Blockchain Archives

July 18, 2022September 16, 2022

A Quick intro to DAOs challenges

In the next essays I will write about Web3, in particular DAOs. I’ll share some of my findings and takes. Developed in the last years, doing consultancy. As well as being a somehow hardcore user of blockchain-based tech. Somehow I thought it needed a bit of context. At least for a part of the audience with a shallow experience around most parts of the web3 universe.

DAOs are particular entities, that face new operational paradigms. Some of the ones any traditional organization has. Some new and exclusive from this kind of organization. This will be a quick review of the challenges they face. There is a complete DAO stack that is surfacing to solve those particular problems. I’ll touch base in the next weeks about analysis of specific areas and solutions in the landscape.

I like the way new situations create new types of problems. From time to time you have the opportunity to work on challenges that have a little background. You are an explorer in a new land and I find that appealing to say something.

My belief is DAOs will be WAY more impactful down the road than we can foresee now. Perhaps not in the actual form. In an evolved shape, resulting in overcoming today’s challenges. By learning about those challenges. About what kind of solutions are being developed around them. We can get a solid head start on understanding the future.

If you are familiar with what DAOs are, please, skip this part. I want to give a quick overview for someone who does not know what they are, providing a bit of context. Pretty hard to not know what DAOs are, but there is a world outside of our little bubble.

What DAOs are

DAO stands for decentralized autonomous organization. In essence, a group of individuals, aligned with a shared purpose. Using web3 technology to register its nature, rules and operational logic.

Smart contracts are at their core. They use blockchain-related technology to operate. Making use of web3 financial and operational instruments (cap table, treasury handling, tokenization of shares, voting mechanisms, ID management,…).

The autonomous part comes from it being a flat hierarchy org. Not connected to a central organization or institution. In theory, the members of the DAO. The theory implies fewer management layers. A learner structure. Value-based and with the consensus of its members being a driver of every workflow.

The first proponents of a decentralized structure go back to 2016. DAOs are relatively new, aren’t they? ergo a work in progress.

What challenges DAOs face now

They have a particular set of operational challenges. It will vary depending on what the DAO’s targets are. A social DAO does not have the same needs as an investment DAO. They will share some commonalities, regardless of the nature of their goals. Some of those challenges are:

Governance and decision making
Setting goals in a decentralized way
Handling the shared cap tablet, shared treasury, taxes…
Allowing participants to capture value in a healthy way
Keeping coherence and do not diverge from the original targets over time
rewarding contributions without encouraging pavlovian behaviours.
Incentivize engagement with the project, rewarding participation
Aligning resources with goals effectively
Onboarding and effective engagement of new participants

Defining business logic without a central structuring is challenging. DAOs are not only subjected to new dynamics and tensions because of their nature. They interact and live in the real world. They have to run and deal with trad organizations and structures. I find it extremely enticing to follow its evolution. Seeing new forms of organizational structures popping up is absolutely exciting.

Keep tuned if you want to know more about it. Something you’d like to know in particular? please, hit me up!

July 13, 2022July 4, 2022

Unstoppable Sites, how do they work

I have been playing this weeks with deploying decentralized applications. Doing a bit of analysis on the landscape. What are the existing options, the challenges they face and the stage of the different parts. What would be a decentralized web3. Moving some of my notes into articles.

How do they work now?

Let’s take a step back and check how the web2 works. You have a DNS, Domain Name Service, a service able to translate IP addresses into human-readable addresses (i.e. “yahoo.com”). When you ask for a site, your ISP handles that request. Routing it to the entity you are looking for and retrieving the packages said entity sends back to you (data).

All this game of interactions. Between your computer, the application you are using, your ISP, servers, etc, is abstracted. To create a more user-friendly experience.

Here you have a nice graph (not mine) of how all that works. It is of course a simplification, we have built a lot of infrastructure over the years to deliver a great experience (CDNs, containers,…). You get the idea.

How do decentralized domains work then?

How do web3 works? We have a similar problem. For starters, wallets have long, unfriendly addresses. Hard to memorize, share and prone to typing errors. We have Unstoppable Domains and ENS, Ethereum Name Service, whose job is to “translate” those into something easy to type and remember. Both allow multiple wallets in different coins (ETH, BTC, LTC, DOGE). As Well as add different records (content, discord,…). Allow you to point your domain to a site.

There are differences and similarities around how the registration process works. Price models, how ownership is handled, etc, but will not go there. The main difference between both services is their business model. ENS has a yearly payment structure, while UD has a one-off payment model. Not fundamentally relevant, but worth remembering.

The main caveat right now is that you need to use applications that work with said domain extensions.

The ICANN has not introduced those domain extensions in the standard. Regardless of how you host your site, your audience will still need a browser supporting your “special” domain (Brave). Alternatively, extensions that help you load crypto-related domains. It is very unlikely they will be incorporated natively in the future. Their creation and ownership are completely out of the control of the ICANN. A strong barrier to adoption, although not a definitive one.

What is the promise?

The promise is to have a decentralized web. Meaning your site infrastructure is not dependent on private entities, but organized in a way that your content would be theoretically more resilient. Your data cannot be taken down, disappear or be regulated.

This would enable to have always available information, reliable. Escaping the censorship in authoritarian governments. We all know the dark side of said promise as well, the dark web, the uncontrollable spread of fake information… Aspects not limited to a pure societal rejection, but also having strategic value. Being susceptible to manipulation according to particular interests. Weaponizing information is not new, but the scale and reach are.

Another aspect to take into account is that complete anonymity is not possible. Even not providing your personal information when registering. You are still leaking details about your wallet, IP address, etc.

The elephant in the room is they are still pretty much centralized. As they are now at least. First, you need the central organization (ENS, Unstoppable Domains) to provide the domain. You also need a said entity to allow the association with a particular coin or asset. Second, you still need a third-party browser or extension to route to your domain. Meaning that, as example, Brave could tomorrow decide to block your particular site and no user will be able to easily reach your content.

Great teams are working on providing the other (more significant) significant parts of the equation in an almost decentralized shape (message routing, container resolving,…). Making it possible running on-chain applications. I promise I will write more about all the work done by the IPFS and the Internet Computer protocol.

March 14, 2022March 13, 2022

Blockchain Layers, L1s and L2s

Once we passed the stage about explaining to my dad what a blockchain does (lately I am working more with Web3 projects, protocols, etc), the biggest struggle was not so much the logistics (cloud, decentralization), but the motivations. “Nodes? yes, but why? who owns them, how do they find out about all this, … “. From there I moved to how does it operate and works (proof-of-work, proof-of-stake). Then I started to mention L1s and L2s.

If you are having trouble figuring out what are L1 and L2s, you are not the only one. Let’s give it a try to explain something relatively complex in a simple way.

What does it mean L1s and L2s?

The L means Layer (network) and the number indicates their “position” (duh). A Layer network is a blockchain in a decentralised system. Not very clear, isn’t it? we have a decentralized system, the blockchain would be the first layer (L1). It provides the core functionality of the system. The second layer (L2) would be third-party integrations that interact with the first layer to enhance the whole system throughput. They expand the blockchain protocol, augmenting its scalability. Examples of L1 are BTC (Bitcoin) or ETH (Ethereum). Examples of L2s are Plasma (extending Ethereum protocol) and Lightning (built on top of Bitcoin).

In an even simpler way to define it, we have the blockchain protocol. Conceptually exciting but hard to implement in real life. L1 solutions re-define how the protocol works to increase its utility (they make it a better, usable, native version). L2 solutions work on top of that protocol to improve its scalability and performance.

What is the difference between L1s and L2s

To understand the difference, we need to understand their “raison d’etre”. Let’s introduce the scalability trilemma. In Vitalik Buterin words:

The scalability trilemma says that there are three properties that a blockchain try to have, and that, if you stick to “simple” techniques, you can only get two of those three. The three properties are:

Scalability: the chain can process more transactions than a single regular node (think: a consumer laptop) can verify.
Decentralization: the chain can run without any trust dependencies on a small group of large centralized actors. This is typically interpreted to mean that there should not be any trust (or even honest-majority assumption) of a set of nodes that you cannot join with just a consumer laptop.
Security: the chain can resist a large percentage of participating nodes trying to attack it (ideally 50%; anything above 25% is fine, 5% is definitely not fine).

L1 protocols eventually found scalability problems when they reach a high adoption rate. Layer 2 solutions solve scalability problems while preserving those three properties of the system.

How do Layer 2 solutions work?

By abstracting part of the transactional load to an auxiliary architecture. A different “layer” absorbs part of the burden of the native system. It processes part of the data, reporting back to the main network. By doing that, the base layer gets less congested, can scale up and handle overall higher levels of activity.

L2s promise to bring transaction costs down, speeding up transactions along the way.

I would like to note down that L2s are not a monolithic solution. There are different approaches to Layer-2 solutions. Nested blockchains, State channels, sidechains, all of them with their own particularities, making use of different mechanisms, with their set of tradeoffs and advantages towards solving the scalability problem. I’ll review some of those in future articles, probably.

The competition between L1s and L2s

How do they compete? In a world of finite attention and capital, there is a paradigmatic competition between L1s and L2s. On one side, L1s compete to be the base layer for L2s. On the other side, their future growth depends on how they look in terms of investment returns potential. They compete in terms of adoption (we can measure it in terms of daily transaction growth and Total Value Locked / TVL), public awareness as well as how rich is the ecosystem (participants, tooling, quality of satellite solutions).

There are great theses out there about how to evaluate the quality of those assets and useful information about the more probable bets, but for the moment the key idea is that said competition exist.

I hope what are Layer 1 and layer 2 is clear by now, how they operate and why they somehow are competing. If you have questions just send them my way!

February 23, 2022March 13, 2022

Proof-of-stake

I am writing it for my father, or at least that is the idea. Explaining complex concepts, to someone that does not necessarily have the same background or technical acumen. I got a lot of questions about my line of work, mostly related to tech or logistics of how I operate daily (aka, “yes, you are paid, but what is that you do exactly? how is your day at work?”). So I’ve decided to write about those. Disclaimers about the technical validity or accuracy of my affirmations.

What is proof-of-stake (POS)?

It is a safety mechanism to prevent abuse of a system. The most popular application is to cryptocurrencies. It is actually a solution to a somehow faulty solution, Proof-of-work (POW). Proof-of-work is a similar mechanism, based on increasing the cost of interacting with the system artificially. In PoS, instead of demanding a costly computation to participate, participants stake the coins they hold. The more coins they hold, the higher the possibility for them to interact (validate).

Lets’s take a step back. How do we prevent people from interacting maliciously with a system where said interaction has friction closer to zero? By adding friction artificially. Asking to solve a problem that is difficult to find, but easy to verify. It adds the right amount of effort to dissuade malicious attacks, keeping it functional.

The idea Cynthia Dwork and Moni Naor come up with in 1993 were quite beautiful. It was adopted in the famous foundational Bitcoin paper by Satoshi Nakamoto in 2008.

How does proof-of-work work?

Bitcoin is a distributed ledger. Information is stored in blocks, where every piece can be viewed by all participants in the network. It has a caveat though, without a central authority to verify if a transaction is real or fraud, how can you trust it? It needed a mechanism at its core to resolve this validation process in a decentralised way.

So, we have a blockchain (a distributed database), miners (nodes in that network, computers) and transactions we want to record in a way we can trust. When a new transaction occurs, a puzzle is given to miners. Miners compete to resolve it. Once the first one to solve the puzzle, the others verify the solution is right. If it is okay, the transaction is recorded and only that miner is rewarded. We have a system decentralised (multiple verification nodes), autonomous (as soon as the incentives are economically efficient miners will keep operating) and trustable.

How is the puzzle? It is a mathematical problem. The kind that can only be solved by trying one solution after another. They try to guess a 64-digit hexadecimal number, called a hash, that is less than or equal to a target hash in SHA-256, Bitcoin’s PoW algorithm. Not a hard problem, but one that allows for no shortcuts. Speed of processing is more important than being “smart”. This is an oversimplification and there are TONS of nuances around it (how the difficulty of the problem increases over time, probability of reward, POW algo…).

What is the issue then?

On one side POW is by definition costly. In terms of energy, hardware, infrastructure. It has raised real concerns about it being the best possible use of that energy. On the other side, participants (miners) are prone to maximise profits, regardless of the network. There is no incentive to improve the network. Bitcoin or Litecoin are still running on a PoW method.

Proof-of-stake is the proposed solution. Instead of having all participants compete, it assigns the option to create the block randomly. The amount of mining power depends on the amount the participant holds, assuming the more coins you hold, the higher the incentive to keep the system running. Miners or validators are rewarded as well, but they have to lock their tokens up in order to participate. Risking losing them if they are being malicious agents.

I hope it is clear enough. It passed the Dad test. Quite literally.