by Tristan Borges Solari 7 months ago
There is the conception that having your own blockchain to track and record tokens that represent an arbitrary asset is the way to go. When it comes to money, a blockchain is useful since it represents information in a linear fashion and is tamper-evident and immutable if there are proof-of-work and verification functions independent from one another.
With the advent of Bitcoin, numerous other projects have appeared claiming to be a blockchain of one kind or another, portraying themselves as pertinent in their own way by offering an array of different functionalities, faster transactions times or their capability to integrate with the physical realm.
A rising use of such a technology is to issue assets that can leverage the supposed qualities found in numerous blockchains. Issuing an asset, token or any other digitized piece of information through such structures does have advantages compared to traditional methods of doing so. You can have greater flexibility over the nature of the issuance as well as avoid the high barriers of entry of obtaining such a service from traditional financial institutions.
Multiple platforms now exist that allow users to create digital representations of pretty much anything they wish to have a marketplace for. We will be exploring the Issued Assets functionality of the Liquid Network, a Bitcoin sidechain and compare it to Ethereum's popular token technical standard, ERC-20. It is by objectifying these two standards that we can better identify what is appropriate to use when the mission is to create an asset that can be transacted securely, is verifiable and scalable.
If you’d like to learn more about the Liquid Network sidechain before diving into this comparison, I invite you to read our blog post on the subject here.
This article will overview five characteristics that we believe must be taken into consideration before choosing which platform is appropriate for your needs. They are:
You will also find at the end an additional comparative table to further contrast features that will not be vulgarized in this text.
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The Liquid sidechain is a trusted model made up of Functionaries. There are two distinct functions that make up the functionaries of this sidechain: Block Signers and Watchmen.
There are a total of 15 Block Signers spread across multiple jurisdictions. Liquid has been created as a tool to facilitate trade between exchanges and improve price discovery by reducing arbitrage opportunities and increasing liquidity. The Block Signers are incentivized to respect their roles since this system benefits them directly.
Blocks are proposed in a round-robin fashion every minute by the Block Signers, meaning an amount of processing power allotted to every signer for a certain amount of time. Once that expires, it’s onto the next Signer to begin the process. Once a block is proposed, at least two-thirds of the remaining Block Signers must validate its content and approve it in order for the proposed block to be added to Liquid’s ledger. Blocks that would entail a reorganization of more than one block are refused. If the signer is offline, no blocks will be created during that turn. If there is less than a third of signers operating, blocks will no longer be signed and the blockchain will be frozen until the quorum is reached again.
Watchmen are responsible for securing the bitcoins that are pegged in the Liquid network and assuring their peg-out process (moving funds back into the Bitcoin blockchain). They also require a quorum of two-thirds in order to spend funds in Liquid.
Ethereum is governed by node operators and the core developers as to implement off-chain governance, like Bitcoin. The only difference with Bitcoin is there have been circumstances, such as during the DAO hack or the Parity multi-signature wallet hack, where a vote on-chain took place. Unlike a UASF (User Activated Soft Fork), not all nodes had equal voting power, since those that have more holdings have more votes compared to those that aren’t as token rich. About 70% of the ethers in circulation were premined during its launch, with about 12% of tokens being awarded to the developers of the project. Lower voter turnout is thus a drawback of this type of system. This isn't to be confused with on-chain governance, since the upgrade process is still being done off-chain, but it's an important difference to remark.
There is currently no total supply cap either, so additional coins will be issued over time and the idea has been floated that newly issued tokens should go either partly or entirely towards supporting development. Add the issue that running a fully verifying Ethereum node is a very difficult feat, you essentially have a plutocratic system in place.
Peg-in transactions require 102 confirmations on the Bitcoin blockchain before funds can be claimed on the Liquid network. This ensures that the bitcoins being pegged into Liquid are reorganization-safe, since it takes 100 confirmations before a miner can spend their coinbase UTXO.
A Peg-out Authorization Key (PAK) is used to derive addresses for users to create a peg-out transaction. The functionaries control a list of PAKs so they know which users are authorized to peg-out of Liquid. It takes three days for this list to be updated to allow the network to detect attacks that would compromise the functionaries and make a withdrawal to the attackers own wallet.
Transactions require a fee of at least 1 satoshi per vbyte to provide a denial of service protection. This limit is set to change as exemplified in a transaction here where it is at 0.1 satoshi per vbyte. Transactions in Liquid are larger due to range proofs required in Confidential Transactions so to prove that no outputs are negative values.
Functionaries are equipped with two hardware components: the host server and a key storage module. The host server is for proposing blocks and contains a full Bitcoin and a Liquid node. It communicates over Tor as to avoid having locations compromised by having IP addresses exposed when functionaries communicate with one another and being subject to a Denial of Service attack. This device is also tamper-evident and only allows incoming SSH connections when a button is pressed simultaneously, so the device must be physically accessed for changes to occur. The key module is to make sure that only authorized users can spend the bitcoins from the network (see the Liquid Technical Overview).
An user could issue assets onto Liquid using a multisignature scheme. Multiple parties can be involved to allow a reissuance of the desired asset. Reissuance tokens can also be held in cold storage to serve as a backup in case the original keys are lost.
Ethereum, to this day, utilizes a Proof-of-Work mechanism to help prevent spam and to increase immutability and attack costs or add fraudulent blocks to the chain unless they control the majority of the network’s computational power. This is supposedly going to change to a Proof-of-Stake model, meaning in order to take control of the network, 51% of all coins must be controlled by an attacker or the large stakeholders must collude.
However, when it comes to assets you create using ERC-20, they could be subject to arbitrary changes made in the Ethereum protocol due to the governance structure mentioned above.
Ethereum has introduced and popularized smart-contracts. They provide users great flexibility and more degrees of freedom as to how they wish to characterize their assets. This is a cool trait that could interest several programmers appealed by the greater sense of liberty in their code. However, this also increases the amount and complexity of code required. Allowing a wide array of functionalities increases the likelihood that errors are introduced, just look at the overflow vulnerabilities and the unprotected functions problems. No code is perfect, which is why Bitcoin’s programming language is intentionally limited as to only allow a very narrow functionality. Here are some additional Ethereum threat vectors that have been explored.
As mentioned above, two-thirds of the Watchmen must approve the transactions to be spent. This is to ensure a byzantine fault tolerance - these functionaries can reach a consensus even when some fail to respond or respond incorrectly. However an issue arises when this quorum is not met. In this scenario, funds would be frozen indefinitely. To mitigate this risk, there is a set of three emergency keys, of which two are required to unlock these funds if the network hasn’t been functional for thirty consecutive days. Once they are activated, funds are returned to the authorized users’ wallets.
There aren’t really any ingrained methods that allow users to recuperate funds if the ledger they operate over fails to broadcast transactions or if the contract rules are broken and funds frozen or confiscated.
There are however examples of what has been enacted as a fail-safe - in a very broad sense of the definition. For instance, the DAO was built as a smart contract on the Ethereum blockchain. In June 2016, a loophole in the code allowed a hacker to take a chunk of the funds. The Ethereum blockchain was rolled back in time in order to return the funds to the original owners, this was achieved thanks to a hard fork.
The amounts and asset types are only known to those directly involved in the transaction and any designated third parties thanks to the use of Confidential Transactions. This means that transactions, whether they are L-BTC or any other asset or security issued onto the Liquid network, are indistinguishable from one another.
Assets issued using the ERC-20 contract do not have any confidentiality or privacy features. There are advances being made using the Aztec protocol with Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (Zk-SNARKS), allowing one to present proof that a particular piece of information exists without actually revealing this data. However, this is yet to be implemented in Ethereum ERC-20 tokens, except Dai.
The Issued Assets feature found in Liquid gives users great flexibility for the policies concerning the units they wish to create. An issuer can:
There are six functions that are defined for a ERC-20 contract:
There are three additional optional fields:
Below you’ll find a comparative analysis table of some of the features mentioned in this article with others that haven’t been explored. Hopefully, these further elements will complement the text above to give you a clearer understanding of how to effectively decide on how to issue assets for your next project.
Over the past 11 years we have seen countless iterations of cryptocurrencies offering their users a variety of supposed advantages that will uniquely position them in a digitized world. Some projects have grown quite a bit while many have simply faded away. There is however one that starkly stands out from the rest: Bitcoin. It is in fact the only one that is censorship-resistant, scarce, immutable, decentralized, permissionless and trustless when properly operated by users. Its tenents, such as implementing little or no change to the core protocol, slow and steady development, intensive verification and peer review and the uncompromising belief by its hodlers that money is a crucial element of the fundamental economic institutions of society, which are private property and the freedom of association. In short, the money you hold belongs to you and only you, and you should not fall victim to its debasement or confiscation.
This article has described two means for issuing assets: the Liquid Network and ERC-20. Neither are totally trustless, nor do they encompass the entirety of the features their underlying assets have to offer, yet one does present many more advantages.
The Liquid Network being built upon the best free market money known to Man thus far is an important element to consider, as well as bringing more to the table compared to others in the market for those needing to issue assets. It’s privacy, scalability, security features and governance structure make for a system that far outperforms the rest.
If you are curious about how Liquid’s Issued Assets capabilities can benefit your organization, drop us a line here and we’ll be happy to answer any further questions you might have.
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