December 23, 2023 - 11 min read
A discussion of the emerging technology enablers representing the keys to verifiable, credible, and interoperable infrastructure.
Decentralized systems, like DeFi for example, are often unstable by their very nature, but they become stable in the form of blockchain technology with the use of cryptography and a clever method of reaching consensus, not to mention well-thought-out incentives for rewarding participants for desired behaviors.
After all, with so much value at stake when it comes to the storage and transfer of digital assets, it is fair to assume that the best design will be one in which participants can all see great benefits for themselves individually and also see no benefit whatsoever to cheating. Each individual must see the benefits of adding value. They must have a meaningful stake in the network and a desire to see it grow, but they must also realize that it is impossible to realize these goals at the expense of others.
In 1776, Adam Smith published Wealth of Nations, writing that: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
In other words, he identified that true value is generated when participants understand that they can get what they want by anticipating the needs of others and delivering upon those needs. That is to say, serving the needs of others is to serve oneself, and is the basis upon which a decentralized network may survive.
In a multi-chain world, trust is everything. We cannot simply trust in the goodness of others to achieve an interoperable, multi-chain world. Instead, we must design it carefully and build a powerful technology stack from the ground up. The following article outlines several technological hurdles which will ultimately enable a more secure, seamless, and universally interoperable ecosystem for digital assets.
Game theory is a useful framework for understanding how individuals behave in environments in which they must also consider the competitive nature of other participants before acting. In the context of capital markets, both bulls and bears must consider the market sentiment of all other participants in order to make successful investments or trades.
To understand this dynamic, it is best to consider a more specific, tangible analogy. Consider the game of Poker in which many players have famously won rounds by secretly misleading the other players into believing that the winner had a strong hand when that wasn’t the case, thereby winning the hand through “lying,” so to speak. Of course, the term in Poker for fooling one’s competition in this way is known as bluffing.
Additionally, information asymmetry amongst market participants gives a competitive advantage to some while creating disadvantages for others. Consider that insider trading is illegal, but many of those who participate have decided that the profits they can make from their privileged access to information will outstrip any penalties they might pay if they are unlucky enough to be caught and penalized.
This is where the concept of a Nash equilibrium comes into play so that incentives are aligned in favor of cooperation or at the very least, safe and honest coordination. A Nash equilibrium is essentially a stable competitive or cooperative environment under which no participant can gain an advantage over their interlocutors by deviating from the stability of a given equilibrium. It is the basis for fair play as opposed to sneaky forms of exploitation or outright cheating.
In DeFi, various participants need to be sure that the protocol will perform as expected, and this results from the honest behavior of nodes. However, simply trusting nodes to do what is in the best interest of the protocols instead of themselves is not acceptable in the case of distributed networks. Instead, protocols must be designed from the ground up to achieve a Nash equilibrium through properly aligned incentives and in many cases, punitive measures for deviations from the protocol.
This stability is crucial for the proper functioning of financial applications where users rely on consistent rules and outcomes. Achieving a Nash equilibrium makes a network more resistant to manipulation. If participants see no incentive to deviate from honest participation, it becomes unlikely that malicious actors will exploit the system for personal gain. This state of equilibrium lends itself to consistent functionality and long term stability.
In capital markets, honesty is usually enforced via a complex system of rules, regulations, compliance reporting, and oversight committees. Self-interested individuals choose to avoid punishment just as much as they seek to provide value; it is not perfect but perhaps it is the best we had until now.
Still, centralized agencies often become captured by those who would use their positions to influence outcomes in their own favored ways. Understanding this principle is key to a secure design. After all, people are creative and will naturally devise ways to extract value from this sort of advantage.
The likelihood of this increases with the growth of any network, as the total value locked (TVL) becomes too tempting for Byzantine actors to resist. That is to say that enough people out there have enough free time on their hands that they might choose to spend it by figuring out how to “game” any system, particularly if the prize is a large monetary reward. It is the reason why centralized institutions inevitably become corrupted once too much time has passed.
Worse yet, centralization lends itself to the establishment of regulations which protect the largest incumbents from competition and either directly or indirectly increase their power. A lack of transparency and information asymmetry with regards to finance is precisely what has led to the birth and proliferation of DeFi.
There is no putting this genie back in the bottle, but that does not mean the sector is fully ready to go mainstream. That is to say that there are still several key aspects of a fully interoperable Web3 stack which are under development, and on the cusp of greatness. Let’s have a look at them now and check up on their status.
With DeFi, the technology is more sophisticated – yet the incentives remain the same. Using advanced cryptography and a decentralized, consensus-based network of nodes, developers work diligently to prevent nodes from gaining unique advantages for themselves or otherwise colluding amongst themselves at the expense of the network’s integrity and all of its honest users.
Decentralized Identifiers (DIDs) are designed to enable individuals and organizations to generate their own identifiers using systems they trust. These new identifiers enable entities to prove control over them by authenticating using cryptographic proofs such as digital signatures.
The scope and use of these identifiers can be applied as appropriate in different contexts. For instance:
At some point in the near future, deep fakes will become essentially indistinguishable from reality. DIDs should therefore explode in terms of the ubiquity of their implementations. Social-layer verification will become riskier as time goes on for asset custody, requiring solutions with multiple layers of cryptographic proof. This seems to be only a matter of time before DIDs are an absolute necessity for distinguishing reality from fiction online.
Conceptually, ZK proofs allow for a proving party to demonstrate cryptographically to a verifying party that a certain statement is true, but without revealing all of the specifics contained within the statement. That is, ZK proofs can demonstrate knowledge of a wallet holder’s private keys in order to sign off on a transaction without revealing the keys themselves.
As with everything in life, ZK proofs also have their tradeoffs, even though they are very efficient in terms of data management and gas costs. For instance, ZK proofs involve complex cryptographic operations which compress large data sets into smaller ones but take more time and cost more, while others involve less computational complexity but result in less scalable implementations. Furthermore, this technology is rather experimental and difficult to audit, which introduces risks to users which they may not fully comprehend.
Scalability is also an issue, especially concerning use cases requiring frequent and rapid on-chain ZK proofs. This is where a lot of the tradeoffs happen when it comes to which ZK proof is most applicable to certain Web3 applications and which are not, as well as the overall memory footprint and therefore scalability.
The difficulty and expertise required to audit ZK proof protocols can also create issues regarding KYC regulations. For example, users may desire privacy in ways which might be antagonistic to regulations which might require the kind of transparency that ZK proofs simply can’t provide. Of course, the implementation and deployment of ZK proofs will involve a bit of trial and error while developers optimize for specific use cases and the regulatory risks involved with privacy-preserving technologies.
Oracles are the way in which the Web3 ecosystem accesses off-chain data sources and designated computations. Decentralized Oracles like Supra are the superpower behind automated smart contracts. The status quo Oracles continue to be found wanting due to costly gas fees, questionable security guarantees, and limitations to their functionality.
On the other hand, Oracles also come with certain downsides and challenges. If bad data is allowed to interact with automated smart contracts, they’ll execute erroneously. This is completely unacceptable, as a mistaken price pair can result in massive losses for one of the parties involved. If Oracles are compromised, or if nodes collude to take advantage of transaction ordering, the integrity of the data being fed into the smart contracts is also called into question.
If not properly accounted for, the Oracles themselves could use their position next to the data faucet in order to make buy-sell decisions before other actors within the network. This is why Supra Oracles are grouped into Tribes and Clans which have their members periodically reshuffled, among other mitigating factors. See our DORA whitepaper for the specific details on this architecture.
The asymmetry of data knowledge would then put colluding Oracles in a position to report the wrong prices in such a way that they can frequently buy and sell at a profit. Such a situation would allow Byzantine nodes to collude and take advantage of the honest users which create smart contract agreements and trust that the incentives of a given blockchain network will perpetuate good behavior.
Most Oracles do not properly account for dishonest or colluding nodes. This is one of the reasons that Supra periodically re-shuffles nodes into new tribes and clans. In addition to mitigating Byzantine behavior, it is also a highly efficient architecture via the distribution of labor amongst nodes. This ranges from receiving and ordering transactions to validating the blocks themselves.
Establishing secure and efficient liquidity channels between disparate blockchains is a technical hurdle, but not an impossible feat. Different blockchains have unique architectures, consensus mechanisms, and smart contract standards, making it thus far difficult to establish a secure interoperability standard that works seamlessly across blockchains.
In fact, we mostly have had bridges, which involve a third-party to perform an escrow service to custody funds from both sides of a transaction. This creates a honeypot for malicious actors as a lot of digital assets end up under the auspices of one custodian. If history can be our guide, it shows us that cross-chain bridges have been one of the most common and lucrative targets for hackers.
In addition, dApp developers need to write bespoke code modules and keep them up to date for each chain-specific integration. This makes it arduous and frankly, impractical to imagine a multi-chain DeFi ecosystem emerging from such an arrangement. However, this problem is a well known one and a number of projects are looking to meet the demand for seamless interactions across a multitude of blockchains and applications.
In response, Supra is preparing to launch HyperNova, a bridgeless protocol solution for a multi-chain world. This Intralayer solution leverages the L1 security of any blockchain while allowing users on disparate ecosystems to interact with each other via a unified interface.
Every technology feels great until it needs updating, at which point it becomes obvious that a change is in order. That is true of blockchain consensus mechanisms as they run into scaling issues, weak points within the coding language used for databases or smart contracts, or other unintended outcomes as users test the bounds of a new technology. This is the basis for innovation.
Of course, smart contracts powered by Supra are the nexus at which on-chain assets and off-chain infrastructure meet. With Supra’s Move smart contracts, dApp developers can implement their dApps, interoperate with traditional systems, and react in real time to real-world events. This is in pursuit of a secure and interoperable multi-chain world; join us and build, or watch us do the work to get us there.
Supra is at the forefront of researching and implementing decentralized Web3 services which optimize for scalability, security, and fast finality when it comes to settling transactions on-chain. Our developer toolkit consists of a growing library of comprehensive guides and technical whitepapers, and serves as the foundation for builders to understand and implement these tools.
You’re invited to join Supra’s epic journey to make digital assets more secure and interoperable, be a part of our vibrant community, and be the first to enjoy the stream of innovations pouring forth from Dr. Kate and Supra’s research team.
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