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However, all of them are still in the experimentation phase. Nevertheless, this post describes Proof of Location services, compares them against existing solutions, lists potential application fields for them and concludes with some open issues. Implementation examples are provided based on FOAM.

In the context of Proof of Location services, three types of maps exist:

• Commercial maps: Commercial maps are centrally maintained by organizations. Examples are Google Maps and Foursquare.
• Non-blockchain-based open-source maps: Non-blockchain-based open-source maps (hereinafter referred to as just open-source maps) are maintained by a community of voluntary individuals (cartographers). The most prominent example is OpenStreetMap.
• Blockchain-based open-source maps: Like open-source maps blockchain-based open-source maps (hereinafter referred to as just blockchain-based maps or Proof of Location services) are maintained by a community of voluntary individuals.

Based on that, the differences between open-source and blockchain-based maps as well as the issues of commercial and open-source maps that blockchain-based maps try to solve, are explained below.

Blockchain-based maps are community-driven, open source, and semi-free

Blockchain-based maps are community-driven, open source, and semi-free. Through that, they are maintained by a broader range of people, have fewer restrictions and distribute rents more fairly. The following section explains each of these concepts in more detail.

Community-driven allows more people to curate and verify maps

One of the focal points of Proof of Location services is that their maps are community-driven.
This allows more people to curate and verify maps. As such, this stands in contrast to commercial maps where only the governing organizations can curate and verify geospatial data.

Less restrictive through open-source

Moreover, because blockchain-based maps are open-source, hardly any usage restrictions exist. Thus, for instance, developers can access the raw geodata to experiment with new routing algorithms for navigation software. Again, this stands in contrast to commercial maps. Commercial maps are proprietary and come with restrictions and requirements. Besides individual usage preconditions (i.e. the Terms and Conditions), there are copyright restrictions, inextricably linkage to certain applications (e.g. Foursquare’s POI cannot be used outside Foursquare) or the lack of access to the raw geodata.

Fairer rent distribution through semi rent-free payment model

Further, commercial and blockchain-based maps have different economic models. Commercial maps are either fully paid or semi-free. Semi-free commercial maps like Foursquare are semi-free because they do not cost money, but people pay indirectly through their data. In contrast, the payment model for blockchain-based maps differs based on the accessing actor. Generally speaking, there are three actors: users, curators, and members.

1. Users: Users are those actors that use maps to look up objects. For them, blockchain-based maps are free.
2. Members: Members are entities that want to be included on the maps as POIs. The POIs in blockchain-based maps constitute an exclusive list. In order to become part of this list, POIs must pay a fee. The concept behind such exclusive lists is called a token-curated registry. [1]
3. Curators: Curators are entities (people or machines) that contribute something and are rewarded for their work. A common contribution is the curation of POIs (see below).

Thus, although Proof of Location services per se or their creators do not incur rents, blockchain-based maps are still only semi rent-free because curators (who might be the creators) earn rents. However, because curators are rewarded and the creators not necessarily, one might argue that blockchain-based maps still distribute rents more fairly than commercial maps where all rents are collected by the map creators.

Furthermore, this incentivization of curators is one of the crucial aspects that differentiates blockchain-based maps from open-source maps.

Incentivisation in Proof of Location services

As indicated above, Proof of Location services incentivizes curators to maintain them. This is an essential difference to open-source maps whose adoption struggle exactly due to this lack of inherent incentives.

Asides that, in Proof of Location services curation is needed in three areas:

Curation areas in Proof of Location services

1. Community-based curation of static geospatial data (POIs)
2. Maintaining hardware nodes that enable alternative navigation systems for dynamic geospatial data
3. Validating dynamic geospatial data

Four pillars that constitute Proof of Location services

These three curation areas are also three of the four pillars that make up Proof of Location services:

1. Community-based curation of static geospatial data (POIs)
2. Maintaining hardware nodes that enable alternative navigation systems for dynamic geospatial data
3. Validating the location of dynamic objects
4. Location encoding to bring geospatial data to blockchains

The following section explains each of these building blocks in more detail.

Location encoding to bring geospatial data to blockchains

Similar to an oracle, Proof of Location services enable the integration of verifiable and tamper-proof geospatial data to blockchains. Prior to them, such an integration was impossible.
The following list shows applications where verifiable and tamper-proof geospatial data is useful. It must be noted that the list does not contain new applications, but rather improved versions of existing ones.

Ride-sharing: Verifying driver locations

In vehicle sharing networks drivers can spoof their GPS-based location to charge higher fees. Verifiable and tamper-proof locations would prevent such fraud.

Data and supply chain management: Verifying the location of data and products

Verifiable and tamper-proof locations could verify the true location of goods along the supply chain.
Similarly, Proof of Location services could ensure that data (e.g. evidence pictures) was truly captured where it is claimed.

Compliance with local laws

When securely knowing customers’ locations, businesses could fully comply with local laws.

Location-based business cases

Through tamper-proof locations, companies can offer location-based products without “location fraud”. One example are location-based car insurances.

Location-based rewards

Verifiable and tamper-proof locations enable a more trustful collection of location-based rewards. Examples include cryptocollectibles, wages, loyalty points, and toll reductions.

Location-based cryptocollectibles for games

Proof of Location Services can help build games where users hunt for cryptocollectibles (unique digital collectibles, and one of many cryptoeconomic primitives) constrained to specific locations. Because the gamer’s location is verifiable and cannot be spoofed unlike with GPS, games are truly location-based. As such, fully tamper-proof Pokemon Go variations are finally possible.

More about cryptocollectibles here.

More about cryptoeconomic primitives here.

Location-based wages

Another type of location-based reward is wages. Payments in form of cryptocurrencies can be designed in a way that they can only be collected at a defined location (e.g. workplace). Again, as the worker’s location is verifiable and tamper-proof, fraud is minimized.

Location-based rewards to incentivize store visits

Companies can steer customers to certain stores by attaching rewards such as loyalty points to predetermined stores.

Location-based rewards to manage traffic flows

Similar to the incentivization of store visits, city planners can steer traffic to specific routes by placing rewards (such as fractional toll reductions) along them.

Community-based curation of static geospatial data (POIs)

Static geographical data or POIs refer to hardly changing concrete or virtual locations. Concrete locations are objects like stores or restaurants, and virtual locations are classified based on the activities happening there. Examples for virtual locations are traffic bottlenecks or areas with increased criminal activity.

Commercial and open-source maps have troubles curating such POIs (due to lacking incentives and the sheer amount of POIs). Proof of Location services, by combining financial incentives and open-source, try to combat these downsides.

Non-blockchain-based maps have troubles maintaining POIs due constantly changing POIs and lack of incentives

As indicated above, POIs are mostly centrally curated by commercial companies such as Google and Foursquare. As POIs change constantly (e.g. businesses move), centralized entities have troubles keeping them up-to-date. Open-source alternatives, which are maintained by a larger group of curators, could combat this through greater manpower. However, they fall behind because incentivizing curators, like in any open-source project, is difficult.

In this regard, blockchain-based maps are similar to open-source maps; they can keep up with constantly changing POIs through their large member bases. However, in contrast to open-source maps, with token-curated registries, blockchain-based maps have found a way to incentivize curators.

Token-curated registries are blockchain-based methods (one of many cryptoeconomic primitives) to incentivize the curation of high-quality lists by decentralized entities. Such lists contain items that meet certain criteria. In the case of Proof of Location services, the lists are the POIs, each item on this list is one POI, the criteria can be the POI type (e.g. sights) and the decentralized entities are the cartographers. As such, combing combining financial incentives and open-source, Proof of Location services could theoretically motivate enough people to keep POIs up-to-date.

More about token-curated registries here.

More about cryptoeconomic primitives here

Related to the curation of static geospatial data, Proof of Location services are working on navigation system alternative to GPS which are tamper-proof and whose location information can be validated.

Building tamper-proof and verifiable navigation system alternatives to GPS for dynamic geospatial data

Besides the fairly static POIs, Proof of Location Services want to capture dynamic geographical data as well. Dynamic geographical data refers to moveable objects such as cars or people.
Traditionally the position of such objects is captured with the
navigation system GPS. However, Proof of Location services consider GPS unsuitable for blockchain-based location data, because, among other things, the following reasons:

• Insecure and prone to failure: GPS is insecure and prone to failure due to its centralized organization
• Limited range: GPS does not work indoors or underground
• Energy-intensive: The battery drain of GPS makes it unsuitable for small devices such as microcontrollers. This is particularly important in IoT-related applications such as access controls for cars and many other areas in the Automotive & Mobility industry.
• Not tamper-proof: GPS is susceptible to spoofing
• Inaccurate: GPS’s 5 to 15 meter precision is considered too inaccurate

Thus, Proof of Location services are working on navigation system alternatives to GPS which ought to be tamper-proof (e.g. insusceptible to spoofing), more reliable (due to decentralized hardware), wider-reaching (e.g. also indoors or underground), less energy hungry, and more accurate.

As such, FOAM, for instance, proposes LoRa as an alternative.
LoRA is a low-energy wireless transmission technology for long-distances. A LoRa-based navigation system would more reliable (because nodes are maintained by multiple entities and because LoRa nodes are easily replaced), wider-reaching (as it is satellite-free it works indoors or underground), and suitable for small devices (due to LoRa’s low-energy consumption).

However, to build a LoRa-based navigation system, FOAM needs multiple LoRa sensors (nodes). Instead of setting up and maintaining all nodes themselves, FOAM’s goal is to have node operators maintain them. As indicated above, FOAM will reward node operators via FOAM tokens.

Validating the location of dynamic geospatial data

Finally, FOAM wants the LoRa network to be tamper-proof. Similar to the maintenance of LoRa nodes, FOAM uses financial incentives to ensure verified locations of moving objects (so-called Verifiers receive FOAM tokens for verifying locations).

Open issues

Having said all that, one must not forget to weight in open issue for Proof of Locations services. The following issues are very broad and do not deal with implementation aspects. Thus if you have technical experience with blockchains or even Proof of Locations services, you might already be familiar.

User adoption required

Most obviously the success of Proof of Location services depends on whether enough users, curators (cryptographers or node operators), and members can be acquired.

In part, this depends on the height of the incentives curators earn. For instance, node operators (such as LoRa nodes in the case of FOAM) will expect a return at least equal to the costs of nodes.

Another reason hindering the acquisition of curators is simply lack of curators. If community-based blockchain applications where volunteers for maintenance are needed keep growing, we might encounter worker shortages. Similarly, depending on the complexity of curation tasks, Proof of Location services might simply not find enough qualified people.

Proof of Locations services still in the experimentation phase

For the sake of completion it must be mentioned that by looking at the different approaches of competing Proof of Locations services, one can observe that they are still in the experimentation phase. Among other things they are experimenting in regards to location sensors, security and privacy configurations, and bootstrapping methods,

Untested building blocks

Similarly, one must not forget that the building blocks of Proof of Locations services such as token-curated registries or blockchain governance models are also still in the experimentation phase.

Competing data and long-term oligopoly

Although the currently available Proof of Location services still show little to no traction, it is foreseeable that they will compete against each other. This competition also implies that competing geospatial datasets will exist. However, as there is little use in having different geospatial data (after all geospatial data is subjective — an object is either there or not), in the long-run the industry will lead consist of oligopolistic data providers. This again would result in a return to today’s situation where only a few companies govern the world’s maps.

Conclusion and final thoughts

Proof of location services serve two purposes. On the one side, they improve geospatial data (through more openness, fairer distribution of rents, incentivization and accountability, and verifiable truths). On the other side, they serve as blockchain building blocks by bringing geospatial data to blockchains. As such blockchain building blocks, they are not enabling new applications but rather improve existing ones. This might change in the future. However, currently, Proof of location services are still in experimentation phase and must first bootstrap their navigation networks and the required geospatial data.

Notes

[1] Token-curated registries are blockchain-based methods (one of many cryptoeconomic primitives) to incentivize the curation of high-quality lists by decentralized entities. Such lists contain items that meet certain criteria. In the case of Proof of Location services, the lists are the POIs, each item on this list is one POI, the criteria can be the POI type (e.g. sights) and the decentralized entities are the cartographers.

More about token-curated registries here.

Originally published at researchly.leobosankic.com on June 19, 2018.

Proof of Location: Geospatial data on blockchains was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.

Executive Summary

Most of the projects in the space range a still very young. The oldest (measured by when their token sale was finished) date back to September 2017. In that time about 25 ICOs were conducted that can be classified as belonging to the Automotive industry. At the same time, approximately 1100 ICOs were conducted in other industries. Similarly, the Automotive sector raised about $61 Million in that period, and all the other ICOs combined (excluding Automotive) raised around $9 billion.

View the data for yourself on Researchly

It should be noted that Researchly currently does not track all ICOs. However, because the sources that I track are industry-agnostic, it is reasonable to believe that the dataset does not contain a tendency towards an industry. Also, the above-noted funding data contains only finished ICOs. Additionally, as will be shown below, it is difficult to attribute one project flawlessly to one industry. Finally, it must be noted that I lack funding data for some projects from the Automotive industry. However, their presence won’t impact the significant difference to the rest of the market.

This being said, here are the themes that emerged from the projects.

Data

1. Separation between the data and the application layer
2. Location data
3. Digital twins
4. Data marketplaces
5. Decentralized machine learning

Mobility Operating Systems

1. Seamless mobility
2. Unique identity and access controls

Cars are becoming self-sustaining autonomous entities

Inclusion of cars into energy grids and wi-fi networks

Car- and ride-sharing

Industry-agnostic trends

1. Supply chains
2. Securing rental deposits
3. Connected Cars in the context of IoT
4. Micro- and instant-payments for in-car services and usage-based fees

Data

As expected, for many blockchain projects, data plays a huge role. One very common theme is the separation between the data and the application layer.

Separation between the data and the application layer

In most cases, data (e.g. driving patterns) produced by cars and mobility applications reside within the application that captures it (e.g. Google Maps). A range of startups is developing “mobility blockchains” that store all the data produced by cars and mobility-related services. The advantages differ based on the type of data, but generally such mobility blockchains make the data more open so that more people can utilize it more easily (e.g. build a P2P car sharing app without first bootstrapping drivers and passengers) and giving people more sovereignty over the data so that they can decide who uses which of their data and what the really truthful data is.

For starters, there is location data.

Location data

So-called Proof of location services are working on alternatives to existing maps such as Google Maps or OpenStreetMap by storing location data on the blockchain. This makes geospatial data manageable by outsiders (the community can verify and add locations such as points of interest) and fully publicly available (using commercial maps like Google Maps is bound to certain requirements and most commercial maps do not offer raw geodata for further experimentation). Furthermore, trusted location data enables the creation of virtual toll gates or precise location-based fees or taxes.

Companies working on Proof of Location inlcude Platin, FOAM, and XYO.

Read the full report on Proof of location services here

Storing vehicle information to create digital twins and manage vehicle lifecycle data

In addition to location data, blockchain-based car databases store car lifecycle data such as repair records, accident history, and mileage on the blockchain. This increases transparency (e.g in the market for used cars) and prevents fraud like odometer manipulation.

Companies working on blockchain-based car databases include VINChain and carVertical

Read the full report on blockchain-based car databases here

Data Marketplaces

As implied above, if the data is decoupled from the application that generates it, users can exchange that data more easily. This leads to the creation of data marketplaces. A range of startups is working on data marketplaces where individuals and organizations can trade mobility-related data. One interesting use of such data marketplaces is the accumulation of training data for autonomous cars in what is often called “decentralized machine learning”.

Decentralized machine learning for autonomous cars

Self-driving cars suffer from a geographical bias towards the area where they are manufactured and trained. A car manufactured and trained in the USA might have troubles driving on Asian or European roads. Data marketplaces with driving data from all around the world, can help combat such biases by providing the right data. Furthermore, a data marketplaces for driving data gives car manufacturers access to the huge amount of data needed to successfully train autonomous vehicles.

Companies enabling dece include Ocean Protocol, Streamr, and weeve.

Read the full report on decentralized machine learning for autonomous cars here

All-encompassing “Mobility Operating Systems” for seamless mobility and unified access and identity

Several startups are working on Mobility Operating Systems. Such Mobility Systems integrate all mobility providers (in the broader sense) into one network. Examples for mobility providers are providers of shared vehicles (car/biker/scooter sharing companies), payment processors and banks, mechanics, infrastructure providers (roads, tolls, parking spots, charging stations…), insurances, telco companies, public transportation, car manufacturers, and government agencies.

Companies working on Mobility Operating Systems are Mobility Operating System (Mobility OS) and Open Mobility System (OMOS).

Read more about Mobility Systems here

Seamless mobility

Such Mobility Operating Systems should make „mobility“ more open and frictionless. Frictionless centers around the idea to enable users to use one app to get from A to B despite switching between several payment processors, mobility solutions (e.g. cars, bikes, and public transportation), and tariff zones (e.g. traveling outside the city). This also implies that the communication between machines (e.g. cars and other cars or cars and toll stations) works similarly seamlessly. Open centers around the idea of separating the application layer from the data layer (see below).

Unique identity across services and devices and access controls

An all-encompassing mobility system also implies the existence of one ID (similar to a license) that allows access to all services without the need of multiple sign-ups. Moreover, this includes cars access management. On the one side, access management refers to the management of cars entering geographical areas (e.g. allowing cars to pass virtual toll stations based on the location stored on a blockchain — see below for more on location data). On the other side, access management refers to managing the access of people to cars (e.g. in a car sharing network, a smart contract can be given predetermined people access to cars for a predetermined period of time)

Cars are becoming self-sustaining autonomous entities

Autonomous cars are becoming increasingly mainstream. In addition to self-driving, autonomous cars are more and more seen as self-sustaining. They have their own wallets and can completely take care of themselves by earning and spending money autonomously (e.g. by participating in car sharing networks, deliveries or by contributing generated solar energy to earn money and by spending money on electricity or tolls and parking).

Inclusion of cars into energy grids and wi-fi networks

Some projects also proposed to turn cars into providers of energy and internet connectivity. Electric vehicles can feed their excess solar energy into the energy grid which can then be used by other entities. Similarly, because in the future most cars will be equipped with internet, they can serve as WI-FI hotspots when they are parked.

Car- and ride-sharing

Car- and ride-sharing is maybe one of the most well-known blockchain-based automotive use cases. There is not much to say about them except that several companies are working on them but have yet to show traction.

Industry-agnostic trends

For the sake of completion, some themes must be mentioned that are not specific to the Automotive & Mobility industry but that merit inclusion because they will affect it nonetheless.

Supply chains

The low real net output ratio in the automotive industry of down to 20% (i.e. 20% of a car is produced by suppliers)l merited the inclusion of blockchain-based supply chains in this report. The use cases are as diverse as the companies working on them, but in general, there are two broad categories: — Securely tracking what happens on-chain (e.g. the positions of seatbelts along the supply chain or inventory management) — Bringing physical items on-chain by assigning unique cryptographic ids to physical products (e.g. to combat counterfeits) (see also digital twins)

Securing rental deposits

Deposits for rental agreements (e.g. when renting a car) and their terms can be stored on a blockchain. In such a setting, funds and their terms are kept within smart contracts and only released if the contract’s terms are met. Moreover, blockchain governance models can be used to for decentralized dispute settling.

Connected Cars in the context of IoT

There are two categories of connected cars: connected in regards to direct consumers services such as streaming services (digital communication) and connected in terms of machine-to-X (M2X) communication, where the car communicates with other machines. Whereas digital communication is nothing new anymore, it was only in recent years with the emergence of autonomous cars that M2X is gaining importance. A range of startup is working on M2X to make it faster, more secure, and less complex.

Read XAIN — access control protocol for the mobility sector for one example of Blockchains and Connected Cars

Micro- and instant-payments for in-car services and usage-based fees

Blockchains allow for instant settlement of even the smallest value to several parties simultaneously and enable usage-based payments. Nearly every crypto startup from the automotive sector utilizes micro- and instant-payments. Common examples include usage-based insurance or tolls or the instant settlement of transactions in settings where multiple stakeholders are involved (such as in car-sharing networks to instantly distribute fees across insurances, car owners, payment processors, and authorities). Moreover, cars are becoming media centers; what can be done inside a car (e.g. streaming services) is becoming more and more important. Like in many other areas blockchain-based financial transactions (enabling micro- and instant-payments) are finding a use case here.

Originally published at researchly.leobosankic.com on June 11, 2018.

Blockchain in the Automotive & Mobility Industry: The Current State was originally published in CryptoDigest on Medium, where people are continuing the conversation by highlighting and responding to this story.

What is governance

Governance refers to all actions such as decision-making processes that are involved in creating, updating, and abandoning formal and informal rules of a system. These rules can be code (e.g. smart contracts), laws (e.g. fees for malign actors), processes (what must be done when X happens), or responsibilities (who must do what).

In the Blockchain space, there are three broad types of such rules which translate to different areas where blockchain governance is needed; blockchain or network governance, project governance, and fund governance.

Blockchain or network governance

Blockchain or network governance is needed to achieve network mining consensus through special algorithms. Typical algorithms are Proof-of-Work (PoW), Proof-of-Stake (PoS) and a hybrid of these.

Funding governance

Funding governance regulates how projects manage collected funds. Among other things funding governance defines:

• Funding source: Defines the funds’ source, i.e. where do funds come from (e.g. a cut of mining rewards)
• Funding amount: Defines how much funds are collected (e.g. 10% of all mining rewards)
• Funds Administrator: Defines who collects, spends, and keeps the funds
• Fund usages: Defines what should be done with the funds
• Reporting process: Defines how the fund usage should be communicated to the outside (e.g. through quarterly financial statements)

See Decred’s Funding governance for an example of Funding Governance

Project governance

Project governance deals with all topics related to the technology (i.e. the code), blockchain/network governance, funding governance, and meta-governance (i.e. changing the governance process itself). Technology-related topics include, among other things, blockchain parameters (e.g. changing block size or gas prices), fixing bugs, or adding new features.

Governance as a mean to achieve efficient change

The biggest motivation behind Blockchain governance is the goal of efficient change. In other words, the ability to fix issues as fast as possible and change where change is needed. These issues can be of all kinds. Among other things, it includes changes to blockchain parameters (e.g. block size) but also the recovery of lost coins due to hacks.

Having said that, there are several reasons underlying the goal of efficient change.

Quick updates enable enterprise and mass market end-user use cases

Governance is especially needed in blockchains with enterprise or end-user use cases. If it takes too long to fix an issue, people will abandon the service or won’t participate in the first place. Furthermore, changes can divide the community and lead to even more uncertainty and hesitation to participate.

Conceptually, this is where centralized applications are advantageous; although they are decentralized within (different hierarchies and decision makers in a centralized corporation), they act as a centralized entity with a defined chain of command and common goals. The CEO can make very quick decisions and has the final word; what she decides must be followed. This stands in sharp contrast to the blockchain space where decision making is decentralized, people will depart if they dislike the decisions and different agents (users, miners, developers) have different goals and incentives. For instance, Monero’s update to become ASIC-resistant, developers where happy, but ASIC miners, seeing their profits shrink, less so. Furthermore, the hard fork that followed resulted in four different versions of Monero, essentially splitting the community.

Blockchain governance mitigates indirect dependence on incumbents

Companies such as Facebook, Amazon, Netflix and Google(FANG) determine their rules*. This includes also publicly criticized things such as the use of personal date. The argument is that nobody must use FANG if they disagree with their approaches. Whereas that is true in theory, in reality abandoning those services is cumbersome due to their power and thus dependence on them. As I have argued in “Bitcoin, Blockchain, and Cryptoassets: discussing bubbles vs. discussing socio-technical systems“ Facebook and Co. are more than just an app, they are systems that are deeply integrated into our social and business lives. For instance, whereas one must not use Google for advertising or Facebook for communication, there are little solid alternatives left. As a consequence, people are indirectly obliged to use them.

Publicly accessible and governable Blockchains could mitigate that indirect dependence. Everybody who is interested in how those systems are set up, could purchase the respective tokens and suggest changes including changes in regards to how personal data is handled.

Governance as a competitive advantage

Given the fact that most Blockchain projects are open source, copying them is trivial. Thus, the biggest competitive advantages for blockchain projects stem from the community’s size and speed of adaption. The more supporters a project have and the quicker the developers can react to issues and competitors, the greater the chances of survival.

Whereas governance model cannot prevent the above-mentioned problems from occurring, they can drastically speed up solving them.

Generally speaking, there are two approaches towards blockchain governance; on-chain and off-chain.

On-chain governance Cosmos Network, DFINITY, Qtum, and Tezos

The following section looks at the governance model of Cosmos, DFINITY, Qtum, Decred, Tezos, Bitcoin, Ethereum, in more detail. Furthermore it provides a consolidated list of takeaways

Governance models takeaways

• In cross-chain projects, multiple governance models can be used (see Cosmos).
• Malign changes are inevitable. Thus, having a roll-back process in place is crucial
• A blockchain’s own token is very useful in incentivizing good behavior, although not a perfect solution (e.g. shorting the market is still possible)
• Liquid democracy can prevent voting centralization but still includes many voters (e. g. DFINITY)
• Governance models can be improved through algorithmic decisions (e. g. DFINITY)
• An expensive proposal process can hinder innovation because proposals are avoided due to high costs. Finding the right balance between preventing spam and hindering innovation remains experimental.
• Validating the identity of submitting entities and their proposals remains cumbersome and expensive. The irony is that Blockchain is supposed to remove exactly this counterparty risk. (see DFINITY)
• Categorizing proposals (e.g economics, or policy) is helpful for refining the governance process (see DFINITY)
• Hard and soft forks are unavoidable but they must not be used for all changes
• Requirement-based governance (approving proposals only if specific actors — e.g. stakers or developers — have voted) is useful for refining the governance model (see Qtum)
• Governance models can range from zero to full automation and have all kinds of variations in between (see Qtum)
• The design of governance models must account for voting thresholds and define how many votes are required to achieve a change. (e.g. Tezos)
• Governance models can start as off-chain and move on-chain over time
• Off-chain governance model can be complex (but not necessarily complicated) (e.g. Decred)
• Transparency in regards to governance rules (e.g. application requirements) and outcomes is crucial for off-chain governance (see Decred)
• Meta-governance, i.e. how to govern or change the rules that make up the actual governance matters (e.g. Decred)

Cosmos: individual governance for each blockchain in cross-chain projects

Cosmos is a blockchain network in which multiple independent blockchains can be connected to each other. Those blockchains connected to the Cosmos network are called zones. Each such zone has its own governance and within these zones validators and delegators (see below) vote on proposals. These proposals can be blockchain parameters (e.g. block size) and adaptions to Cosmos’ constitution, among other things. Similar to DFINITY (see below), Cosmos supports roll-backs.

• Validators: Validators are nodes with positive voting power that can vote for agreement on the next block.
• Delegators: Delegators are indirect validators. Analogous to a liquid democracy (or delegative democracy) delegators transfer their tokens and thus voting power to validators. Those validators then vote with their own tokens and the tokens lent to them. Delegators can withdraw their tokens from validators at any time. This is similar to DFINITY’s automatic voting (see below).

Takeaway: In cross-chain projects, multiple governance models can be used.

Open questions

• Cross-chain governance: How will cross-chain governance be regulated?
• Coordination costs of multiple governance models in cross-chain settings: Will one governance model across multiple blockchains in a cross-chain setting make the whole system more or less efficient and would rather a unified governance model suffice?

DFINITY: Governance through the Blockchain Nervous System (BNS)

DFINITY is a Blockchain that distinguishes itself, among other things, by having algorithmic governance. DFINITY’s tokens are called dfinities.

Essential to DFINITY’s blockchain is its so-called Blockchain Nervous System (BNS). In order to implement a change in DFINITY, each proposed change must go through four steps.

1. Proposal submission
2. Voting
3. Proposal evaluation​
4. Proposal implementation

Proposal submission

Proposals, which fall into different categories such as „Economics“, „Policy“, or „Protocol“ are submitted by paying a submission fee. If the proposal is adopted, this submission fee is returned. This fee should prevent spam and encourage high-quality proposals.

Voting

In DFINITY Neurons (entities that have voting power; see below) vote on the submitted proposals.

DFINITY’s Neurons

In DFINIY Neurons are voting entities and are run by people using a dedicated software. Everybody can create a neuron by making a financial deposit using dfinities. This deposit regulates the neuron’s voting power. The higher the deposit, the more voting power the neuron has. Deposits can be withdrawn after a minimum of three months (duration is possibly subject to change). Deposits should incentivize good decision making; bad decisions carried out by the BNS might lead to bad network performance, in turn lowering the tokens’ value and thus the deposit’s value. Moreover, deposits are used to calculate reward. Neurons that vote are rewarded dfinities. The reward height is proportional to the deposit; the higher the deposit the higher the reward.

Neurons can vote manually or automatically.

Manual voting by manually issuing votes
The user running the neuron software can vote on proposals. For voting, she may choose between „Adopt”, „Reject”, and “Pass”. The significance of the user’s vote depends on the neuron’s deposit.

Automatic voting by following other neurons
Automatic voting is similar to liquid democracy. In this scenario, the users’ neurons copy the decisions made by other neurons. Users can configure a “follow list” for which proposal type (e.g economics, policy, or protocol) to follow which neuron’s vote. The rationale behind this delegation is that users lack expertise in certain areas and therefore give their vote to users of whom they believe that they have the right expertise. For instance, a user decides that she doesn’t want to vote on economics-related proposals because she lacks the right knowledge. Therefore, she gives her voting power to a user of whom she believes will make the right economics related decisions. In each automatic voting decision the algorithm follows the vote of the most powerful neuron in a cascading matter. That means that if the most powerful neuron from the user’s follow list has not voted, the vote of the next neuron will be copied and so on.

Proposal evaluation

In this evaluation stage, the proposal’s issues and solutions are evaluated. DFINITY has implemented three steps for this evaluation:

1. Establishing legitimacy: Here the involved entities conduct a background check to ensure that the proposal and the originator of the proposal are legitimate. This step is cumbersome, very manual, and can even include live phone contact.
2. Problem evaluation: In this step it is validated whether the issue identified in the proposal is really a problem.
3. Solution evaluation: Finally, the proposed solution’s code is evaluated. The code is checked to ensure that it will fix the problem and that it won’t affect other parts of the system.

In all of these three steps the parties doing the research are rewarded by DFINITY’s BNS. This reward, however, must be paid by the entities submitting the proposal. The whole process can be expensive.

Proposal implementation

For implementation, DFINITY’s Blockchain Nervous System distinguishes between two different proposal types, namely active and passive ones.

• Passive proposal: A passive proposal equals changing the telemetry of the system (e.g. mining reward). In this case, the new information is updated on the BNS smart contract. This is similar to Qtum’s Decentralized Governance Protocol (see below).
• Active proposals: Here DFINITY’s BNS changes things outside its own smart contract. For such amendments, special code is required which DFINITY has added to the EVM (Ethereum Virtual Machine). One example for active proposals is the termination of certain malign smart contracts.

Built-in versioning system

One rationale behind the deposits required to create neurons is to mitigate malign behavior. If a participant votes for malign proposals and these proposals are implemented, the network will suffer. In turn, the dfinities and thus the malign actor’s dfinities suffer. (this incentivisation doesn’t, however, account for malign actors trying to short the market). Nevertheless, bad proposals that harm the network in a substantial way might get implemented (knowingly or not) anyway. To mitigate fatal changes, DFINITY has integrated a versioning system. With this versioning system users can reverse malign changes through hard forks. Furthermore, neurons that voted for that malign proposal are terminated during this fork.

Takeaways

• Malign changes are inevitable. Thus, having a roll-back process in place is crucial
• A blockchain’s own token is very useful in incentivizing good behavior, although not a perfect solution (e.g. shorting the market is still possible)​
• Liquid democracy can prevent voting centralization but still includes many voters
• Governance models can be improved through algorithmic decisions
• An expensive proposal process can hinder innovation because proposals are avoided due to high costs. Finding the right balance between preventing spam and hindering innovation remains experimental.
• Validating the identity of submitting entities and their proposals remains cumbersome and expensive. The irony is that Blockchain is supposed to remove exactly this counterparty risk.
• Categorizing proposals (e.g economics, or policy) is helpful for refining the governance process

Qtum: hybrid governance and wide automation governance spectrum

Qtum, a Blockchain focused on enterprise use case, takes a hybrid approach towards Blockchain-governance consisting of hard or soft forks and the so-called Decentralized Governance Protocol (DGP).

Hard/soft forks, hotfixes or both

Qtum uses hard and soft forks — as many other projects — for new features and significant changes. In addition to hard and soft forks, Qtum has developed the so-called Decentralized Governance Protocol (DGP) to fix specific blockchain parameters (e.g. block size or gas prices). Deploying hotfixes instead of more complicated hard or soft forks entails a couple advantages. Most notably, hotfixes do not disrupt the user experience; agents (stakers, node operators, users) do not need to download new software or intervene in any other way. However, in certain instances both types might be used. For instance, in the case of problematic gas prices for certain operations (higher prices for processing blocks than creating them — this scenario can be used to attack the network) DGP will temporarily increase the prices for the problematic operations to mitigate malign attacks on the network. A fork will then fix the operation’s underlying problem.

Process of Qtum’s Decentralized Governance Protocol (DGP)

Changing certain blockchain parameters through a dedicated smart contract

Qtum’s Decentralized Governance Protocol (DGP) consists of four steps.

1. Proposal creation: Governing parties make a proposal to change parameters
2. Voting: Governing parties vote for or against the proposal
3. Implementation or rejection: If vote threshold is reached, the proposal is implemented
4. Archiving: Proposal data is stored in a standardized format on a particular storage. Thus, the proposal can be accessed without executing the DGP.

Design variations can be made along the vote sources (i.e. who has voted) by differentiating between users, miners, and developers. This allows for a requirement-based governance process where, for example, a change can only be implemented if 100 users, 10 miners, and 50 developers have voted for the change.

Governance spectrum: from full to none human involvement

In Qtum, the governing parties are either people or smart contracts. The nature of these governing parties is important because depending on whether it consists of people or smart contracts it takes different positions along the governance spectrum.

• No code: On the far left of the governance spectrum Qtum’s governing parties consist primarily of people. Those people would propose changes, vote on them, and implement them.
• No people: On the far right of the governance spectrum the governing parties consist primarily of code, i.e. smart contracts. In this scenario, there are different smart contracts for different tasks. Some would monitor the blockchain for technical issues, some would create the proposals, others would vote or take care of collecting votes from other smart contracts, and yet others would finally implement the proposals leading to what Qtum calls a „self-aware“ Blockchain.

Between those two extremes of full and zero human involvement lies a range of variations in regards to the human/machine distribution.

Takeaways

• Hard and soft forks are unavoidable but they must not be used for all changes
• Requirement-based governance (approving proposals only if specific actors — e.g. stakers or developers — have voted) is useful for refining the governance model
• Governance models can range from zero to full automation and have all kinds of variations in between

Tezos

Tezos is a blockchain that distinguishes itself by having built-in on-chain governance.

In Tezos, there are two general triggers for protocol changes.

1. Stakeholders voting
2. More complex variations: protocols can only be changed if verified by a computer that they meet certain properties.

Either way, changes are implemented in so-called election cycles

Four election cycles until implementation

These election cycles last for about three months and consist of four quarters, each representing a different process in the governance model:

1. First quarter — Approval voting: During the first quarter protocol changes are submitted and stakeholders can approve the suggested protocols.
2. Second quarter — Voting: Stakeholders vote on the protocol that has received the most approvals in the previous quarter. Each type of decision (pro, against, abstention) counts as a vote.
3. Third quarter — Implementation or rejection: If the quorum is met and 80% of stakeholders voted in favor of the change, the change is implemented on the testnet. Else, the change is rejected. The quorum starts with 80% but is updated after each vote based on the quorum reached in the current election cycle.
4. Fourth quarter — Possible Go-Live: In this quarter stakeholders vote again. If the quorum is met and if the change receives 80% pro-votes, the protocol, currently running on the testnet, is updated onto the mainnet.

In the first twelve months of Tezos’operation, the Tezos foundation will have a veto power to mitigate any issues that might arise due to the yet untested governance model.

Takeaway

• The design of governance models must account for voting thresholds and define how many votes are required to achieve a change.

On-chain governance: aeternity and Dash

• aeternity: The aeternity blockchain uses prediction markets for their governance.
• Dash: Dash, a currency with focus on privacy (see Privacy coins vs. coins with a privacy feature: analysing privacy coins and Market map privacy coins, protocols, and platforms: cryptos bringing privacy to blockchain for more on privacy coins) relies on the so-called Decentralized Governance by Blockchain (DGBB) for governance. The DGBB uses masternodes for voting.

Decred: (temporary) off-chain governance through Councils

Decred, a currency with focus on privacy (see Privacy coins vs. coins with a privacy feature: analysing privacy coins and Market map privacy coins, protocols, and platforms: cryptos bringing privacy to blockchain for more on privacy coins) relies (currently) on off-chain governance. In the future, the decision making will be moved on-chain.

Crucial to Decred’s governance process it the Decred Assembly which votes on changes. The Decred Assembly consists of so-called Assembly members. Those Assembly members are selected by the Admission Council. This Admission Council is one of initially three Councils (more can be added over time, see Creation Council below). These Councils are split based on their function:

Admission Council

The Admission Council votes for admissions into the Decred Assembly. Assembly members are selected regardless of age or nationality but must pass the following restrictions:

• applicants must receive 60% or more votes from the Admission Council members
• applicants must have been involved in Decred for a certain time
• the work of the applicant and its impact on Decred must be deemed worthy by the Admission Council.

Creation Council for creating new Councils

The Creation Council’s has a meta-governance responsibility, namely the creation of new Councils

Attrition Council for terminating Councils and Assembly members

The Attrition Council is responsible for terminating Councils and Assembly members. The framework for terminating members is as follows:

• 60% or more members of the Attrition Council must vote in favor of termination
• members are terminated if they do not fulfill one’s duties for the respective Council(s) or the Assembly itself
• members that conduct in ways that harms Decred without trying to undo are terminated

Furthermore, Decred has set up a maximal resolution time of 365 days. This means that all issues must be resolved by vote within a maximum of 365 days.

Takeaways

• Governance models can start as off-chain and move on-chain over time
• Off-chain governance model can be complex (but not necessarily complicated)
• Transparency in regards to governance rules (e.g. application requirements) and outcomes is crucial for off-chain governance
• Meta-governance, i.e. how to govern or change the rules that make up the actual governance matters

Off-chain governance: Bitcoin and Ethereum

Bitcoin and Ethereum use off-chain governance where the Bitcoin Improvement Proposals (BIPs) and Ethereum Improvement Proposals (EIPs), respectively are submitted, discussed in online meetings and if agreed upon implemented.

Notes

*edit thanks to Júlio Santos

• gdax exchange: buying and selling of cryptocurrencies for institutional and professional investors
• Coinbase.com: buying and selling of cryptocurrencies for „mainstream“ users
• Coinbase Commerce: merchants payment systems for accepting cryptocurrency payments

Earn.com is a task-platform where users earn bitcoin for completing tasks. The tasks are offered by blockchain startups doing an ICO and involve things like signing up for newsletters or joining telegram groups. Those blockchain startups are very often in an early phase and Earn.com serves as a marketing tool for them.

Some argue that the acquisition was an acqui-hire for Earn founder and CEO Balaji Srinivasan. And Balaji Srinivasan, who has an impressive track record (among other things as partner at Andreessen Horowitz) is now indeed Coinbase’s CTO.

Whereas acqui-hiring Balaji Srinivasan might be the acquisition’s real intention, looking at the acquisition in the context of Coinbase’s other acquisitions and their self-imposed company description shows another perspective, namely that Coinbase is building a “crypto empire“ serving a user’s whole „crypto lifecycle“.

Building a crypto empire with Earn.com, Cipher Browser, Coinbase.com, and gdax

Coinbase was founded in 2012 and since then they have made the following five acquisitions:

1. Kippt, a bookmarking tool
2. Blockr.io, a blockchain explorer
3. memo.ai, a Slack-based wiki
4. Earn.com, task-platform
5. Cipher Browser, a dapp Browser

Overview of Coinbase’s acquisitions

“Coinbase is the easiest and most trusted place to buy, sell, and manage your digital currency.“Whereas memo and probably Kippt were an aqui-hire, the acquisitions of Cipher, Blockr, and Earn can be seen as an extension of Coinbase’s self-imposed company description (from their Website)

With Coinbase.com they target average investors who want to invest in established cryptos (established in terms of age and market cap).

With gdax they target more experienced traders, again for established cryptos.

Blockr.io, the blockchain explorer, is integrated into those services as a feature to help users track their transactions.

Finally, Earn.com and Cipher Browser are positioned at the beginning and end of a user’s crypto lifecycle.

With Earn.com users are on-boared and hooked into the crypto world through small steps, without risk and most importantly for free. While completing tasks on Earn.compeople might learn a thing or two about crypto projects and simultaneously receive money that they can use to invest further; firstly via Coinbase and later on gdax. Moreover, they can buy additional cryptos through Coinbase.com or gdax.

Finally, after purchasing cryptos people browse dapps with the Cipher Browser and find applications where they can spend their cryptos.

Coinbase’s future as a potential gatekeeper

Considering in this context the allegations by Wikileaks that Coinbase has shut down their Coinbase Commerce account, triggers the question of Coinbase’s future position as a gatekeeper. Coinbase.com, Earn.com, and Cipher Browser are all known projects and especially Coinbase.com is for many the first entry into the crypto world. Moreover, rumors about cryptos being listed on Coinbase have lead to them increasing — often rapidly — in price.

Thus, it will be interesting to see how powerful Coinbase will get and how centralized the crypto world, in general, will be (comparing to how much is controlled by GAFA). For instance, what if Coinbase tries to start regulating which dapps people see in the Cipher Browser? This would definitely go against the idea of a decentralized Internet and it will be interesting to see what will happen if Coinbase amounts as much power as Apple or Google have with their app stores.

Finally, Coinbase’s past acquisitions beg the question of future ones. Continuing with the lifecycle argument crypto inheritance management solutions such as DigiPulse are the first that come to mind.

Originally published at researchly.leobosankic.com on April 25, 2018.

Notes

[1] Wikileaks Claims Coinbase Has Shut Down Its Online Store’s Bitcoin Account

• Digitalization: Companies from this category are digital versions of offline analogies: Examples include online shops (e.g. Amazon), video streaming platforms (e.g. Netflix), and travel booking platforms (e.g. Booking.com). Online shops are a digital version of retail stores, video streaming platforms are digital counterparts to video shops, and online booking platforms are Internet-based travel agencies.
• Supporting: Companies from this category are tools (in a very broad sense) for the Internet ecosystem. Examples include search engines (e.g. Google), cloud hosting providers (e.g. AWS), and social listening apps (e.g. Moz). Search engines are tools to search for online content, cloud hosting providers are tools that support the hosting of online content, and social listening apps are tools for analyzing online content.

Today’s top public (Internet and non-Internet) companies by market cap are all using the Internet in two ways

• Process innovation: Companies from this category use the Internet to improve their processes. Examples include Apple, JPMorgan Chase, and Berkshire Hathaway. Apple uses the Internet to speed up their product discovery (i.e. online shops), JPMorgan Chase to speed up their trading (e.g. AI-based trading tools) and Berkshire Hathaway to speed up their administration (e.g. bookkeeping). Moreover, all these companies use the Internet in one of simplest way; e-mails instead of letters or faxes.
• Business foundation: Companies from that category are building their end-user business using the Internet. Examples are Alphabet, Amazon, and Facebook. All three examples serve their customers via the Internet, none of their business can be used without an Internet connection.

These categorizations show a few things

• The Internet can be a tool but also a foundation: For Alphabet, Amazon, and Facebook the Internet is their foundation (see Business foundation). For Apple, JPMorgan Chase, and Berkshire Hathaway the Internet is a tool, a means to an end. The lines are blurring but an iPhone can be used without Internet, Facebook, however, not.
• The Internet has either digitalized existing offline applications or created new ones that are specifically needed for the Internet: Amazon, Netflix, and Booking are those digitalizers (see „Digitalization“ above). Companies from the category „Supporting“ were newly created for the Internet. AWS, Moz, or Google wouldn’t have been created if the Internet hadn’t been invented.

Collaborative approach to innovations

However, labeling above-mentioned companies „Internet“ companies is misleading, because it implies that the innovation underlying them is the Internet. The Internet does play a role, but only a collaborative one. Those companies are namely enabled by a collaboration of several innovations.

Innovations in the fields of Artificial Intelligence (e.g. Amazon’s recommendation engine), data compression (e.g. Netflix’s streaming service) or logistics (e.g. Amazon’s warehouses).

Second-order innovations

Moreover, we can observe companies with second-order innovations that are not obviously Internet companies but still require the Internet. The most prominent example are smartphone apps such as Tinder or Uber. For most of them, although they use the Internet, the Internet has become a given background ingredient. This stands in sharp contrast to traditional Internet companies such as the mentioned Amazon, Google, or Booking.

Now, if the blockchain is similar to the Internet, the above-mentioned categorizations and the here described collaborative innovation provides an interesting starting point when thinking about the future of Blockchain.

If the Internet (or software) is eating the world, Blockchain seems to be eating software/Internet

I have touched upon this paradigm in “Decentralized applications — “experimenting with blockchain” is more than tech“ where I argued that “many blockchain startups, offer decentralized solutions of existing products. This can, for instance, be observed in social networks, video hosting, and music streaming, and marketplaces and shopping apps.“

If the Internet needs supporting tools, Blockchain does so as well

Examples for such supporting tools are privacy coins (see Market map privacy coins, protocols, and platforms: cryptos bringing privacy to blockchain and Privacy coins vs. coins with a privacy feature: analysing privacy coins), decentralized exchanges, and Dapp browsers. Privacy coins solve Blockchain’s anonymity problem, decentralized exchanges enable trading of cryptocurrencies, dapp browsers are used to browse dapps. If the Blockchain hasn’t been invented, none of these tools would be necessary.

If the Internet poses process innovation as well as business foundation, blockchain seems too

For companies such as Golem (decentralized cloud computing) or Augur (prediction market) blockchain is their business foundation. If there were no blockchain they couldn’t implement their business the way they do (e.g. token-based incentivization). In contrast, a range of companies might use a blockchain to improve existing processes. Examples for such process are supply chain management or invoicing. Populous, a blockchain-based invoicing platform is a great example. For Populous itself Blockchain is the business foundation, they cannot build their business in the way they are doing without a blockchain. For Populous’ customers, however, Populous is just one of many technologies they could use to improve their invoicing.

If the Internet-enabled, second-order innovations blockchain will too

As mentioned-above, the Internet has lead to second-order innovations such as Uber or Tinder. Furthermore, other innovations such as the car have also lead to second-order innovations (e.g. motels). Similarly, blockchain will bring innovations that go far beyond what is happening right now.

Originally published at researchly.leobosankic.com on April 23, 2018.

Research

Analysis and reports published this week on Resarchly

Privacy coins vs. coins with a privacy feature: analysing privacy coins

Analysis how crypto privacy coins (Monero, Dash, Verge, Zcash, Bytecoin etc.) differ.

There are fully private coins and coins with privacy as a feature. Further differentiators: scope of anonymity, depth of technical integration, type of privacy technology, mining algorithm, and ASIC-resistance.

Read full analysis on Researchly

Scams, scaling, and dapps: working on the right things at the right time

Argues that different industry participants are working on different things. The issues with that, however, is that those things depend on each other. Unless technical core issues (e.g. scalability, decentralized exchanges or ASIC) and market issues (e.g. loss of trust or proof of concepts) are solved, building mass marked ready applications is impossible.

Read full analysis on Researchly

Appcoins — product rewards matter more than financial rewards

Looks at different ways how startups are building centralized products with tokens. Concludes by stating that many of these startups don’t need a token in the first place and if they do need, very often a non-cryptographic token (e.g. loyalty points) or tokens based on existing platforms (e.g. Ethereum) would suffice. Furthermore, the analysis argues that appcoins such focus on product rewards (what can I do with the token) instead of financial reward (how much money can I earn with the token)

Read the full analysis on Researchly

Decentralized applications — “experimenting with blockchain” is more than tech

By looking at different blockchain startups that are re-creating already existing applications such as Facebook, YouTube, or Spotify the analysis shows how „experimenting with Blockchain“ involves far more than just developing the technology. The image below provides a short summary.

Market map privacy coins, protocols, and platforms: cryptos bringing privacy to blockchain

Overview of cryptos bringing privacy to blockchain including privacy coins, privacy protocols and privacy platforms.

Read the full analysis on Researchly

Coinbase

Coinbase, after acquiring dapp browser Cipher Browser last week (see news in newsletter for week #15), this week acquired Earn.com, a company where people can earn money for completing tasks, for allegedly $100 Million (recode).

Exchanges and trading

OKEx exchange, has announced that it is expanding to Malta (OKEx). This comes after Binance’s announcement end of March saying that they are moving to Malta as well. Moreover, this comes after New York’s Attorney General’s inquiry into the operations of 13 crypto exchanges (coindesk). Also, this news appears in the context of Malta announcing their “Consultation Paper on the Financial Instrument Test“ (see Regulations below).

More exchanges and trading apps

• Germany’s #2 Stock Exchange Unveils Crypto Trading App (coindesk)
• Yahoo Japan Buys Stake in Cryptocurrency Exchange (coindesk)
• Kraken CEO: Crypto Exchange Won’t Answer New York AG’s Inquiry (coindesk)
• User claims that Localbitcoins required identification (cointelegraph) Maybe time to explore other decentralized exchanges

Related: Market map: blockchain startups working on decentralized exchanges

Malta is where the Blockchain is.

The Malta Financial Services Authority (MFSA) published their “Consultation Paper on the Financial Instrument Test“. The paper aims at determining regulations for DLT-based assets and is currently seeking public feedback (MFSA). Malta is generally very positive towards blockchain. End of March, Joseph Muscat, Malta’s prime minister, tweeted how they “aim to be the global trailblazers in the regulation of blockchain-based businesses“. That tweet came out when Binance exchange announced that they were moving to Malta.

Joseph Muscat on Twitter

Welcome to #Malta 🇲🇹 @binance. We aim to be the global trailblazers in the regulation of blockchain-based businesses and the jurisdiction of quality and choice for world class fintech companies -JM @SilvioSchembri https://t.co/3qtAQjOpuQ

Porn.

Pornhub starts accepting Verge. Verge (ticker XVG), a privacy-focused currency (see here for an analysis of privacy coins), did an impromptu crowdfunding around the end of March asking for 75 Million XVGs (back then worth about $3 Million). The crowdsale was scheduled to last five days (until 26 March) and the proceedings were supposed to be used to establish a certain partnership. That partnership is now Pornhub. (theverge)

Pornhub is a well-frequented site and I am extremely curious to see how the adoption will be. In Two mental steps towards cryptoasset diffusion, I made the point that the adoption of cryptocurrencies is a two-step process where we move from one mental model to the other. These models are:

1. Acceptance of cryptoassets in general: Initially, people must accept the concept of cryptoassets per se.
2. Acceptance of one particular cryptoasset. Secondly, once people understand cryptoassets and believe they are better than whatever they replace, people must accept that one particular coin for that one particular use case.

I am curious to see how far people’s mental models have already developed.

Besides that, it is worth-noting how much medial reception Verge received for something that happens daily outside the crypto industry. In the „non-crypto world“, Verge’s partnership would be the equivalent of an online shop accepting a payment system such as PayPal (admittedly Verge is a currency and PayPal a payment system but conceptually it is the sam).

Recommended readings:

• Privacy coins vs. coins with a privacy feature: analysing privacy coins

Exit scam. Or not. Or yes. Or…

Savedroid, the Germany-based savings and investing app for cryptocurrencies, faked an exit scam. In short:

1. Their website went offline and was replaced by an “And It’s Gone“ meme.
2. Their CEO tweeted two images suggesting he had underdone an exit scam
3. The community went crazy, became threatening and angry
4. Finally, their CEO posted a video explaining that the whole action was only to remind the community that the crypto industry is wild west and needs regulations. In the same video they offered to work with regulators and announced an ICO checklist and expansion into ICO advisory.
5. Mixed medial and public reactions ranging from

• considering the explanation fake and that the initial plan was an exit scam after all (businessinsider)
• labeling savedroid’s action inappropriate (paymentandbanking, link in German)
• an investigation by the German prosecution (wiwo, link in German)

Besides all that, it is still unclear whether savedroid really needs a crypto token

Originally published at researchly.leobosankic.com on April 22, 2018.

Motivation behind privacy coins: making public blockchains more private and restoring the right to privacy

Privacy coins are insofar essential because they are solving a problem blockchain has created. Blockchain, being a public infrastructure, allows anybody to see everybody’s transactions. This means that in regards to payments, everybody knows everybody’s financial transaction, i.e. everybody knows who sent what to whom. Knowing that this also implies that government and government-related entities can see one’s transactions with little effort might derail people from using blockchain-based payment systems.

Another way to argue in favor of privacy coins is through the lens of financial privacy as human right. Based on that, one could argue that governments and companies who have access to people’s financial transactions are in violation of that human right.

Whatever the motivation behind building privacy coins, there are actually two types of them. Furthermore, within those two types a host of other differentiators exits.

Privacy coins vs. coins with privacy as a feature

Privacy coins and coins with privacy as feature refer to coins that obscure blockchain transactions in order to achieve anonymity.

Privacy coins are coins whose main goal is privacy (e.g. Monero). Coins with privacy as a feature implement privacy as one of their many features (e.g. Dash). For instance, Monero has privacy per default and the developers focus primarily on privacy (and security). Dash, in contrast, aims to be, among other things, fast and private. For transactions to be private with Dash one has to use their feature called PrivateSend.

Scope of anonymity

A similar differentiation is scope of anonymity, i.e. what do privacy coins and coins with privacy as a feature obscure. It goes from anonymization of only the senders’ IP addresses (e.g. Verge) to fully obscurity (anonymization of sender, receiver, and amount) with privacy coins such as Monero.

Depth of technical integration

Another technological difference between privacy coins and coins with privacy as a feature, is how deeply privacy is integrated into the coin’s code. Verge, for instance, only implements their privacy protecting technology (TOR and I2P). Monero, and many other privacy coins are developing their privacy protecting technology (ring signatures, ring confidential transactions, and stealth addresses) themselves. Admittedly, Monero’s privacy tech is based on the CryptoNote protocol, but the integration and adaption still goes very deep into Monero’s code.

Different type of privacy technology

Privacy coins and coins with privacy features also differ in regards to the privacy technology they use. The following non-exhaustive list contains some of the privacy technologies, tools and process used by privacy coins and coins with privacy as a features:

• ring signatures
• ring confidential transactions
• stealth addresses
• TOR
• I2P (e.g. Verge)
• coin-mixing (e. g. Dash)
• zk-SNARK proofs: a zero-knowledge proof construction used by Zcash
• one-time public keys (e.g. Bytecoin)

Privacy with or without a choice

Moreover, privacy coins and coins with privacy as feature differ in how the implement privacy from a end-user perspective, specifically if privacy is an option or not. With Zcash, Dash, or Verge, users can choose whether they want to send a private or transparent transaction.

In contrast, Monero believes in privacy without choice; with Monero it is impossible to send a transparent transaction.

Monero believes in privacy without choice; with Monero it is impossible to send a transparent transaction

Side note: Although “privacy without choice” instead of “transparency without choice“ sounds weird because it is a very atypical state, it gives the whole discussion around public blockchain and private coins, a very intriguing spin.

Mining algorithm and ASIC-resistance

The final technical differentiation is mining algorithm and ASIC-resistance.

Most privacy coins and coins with privacy as a feature are Proof-of-Work (PoW). PIVX is one of the few with Proof-of-Stake, and Decred (whose privacy features are not yet available) uses a hybrid of PoW and Proof-of-Stake (PoS).

Additionally, ASIC-resistance is another differentiating factor. Most interestingly in this context is Monero. Monero’s hard-fork in early April 2018 made it ASIC resistance and as a consequence probably made mining hardware producers such as Bitmain unhappy. Besides such ecosystem issues, ASIC-resistance and mining algorithm are important because they can influence how centralized privacy coins and coins with privacy as feature become on the mining side leaving projects open to potential 51% attacks, censorship or concentration of power.

Originally published at researchly.leobosankic.com on April 22, 2018.

• 0x, a protocol for building decentralized exchanges, raised $775 000 last year (The news that they raised money last year appeared recently)
• Vitalik Buterin doesn’t fear ASIC mining and Monero forked to circumvent ASIC miners
• Coinbase acquired decentralized app browser/wallet Cipher Browser
• The team behind Modern Tech, a Vietnamese-based crypto company, disappeared after collecting $660 Million through an ICO in an „exit scam”

In other words:

• The industry is interested in Blockchain’s core technological issues; 0x who raised money, working one of the essential features — decentralized exchanges — is one example of that. Besides that, ongoing scalability issues are the general concern in the industry.
• The industry is interested in end-user applications: Coinbase’s acquisition of Cipher Browser is one recent example for that. Semi-useful dapps and tokenized apps are a general representation of that interest (see Appcoins — product rewards matter more than financial rewards and Decentralized applications — “experimenting with blockchain” is more than tech)

however:

• The industry is still uncertain about foundational aspects; “ASIC wars“ (the fight between mining equipment companies like Bitmain and developers like Buterin whether ASIC mining is the future) is one of many examples
• The industry is still wild west: Modern Tech’s exist scam is one of the countless examples. Ongoing changes in regulations across countries is another one. The consequence is loss of trust and consumer uncertainty.
• The industry is still highly experimental: in “Decentralized applications — “experimenting with blockchain” is more than tech“ I argued that, among other things, it is still unsure whether people want self-governance, that the industry’s experiments with new business models (tokens instead of ads) is yet to be proven, and that economic models (how will token value, spending, and saving correlate? — e.g. if people expect a token to rise in value will they spend it?) still require long-term testing.

In yet another words: different industry participants are working on different things. The issues with that, however, is that those things depend on each other. Unless technical core issues (e.g. scalability, decentralized exchanges or ASIC) and market issues (e.g. loss of trust or proof of concepts) are solved, building mass marked ready applications is impossible.

Originally published at researchly.leobosankic.com on April 18, 2018.

1. Enhancing current products
2. Building centralized products with tokens
3. Re-creating applications in a decentralized way
4. Innovating new applications

This is a series of posts, in this post I will cover “Re-creating applications in a decentralized way”

Read “Enhancing current products” here

Re-creating applications in a decentralized way

Many blockchain startups, offer solutions decentralized solutions of existing products. This can, for instance, be observed in social networks, video hosting and music streaming, and marketplaces and shopping apps.

Social networks

Many social networks range already exists but a lot of Blockchain startups are building new ones. One example is Sociall.

Sociall
Sociall, currently in closed beta, is an open-source based social network focusing on privacy and security. All the data uploaded to Sociall is stored in a decentralized way and Sociall aims to be self-governed, i.e. users can manage the platform’s content (e.g. removing spam). For that governance, users will get Sociall’s token — SCL — in return. In regards to privacy, Sociall has implemented a range of privacy-protecting features. Among others, one’s Sociall profile cannot be index by search engines, feed content is chronologically ordered (without any algorithmic influence) and Sociall does not use any facial recognition software.

Video hosting and music streaming

Standing alongside giants like Spotify, Soundcloud, and YouTube, Blockchain-startups are emerging in the area of video hosting and music streaming as well.

• Viuly: Viuly is a video platform where viewers and contributors are financially rewarded with VIU — Viuly’s token. Viewers are rewarded for watching ads, contributors for adding content.
• Musicoin: In analogy to Spotify, Musicoin is an intermediary-free music streaming platform where musicians and listeners are reward with Musicoin’s coin — MUSIC. Musicians are — similarly to Viuly — rewarded for contributing their work. Listeners, on the other side, can use the add-free Musicoin for free. Furthermore, listeners can earn MUSIC tokens by sharing music or creating playlists. They can also use MUSIC tokens to purchase content (e.g. download songs) or tip musicians, among other things.

Marketplaces and shopping apps

In analogy to big incumbents (who are by now more than just marketplaces or apps, they are „ecosystems“) several Blockchain startups are trying to enter the industry. Among others, there is Wysker.

Wysker
Wysker is a “Blockchain-powered mobile shopping“. wysker shows you up to 20 product images per second (yes, seconds. And yes, 20). Once you pick a product, you are redirected to the seller’s website where you can purchase the items. With Wysker’s token — wys — wants to build a three-sided network consisting of users, retailers, and advertisers.

Users earn wys tokens through, for instance, product views. These tokens can then be used as a currency within the app. Advertisers in turn (who simultaneously can be retailers) use these tokens to promote their offerings. Information between users and advertisers or retailers flows only with the owner’s consent, i. e. only if you want to share your data (e. g. product preferences) the other parties get it.

There are a lot more examples but the message regarding startups from that category is that they are „blockainizing“ existing business models. To be honest, not with all startups it is even clear how they are applying blockchain technology, let alone whether — if they are — they should.

However, they are — in one way or another — experimenting with blockchain technology. However, if we looked at „experimenting with blockchain“ from a „user perspective” would could translate “experimenting with blockchain“ into a range of other experiments and assumptions.

Dismantling “experimenting with blockchain”

Among other things, experimenting with blockchain implies the following:

• People want self-governance: refers to the assumption that people will care enough to manage content themselves (e.g. removing spam like in the case of Sociall)
• Open-source as a competitive advantage: the assumption that that open-source code can provide enough competitive advantage in the long-run (like — again — Sociall). Of course, it worked in the past, but that doesn’t mean that it will work in the given “Blockchain” content
• New monetization models: whether replacing adds with tokens will work must first be validated
• Experimenting with privacy settings: it must be questioned whether people value their data enough to live with the consequences (e.g. paying for social networks)
• Fighting incumbents: the Amazons, Facebooks, and YouTubes of this world will not just stand by if Blockchain-based startups start taking of
• Experimenting with economics and market behavior: how will token value, spending, and saving correlate? (e.g. if people expect a token to rise in value will they spend it?)
• Experimenting with new type of money: Knowing that getting people to switch from cash to contactless payment is an extremely slow process, how can we expect that people will switch to cryptocurrencies almost instantly as implied by many startups?
• Experimenting with suppliers: advertisers, musicians, and stakeholder must be convinced to invest considerable time and money into new territory
• Experimenting with the industry: the industry is still refining the crypto funding process (e.g. DAICOs, SAFTS, ILPs, AirDrops), crypto regulations across countries are still unclear, and the “codebase“ is still in development (think forks or missing consensus over consensus algos)
• Experiment with business models and products: what is it that people want?

Cumulative implications increase difficulty and hybridization and “better products” as the alternative

Of course, not all these implications are exclusive to Blockchain-startups, nevertheless, they exist and must be overcome. More importantly, they are cumulative. This means, for instance, that while a startup is still trying to figure out their economic token model, they must react to legislation, acquire customers…

Considering especially that many Blockchain startups are not providing a groundbreaking improvement to the end-user and that incumbents are extremely strong, the „re-creating applications in a decentralized way“ strategy might not be the best one to pick.

Having said that, I believe that hybridization (i.e. enhancing current products through hybridization — see Blockchain and socio-technical systems — diffusion through hybridization) is — if we really want or need dapps or Blockchain-based startups — an undervalued strategy. The second approach is truism per excellence: use blockchain to make substantially better solutions. Like Wikipedia was a substantially better way to discover knowledge than the then prevailing Brockhaus Enzyklopädie or how e-mail was a substantially better way to send messages across the world than faxes, dapps will only take off if they are substantially better than existing solutions.

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Originally published at researchly.leobosankic.com on April 16, 2018.

1. Enhancing current products
2. Building centralized products with tokens
3. Re-creating applications in a decentralized way
4. Innovating new applications

This is a series of posts, in this post I will cover the first approach.

Sign up for the Researchly newsletter for updates on the other parts

Enhancing current products through hybridization

Startups from that space are working on solutions that can be incorporated into existing „normal“ products.

Through that integration, those „normal“ products can be enhanced with features that — in the best case — are only achievable using blockchain technology.

Two examples are AppCoins and Credo.

AppCoins

AppCoins is an app protocol. The idea behind AppCoins is to develop a protocol that can be incorporated into existing apps to allow those to profit from blockchain’s advantages. Concretely, AppCoins wants to incorporate advertising, in-app purchases and app approval.

• Advertising: Similar to the Basic Attention Token and Synereo AppCoins should be used to reward users for their attention.
• In-app purchases: Like a lot of other Blockchain startups, AppCoins should allow users to pay in apps using APPC (AppCoins’ token)
• App approval: AppCoins should be used to rank developers and approve their apps accordingly.

Credo

Credo is the token for the e-mail spam fighting solution BitBounce. With BitBounce one can whitelist e-mail-addresses. Each message that comes from a whitelisted e-mail will get delivered as usual. If the e-mail, however, is not whitelisted, the sender will get an autoreply by BitBounce informing her that her e-mail cannot be delivered and if she wants her e-mail to get through she must pay a fee using Credo.

Credo has been trading since September 2017 (ticker CREDO) and has, among others, Tim Draper as an investor.

With these and other solutions existing (Non-Blockchain) products are enhanced and both, the new and old „worlds“ (i.e. Blockchain and non-Blockchain) are co-existing in a hybrid state. That symbiotic approach is particularly interesting because of three advantages it provides:

1. Companies which are enhancing existing products are not positioning themselves as competitors and thus aren’t a threat to incumbents. Because incumbents are very powerful, this strategy allows Blockchain startups to work without having to worry that much about competition. This leads to the second advantage.
2. Because startups must not fight incumbents they have enough time to study the industry and work on bigger products which will eventually end up being direct competitors. Until then, however, those startups are operating under the „competition radar“.
3. Accustom people slowly to the new „world“: By not confronting users directly with something completely new, startups can slowly accustom people to the new paradigm and incrementally lead them towards the new world.

We have seen such strategies being very successful in the past, especially when dealing with socio-technical systems. Socio-technical systems are systems that consist of the technology per se, the applications and everything around it such as user practices, symbolic meaning, regulations and the wider network of stakeholders.

In „Blockchain and social networks: unbundling, and re-creating the stack“ I explained such systems by the example of Facebook and the car. The car, as part of the socio-technical system, „the transportation system“, started off as an extension of the then prevailing transportation systems. In the beginning, the car was enhancing prevailing means of transportation (e.g. horse-drawn carriages) in areas were those fell short (e.g. not being able to cover long distances). It was only after time and gradually that the car replaced horses completely [1].

If we now consider Blockchain as such a socio-technical system or the technology part of it, with AppCoins and Credo we can see a similar pattern playing out.

Leaving aside the question of whether certain products need a blockchain in the first place, I believe that such a hybrid approach of first being a partner and then a competitor is far more useful than the “lets add Blockchain to an existing business model and fight the Amazons and Facebooks of this world” big bang approach.

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Notes

[1] This line of thinking originates form “Technological Transitions And System Innovations: A Co-evolutionary And Socio-technical Analysis” by Frank W. Geels (Amazon)

Originally published at researchly.leobosankic.com on April 15, 2018.

Blockchain and socio-technical systems — diffusion through hybridization was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.