The most important developments in Crypto 2.0

Something strange is happening in the world of cryptocurrencies. To the investor, the speculator, or the casual observer, the industry is in the midst of the “crypto winter” marked by dwindling public interest and stagnant prices after last year’s massive plunges.

But to the engineer or the founder, it is an industry which has never been so feverish; a sector erupting and overflowing with new initiatives, new developments, and new technologies. What follows is a brief, oversimplified summary of what I view as the most important current initiatives.

Outsiders ask, quite reasonably: will anyone outside of a tiny minority ever really care? But “ever” is a long time, and blockchainers are still fairly flush with funding from the boom, and — more importantly — armed with two of the most potent weapons known to humankind: technical brilliance and true belief.

Lightning

There’s little doubt that the biggest thing in the Bitcoin world right now is the Lightning Network. Jack Dorsey is a convert. Multiple well-respected, well-funded companies populated by serious engineers are building implementations … but it is not without its idiosyncratic problems.

First proposed in 2016, Lightning is a solution — of sorts — to two of Bitcoin’s problems as a payments network: that it is slow and expensive to use. Slow, because you have to wait for an hour or more for high confidence that any given transaction has been irrevocably committed to the Bitcoin blockchain. Expensive, because the Bitcoin network only supports a handful of transactions per second, so when it is congested, its miners will only process transactions which offer them relatively high fees.

Lightning addresses these issues — again, sort of — by letting people open “channels” which support secure, instantaneous, and much cheaper Bitcoin payments. Which sounds great, and in certain circumstances, is. Unfortunately, those circumstances can be somewhat limited, as Lightning has a lot of restrictive quirks of its own.

To open a “channel” you must first commit bitcoin to it, via a transaction on the main blockchain, so that initial transaction suffers from all of traditional Bitcoin’s speed and cost problems. Once a channel is open, you can only transfer an amount up to however much you initially committed — and channels are point-to-point, not universal. You might reasonably ask: how exactly is this whole process cheaper and faster than an ordinary bitcoin transaction, when it must begin with a bitcoin transaction?

The expectation is that most users will just need to open up one-time sizable channels to a single counterparty, a lightning “hub,” which will dynamically route (micro)payments to recipients, in the same way that your home router connects to a single ISP which routes data from your home across the Internet. Lightning hubs will charge for this service — and for ensuring that nobody tries to scam you, which in principle is possible if no one is watching your transactions somewhat carefully — but those fees are expected to be much lower than fees on the root blockchain.

Which sounds extremely promising, but Lightning does suffer from a bit of a chicken-and-egg problem. For it to be useful, users must commit money to their Lightning channel before they need to spend it, or else wait for the commitment transaction to be finalized on the Bitcoin blockchain, defeating the whole point. In other words, Lightning acts a lot like a prepaid credit card, not exactly an inspiring analogy for a new financial instrument.

I can imagine certain circumstances and contexts, e.g. machine-to-machine payments, in which Lightning is incredibly useful, even potentially revolutionary … but it seems reasonable to still be skeptical about ordinary use by consumers or businesses with simpler, and better, traditional alternatives.

Bitcoin

As for the Bitcoin blockchain itself – well, the Bitcoin technical community is very cautious and conservative, far more than that of any other blockchain initiative (this is no bad thing). But even so, there is a slew of other technically interesting stuff going on in the Bitcoin world, despite its inherent caution and conservatism.

Schnorr signatures, which improve both the efficiency and privacy of multi-sig transactions. MAST, which make Bitcoin smart contracts more efficient, (potentially) larger, as well as more private. Bulletproofs / Confidential Transactions, to greatly improve transaction privacy.

If you’ve noticed that privacy is a theme here — well, there’s a reason for that. The public nature of Bitcoin transactions makes a lot of people uneasy. This is why “privacy-preserving” cryptocurrencies like Zcash and Monero exist. This is not least because of the possibility of regulators trying to make the currency non-fungible by making certain “tainted” bitcoins — those garnered by theft or corruption — illegal to use.

Transaction confidentiality will ensure Bitcoin fungibility regardless of regulatory regime. Is this an uncontroversial approach? It most certainly is not! But in an era of ever-greater encroaching corporate and government surveillance, anything which preserves individual privacy seems highly morally defensible.

Ethereum

Privacy is a big deal to Ethereum, too, both inherently, and because new privacy technologies known as zkSNARKs and zkSTARKs will theoretically allow for transactions and smart-contract computation to be performed off-chain and stored massively more efficiently. But privacy is not the Ethereum community’s primary focus right now. In fact I think it’s fair to say that its focus is currently on destroying Ethereum in order to save it.

That may sound extreme — but the changes coming to Ethereum, collectively known as “Ethereum 2.0,” are immense and pervasive. I strongly recommend this excellent James Prestwich technical summary from a couple of months ago, and its key line: “The tools and contracts we’ve written for ETH1.X will likely need to be completely redesigned and rewritten for ETH2.0.” For a higher-level, more business-focused analysis of this year in Ethereum, I equally recommend Jim Stark’s post.

Ethereum 2.0 is not so much an upgrade on Ethereum 1.0 as it is an entirely different beast: a sharded Proof-of-Stake blockchain, probably with ongoing “state rent” to pay for smart-contract storage space, rather than a single Proof-of-Work with one-time, up-front storage fees. You can get a (now somewhat out of date) oral history of its development straight from the wunderkind’s mouth:

One of the biggest changes on deck is a move from the current Proof-of-Work system, wherein (as with Bitcoin) the Ethereum blockchain is verified by “miners” performing computationally difficult tasks, to Proof-of-Stake, wherein its integrity will be guarded by “validators” who own cryptocurrency which they “stake.” These validators will earn rewards if reliable, honest and accurate … but if not, their stakes will be “slashed” (i.e. they will lose money).

Meanwhile, while the “base layer” of the Ethereum blockchain is under massive redevelopment, so-called “Layer 2” solutions are also being built. These technologies are essentially to Ethereum what Lightning is to Bitcoin, but at the cost of being much more complex.

If this all works out well, then Ethereum will be able to securely scale to an essentially arbitrary size, and become a true “world computer,” albeit one which is really a disparate set of networks of computers whose peer-to-peer Layer 2 work is orchestrated by regular check-ins with the Layer 1 decentralized hierarchy of an arbitrary number of sharded subnetworks that are constantly working together to agree on transaction finality and collective state. Whew.

If. That’s a big if, given the seemingly fractal complexity of Ethereum 2.0. I’ve long been a big Ethereum fan — my own pet reputation-cryptocurrency project is built atop it — but this complete destroy-in-order-to-save reconstruction, and its seeming exploding complexity, worries me. To its community’s credit, though, it’s taking steps slowly, and only when they have confidence in them.

Governance, Staking and Interchains: Cosmos, Tezos, and Polkadot

Beyond those Big Two (yes, for a time Ripple was on paper the second most valuable cryptocurrency, but it’s seemed to me technically stagnant and boring for a long time now) there are a number of other interesting initiatives aimed at advancing blockchain tech via Proof-of-Stake chains, on-chain governance, and interchain connectivity.

As mentioned, Ethereum is moving to Proof-of-Stake. A few chains are already ahead of it, though, noticeably Cosmos (whose launch I wrote about recently) and Tezos. Both of those chains also offer on-chain governance, meaning that decisions about changes to the blockchain in question can be made on the blockchain itself, rather than via some sort of off-chain foundation, company, or organization, via votes by owners of the cryptocurrency in question. Tezos is in the midst of its first upgrade initiated and approved by decentralized governance, a major milestone.

You’ll notice that between Cosmos, Tezos, soon(?) Ethereum, and more to come, we now have multiple major blockchains which are secured by “stakers” rather than the “miners” of Bitcoin and its ilk. Since stakers effectively earn rent on their stakes, this has led inevitably to yet another whole new crypto business model: Staking as a Service.

Cosmos is intended as more than just a blockchain, though: like another initiative, Polkadot, it’s built for a vision of a world with many blockchains, one per decentralized application and/or relevant cryptocurrency, which will talk to one another — and pass assets to and from one another. Similarly, Plasma pioneers are already announcing plans to connect multiple blockchains. I remain somewhat skeptical about that, but they, Cosmos, and Polkadot all intend to be the connecting substrate for such a many-blockchain world.

Are we moving into a world where many intertwining blockchains constantly communicate with one another, passing a galaxy of assets back and forth from one decentralized system to another? Or one in which almost all decentralized apps run on a single master chain, such as Ethereum or Tezos? Or one in which such apps use blockchains only for identity / authorization, and all other code is peer-to-peer — the Blockstack vision?

… And/or a world in which the tradeoffs which come with decentralized apps are so onerous that essentially no one uses them, whether in a consumer or enterprise setting, making the above paragraph essentially moot and irrelevant? No one in “the crypto world” believes in that future, obviously. On balance, I don’t believe it myself … quite. But I think it’s fair to say it remains the majority view, and I’m less quick to write it off entirely.

Other Initiatives

Blockchain technology has become a vast, diverse, and dizzyingly complex and fast-moving world, and keeping it up with it all is no mean feat. This piece is already long enough, so let me just quickly add some point-form notes of a few other initiatives I find interesting:

• Blockstack is essentially a peer-to-peer computing initiative with a blockchain identity layer, which is a different and to my mind often superior model of decentralizing apps than the “smart contracts on a blockchain” one found elsewhere.
• Foam is a “proof-of-location” system which promises a decentralized, worldwide alternative to GPS and other positioning systems, courtesy of blockchain rewards for maintaining geolocated radio beacons. There are many “decentralized mesh” notions out there, but Foam seems to be the one furthest along in actual development.
• Handshake is a decentralized naming system which could ultimately be used as an alternative to e.g. the Internet’s domain naming system and X.509 certificate system.

The Upshot

It may seem strange that, even as the public cryptocurrency frenzy of 2017-18 dies down, we seem to be in the midst of a Cambrian explosion of blockchain advances, initiatives, and iterations. But it seems that now that (some of) the get-rich-quick scam artists have been filtered away, the true believers and technical devotees can get back to work building what they believe to be the future.

Is it? Well, maybe not the future, but very possibly a nontrivial part of it. As I’ve argued before, though, cryptocurrencies and decentralized apps don’t need to conquer the mainstream and replace the existing tech megacorporates to succeed, any more than Linux had to destroy Microsoft in order to become enormously influential. All they have to do is provide a viable alternative in other to keep government and fiat currencies somewhat honest. I’m pleased to report that we’re noticeably closer to that state of affairs than we were a year ago.