’s software and system architecture, an examination of the project’s history, and an analysis of risks facing the project.

There are three tokens related to VeChain: VEN, VET, and VTHO. VEN is the ERC20 placeholder token issued to ICO participants. When the network launches on June 30, VEN tokens will be exchanged for VET tokens at a rate of 1:100. VET tokens will be used as a medium of exchange and determine stakeholder voting power. The VTHO token will be VeChain’s equivalent to the concept of gas in Ethereum; a unit that represents computational costs.

The VeChain client, “Thor Core,” was designed to store supply chain data and execute applications based on smart contracts. The client is largely based on Geth, the Go implementation of the Ethereum protocol, but with changes to support an alternative consensus algorithm called “Proof-of-Authority,” where stakeholders must maintain a minimum balance of VET tokens to engage in protocol governance. A key concern of this structure relates to blockchain bloating, a potentially unmanageable increase in the size of the blockchain. For example, an archival Ethereum Geth node requires nearly 1TB of space, which impedes certain machines, such as most retail laptop computers, from participating in the network. VeChain may suffer from a more severe problem because the storage requirements for supply chain management systems are arguably more onerous than the average Ethereum smart contract. This poses a threat to the use of VeChain Thor for the intended IoT applications and complex supply chain management systems. This issue was not addressed in the project’s 114-page white paper.

There are also potential economic and centralization issues associated with a Proof-of-Authority consensus algorithm. First, it relies on a validator’s public identity and reputation. If a validator misbehaves, it is excluded from the network and its public reputation is tarnished. However, there is no collateral forfeiture or “punishment” other than loss of reputation. Second, the structure of Proof-of-Authority often leads to high levels of centralization. It is reasonable to assume that, under this system, the VeChain Foundation will ultimately control the consensus process and how the protocol evolves. Whether decentralization is required for what the project is trying to accomplish comes down to one’s philosophical beliefs about decentralization and the value of censorship-resistance.

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