2020 is coming to an end. What impressed you most about the blockchain industry this year? Is the explosive growth of public chain ecology? Or the boom in blockchain applications? Or a big policy boon? At the end of 2020, Wanxiang Blockchain launched a series of four blockbuster annual review articles: Public Chain, Application, Serving the Real Economy and Supervision, recording a year of blockchain development. Below is the annual review series – public chain, author: Wanxiang Blockchain chief Economist office. Let’s see, this year the public chain is surging.

The year 2020 is coming to an end, and although the epidemic has swept the world, it has not affected the progress of the blockchain industry. In this year, breakthroughs were made in both public chain and ecological applications, and policies of various countries on blockchain and crypto assets were gradually improved. This article is a review of the progress of the blockchain industry this year, especially the progress of the public chain, with a focus on bitcoin, Ethereum, Polkadot and Filecoin, four popular public chains.

The currency

Bitcoin’s biggest technical development this year was the Taproot/Schnorr upgrade, which was proposed by Bitcoin developer Pieter Wuille and published as the Bitcoin Improvement Proposal (BIPs), numbered BIP 340-342, and is now officially incorporated into the main branch of the Bitcoin code. This is the biggest technical expansion of Bitcoin since the launch of lightning Network.

(1) Schnorr upgrade

The ECDSA signature algorithm currently used in Bitcoin and the Schnorr signature algorithm to be adopted are both elliptic curve digital signature algorithms. The elliptic curve they use is SECP256K1 and hash function SHA256, so they have the same security in this level.

Schnorr signature algorithm has the following advantages.

First, Schnorr signature algorithm has demonstrable security. In the Random Oracle model assuming the difficulty of elliptic curve discrete logarithm problem, and in the general group model assuming Preimage Resistance and Second Preimage Resistance, Schnorr signature algorithm has Strong Unforgeability under Chosen Message Attack (SUF-CMA). In other words, if the private key of the Schnorr signature is not known, no other valid Schnorr signature can be derived even if there is a valid Schnorr signature for any message. The provable security of the ECDSA signature algorithm depends on stronger assumptions.

Second, Schnorr signature algorithm has non-malleability. Signature malleability means that a valid signature for a public key and a message can be transformed into another valid signature for that public key and information by a third party without knowing the private key. The ECDSA signature algorithm is inherently malleable, which is the problem addressed by BIP 62 and BIP 146.

Third, the Schnorr signature algorithm is linear, allowing multiple collaborators to generate signatures that are also valid for the sum of their public keys. This feature is important for applications such as multi-signature and Batch Verification to improve efficiency and help protect privacy. However, under ECDSA signature algorithm, without additional witness data, batch verification does not improve the efficiency compared with one by one verification.

Finally, the Schnorr signature algorithm is compatible with the current bitcoin public and private key generation mechanism because it uses the same elliptic curve secP256K1 and hash function SHA256.

(2) Taproot upgrade

The Taproot upgrade can be viewed as an application of the Merkelized Abstract Syntax Tree (MAST), which in turn is related to pay-to-script-hash (P2SH).

P2SH is a new class of transactions launched in 2012 that make using complex scripts as easy as paying directly to a Bitcoin address. In P2SH, the complex locking Script is replaced by its hash value, called a Redeem Script. When a subsequent transaction attempts to spend this UTXO, it must contain a script that matches the hash value and unlock the script.

The main advantages of P2SH include: first, in the transaction output, complex scripts are replaced by hashes, making the transaction code shorter. The other is to shift the burden of the build script to the recipient, not the sender. Third, privacy protection is better. In theory, any party other than the recipient can be unaware of the payment conditions contained in the exchange script. For example, in multiple transactions, the sender may not know the public key associated with the multi-signed address; The public key is disclosed only when the recipient disburses funds. But P2SH has drawbacks: First, all possible spending conditions must eventually be disclosed, including those that are not actually triggered. The other is that when there are multiple possible payout conditions, P2SH will become complicated, which will increase the workload of calculation and verification.

However, P2SH behaves differently from the common pay-to-public-key-hash (P2PKH) and still has privacy issues. Taproot solves the problem of making P2SH and P2PKH look the same on the chain (Figure 1) : 1. 2. Adopt multiple signature algorithm based on Schnorr signature for “cooperative expenditure” script; 3, the “cooperative expenditure” and “non-cooperative expenditure” together expressed in the form of P2PKH; Cooperative expenditures behave like P2PKH transactions, with a public key and corresponding private key, without disclosing the underlying maSts. Non-cooperative expenditures disclose the existence of masts, but only the part of the script that is executed.

Figure 1: the Taproot

The etheric fang

Scalability has always been a problem for Ethereum, especially with the DeFi app explosion in 2020, when network congestion led to high processing fees. This lack of performance makes it difficult for Ethereum to live up to the requirements of a “world computer” and also affects the user experience. Expansion is a top priority for The Ethereum network. The progress of Ethereum in 2020 mainly focuses on expansion, which is divided into two parts: one is the preparation and launch of Ethereum 2.0, and the other is the development of Layer 2 expansion plan, among which the Rollup route is the most prominent.

(I) The progress and route of Ethereum 2.0

The transition to PoS public chain is the goal of the “quiet” phase of Ethereum’s evolution, known as Ethereum 2.0. ETH output will then shift from mining to Staking, where 32 ETH are mortgaged. Ethereum 2.0 was originally planned to go live in three phases: Phase 0, Phase 1, and Phase 2. Ethereum 2.0 is a beacon chain plus shard blockchain multi-chain structure. All shard chains are connected to the beacon chain, which is responsible for communication between shard chains and elects verification committee members for each shard chain. Phase 0 will stake beacon chains and unstate Staking. Phase 1 will stake sharding chains, with an initial plan of 64 sharding, but without smart contracts and transfers. Phase 2 will stake smart contracts and formally complete deployment of Ethereum 2.0. In the Ethereum 2.0 roadmap, the entire project will be completed by 2022.

The startup condition of ethereum 2.0 network is that more than 16,384 verifiers pledge 32 ETH, that is, at least 16,384 nodes are required to participate. Phase 0 of Ethereum 2.0 started on December 1, and currently the number of active nodes is 26,861, with more to come. Such Staking ETH will not be transferable until Phase 2 of Ethereum 2.0 is complete. Ethereum 2.0 is a long-term strategic goal of Ethereum, but Ethereum founder Vitalik has written several times in support of rollup in Ethereum.

In recent public statements from the Ethereum development team and Vitalik, they acknowledged that ethereum 2.0’s roadmap has changed, including the following: 1. The future roadmap will be Rollup centered, and Phase 1 will be simplified to data sharding available for Rollup. Since the advantages originally envisioned have not been realized, eWASM’s route is no longer emphasized; 2. Simplify the merging of Ethereum 1.0 and 2.0 phases by storing Ethereum 1.0 transactions directly on the beacon chain rather than as shards in Ethereum 2.0, which will shorten the merging process; 3. Parallelization of work, light client, data sharding, and merging 1.0 and 2.0 independently, as long as each part is ready.

As can be seen from the changes in Ethereum 2.0, the overall development is in the direction of faster landing and use. The Rollup solution was introduced not only to address the current pressing expansion needs, but also to facilitate innovation. The old path of Ethereum 2.0 is not completely abandoned, it just no longer has the highest priority.

(ii) the route centered on Rollup

Layer 2 solves the scalability problem by moving behavior operations from the main chain to the chain to save resources on the main chain without affecting the public chain itself. The main schemes of Layer 2 include state channel, side chain, Plasma and Rollup. However, the first three have encountered various bottlenecks in their development in recent years, such as centralization, complex user operation, failure to support smart contracts, and complex exit mechanism. The Rollup scheme is implemented by packing the transaction data down the chain into a single transaction and transferring it to the chain, while ensuring the same security as Layer 1.

Different teams came up with different solutions for how to implement Rollup. Optimistic Rollup and ZK Rollup are currently two of the most widely used and developed by the development team. Optimistic Rollup ensures that nodes will not be evil through fraud proof mechanism, while ZK Rollup uses zero-knowledge proof to ensure the same security as the main network. Optimistic Rollup supports smart contracts, but the withdrawal period is long, which will affect the utilization rate of funds. ZK Rollup has a short withdrawal period, but it is difficult to support general smart contracts.

Many applications on Ethereum have been or will be tested with different rollups, such as Curve, Synthetix, and Uniswap, as well as DeFi projects based on Rollup.

Polkadot

(I) Technology and governance progress

Polkadot launched DOT transfer in August 2020, marking the completion of the mainnet phase. Polkadot is a heterogeneous multi-chain architecture, which adopts the form of relay chain plus parallel chain to cross chains, enabling interaction between chains and improving scalability, in which Substrate framework plays an important role. Substrates can be interpreted as general pallets for various functions, and developers can choose to invoke different pallets to save development time. At present, Substrate is launched in version 2.0, and more than 70 pallets and sub-pallets are added.

The Kusama test Network continued to exist after the Polkadot main network went live, acting as a precursor network, and Kusama’s token, KSM, functioned similarly to DOT, remained. Risky features will run feedback on the Kusama network before going live on the main network, such as the upcoming parallel chain card slot auction, which will go live on Kusama for actual testing before launching on Polkadot. Rococo is a test network designed to test parallel chains. Currently, the V1.0 version of The parallel chain is available, which means that the mainnet parallel chain is one step closer to launch.

In terms of governance, Polkadot’s on-chain governance has begun, but the problems of the power of the tycoons and low public turnout remain. Polkadot’s board of directors is Staking, and that voting is not in conflict with referendums and otherwise, where a business owner elects a board member who likes what he or she likes and uses his or her DOT to vote in a referendum. Although this approach can make the governance result express the will of the largest stakeholder, it will cause the centralization of governance. Also, voter turnout among DOT holders was low during the referendum vote. In Polkadot Staking is independent of governance voting, and the pledge rate is currently around 70%, but voter turnout in a referendum is in the single digits. Low voter turnout affects how distributed governance is and does not truly reflect the will of all people. This may be due to the complexity of repeated voting operations, or it may be because users do not know the content of the proposal and cannot make a choice.

2. Ecological progress

Although the Polkadot main network is not fully functional, many applications have emerged in ecology. According to the statistics of PolkaProject, there are nearly 300 Polkadot related projects, including Substrate based development projects, tools, forums, wallets, etc. Figure 2 shows the ecological overview of Polkadot as summarized by PolkaProject.

Figure 2: Polkadot ecology overview (image: PolkaProject.com)

Polkadot’s ecosystem is focused on DeFi, which is currently the industry’s hottest area, along with data, privacy and asset Bridges. Polkadot has few games, predictions, and social apps compared to other public chains. This is due to Polkadot’s early launch, but also because some apps have been falsified on other public chains or don’t make much sense across chains. In DeFi, liquidity release and DEX are the most debatable sectors. DOT in Polkadot locks liquidity in a variety of ways, including governance, governance, and slot auctions (governance and other locking features don’t conflict), so there is a need to release liquidity, and DEX is a must-have application for value exchange on the chain.

At present, almost all Polkadot ecological applications need to carry out business based on parallel chain. Applications that are not online on the main network also need verifiers on the Polkadot relay chain to ensure their security. Therefore, these projects must participate in the parallel chain card slot auction.

Polkadot’s network resources are limited. Currently, it supports a maximum of 100 parallel links. To use the parallel links, the project side needs to rent the parallel link card slot. The card slots are released by Polkadot authorities at irregular intervals. The leased card slot needs to be locked DOT and released after the lease term ends. The DOT locked in the lease is refunded at the end of the lease term, so the lease cost is just an opportunity cost for the DOT. Polkadot allows others to deposit DOT on behalf of the project to help the project win the auction, which requires the project to set up effective incentives to attract DOT holders.

Typically, a project owner will award its tokens to users who help it with a parallel chain auction, also known as a Parachain Lease Offering (PLO). Similarly, for users, the cost of PLO participation is the opportunity cost of lock-in DOT. Today, DOT Staking is Staking, governance, trading, and parallel chain leasing, and there will be other applications in the future. Long-term holders of DOT are better off if the project owner gives more value to the token than participation in staking (currently above 10%) or the yield of some DeFi.

In official information, in addition to the initial parallel links being distributed by auction, Web3 will also sponsor some social links, including links containing infrastructure or connecting Bridges. Parallel chains related to smart contracts, for example, may be directly aided by Web3 in card slot use. If the slot is not secured successfully, there are several options for participating in the cross-chain, using parallel threads and deploying to other parallel chains that already have the slot, or using cross-chain Bridges to connect to Polkadot if you already have your own main network.

(3) Problems in Polkadot ecology

Parallel chain slots will be leased, meaning that most Polkadot projects will have to pay a cost (pledged DOT) for cross-chain resources on Polkadot, so the bar for parallel chain distribution with Polkadot relay chain security is much higher. For most projects, Polkadot’s security is available only to those who can afford to lease cross-chain resources, or deploy nodes themselves, which can make early projects more difficult to start. There are sustainability issues with the PLO solution currently adopted by the project side. If the tokens are distributed, other ways must be adopted to attract users to assist in the auction, and the value capture capability of the project side tokens after the parallel chain goes online is also at risk. In a world where parallel slot auctions are highly competitive and projects must conduct extensive publicity campaigns prior to launch, a cold start would be difficult to survive in the Polkadot ecosystem. If there is fierce competition in the future, the competition for cross-chain resources will lead to the survival of the fittest before the project goes online.

However, other cross-chain solutions exist on Polkadot, such as parallel threads or integration into other projects with parallel chain slots, as well as distribution on the Kusama network to reduce costs. The current differences between the availability of parallel chains and parallel threads, and the burden of cross-linking in other ways on the team will need to be observed after launch.

The Kusama features of Polkadot and testnet are not very different, so teams seeking different stability have different options, but it can lead to user and community fragmentation. Although the two don’t fork when the technology is upgraded, the two communities are separated from each other in the beginning, which creates a split in the community in stealth.

Polkadot targets platforms of platforms, and cross-chain is one of the issues it addresses. For public chains, the default cross-chain problem exists only between mainstream public chains, and it remains to be seen how Polkadot will win out among the many cross-chain solutions that are emerging today. Polkadot also has the advantage of improving single-chain performance. There are many solutions to improve performance, such as layer 2 networks, and Polkadot’s effectiveness will be tested over time.

Polkadot has a large imagination space for cross-chain between enterprise platform and public chain and between enterprise platform and enterprise platform, but the cost and significance of cross-chain also need to be further investigated. At present, the connectivity between alliance chain and public chain is not urgent.

Filecoin

Filecoin provides incentives for distributed storage IPFS and includes IPFS members as core members. Both Filecoin and Filecoin were created by Protocol Lab and have attracted worldwide attention since their launch. In 2017, it raised $257 million for a 10% share, a record at the time. However, the process of going online is far from as smooth as financing. The test network and main network scheduled to go online in 2018 have been delayed and delayed, and will finally be officially launched in 2020 in 10. The Filecoin project has been delayed for two years, but the buzz is still there, especially among miners.

(1) Current progress

In Filecoin consensus, block creation is based on the expected consensus (EC) model, which means that each round elects one or more miners to create a new block, and the likelihood of a miner winning the election is proportional to the miner’s current storage capacity. The storage capacity of miners is proved by using space-time proofs (PoSt) and replication proofs (PoRep). Space-time proof can use proof chain and time stamp to prove that miners store data in a certain period of time. Even if the verifier is not online, it can also verify that miners become proof chain in this period of time in the future, effectively preventing temporary data generation attacks. Replication proof proves that data has been successfully created in a particular sector. And guard against three kinds of attacks: one is the witch attack; Second, external data source attacks; The third is the generative attack. Duplicating proof prevents miners from being able to store less data than they promised in a different way to get paid extra.

Miners’ rewards will be released linearly, halving output every six years. Currently, Filecoin’s storage capacity has exceeded 1 EiB (Exbibyte) and now stands at 1.27EiB, with 789 active miners. Although The Filecoin browser shows miners in Asia, Europe, North America, Oceania and Africa, it is clear from the labeling and disclosure information that the majority of participants are Chinese miners. The distribution of effective computing power of miners has not yet been as centralized as that of bitcoin mining pools.

Figure 3: Distribution of effective computing power for miners (image source: filfox.info)

(2) Economic mechanism and current situation

There are two markets in the Filecoin economic model: the storage and retrieval markets, with customers and miners in each market. In addition to these two roles, there are developers and investors in the Filecoin economic model ecosystem.

In the storage market, miners are rewarded in three ways: transaction fees; Second, block reward; The third is Networking Message Transaction Fees. Transaction fees and network transaction acceleration fees are paid by customers in advance, and block rewards are generated by the system. Filecoin differs from the Bitcoin network mainly in the nature of the service it provides: storage is a long-term service, and Filecoin requires miners to maintain the network over a long period of time, as opposed to the bitcoin network, where miners can come and go. The storage market also introduced a pledge mechanism, a miner penalty mechanism, to protect Filecoin storage market customers from losing their data.

In each storage agreement between a user and a miner, the miner in the storage market stores the data provided by the customer on the network, known as a Sector. The sectors added by each miner will contain the contents of the stored files and the promised storage duration, ensuring that customers can freely use their stored data during the agreed storage duration. When a miner adds a sector to the Filecoin network, the miner is required to pledge a lock-up fund. The lock-in funds are made up of two parts: the miners’ own FIL tokens and part of the block award. If a miner goes offline during the promised storage period, he loses a portion of his lock-in funds. If the miner stops saving entirely, he may lose all of his locked tokens. Locked funds are unlocked after the miner fulfills the storage agreement, and the miner can recover all the money after a short lock-up period.

This means that the miner has to pledge FIL to get the block reward, but FIL tokens are released gradually in a linear manner. Currently effective work force growing too fast and FIL early online prices are too high and volatile, linear release time cycle is long, many men don’t want to buy mortgage needed in high out-of-pocket FIL, so at the beginning of the online event caused the miners’ strike, many storage capacity as there were not enough FIL to enter Filecoin network, But it has a lot to do with being oversold. The miners had no control channels, so they chose to confront the project side. The final result was that the project side compromised and changed the reward for mining from 180 days of linear release to 25% and 75% linear release. In addition, in order to solve the problem of FIL shortage, the relevant service providers in the official and market are preparing or have already launched FIL loan service.

3. Future development

Because of the complexity of Filecoin and the centralization of the corporate decision that many miners are unhappy with, there are fork projects like Filecash, FileStar, etc.

It’s easy to see how the market for Filecoin is hot right now, and FIL’s price is related to that. But in the original design, FIL’s supply and demand and price were regulated by market services. Miners need to pledge FIL to get a block reward, and FIL tokens are released in a linear progression, so the supply side is expected to grow slowly and the growth rate is exponentially decreasing. On the demand side, market participants must continue to buy FIL due to the increasing demand for service. In order to maintain the stability of the service price, whether the FIL goes up or down, the price of the transaction fee for storage and retrieval needs to be anchored in fiat currency or stable currency. When FIL prices go up, customers pay less transaction fees and network acceleration fees for FIL units, and miner block rewards account for a higher percentage of revenue. When FIL prices fall, customers pay higher transaction fees and network acceleration fees for FIL units, and the proportion of revenue generated by miners’ blocks decreases. Assuming that only service demand is considered, when the price of FIL increases, the rate at which customers buy FIL in the secondary market will slow down, and when the price of FIL decreases, the rate at which customers buy FIL in the secondary market will increase, thus achieving the function of regulating the secondary market.

But now that there are far more miners than users, and supply of storage capacity than demand, the balance is upset. The participation of PoW miners in Bitcoin is determined by profit, so it is a gradual process that more miners and computing power join the bitcoin network as the currency price rises. However, Filecoin is already being produced and sold by a large number of mining machines before it goes live. If the mining machines are not able to access the network, it will be difficult to maintain cash flow. If the mining revenue is not good, it will affect the interests of mining machine manufacturers. The market mechanism in Filecoin will work in the future, but it remains to be seen whether there will be real users. It also remains to be seen whether Filecoin storage’s censor-resistant nature will limit its growth in the global market.

Thinking and summarizing

Currently, except for Filecoin storage, most public link projects use PoS based consensus mechanism. Their differences lie in the implementation method of PoS, governance mechanism and economic model, etc. In the future, Ethereum will also adopt PoS consensus. Although common chains are not limited by application scenarios, on-chain application convergence means that they are in a competitive relationship. Future applications migration in the Ethereum 2.0 phase and the development of Polkadot ecosystem applications are the next hot topics in the public chain space.

For the public chain itself, how to balance performance, security and decentralization is still a problem it faces, such as the Rollup scheme of Ethereum and various problems of Ethereum 2.0 scheme. Finding a balance between the three is still a breakthrough for the public link.