“The future of IT will be many private enterprise blockchains, many private consortium blockchains, and some public blockchains.”
These are the words of Joseph Lubin, the co-founder of Ethereum and CEO of Consensys, a prominent blockchain development company which released the software likes of Metamask, Truffle, and Infura, all of which were an enormous addition to the development stack of blockchain programmers all around the world.
Recently we could also saw a tweetstorm coming from Joe which gives a very interesting perspective on the state of Blockchains in the industry:
#Blockchain is more than a market. It’s a movement.
— Joseph Lubin (@ethereumJoseph) December 1, 2018
We do seem like @ethereumJoseph fanboys but the man sure knows his domain. With the above intro, we set the tone for our write-up where we will try to cover the Ethereum space, private networks, scaling solutions and how blockchain can be used throughout various industries and businesses.
What this series of articles will talk about is the application of blockchain technology in enterprise use. In this first part, we want to give a broader overview of the concepts that we will be using throughout our series so that you can easily relate to certain parts that we will be talking or implementing. Following that, we will introduce our custom implementation of a hybrid blockchain proof of concept that helps us navigate the landscape and test out various tools in the space. The concrete series is in 4 parts:
- PART I – Exploring Ethereum Blockchain for Enterprise use
- PART II – Setting up a private Ethereum Network
- PART III – Cross-bridging to the Ethereum Main Net
- PART IV – Using the Main Net for Tamper-proof transactions
We all already know what this famous word stands for. An open, decentralized and censorship-resistant database which is capable of processing transactions without a central authority. First elevated by Bitcoin and then Ethereum, it has entered many domains but most notably the finance industry. However, the technology itself is applicable in a lot of other places but there are some challenges that deter it a bit from reaching real-world adoption. One of those is scalability.
Scalability is a known challenge for engineers within the reigns of blockchain technology. To give you a certain perspective on that, currently, the Bitcoin Blockchain can process up to 7 transactions per second (tps) while Ethereum can do double of that, an amazing 15 tps.
As you can see, that’s not quite a lot. But then VISA comes in and says, yeah guys all that is sweet, but what happens on a normal day when there are 3 or 4 THOUSANDS of transactions (payments) in a given second and someone has to support/process that volume. Here is where current blockchain implementations start to struggle. VISA also claimes they can process up to 20000 transactions per second. We say Ethereum is not scalable, because it’s simply not technically possible for Ethereum MainNet to process 40k transactions per second. And that’s important because VISA claims they do it, so we can conclude that there is a need for it if Ethereum wants to become generally adopted as VISA already is.
The reason why it is so difficult to solve scalability lies in the decentralized nature of blockchains and their mechanisms through which the network achieves validation of transactions. Those are consensus protocols and in the next section, we dive a bit more into the constructs behind those.
Consensus protocols are exactly what it says. Mechanisms that are in charge of reaching a consensus in a given system. In the blockchain world, there are three main “algorithms” that are used to reach a consensus in a decentralized system. Those are Proof of Work, Proof of Stake and Proof of Authority. We will talk a little about each of them as they are the necessary building blocks in the blockchain architecture. Basic implication is that a party that verifies blocks and transactions has to give something in return so it can confirm transactions. In Proof of Work that’s electricity, in Proof of Stake that’s money, and in Proof of Authority, that’s implicit trust that is the backbone of the network.
Proof of Work
The Proof of Work consensus algorithm is the original mechanism that was proposed in 2008. Bitcoin Whitepaper by Satoshi Nakamoto. The core of this algorithm is to use expensive computational resources to solve complex cryptographic hashes which are difficult and time-consuming to produce but easy for others to verify. In blockchains that use PoW system, the validators are the so-called miners which take a bunch of transactions, add them in a block and go on solving this mathematical puzzle. The first validator that solves it is rewarded and incentivized with monetary value to continue “mining” therefore securing the network as it adds every new block. Currently, PoW is the most used algorithm in the world (due to Bitcoin popularity) and it’s estimated that it uses enough electricity to power all households in Ireland. Although it has some drawbacks and speed is one of the major ones, it is considered the safest and most robust consensus algorithm for global public blockchains. We have written more in-depth about PoW, so if you are interested in learning more, head over to our dedicated article.
Proof of Stake
Proof of Stake consensus mechanism is a type that requires the nodes/validators to stake a portion of their tokens so they could be included in the validator network and being selected to validate blocks of transactions. If they are acting in good faith, they are rewarded for processing the transactions. If they are not, they are penalized and their stake is automatically taken back by the network. PoS algorithm is by several magnitudes faster in regards to PoW but it also has specific drawbacks like long-range attacks. We won’t go into the details but if you are interested in more depth about this topic, feel free to check a great breakdown by Abhishek Sharma “Nothing’s at Stake”.
Proof of Authority
Proof of Authority is an algorithm used within a given blockchain network that does not rely on computational power and solving hashes like Proof of Work but the blocks are instead validated and approved by authority nodes known as validators. All that validators are doing is basically running a software that allows them to put the transactions into blocks. The validators guarantee for their trustworthiness and credibility with their identity so it is in a way similar to the proof of stake algorithm, however, instead of the stake in the form of some monetary value, the stake is the identity and credibility of the validator. While it has the fastest processing time, it does that at the expense of decentralization. You need to be on the list of approved block validators, while in Proof of work blockchain, in theory, anyone can just start mining.
However this consensus algorithm makes more sense for private networks, and it is something on which we will base our series of blog posts.
Private network vs Public network
To understand private (or in some case permissioned) blockchains, we first need to set a clear distinction between public ones. And the distinction is that in public blockchain, everyone can participate in any activity as it is open-source and there is no central authority in charge. Examples of such blockchains are Bitcoin, Ethereum, Litecoin, Waves and many others.
A private network is a complete opposite of the public one. It’s a network (blockchain) where not everyone can participate. A private network is usually owned by a certain entity or entities and is governed by a set of rules and permissions as to who can join the network. This goes against the case for decentralization, and censorship resistance however it does make them much faster and cheaper than the public ones. So if you are willing to sacrifice decentralization for some other features like traceability, transparency and immutability then they make a compelling piece of technology for domains like business enterprises.
On the below image you can also see a very cool representation of the space and how different consensus mechanisms reflect certain features. An in-depth dive into distinctions can be found on this superb article by Lukas Kolisko.
There is an intersection of all these concepts in the Ethereum scaling proposal that is named Ethereum Plasma. It was written by Vitalik Buterin and Joseph Poon and it gives an interesting approach to the burning issue of scaling Ethereum as we spoke a bit above. Plasma is a mechanism for conducting off-chain transaction while relying on the underlying Ethereum blockchain to ground its security.
You can imagine it like there are numerous private chains or side-chains that are working simultaneously under one root chain which is the Ethereum Main-Net. Those side-chains handle their own transactions, business logic, and economic activity but if there is some dispute, it can be “elevated” to the main chain for evaluation. This system would function as a supreme court jurisdiction where the Ethereum root chain would have the final say.
Can we try to emulate this?
The main takeaway is the following… The Main Ethereum blockchain has to be “off-loaded” to achieve bigger bandwidth and scaling possibility, and this could be done by introducing side-chains. We asked ourselves, what if we would literally try “hacking” this concept with the tools that we have at hand and in the same process learn more in-depth about private chains, consensus algorithms and feasibility of use cases that we will talk later on. And that’s what we did…
This concrete implementation is inspired by the ideas of Ethereum plasma improvement which is not yet operational and is to bring a scalable solution to the Ethereum blockchain. A system of off-chains which operate as a separate entity within the Ethereum ecosystem but use the main net for dispute resolution in a proposed proof of fraud consensus. Vividly it is explained as a system where the main net is the “Supreme Court” and any conflicts or frauds can be taken from the off chain to the main net for resolution.
We will try to build the concepts of the Ethereum Plasma improvement from scratch. We are going to build a private network, add business logic and facilitate a bridge to Mainnet as this will act as our single source of truth. For the sake of easier reference in the future, we have called our little project – Bonanza.
One of the main problems that Ethereum currently faces is the question of scale. Since scaling is a very general blockchain problem as we explained above, we will focus on creating a blockchain solution that uses a private blockchain. We are not trying to invent hot water, we are simply trying to use existing technologies in the Ethereum space to fit our needs.
Private blockchains offer a quick solution to scalability. If there are fewer nodes and transactions on the network – smaller the stress on the given network. With that in mind, to provide an even quicker solution to the biggest bottleneck – consensus algorithms, we are going to use Proof of Authority for our private blockchains. We are sacrificing decentralization for more speed in this case.
If we build a private blockchain with Ethereum, we can still write DApps in the same way we already do on the Mainnet, but the end users will get a little better/faster/cheaper user experience (and they won’t need real Ether).
The most interesting part of the solution is the bridge between the private network and Mainnet. We are going to talk about some different ways to solve that problem along with offering code examples. How are we going to store the end result of our whole process on Ethereum Mainnet is a problem of smaller scope as the only important thing is that we store minimum needed information that is needed to support the use case we are solving.
One simple use case we are trying to achieve is creating a blockchain based game that runs on a private network, but NFT tokens that represent items (or whatever value) in the game, can be traded on Ethereum Mainnet.
This concludes our “small” intro into what we will be doing throughout the series, so stay tuned for PART II as we dive deep into setting up our basis of Bonanza, and that is a Proof of Authority Private Ethereum Blockchain.